LSB Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. LSB manufactures and sells nitrogen-based fertilizer and chemical products for agricultural, industrial, and mining markets. Results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $181.0 million | $199.0 million | Down 9% |
| Gross profit / margin | $41.6 million / 23.0% | $90.7 million / 45.6% | Profit down 54% |
| Adjusted gross profit / margin | $59.0 million / 32.6% | $110.4 million / 55.5% | Profit down 47% |
| Operating income | $30.5 million | $80.0 million | Down 62% |
| Net income | $15.9 million | $58.8 million | Down $42.9 million |
| Diluted EPS | $0.21 | $0.65 | Down $0.44 |
| Operating cash flow | $59.2 million | $85.5 million | Down $26.2 million |
| Capital expenditures | $18.4 million | $8.3 million | Up $10.2 million |
Lower selling prices drove the earnings decline, partly offset by higher sales volumes. Total tons sold for the key reported products rose 6%. Average selling prices fell 4% for AN and nitric acid and 27% each for UAN and ammonia. Higher average natural gas costs also pressured gross profit: $5.66 per MMBtu versus $4.74 a year earlier. Interest expense rose to $12.2 million from $10.0 million, principally reflecting the additional $200 million of 6.25% notes issued in March 2022. Interest income on short-term investments contributed to $3.5 million of non-operating income in Q1 2023.
Liquidity and debt
At March 31, 2023, cash and cash equivalents were $48.9 million and short-term investments were $376.9 million, totaling $425.8 million. Total debt, including current maturities and net of issuance costs, was $710.6 million; the $700 million 6.25% senior secured notes mature in October 2028. The working capital revolver was undrawn, with approximately $62.3 million available. No revolver covenant trigger had occurred. Management said available cash, investments, revolver capacity, and operating cash flow should fund anticipated needs for the next 12 months.
Operating cash flow was $59.2 million; investing cash outflow was $63.4 million, including purchases of short-term investments and capital spending; financing cash outflow was $10.7 million. The approximately $3 million balloon payment on secured financing due in June 2023 was repaid in April 2023.
Material changes and management commentary
- Sales fell despite higher aggregate volume, as lower fertilizer and ammonia prices outweighed stronger ammonia production. Management attributed market price pressure partly to lower European natural gas costs and increased global nitrogen supply, as well as delayed U.S. spring fertilizer applications and softer ammonia demand in some Asian industrial markets.
- SG&A decreased 10% to $9.9 million, partly because Q1 2022 included about $2.4 million of nonrecurring transaction and professional fees.
- Cash and short-term investments increased to $425.8 million from $394.4 million at year-end 2022; total debt carrying value declined slightly from $712.3 million.
- Management targets 830,000–850,000 tons of ammonia production in 2023 and is working toward a 95% plant on-stream rate. Planned 2023 capital expenditures are $60–$80 million, primarily for reliability and maintenance.
- LSB continues to evaluate capacity debottlenecking, acquisitions, and low-carbon ammonia opportunities. Its El Dorado carbon-capture project is subject to permitting and targeted for completion by 2025; the EPA accepted the pre-construction Class VI permit application in March 2023. A Pryor green-ammonia project remains in feasibility and design evaluation. No earnings or revenue guidance is provided.
Risks, contingencies, and unusual items
- Natural gas contracts included fixed-cost purchase commitments for approximately 21.1 million MMBtus through December 2023, at a weighted-average $3.60 per MMBtu (approximately $75.9 million). Commodity prices, product pricing, weather, logistics costs, and plant reliability can materially affect results.
- The company faces continuing litigation related to the 2013 West Fertilizer explosion; it has settled certain claims but cannot estimate a possible loss range and has established no reserve for this matter.
- A court judgment in the Global Industrial matter awarded approximately $7.4 million plus about $1.3 million of prejudgment interest; the judgment was accrued, is under appeal, and post-judgment interest continues to accrue.
- Environmental matters include a recorded liability of approximately $0.5 million. Management expects $3.1–$3.5 million of environmental project expenses for the remainder of 2023, in addition to $1.1 million incurred in Q1; actual costs could differ materially.
- Performance and payment bonds expose the company to indemnification obligations of up to $9.7 million. Management reported no material changes to the risk factors in its 2022 Form 10-K and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether fertilizer prices and margins stabilize or recover, and how product mix and sales volumes develop.
- Actual ammonia production, plant reliability, and capital spending versus the 2023 targets.
- Liquidity and debt service capacity, including revolver availability, secured financing obligations, and any covenant trigger.
- Permitting, costs, financing, and execution milestones for the carbon-capture, blue-ammonia, and green-ammonia projects.
- Developments and potential financial exposure in the West Fertilizer, Global Industrial, and environmental matters.