See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes condensed consolidated financial statements.
See accompanying notes condensed consolidated financial statements.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited interim financial statements and notes of LSB Industries, Inc. (“LSB”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022, as amended by the Form 10-K/A filed on March 25, 2022 (“2021 Form 10-K”). The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2022 and 2021 and the Company’s financial position as of June 30, 2022.
Basis of Consolidation – LSB and its subsidiaries (the “Company,” “we,” “us,” or “our”) are consolidated in the accompanying condensed consolidated financial statements. LSB is a holding company with no significant operations or assets other than cash, cash equivalents and investments in its subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to current period presentation, including all share and per share information relating to the stock split in the form of a stock dividend on October 8, 2021.
Nature of Business – We are engaged in the manufacture and sale of chemical products. The chemical products we primarily manufacture, market and sell are ammonia, fertilizer grade AN (“HDAN”) and UAN for agricultural applications, high purity and commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids, carbon dioxide and diesel exhaust fluid for industrial applications and industrial grade AN (“LDAN”) and solutions for the mining industry. We manufacture and distribute our products in four facilities; three of which we own and are located in El Dorado, Arkansas (the “El Dorado Facility”); Cherokee, Alabama (the “Cherokee Facility”); and Pryor, Oklahoma (the “Pryor Facility”); and one of which we operate on behalf of a global chemical company in Baytown, Texas.
Sales to customers include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the United States (“U.S.”); industrial users of acids throughout the U.S. and parts of Canada; and explosive manufacturers in the U.S. and parts of Mexico and Canada.
These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.
Use of Estimates – The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock Repurchase Program – During May 2022, our Board authorized a stock repurchase program. Under the repurchase program, we may repurchase up to $50 million of our outstanding common stock through the duration of the authorization. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate LSB Industries to purchase any particular number of shares. During the second quarter of 2022, we repurchased approximately 0.7 million shares at an average cost of approximately $18 per share.
Short-Term Investments - Investments, which consist of U.S. treasury bills with an original maturity up to and less than 52 weeks, were considered short-term investments. These investments are carried at cost which approximated fair value.
Contingencies – Certain conditions may exist which may result in a loss, but which will only be resolved when future events occur. We and our legal counsel assess such contingent liabilities and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a loss has been incurred, we would accrue for such contingent losses when such losses can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable but reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Estimates of potential legal fees and other directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Loss contingency liabilities are included in current and noncurrent accrued and other liabilities and are based on current estimates that may be revised in the near term. In addition, we recognize contingent gains when such gains are realized or when the contingencies have been resolved (generally at the time a settlement has been reached).
8
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies (continued)
Derivatives, Hedges and Financial Instruments – Derivatives are recognized in the balance sheet and measured at fair value. Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply, or hedge accounting is elected.
The fair value amounts recognized for our derivative contracts executed with the same counterparty under a master netting arrangement may be offset. We have the choice to offset or not, but that choice must be applied consistently. A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions reported as an asset or a liability in the balance sheet. When applicable, we present the fair values of our derivative contracts under master netting agreements using a gross fair value presentation.
Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 - Valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts.
Level 2 - Valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts.
Level 3 - Valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Recently Issued Accounting Pronouncements
ASU 2020-06 - In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s own Equity (Subtopic 815-40). This ASU addresses the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models. Additionally, the ASU requires entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. This ASU will be effective for us on January 1, 2024; however, early adoption was permitted beginning January 1, 2021. We no longer believe this ASU is applicable to our consolidated financial statements and related disclosures. We will continue to evaluate this ASU if our financial instruments change.
ASU 2020-04 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates such as LIBOR that are expected to be discontinued. This ASU provides exceptions and optional expedients for applying GAAP to contract modifications, hedging relationships and other transactions that reference LIBOR or other reference rates to be discontinued as a result of reference rate reform. They do not apply to modifications made or hedges entered into or evaluated after December 31, 2022, unless the hedging relationships existed as of that date and optional expedients for them were elected and retained through the end of the hedging relationship. This ASU became effective upon issuance. We evaluated the effect of this ASU on our contracts and debt agreement that include LIBOR rates and concluded any impact is not expected to be material.
