LSB Industries, Inc. (NYSE: LXU) — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also reports fourth-quarter results. LSB manufactures nitrogen-based and other chemical products for agricultural, industrial and mining markets, operating facilities in Arkansas, Alabama, Oklahoma and Texas.
Financial and operating performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $901.7 million | $556.2 million |
| Gross profit | $348.4 million | $139.0 million |
| Gross margin | 38.6% | 25.0% |
| Operating income | $308.4 million | $101.0 million |
| Net income | $230.3 million | $43.5 million |
| Net income per diluted common share | $2.68 | Loss of $4.40 |
| Cash from operating activities | $345.7 million | $87.6 million |
| Capital expenditures | $45.8 million | $35.1 million |
FY 2022 adjusted gross profit was $444.4 million, a non-GAAP measure, and adjusted gross margin was 49.3%, versus $217.5 million and 39.1% in 2021. These adjusted figures exclude unallocated depreciation and turnaround expense.
Fourth quarter: Net sales were $233.7 million, gross profit $92.6 million and net income $65.9 million. In the fourth quarter of 2021, those amounts were $190.2 million, $78.5 million and $42.1 million, respectively.
Liquidity and debt: At year-end, cash and cash equivalents were $63.8 million and short-term investments $330.6 million. The undrawn working-capital revolver had approximately $64.1 million available, bringing reported combined liquidity to approximately $458.5 million. Long-term debt, including current portion and net of issuance costs, was $712.3 million, versus $527.6 million a year earlier. This included $700 million of 6.25% senior secured notes due 2028. The company reported no revolver borrowings and no springing covenant trigger at year-end.
Changes versus prior year
- Sales rose 62% and operating income rose 205%, primarily as higher selling prices more than offset higher natural-gas costs and lower total product volumes.
- Average selling prices increased 102% for ammonia, 90% for UAN and 61% for AN and nitric acid. Natural-gas average cost increased to $6.58/MMBtu from $3.51/MMBtu.
- Total tons sold across the three principal product categories declined 8%, to 1.31 million tons. Two facility turnarounds in 2022 resulted in estimated lost ammonia production of 62,000 tons and $23.4 million in turnaround expense, excluding related lost production margins.
- Operating cash flow increased substantially. Investing cash outflow was $369.7 million, mainly reflecting purchases of short-term investments, partly offset by maturities. Financing cash flow included $200 million of additional notes and approximately $175.0 million of treasury-stock purchases.
- 2021 common-stockholder results were materially affected by a $231.8 million deemed preferred-stock dividend associated with the exchange transaction; the reported 2021 common-share loss does not reflect the improvement in GAAP net income alone.
Outlook, risks and unusual items
- Management targets 2023 ammonia production of approximately 830,000–850,000 tons, versus 732,000 tons in 2022, and a 95% on-stream operating rate goal. Planned 2023 capital expenditures are $60–$80 million, primarily for reliability, maintenance and facility projects. These are operating targets, not formal earnings guidance.
- Management expected supportive fertilizer demand and pricing in the 2023 planting season, citing corn economics and constrained global nitrogen supply. It characterized industrial and mining demand as generally stable and cited contracts and product-mix flexibility as potential recession protection.
- Strategic initiatives include evaluating capacity debottlenecking, pursuing acquisitions, and developing lower-carbon ammonia. The El Dorado carbon-capture project, funded by Lapis Energy, is subject to a Class VI permit and is targeted for completion by 2025. The Pryor green-ammonia proposal remains subject to feasibility work and Board approval.
- Key exposures include volatile natural-gas and fertilizer prices, the seasonal and weather-sensitive agricultural business, plant reliability and unplanned downtime, transportation and supply-chain constraints, customer concentration (nine customers represented about 58% of 2022 sales), competition, environmental regulation and substantial secured debt with restrictive covenants.
- Material legal matters include continuing West Fertilizer explosion litigation; the company said it could not estimate a possible loss range and had established no reserve for that matter. A separate Global Industrial judgment awarded approximately $7.4 million plus prejudgment interest; the judgment was accrued and stayed pending appeal. Environmental liabilities accrued were approximately $0.5 million.
- Unusual FY 2022 items included a $3.0 million life-insurance settlement recorded in non-operating income following Jack Golsen’s death, alongside a $2.5 million death-benefit payment. The effective tax rate was 14.6%, with valuation-allowance releases contributing to the rate; no federal valuation allowance remained at year-end.
- The company reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal controls and reported no critical audit matters.
Important facts for investors to verify
- Whether higher realized prices and the targeted production recovery can be sustained as natural-gas costs, fertilizer pricing and seasonal demand change.
- Execution, cost, permitting and commercial economics of the El Dorado carbon-capture and Pryor green-ammonia projects, and whether proposed capacity projects receive Board approval.
- Near-term liquidity and debt obligations, including the 2023 maturity of a subsidiary secured financing, the revolver’s February 2024 maturity provision, and compliance with debt covenants.
- Outcomes and potential exposure from West Fertilizer litigation, the Global Industrial appeal and environmental matters.
- Customer concentration and contract continuity, including renegotiation of the Koch ammonia supply agreement beyond June 30, 2023 and new marketing arrangements for Pryor UAN after the CVR agreement ended.
- Share-repurchase totals: the filing reports 13,167,794 shares purchased in the annual repurchase table, while other disclosures describe approximately 13.2 million or 13.5 million shares. Clarify the scope and reconciliation of these figures.