LSB INDUSTRIES INC

N/M Not meaningful.

(1)

Represents a non-GAAP measure. The amounts exclude unallocated depreciation and amortization and Turnaround expenses, which we believe are not reflective of our operating performance in a given period.

(2)

Represents amount classified as cost of sales.

(3)

As a percentage of total net sales.

The following tables provide key operating metrics for the fertilizer and major industrial products, the increase or decrease between those periods, and the percentage increase or decrease between those periods with respect to each line item:

Net Sales

As noted in the table above, we recorded net sales of $522.4 million in 2024, compared to $593.7 million for 2023, or a $71.3 million reduction. Net sales of our primary products decreased during 2024 compared to 2023 driven by the impact of lower selling prices relative to 2023 for most of our products and lower ammonia sales volumes partially offset by higher AN and acids sales volumes. The increase in sales volume of AN and acids products was driven largely by stronger production at our facilities reflecting the investments made in plant reliability over the past several years and enhanced by our strategic commercial efforts.

Gross Profit

As noted in the table above, we recognized a gross profit of $47.8 million for 2024 compared to $86.3 million for 2023, or a $38.5 million reduction. Overall, our gross profit percentage was 9% for 2024 compared to 15% for 2023. Our adjusted gross profit percentage increased to 31% for 2024 from 27% for 2023.

The decrease in gross profit in 2024 was primarily driven by lower overall sales prices for our products and higher planned Turnaround expenses partially offset by lower natural gas costs.

Selling, General and Administrative (“SG&A”)

Our selling, general and administrative expenses were $41.8 million for 2024, an increase of $5.2 million compared to 2023. The net increase was primarily driven by increases in payroll related costs as well as professional service fees.

Other Expense (income), net

Other expense, net for 2024 consists primarily of asset write-downs primarily related to assets no longer in use, partially offset by short-term rental income from railcar subleases. The write-downs were higher and rental income was lower in 2024 compared to 2023.

Interest Expense, net

Interest expense, net for 2024 was $34.5 million compared to $41.1 million for 2023. The decrease primarily relates to reduced interest expense as a result of repurchases of our Senior Secured Notes made beginning in the second quarter of 2023 and during 2024, along with a lower outstanding principal balance of our Secured Financing due 2025, partially offset by the reversal of interest accrued from a previous judgment awarded to Global Industrial, Inc. in the litigation discussed in Note 7 – Commitments and Contingencies, which included an interest component.

Gain on Extinguishment of Debt

In 2024, we repurchased $96.6 million of our Senior Secured Notes through open market transactions for approximately $92.2 million. As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $3.0 million.

In 2023, we repurchased $125.0 million of our Senior Secured Notes through open market transactions for approximately $114.3 million. As a result, we recognized a gain on extinguishment of debt net of issuance costs of approximately $8.6 million.

Non-operating Other Income, net

Non-operating other income for 2024 was $10.9 million compared to $14.6 million for 2023, primarily relating to interest income earned during both periods from our short-term investments.

(Benefit) provision for Income Taxes

The benefit for income taxes for 2024 was $6.7 million compared to the provision for income taxes of $6.0 million for 2023. The resulting effective tax rate for 2024 was 25.7% on pre-tax loss compared to 17.7% for 2023 on pre-tax income. For 2024, the effective tax rate was higher than the statutory rate primarily due to changes to valuation allowances and remeasurement of state deferred balances as a result of changes to state apportionment. For 2023, the effective tax rate was less than the statutory rate primarily due to the impact of state tax law changes and the remeasurement of state deferred balances. Also see discussion in Note 6 – Income Taxes.

Liquidity and Capital Resources

The following table summarizes our cash flow activities for 2024 and 2023:

Net Cash Flow from Operating Activities

Net cash provided by operating activities was $86.6 million for 2024 compared to $137.5 million for 2023, a decrease of $50.9 million. The decrease was a result of a reduction in net sales and interest income from short term investments partially offset by lower cost of sales, sublease income received in 2024, and working capital changes.