9
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Income (Loss) Per Common Share
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands, Except Per Share Amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
103,399 |
|
|
$ |
23,670 |
|
|
$ |
162,165 |
|
|
$ |
10,391 |
|
Adjustments for basic income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend requirements on Series E Redeemable
Preferred |
|
|
— |
|
|
|
(10,213 |
) |
|
|
— |
|
|
|
(19,724 |
) |
Dividend requirements on Series B Preferred |
|
|
— |
|
|
|
(60 |
) |
|
|
— |
|
|
|
(120 |
) |
Dividend requirements on Series D Preferred |
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
(30 |
) |
Accretion of Series E Redeemable Preferred |
|
|
— |
|
|
|
(513 |
) |
|
|
— |
|
|
|
(1,024 |
) |
Net income attributable to participating securities |
|
|
— |
|
|
|
(223 |
) |
|
|
— |
|
|
|
— |
|
Numerator for basic net income (loss) per common
share - net income (loss) attributable to common
stockholders |
|
$ |
103,399 |
|
|
$ |
12,646 |
|
|
$ |
162,165 |
|
|
$ |
(10,507 |
) |
Dividends on Series B and Series D Preferred
assumed to be converted, if dilutive |
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
— |
|
Numerator for diluted net income (loss) per common
share |
|
$ |
103,399 |
|
|
$ |
12,721 |
|
|
$ |
162,165 |
|
|
$ |
(10,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per common
share - adjusted weighted-average shares (1) |
|
|
88,181 |
|
|
|
37,031 |
|
|
|
88,301 |
|
|
|
37,162 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stocks |
|
|
— |
|
|
|
1,192 |
|
|
|
— |
|
|
|
— |
|
Unvested restricted stock and stock units |
|
|
1,383 |
|
|
|
964 |
|
|
|
1,364 |
|
|
|
— |
|
Dilutive potential common shares |
|
|
1,383 |
|
|
|
2,156 |
|
|
|
1,364 |
|
|
|
— |
|
Denominator for diluted net income (loss) per
common share - adjusted weighted-average
shares |
|
|
89,564 |
|
|
|
39,187 |
|
|
|
89,665 |
|
|
|
37,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
1.17 |
|
|
$ |
0.34 |
|
|
$ |
1.84 |
|
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
1.15 |
|
|
$ |
0.32 |
|
|
$ |
1.81 |
|
|
$ |
(0.28 |
) |
|
(1) |
Excludes the weighted-average shares of unvested restricted stock that are contingently issuable. |
The following weighted-average shares of securities were not included in the computation of diluted net loss per common share as their effect would have been antidilutive:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Restricted stock and stock units |
|
|
82,072 |
|
|
|
— |
|
|
|
41,037 |
|
|
|
2,142,335 |
|
Convertible preferred stocks |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,191,666 |
|
Series E Redeemable Preferred - embedded derivative |
|
|
— |
|
|
|
303,646 |
|
|
|
— |
|
|
|
303,646 |
|
Stock options |
|
|
13,000 |
|
|
|
81,274 |
|
|
|
13,000 |
|
|
|
94,390 |
|
|
|
|
95,072 |
|
|
|
384,920 |
|
|
|
54,037 |
|
|
|
3,732,037 |
|
10
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Current and Noncurrent Accrued and Other Liabilities
|
|
June 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands) |
|
Current portion of operating lease liabilities |
|
$ |
8,382 |
|
|
$ |
7,755 |
|
Accrued interest |
|
|
7,390 |
|
|
|
8,397 |
|
Accrued payroll and benefits |
|
|
6,951 |
|
|
|
9,794 |
|
Accrued death and other executive benefits |
|
|
2,502 |
|
|
|
2,514 |
|
Accrued health and worker compensation insurance claims |
