LSB Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. LSB manufactures and sells nitrogen chemicals for agricultural, industrial and mining markets from facilities in Alabama, Arkansas, Oklahoma and Texas. Results are seasonal, and planned plant maintenance affects quarterly production and expenses.
Financial performance and liquidity
| Metric | Q3 2022 | Nine months 2022 | Prior comparable period |
|---|---|---|---|
| Net sales | $184.3 million | $668.1 million | Q3: $127.2 million; nine months: $366.0 million |
| Gross profit / gross margin | $22.1 million / 12.0% | $255.8 million / 38.3% | Q3: $17.4 million / 13.7%; nine months: $60.5 million / 16.5% |
| Adjusted gross profit / margin | $57.5 million / 31.2% | $330.7 million / 49.5% | Q3: $43.1 million / 33.8%; nine months: $120.7 million / 33.0% |
| Operating income | $13.1 million | $225.7 million | Q3: $5.4 million; nine months: $31.4 million |
| Net income | $2.3 million; $0.03 diluted EPS | $164.5 million; $1.86 diluted EPS | Q3: net loss $8.9 million; nine months: net income $1.5 million |
| Operating cash flow | Not separately provided for the quarter | $259.2 million | Nine months 2021: $65.5 million |
Adjusted gross profit is a non-GAAP measure that excludes unallocated depreciation, amortization and turnaround expenses. Q3 sales increased 45% year over year, while nine-month sales rose 83%. The nine-month improvement was driven principally by higher selling prices; reported net income also reflects a $32.3 million income-tax provision, largely deferred.
- Products: Nine-month sales were $234.1 million for AN and nitric acid, $184.0 million for UAN, and $200.9 million for ammonia. Average selling prices rose 79%, 127% and 136%, respectively, versus the prior-year period. Total tons sold declined 8% over nine months.
- Cash and liquidity: At September 30, cash and cash equivalents were $19.6 million and short-term investments were $365.6 million, totaling $385.2 million. The company reported $63.4 million available under its undrawn working-capital revolver. Management expects available cash, investments, revolver capacity and operating cash flow to cover anticipated needs for the next 12 months.
- Debt: Long-term debt, including current maturities and net of discounts and issuance costs, was $714.1 million, versus $527.6 million at year-end 2021. This included $700 million principal amount of 6.25% secured notes due 2028. The revolver had no borrowings; two Eldridge-affiliate financings included balances due in 2023 and 2025.
- Investment and capital returns: Nine-month capital expenditures were $32.5 million; management expected approximately $65 million for full-year 2022, mainly for reliability and maintenance. The company issued $200 million of additional 6.25% notes in March and spent $101.9 million on treasury-stock purchases during the nine months. The Q3 repurchase authorization was exhausted; in October the board approved an additional $75 million authorization.
Material changes and management commentary
- Q3 product pricing increased substantially, supported by nitrogen supply constraints, higher corn prices and elevated natural-gas prices in Europe. LSB said higher prices more than offset lower ammonia and acid volumes, but margin percentages were reduced by turnarounds and higher feedstock costs.
- Q3 included turnarounds at El Dorado and Pryor, with approximately 53,000 tons of estimated lost production and $19.2 million of turnaround expense. In Q3 2021, Cherokee had a turnaround with $8.0 million of expense and 21,000 tons of estimated lost production.
- Natural gas averaged $7.65/MMBtu in Q3 2022 versus $3.71/MMBtu in Q3 2021; for the first nine months, the averages were $6.45 and $3.20/MMBtu. Nine-month operating cash flow benefited from earnings and working-capital changes, while investing outflows included $423.1 million of short-term investment purchases.
- For 2022, management targeted total ammonia production of approximately 750,000–780,000 tons despite the two turnarounds. It cited continued focus on plant safety and reliability, product-mix optimization, capacity debottlenecking and strategic acquisitions.
Outlook, risks and contingencies
- Commercial agreements: Pryor gave notice terminating its UAN purchase agreement with CVR effective December 31, 2022, to pursue alternative marketing arrangements; no early termination penalty applied. El Dorado received a non-renewal notice for its Koch ammonia agreement, which runs through June 30, 2023; the parties were renegotiating continued supply.
- Low-carbon projects: LSB described an El Dorado carbon-capture project with Lapis Energy, with Lapis funding 100% of project development capital. Completion was targeted for 2025, subject to a Class VI permit; planned initial capture is more than 450,000 metric tons of CO₂ annually. A proposed Pryor green-ammonia project remained subject to feasibility work and board approval.
- Market and operating risks: Results depend on fertilizer and ammonia prices, corn demand, natural-gas costs, weather, transportation availability and plant reliability. Management noted weakening demand from some export-oriented industrial customers and broader recession concerns; turnarounds and unplanned downtime can reduce output and margins.
- Legal and environmental matters: LSB continued to defend litigation related to the 2013 West Fertilizer explosion; it had no reserve and could not estimate a possible loss range. A separate Global Industrial judgment awarded approximately $7.4 million plus $1.3 million of prejudgment interest; it was accrued, stayed pending appeal, and post-judgment interest continued to accrue. Accrued environmental liabilities were approximately $0.5 million.
- Other commitments: Natural-gas purchase commitments extended through December 2023, with a weighted-average cost of $6.61/MMBtu. The company also had performance and payment bond indemnification exposure of up to $9.7 million. Management cautioned that environmental costs, commodity prices, litigation outcomes and project assumptions may differ from estimates.
Important facts for investors to verify
- Whether higher fertilizer prices and margins persist as natural-gas costs, crop economics, supply and demand, and seasonal selling patterns change.
- How production, sales volumes and costs develop following the El Dorado and Pryor turnarounds, and whether the 2022 ammonia-production target is achieved.
- Liquidity and capital allocation after the $101.9 million of nine-month share repurchases, the new $75 million authorization, planned capital expenditures and debt service.
- Outcomes of the Koch ammonia agreement negotiations and Pryor’s alternative UAN marketing arrangements.
- Permitting, feasibility, funding and expected economics of the proposed carbon-capture and green-ammonia projects.
- Developments in West Fertilizer litigation, the Global Industrial appeal and environmental matters, including any changes to reserves or expected costs.