Net Cash Flow from Investing Activities

Net cash used by investing activities was $53.1 million for 2024 compared to $57.4 million provided by investing activities for 2023, a change of $110.5 million.

For 2024, the net cash used primarily relates to purchases of short-term investments of $270.9 million and expenditures for plant, property and equipment of $92.3 million partially offset by proceeds from maturities of short-term investments of $310.3 million.

For 2023, the net cash provided primarily relates to proceeds from maturities of short-term investments of $389.9 million, partially offset by purchases of short-term investments of $264.4 million and expenditures for plant, property and equipment of $67.6 million.

Net Cash Flow from Financing Activities

Net cash used by financing activities was $114.3 million for 2024 compared to $157.7 million used for 2023, a change of $43.4 million.

For 2024, the net cash used primarily consists of repurchases of our Senior Secured Notes of $92.2 million, payments on other long-term debt and short-term financing of $23.4 million and repurchases of $11.9 million of common stock partially offset by proceeds from short-term financing of $16.1 million.

For 2023, the net cash used primarily consists of repurchases of our Senior Secured Notes of $114.3 million, payments on other long-term debt and short-term financing of $30.1 million, payments of $28.3 million for the purchase of treasury stock and other payments of $2.8 million, partially offset by proceeds from short-term financing of $17.8 million.

Capitalization

The following table summarizes our total current cash, cash equivalents and short-term investments long-term debt and stockholders’ equity:

(1)

See discussion below relating to the debt repurchases.

(2)

Debt issuance costs as of December 31, 2024 and 2023 of approximately $0.6 million and $0.5 million, respectively, relating to our Revolving Credit Facility are not included in Unamortized debt issuance cost. These costs are included in our consolidated balance sheet in Intangible and other assets, net.

Revolving Credit Facility – In December 2023, we entered into a secured revolving credit facility (the “Revolving Credit Facility”) with the lenders identified on the signature pages thereof and JPMorgan Chase Bank, N.A, as administrative agent. The Revolving Credit Facility provides for borrowings up to an initial maximum of $75 million, with an option to increase the maximum by an additional $25 million (which amount is uncommitted). Availability under the Revolving Credit Facility is subject to a borrowing base and is subject to an availability block of $7.5 million, which is applied against the $75 million initially reducing the maximum (which can be removed by us at our sole discretion, subject to the satisfaction of certain conditions) (the “Availability Block”). The Revolving Credit Facility provides for a sub-facility for the issuance of letters of credit in an aggregate amount not to exceed $10 million, with the outstanding amount of any such letters of credit reducing availability for borrowings. As of December 31, 2024 our Revolving Credit Facility was undrawn and had approximately $37.2 million of availability.

The Revolving Credit Facility contains one financial covenant, which requires that, solely if we elect to remove the Availability Block, then we must maintain a minimum fixed charge coverage ratio of not less than 1.00:1.00. The financial covenant, if triggered, is tested monthly. The financial covenant was not triggered as of December 31, 2024.

Senior Secured Notes due 2028 – As of December 31, 2024, we had $478.4 million outstanding in aggregate principal amount of Senior Secured Notes, which originated from the issuance at par of two tranches of $500 million and $200 million in aggregate principal of such notes in October 2021 and March 2022, respectively. During 2024, we repurchased $96.6 million of Senior Secured Notes through open market transactions for approximately $92.2 million. As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $3.0 million. During 2023, we repurchased $125.0 million of Senior Secured Notes through open market transactions for approximately $114.3 million. As a result, we recognized a gain on extinguishment of debt, net of issuance costs, of approximately $8.6 million. The Senior Secured Notes have an interest rate of 6.25%, to be paid semiannually in arrears on May 15th and October 15th, and mature on October 15, 2028.

Secured Financing Agreement due 2025 –We are party to a $30 million secured financing arrangement with an affiliate of Eldridge Industries, L.L.C. (“Eldridge”). Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.

Finance Leases –Our finance leases consist primarily of leases on railcars. Most of our railcar leases are classified as operating leases.