|
|
1,105 |
|
|
|
1,272 |
|
Other |
|
|
5,518 |
|
|
|
6,599 |
|
|
|
|
31,848 |
|
|
|
36,331 |
|
Less noncurrent portion |
|
|
523 |
|
|
|
3,030 |
|
Current portion of accrued and other liabilities |
|
$ |
31,325 |
|
|
$ |
33,301 |
|
4. Long-Term Debt
Our long-term debt consists of the following:
|
|
June 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands) |
|
Working Capital Revolver Loan, with a current interest
rate of 5.25% (A) |
|
$ |
— |
|
|
$ |
— |
|
Senior Secured Notes due 2028, with an interest
rate of 6.25% (B) |
|
|
700,000 |
|
|
|
500,000 |
|
Secured Financing due 2023, with an interest
rate of 8.32% (C) |
|
|
6,110 |
|
|
|
7,712 |
|
Secured Financing due 2025, with an interest
rate of 8.75% (D) |
|
|
22,063 |
|
|
|
23,987 |
|
Secured Loan Agreement due 2025 (E) |
|
|
— |
|
|
|
5,328 |
|
Other |
|
|
629 |
|
|
|
339 |
|
Unamortized discount, net of premium and debt issuance
costs |
|
|
(13,398 |
) |
|
|
(9,722 |
) |
|
|
|
715,404 |
|
|
|
527,644 |
|
Less current portion of long-term debt |
|
|
10,977 |
|
|
|
9,454 |
|
Long-term debt due after one year, net |
|
$ |
704,427 |
|
|
$ |
518,190 |
|
(A) Our revolving credit facility, as amended (the “Working Capital Revolver Loan”), provides for advances up to $65 million (the “Maximum Revolver Amount”), based on specific percentages of eligible accounts receivable and inventories and up to $10 million of letters of credit, the outstanding amount as of June 30, 2022, was $1.6 million, which reduces the available for borrowing under the Working Capital Revolver Loan. At June 30, 2022, our available borrowings under our Working Capital Revolver Loan were approximately $63.4 million, based on our eligible collateral, less outstanding letters of credit and loan balance. The maturity date of the Working Capital Revolver Loan is on the earlier of (i) the date that is 90 days prior to the earliest stated maturity date of the Senior Secured Notes (unless refinanced or repaid) and (ii) February 26, 2024. Subject to certain conditions and subject to lender approval, the Maximum Revolver Amount may increase up to an additional $10 million. The Working Capital Revolver Loan also provides for a springing financial covenant (the “Financial Covenant”), which requires that, if the borrowing availability is less than 10.0% of the total revolver commitments, then the borrowers must maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00. The Financial Covenant, if triggered, is tested monthly.
11
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Long-Term Debt (continued)
(B) On October 14, 2021, LSB completed the issuance and sale of $500 million aggregate principal amount of the Notes of its 6.25% Senior Secured Notes due 2028 (the “Notes”), pursuant to an indenture (the “Indenture”), dated as of October 14, 2021. The Notes were issued at a price equal to 100% of their face value.
On March 8, 2022, LSB completed the issuance and sale of an additional $200 million aggregate principal amount of the Notes (the “New Notes”), which were issued pursuant to the Indenture (the Notes together with the New Notes, the “Senior Secured Notes”). The New Notes were issued at a price equal to 100% of their face value, plus accrued interest from October 14, 2021 to March 7, 2022.
The Senior Secured Notes mature on October 15, 2028. Interest is to be paid in arrears on May 15 and October 15.
