LSB Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. LSB manufactures nitrogen-based fertilizer and other chemical products for agricultural, industrial, and mining markets.
Financial performance
- Q2 revenue: $284.8 million, up 102% from $140.7 million. Six-month revenue was $483.8 million, up 103% from $238.8 million.
- Q2 earnings: Gross profit was $142.9 million versus $35.0 million; operating income was $132.7 million versus $26.5 million; net income was $103.4 million versus $23.7 million. Diluted EPS was $1.15 versus $0.32.
- Six-month earnings: Gross profit was $233.7 million versus $43.1 million; operating income was $212.6 million versus $26.0 million; net income was $162.2 million versus $10.4 million. Diluted EPS was $1.81 versus a loss of $0.28.
- Margins: Q2 gross margin was 50.2%, versus 24.9%; management’s non-GAAP adjusted gross margin was 57.2%, versus 37.4%. Six-month gross margin was 48.3%, versus 18.0%.
- Drivers: Average Q2 selling prices rose 96%–160% across key products, while total fertilizer-product tons sold fell 6%. Management cited strong nitrogen prices and demand, partly offset by wet planting-season weather and higher natural-gas costs. Q2 gas cost averaged $7.15/MMBtu versus $2.78.
- Cash flow: Six-month operating cash flow was $220.8 million, compared with $30.6 million. Capital expenditures were $16.4 million. Cash increased to $125.2 million from $82.1 million.
- Liquidity and debt: Short-term U.S. Treasury investments were $325.6 million; cash plus these investments totaled about $450.8 million. Total debt, including current maturities and net of issuance costs, was $715.4 million, including $700 million of 6.25% notes due 2028. The revolver was undrawn, with approximately $63.4 million available; no covenant trigger had occurred.
- Equity: Stockholders’ equity was $609.6 million, up from $460.5 million at year-end. A $50 million repurchase authorization was approved in May; approximately 0.7 million shares were repurchased in Q2 at an average of about $18 per share.
Changes and unusual items
- Higher product prices drove substantial revenue and margin growth despite lower sales volumes. Six-month sales volumes for the major products shown declined 11% overall.
- In March, LSB issued $200 million of additional 6.25% senior secured notes due 2028. The proceeds contributed to higher debt and liquidity; the company reported lower first-half interest expense than in 2021, partly due to refinancing higher-rate debt.
- Q2 2022 non-operating income included a $3.0 million insurance settlement recognized after approval of a claim related to a former executive’s death. Cash was received and the related $2.5 million benefit paid in July.
- Prior-year comparisons include a $10 million PPP loan-forgiveness gain in Q2 2021. The 2022 six-month tax provision was $31.5 million, including $30.6 million of deferred tax expense.
Outlook, commentary, and risks
- Management targeted 2022 ammonia production of approximately 750,000–780,000 tons, including an estimated 55,000–65,000-ton production reduction during Q3 from planned El Dorado and Pryor turnarounds. Expected 2022 capital expenditures were approximately $65 million, mainly for reliability and maintenance.
- Management said cash, revolver availability, and operating cash flow should cover anticipated liquidity needs for the next 12 months. It expected continued investment in plant safety, reliability, product distribution, and potential capacity improvements.
- LSB is evaluating lower-carbon ammonia initiatives. A carbon capture and sequestration project at El Dorado, funded by Lapis Energy, is expected to be completed by 2025, subject to permitting. A Pryor green-ammonia project remains subject to feasibility results and board approval.
- Key uncertainties include fertilizer prices and demand, weather and seasonal sales, natural-gas and logistics costs, plant reliability and turnarounds, inflation and supply-chain disruption, environmental permitting and compliance, and substantial indebtedness. Management noted fertilizer prices had eased from early-2022 peaks; higher gas costs and weaker demand could pressure margins.
- Contingencies include continuing litigation related to the 2013 West Fertilizer explosion, for which LSB said it could not estimate a possible loss range and had no reserve, and an appealed Global Industrial judgment of approximately $8.7 million plus post-judgment interest, which had been accrued. Environmental liabilities accrued were approximately $0.5 million.
Investor verification priorities
- Confirm whether elevated fertilizer selling prices and margins persist as prices recede from peaks, and assess the effect of gas costs and seasonal demand.
- Track Q3 turnarounds, production against the 750,000–780,000-ton annual target, and progress toward the $65 million capital-expenditure estimate.
- Review cash and short-term investment availability, debt service and maturities, and revolver availability and covenant status.
- Monitor permitting, financing, feasibility, and expected economics of the proposed carbon capture and ammonia projects; these plans are conditional, not assured outcomes.
- Follow developments in the West Fertilizer and Global Industrial matters, environmental proceedings, and potential related costs.