LSB Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. LSB manufactures and sells nitrogen-based chemical products for agricultural, industrial, and mining markets. Interim results are subject to fertilizer-market seasonality and plant-maintenance timing.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $165.8m | $284.8m | $346.8m | $483.8m |
| Gross profit / margin | $36.0m / 21.7% | $142.9m / 50.2% | $77.6m / 22.4% | $233.7m / 48.3% |
| Operating income | $27.5m | $132.7m | $58.0m | $212.6m |
| Net income | $25.1m | $103.4m | $41.0m | $162.2m |
| Diluted EPS | $0.33 | $1.15 | $0.54 | $1.81 |
| Operating cash flow | — | $102.9m | $220.8m |
Q2 sales fell 42% and operating income fell 79% year over year; six-month sales fell 28% and operating income fell 73%. Lower selling prices more than offset higher sales volumes. Q2 total product tons sold increased 6%, including ammonia volumes up 35%, while average selling prices fell 28% for AN/nitric acid, 45% for UAN, and 67% for ammonia. Management cited expanded global supply as European gas costs declined and production resumed, along with weaker demand and delayed U.S. fertilizer applications. Higher beginning-inventory natural-gas costs and plant fixed costs also weighed on gross profit.
Six-month operating cash flow was $102.9m. Investing cash flow was $30.2m, including investment maturities and purchases and $32.3m of property, plant and equipment expenditures. Financing cash flow was negative $151.9m, principally reflecting $114.3m to repurchase notes and $19.8m for share repurchases. Cash and cash equivalents were $45.1m at June 30, down from $63.8m at year-end.
Debt, liquidity and capital allocation
- Cash, cash equivalents and short-term investments totaled $313.9m at June 30, versus $394.4m at December 31, 2022.
- Total debt, including current maturities and net of issuance costs, was $583.6m, compared with $712.3m at year-end. The company repurchased $125m principal of its 6.25% notes for approximately $114.3m and recorded an $8.6m extinguishment gain. Notes principal outstanding was $575m, due 2028.
- The $65m working-capital revolver was undrawn, with approximately $55.4m available. No springing covenant trigger had occurred at quarter-end; the facility matures February 2024 unless earlier refinanced or repaid.
- In May, the Board authorized a $150m share-repurchase program. LSB repurchased approximately 1.8m shares during Q2 for $17.2m, averaging $9.59 per share; approximately $132.8m of authorization remained at June 30.
- Management said available cash and investments, revolver availability, and operating cash flow should fund anticipated needs for the next 12 months.
Outlook, commentary and key risks
- For 2023, management targets ammonia production of approximately 830,000–850,000 tons and expects capital expenditures of $60m–$80m, primarily reliability and maintenance projects. First-half capital expenditures were $32.3m.
- Management expects nitrogen prices to stabilize near current levels and potentially strengthen as demand builds toward the 2024 planting season. This is an expectation, not a guarantee. It also cited steady industrial demand and robust mining demand, while noting recessionary concerns.
- Strategic initiatives include improving plant reliability toward a 95% ammonia on-stream goal, expanding distribution and optimizing product mix, evaluating capacity debottlenecking, and developing low- and no-carbon ammonia projects. The El Dorado carbon-capture project is subject to Class VI permit approval; the Pryor green-ammonia project remains under development and requires further design and Board approval.
- Natural-gas purchase commitments covered approximately 14.2m MMBtus through December 2023 at a weighted-average cost of $3.70/MMBtu. Management cited risks from commodity and fertilizer-price volatility, plant outages, transportation costs, weather, regulation, and environmental compliance.
- Environmental accruals were approximately $0.5m. The West Fertilizer litigation continues; the company said it cannot estimate a possible loss range and has established no reserve. A separate Global Industrial judgment awarded approximately $7.4m plus interest; the judgment was accrued and is stayed pending appeal. The company is pursuing related claims against Leidos. Environmental permitting and remediation exposures remain subject to change.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. No material changes to the 2022 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether fertilizer selling prices and margins stabilize or recover, and whether increased volumes can offset lower prices.
- Actual ammonia production, plant reliability, maintenance costs, and 2023 capital spending versus management targets.
- Liquidity and refinancing arrangements for the revolver maturing in February 2024, as well as debt-service capacity if earnings remain weaker.
- Progress, permitting, economics, and required investment for the proposed carbon-capture, green-ammonia, and capacity-expansion projects.
- Developments in the West Fertilizer and Global Industrial litigation, environmental matters, and associated potential costs.
- Execution and remaining capacity under the $150m repurchase program, including its effect on cash available for operations and investment.