As it relates to the issuance of the Notes in October 2021, most of the proceeds from the Notes were used to purchase/redeem the previously outstanding $435 million aggregate principal amount of senior secured notes scheduled to mature in 2023. The remaining net proceeds were primarily used to pay related transaction fees. This transaction was accounted for as an extinguishment of debt. As a result, we recognized a loss on extinguishment of debt of approximately $20.3 million in 2021, primarily consisting of a portion of the contractual redemption premium paid and the expensing of unamortized debt issuance costs associated with the senior secured notes purchased/redeemed.
(C) El Dorado Chemical Company (“EDC”), one of our subsidiaries, is party to a secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due in June 2023.
(D) In August 2020, El Dorado Ammonia L.L.C. (“EDA”), one of our subsidiaries, entered into a $30 million secured financing arrangement with an affiliate of LSB Funding. Beginning in September 2020, principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025. This financing arrangement is secured by an ammonia storage tank and is guaranteed by LSB.
(E) During the first quarter of 2022 EDC’s secured loan agreement with an affiliate of LSB Funding was paid off resulting in a minimal loss on extinguishment of debt.
5. Commitments and Contingencies
Outstanding Natural Gas Purchase Commitments – At June 30, 2022, certain of our natural gas contracts qualify as normal purchases under GAAP and thus are not mark-to-market. These contracts included volume purchase commitments with fixed costs of approximately 11.5 million MMBtus of natural gas and 22.9 million MMBtus of locked basis differential. Further, the natural gas contracts extend through December 2023 at a weighted-average cost of $6.44 per MMBtu ($73.8 million) and a weighted-average market value of $5.17 per MMBtu ($59.2 million).
Legal Matters - Following is a summary of certain legal matters involving the Company:
A. Environmental Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health and safety matters (collectively, the “Environmental and Health Laws”), many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.
In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety effects of our operations.
12
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (continued)
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines or penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage if an environmental claim is made against us. The Environmental and Health Laws and related enforcement policies have in the past resulted and could in the future result, in significant compliance expenses, cleanup costs (for our sites or third-party sites where our wastes were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products. Further, a number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material adverse effect on their operations and our financial condition.
Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental and Health Laws and significant capital expenditures are expected to be incurred in the future. We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a facility.
As of June 30, 2022, our accrued liabilities for environmental matters totaled approximately $0.5 million relating primarily to the matters discussed below. Estimates of the most likely costs for our environmental matters are generally based on preliminary or completed assessment studies, preliminary results of studies, or our experience with other similar matters. It is reasonably possible that a change in the estimate of our liability could occur in the near term.
1. Discharge Water Matters
Each of our manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control streams, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental agencies as authorized and overseen by the U.S. Environmental Protection Agency. These permits limit the type and volume of effluents that can be discharged and control the method of such discharge.
In 2017, the Pryor Chemical Company (“PCC”) filed a Permit Renewal Application for its Non-Hazardous Injection Well Permit at the Pryor Facility. Although the Injection Well Permit expired in 2018, PCC continues to operate the injection well pending the Oklahoma Department of Environmental Quality (“ODEQ”) action on the Permit Renewal Application. Since that time, PCC and ODEQ engaged in ongoing discussions related to the renewal of the injection well to address the wastewater stream. In 2022, ODEQ responded to the application in the form of an information request. PCC is currently corresponding with ODEQ general council regarding the well integrity and appropriate methods for establishing injection pressure in order to respond.
In 2006, the El Dorado Facility entered into a Consent Administrative Order (“CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater. The CAO required EDC to perform semi-annual groundwater monitoring, continue operation of a groundwater recovery system, submit a human health and ecological risk assessment and submit a remedial action plan.
The risk assessment was submitted in 2007. In 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should continue semi-annual monitoring. A CAO was signed in 2018, which required an Evaluation Report of the data and effectiveness of the groundwater remedy for nitrate contamination. During 2019, the Evaluation Report was submitted to the ADEQ and the ADEQ approved the report. No liability has been established as of June 30, 2022, in connection with this ADEQ matter.
2. Other Environmental Matters
In 2002, certain of our subsidiaries sold substantially all of their operating assets relating to a Kansas chemical facility (the “Hallowell Facility”) but retained ownership of the real property where the facility is located. Our subsidiary retained the obligation to be responsible for and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property, develop a corrective action strategy based on the investigation and implement such strategy. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters.
As the successor to a prior owner of the Hallowell Facility, Chevron Environmental Management Company (“Chevron”) has agreed in writing, within certain limitations, to pay and has been paying one-half of the costs of the investigation and interim measures relating to this matter as approved by the Kansas Department of Health and Environment (the “KDHE”), subject to reallocation.
During this process, our subsidiary and Chevron retained an environmental consultant that prepared and performed a corrective action study work plan as to the appropriate method to remediate the Hallowell Facility. During 2020, the KDHE selected a remedy of annual monitoring and the implementation of an Environmental Use Control (“EUC”). This remedy primarily relates to long-term surface and groundwater monitoring to track the natural decline in contamination and is subject to a 5-year re-evaluation with the KDHE.
13
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (continued)
The final remedy, including the EUC, the finalization of the cost estimates and any required financial assurances remains under discussion with the KDHE. Pending the results from our discussions regarding the final remedy, we continue to accrue our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which amount is included in our accrued liabilities for environmental matters discussed above. The estimated amount is not discounted to its present value. As more information becomes available, our estimated accrual will be refined, as necessary.
B. Other Pending, Threatened or Settled Litigation
In 2013, an explosion and fire occurred at the West Fertilizer Co. (“West Fertilizer”) located in West, Texas, causing death, bodily injury and substantial property damage. West Fertilizer is not owned or controlled by us, but West Fertilizer was a customer of EDC and purchased AN from EDC from time to time. LSB and EDC received letters from counsel purporting to represent subrogated insurance carriers, personal injury claimants and persons who suffered property damages informing LSB and EDC that their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether AN manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether such AN may have been one of the contributing factors of the explosion. Initial lawsuits filed named West Fertilizer and another supplier of AN as defendants.
In 2014, EDC and LSB were named as defendants, together with other AN manufacturers and brokers that arranged the transport and delivery of AN to West Fertilizer, in the case styled City of West, Texas vs. CF Industries, Inc., et al., in the District Court of McLennan County, Texas. The plaintiffs allege, among other things, that LSB and EDC were negligent in the production and marketing of fertilizer products sold to West Fertilizer, resulting in death, personal injury and property damage. EDC retained a firm specializing in cause and origin investigations with particular experience with fertilizer facilities, to assist EDC in its own investigation. LSB and EDC placed its liability insurance carrier on notice and the carrier is handling the defense for LSB and EDC concerning this matter.
Our product liability insurance policies have aggregate limits of general liability totaling $100 million, with a self-insured retention of $250,000, which retention limit has been met relating to the West Fertilizer matter. In August 2015, the trial court dismissed plaintiff’s negligence claims against us and EDC based on a duty to inspect but allowed the plaintiffs to proceed on claims for design defect and failure to warn.
Subsequently, we and EDC have entered into confidential settlement agreements (with approval of our insurance carriers) with several plaintiffs that had claimed wrongful death and bodily injury and insurance companies asserting subrogation claims for damages from the explosion. While these settlements resolve the claims of a number of the claimants in this matter, we continue to be party to litigation related to the explosion. We continue to defend these lawsuits vigorously and we are unable to estimate a possible range of loss at this time if there is an adverse outcome in this matter. As of June 30, 2022, no liability reserve has been established in connection with this matter.
In 2015, we and EDA received formal written notice from Global Industrial, Inc. (“Global”) of Global’s intention to assert mechanic liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new ammonia plant (“Ammonia Plant”) at our El Dorado Facility. Global was a subcontractor of Leidos Constructors, LLC (“Leidos”), the general contractor for EDA for the construction for the Ammonia Plant. Leidos terminated the services of Global with respect to their work performed at our El Dorado Facility.
LSB and EDA are pursuing the recovery of any damage or loss caused by Global’s work performed through their contract with Leidos at our El Dorado Facility. In March 2016, EDC and LSB were served a summons in a case styled Global Industrial, Inc. d/b/a Global Turnaround vs. Leidos Constructors, LLC et al., in the Circuit court of Union County, Arkansas, wherein Global sought damages under breach of contract and other claims. At the time of the summons, our accounts payable included invoices totaling approximately $3.5 million related to the claims asserted by Global, but such invoices were not approved by Leidos for payment. We have requested indemnification from Leidos under the terms of our contracts, which they have denied. As a result, we are seeking reimbursement of legal expenses from Leidos under our contracts. We also seek damages from Leidos for their wrongdoing during the expansion, including breach of contract, fraud, professional negligence and gross negligence.
During 2018, the court bifurcated the case into: (1) Global’s claims against Leidos and LSB and (2) the cross-claims between Leidos and LSB. Part (1) of the case was tried in the court. In March 2020, the court rendered an interim judgment and issued its final judgment in April 2020. In summary, the judgment awarded Global (i) approximately $7.4 million (including the $3.5 million discussed above) for labor, service and materials furnished relating to the Ammonia Plant, (ii) approximately $1.3 million for prejudgment interest and (iii) a claim of lien on certain property and the foreclosure of the lien to satisfy these obligations. In addition, post-judgment interest will accrue at the annual rate of 4.25% until paid. This judgement was accrued for at the time of the ruling.
We have filed a notice of intent to appeal and the court entered a stay of the judgment pending appeal.
14
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (continued)
LSB intends to vigorously prosecute its claims against Leidos and vigorously contest the cross-claims in Part (2) of the matter. Due to the impact from the COVID-19 pandemic, the trial date for Part (2) of the matter has been delayed and we are awaiting a new trial date.
No liability was established at June 30, 2022 or December 31, 2021, in connection with the cross-claims in Part (2) of the matter, except for certain invoices held in accounts payable.
We are also involved in various other claims and legal actions (including matters involving gain contingencies). It is possible that the actual future development of claims could be different from our estimates but, after consultation with legal counsel, we believe that changes in our estimates will not have a material effect on our business, financial condition, results of operations or cash flows.
6. Derivatives, Hedges and Financial Instruments
Natural Gas Contracts
Periodically, we entered into certain forward natural gas contracts, which are accounted for on a mark-to-market basis. We are utilizing these natural gas contracts as economic hedges for risk management purposes but are not designated as hedging instruments. At June 30, 2022 and December 31, 2021, we had no outstanding natural gas contracts. When present the valuations of the natural gas contracts are classified as Level 2.
For the three months ended June 30, 2021 we had no outstanding natural gas contracts. For the six months ended June 30, 2021, we recognized a gain of $2.7 million (includes a realized gain of $1.5 million), all of which was recognized in the first quarter. The gain is classified as a reduction of cost of sales.
Financial Instruments
At June 30, 2022 and December 31, 2021, we did not have any financial instruments with fair values materially different from their carrying amounts (which excludes issuance costs, if applicable) except for our Senior Secured Notes included in the table below. The carrying value of our Senior Secured Notes approximates fair value and is classified as a Level 2 fair value measurement. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities since financial instruments do not include all assets, including intangibles and all liabilities.
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
(In Millions) |
|
Senior Secured Notes (1) |
|
$ |
700 |
|
|
$ |
627 |
|
|
$ |
500 |
|
|
$ |
516 |
|
|
(1) |
Based on a quoted price of 89.50 at June 30, 2022 and 103.25 at December 31, 2021. |
15
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Income Taxes
Provision (benefit) for income taxes is as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
605 |
|
|
|
(175 |
) |
|
|
897 |
|
|
|
(462 |
) |
Total Current |
|
$ |
605 |
|
|
$ |
(175 |
) |
|
$ |
897 |
|
|
$ |
(462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
19,294 |
|
|
$ |
(57 |
) |
|
$ |
30,679 |
|
|
$ |
(136 |
) |
State |
|
|
483 |
|
|
|
(16 |
) |
|
|
(79 |
) |
|
|
392 |
|
Total Deferred |
|
$ |
19,777 |
|
|
$ |
(73 |
) |
|
$ |
30,600 |
|
|
$ |
256 |
|
Provision for income taxes |
|
$ |
20,382 |
|
|
$ |
(248 |
) |
|
$ |
31,497 |
|
|
$ |
(206 |
) |
For the three and six months ended June 30, 2022 and 2021, the current provision (benefit) for state income taxes shown above includes regular state income tax, provisions for uncertain state income tax positions, the impact of state tax law changes and other similar adjustments.
Our estimated annual effective rate for 2022 includes the impact of permanent tax differences, limits on deductible compensation, valuation allowances and other permanent items.
We considered both positive and negative evidence in our determination of the need for valuation allowances for deferred tax assets. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and tax carrybacks, as well as an evaluation of currently available information about future years. Valuation allowances are reflective of our quarterly analysis of the four sources of taxable income, including the calculation of the reversal of existing tax assets and liabilities, the impact of financing activities and our quarterly results. Based on our analysis, we currently believe that it is more-likely-than-not our federal deferred tax assets will be able to be utilized. Thus, we estimate a $12.7 million reduction in the related valuation allowance associated with these federal deferred tax assets will be recognized throughout the year as part of the estimated annual effective tax rate applied to ordinary income. We have determined it is more-likely-than-not that a portion of our state deferred tax assets will not be able to be utilized. However, we estimate a $6.6 million reduction in the related valuation allowance associated with these state deferred tax assets will be recognized throughout the year as part of the estimated annual effective tax rate applied to ordinary income.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.
The tax provision for the six months ended June 30, 2022 was $31.5 million (16.3% provision on pre-tax income). The tax benefit for the six months ended June 30, 2021 was $0.2 million (2% benefit on pre-tax income). For both periods, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation allowances. For the six months ended June 30, 2021, the effective tax rate was also impacted by the PPP loan forgiveness and state tax law changes.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the 2018-2021 years remain open for all purposes of examination by the U.S. Internal Revenue Service (“IRS”) and other major tax jurisdictions. Additionally, the 2013-2017 years remain subject to examination for determining the amount of net operating loss and other carryforwards.
16
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Net Sales
Disaggregated Net Sales
We primarily derive our revenues from the sales of various chemical products. The Company’s net sales disaggregation is consistent with other financial information utilized or provided outside of our condensed consolidated financial statements. With our continued focus on optimizing our commercial strategy and product mix going forward we will report revenue by product as opposed to the end market. Accordingly, this approach is reflected in disaggregated net sales, mirroring how the Company manages its net sales by product through contracts with customers.
The following table presents our net sales disaggregated by our principal product types:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AN & Nitric Acid |
|
$ |
96,142 |
|
|
$ |
56,739 |
|
|
$ |
167,942 |
|
|
$ |
106,576 |
|
Urea ammonium nitrate (UAN) |
|
|
76,986 |
|
|
|
29,899 |
|
|
|
133,555 |
|
|
|
47,537 |
|
Ammonia |
|
|
89,444 |
|
|
|
38,541 |
|
|
|
148,786 |
|
|
|
59,706 |
|
Other |
|
|
22,231 |
|
|
|
15,517 |
|
|
|
33,501 |
|
|
|
24,993 |
|
Total net sales |
|
$ |
284,803 |
|
|
$ |
140,696 |
|
|
$ |
483,784 |
|
|
$ |
238,812 |
|
Other Information
Although most of our contracts have an original expected duration of one year or less, for our contracts with a duration greater than one year at contract inception, the average remaining expected duration was approximately 22 months at June 30, 2022.
Liabilities associated with contracts with customers (contract liabilities) primarily relate to deferred revenue and customer deposits associated with cash payments received in advance from customers for volume shortfall charges and product shipments. We had approximately $0.4 million and $1.6 million of contract liabilities as of June 30, 2022 and December 31, 2021, respectively. For the three and six months ended June 30, 2022, revenues of $1.5 million and $1.4 million, respectively, were recognized and included in the balance at the beginning of the respective period. For the three and six months ended June 30, 2021, revenues of $1.0 million and $1.6 million, respectively, were recognized and included in the balance at the beginning of the respective period.
For most of our contracts with customers, the transaction price from the inception of a contract is constrained to a short period of time (generally one month) as these contracts contain terms with variable consideration related to both price and quantity. At June 30, 2022, we have remaining performance obligations with certain customer contracts, excluding contracts with original durations of less than one year and for service contracts for which we have elected the practical expedient for consideration recognized in revenue as invoiced. The remaining performance obligations totals approximately $72 million, of which approximately 35% of this amount relates to 2022 through 2024, approximately 31% relates to 2025 through 2026, with the remainder thereafter.
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Related Party Transactions
As of June 30, 2022, we have two separate outstanding financing arrangements by an affiliate of LSB Funding as discussed in footnotes (C) and (D) of Note 4. An affiliate of LSB Funding holds $30 million of the New Notes.
We are party to a death benefit agreement (“2005 Agreement”) with Jack E. Golsen (“J. Golsen”), who retired effective December 31, 2017. The 2005 Agreement provided that, upon J. Golsen’s death, we will pay to the designated beneficiary, a lump-sum payment of $2.5 million. J. Golsen passed away in April 2022. Further the Company has maintained and owns a life insurance policy with a face value of $3.0 million for which the Company is the beneficiary. The policy did not have any cash surrender value, premium payments were current and the policy was in force at the time of Golsen’s death. The $2.5 million death benefit payable to the Golsen beneficiary is recorded as a current liability. Our insurer has approved the insurance claim which causes it to be realizable at June 30, 2022 under our insurance policy. We have recorded $3.0 million in other accounts receivable in our June 30, 2022 condensed consolidated balance sheet and a settlement of life insurance presented within non-operating other expense (income), net within our condensed consolidated statements of operations for the three and six months ended June 30, 2022. The settlement of life insurance is included in our condensed consolidated statement of cash flows in “Other” under adjustments to reconcile net income to net cash provided by operating activities. We received the settlement payment of $3.0 million and paid the death benefit of $2.5 million in July 2022.
10. Supplemental Cash Flow Information
The following provides additional information relating to cash flow activities:
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands) |
|
Cash payments (refunds) for: |
|
|
|
|
|
|
|
|
Income taxes, net |
|
$ |
870 |
|
|
$ |
(183 |
) |
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Accounts receivable, supplies, other assets, accounts
payable and accrued liabilities associated with additions
of property, plant and equipment |
|
$ |
15,353 |
|
|
$ |
15,484 |
|
Settlement of life insurance (1) |
|
$ |
3,000 |
|
|
$ |
— |
|
Accounts payable associated with debt-related costs |
|
$ |
387 |
|
|
$ |
— |
|
Loss on extinguishment of debt |
|
$ |
113 |
|
|
$ |
— |
|
Dividends accrued on Series E Redeemable Preferred |
|
$ |
— |
|
|
$ |
19,724 |
|
Accretion of Series E Redeemable Preferred |
|
$ |
— |
|
|
$ |
1,024 |
|
Gain on extinguishment of PPP loan |
|
$ |
— |
|
|
$ |
10,000 |
|
Accounts payable associated with financing professional fees |
|
$ |
— |
|
|
$ |
1,916 |
|
|
(1) |
The settlement of life insurance is included in our condensed consolidated statement of cash flows in “Other” under adjustments to reconcile net income to net cash provided by operating activities. |
18