Capital Expenditures –Our capital expenditures during 2024 relating to plant, property and equipment were $92.3 million compared to $67.6 million in 2023. Of the expenditures in 2024, approximately $67 million was spent on projects to sustain our production capacity while approximately $25 million was spent on growth initiatives. Our capital expenditures were funded primarily from cash and working capital. We expect capital expenditures to be approximately $80 million - $90 million for 2025 of which $60 million - $65 million is expected to be spent on sustaining production with the remainder spent on growth initiatives.

Liquidity –We believe that the combination of our cash and cash equivalents, short-term investments, the availability on our Revolving Credit Facility and our cash flow from operations will be sufficient to fund our anticipated liquidity needs for the next 12 months.

As of December 31, 2024, we had approximately $184.2 million in cash and cash equivalents and short-term investments. Our capital allocation strategy includes, from time to time, seeking to deploy capital through additional share repurchases or the retirement or purchase of outstanding debt. Such repurchases, those of which we describe below for 2024, may be made in open market purchases, privately negotiated transactions or otherwise and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Equity and Debt Repurchases –In May 2023, our Board authorized a $150 million stock repurchase program. The program is intended as a means to maximize stockholder value by returning capital to stockholders. Under the repurchase program, we are authorized to purchase shares from time to time through open market or privately negotiated transactions. Such purchases may be made pursuant to Rule 10b5-1 plans or other means as determined by our management and in accordance with the requirements of the SEC. The repurchase program does not obligate us to purchase any particular number or type of securities.

During 2024, we repurchased approximately 1.5 million shares of common stock at an average cost of $8.13 per share for a total of $12.1 million. During our fiscal quarter ended December 31, 2024, we did not repurchase any of our outstanding common stock. Total repurchase authority remaining under the repurchase program was $109 million as of December 31, 2024. The repurchase program does not have a set expiration date, but may be suspended, terminated or modified at any time for any reason.

During 2024, we repurchased $96.6 million of our Senior Secured Notes through open market transactions for approximately $92.2 million. The debt repurchase was intended as a means to deleverage our balance sheet and reduce future interest costs while maintaining a balanced capital allocation strategy that provides an appropriate level of liquidity to fund our operations and future growth opportunities.

Expenses Associated with Environmental Regulatory Compliance

We are subject to numerous federal, state and local laws and regulations, including matters regarding environmental, health and safety matters. As a result, we incurred expenses of $5.2 million in 2024 in connection with environmental projects, compared to $4.3 million in 2023. For 2025, we expect to incur expenses of approximately $5 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates.

Dividends

We have not paid cash dividends on our outstanding common stock in many years, and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future.

Seasonality

We believe sales of fertilizer products to the agricultural industry are seasonal while sales into the industrial sectors generally are less susceptible to seasonal conditions or cycles. The 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 in the geographical markets where we distribute the majority of our agricultural products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control.

Performance and Payment Bonds

We are contingently liable to sureties in respect of insurance bonds issued by the sureties in connection with certain contracts entered into by subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As of December 31, 2024, we have agreed to indemnify the sureties for payments, up to $10.3 million, made by them in respect of such bonds. All of these insurance bonds are expected to expire or be renewed in 2025.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934.

Aggregate Contractual Obligations

As of December 31, 2024 our aggregate contractual obligations are summarized in the following table:

(1)

The estimated interest payments are all based on fixed interest rates. As of December 31, 2024, we do not have any outstanding borrowings based on variable interest rates.

(2)

Our proportionate share of the minimum costs to ensure capacity relating to a gathering and pipeline system.

(3)

Includes commitments for utility purchases, natural gas transportation and forward contracts on natural gas.

New Accounting Pronouncements

Refer to Note 1 – Summary of Significant Accounting Policies for recently adopted and issued accounting standards.

Critical Accounting Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values. It is reasonably possible that the estimates and assumptions utilized as of December 31, 2024, could change in the near term. The more critical areas of financial reporting affected by management's judgment, estimates and assumptions include the following:

Contingencies – Certain conditions may exist which may result in a loss, but which will only be resolved when future events occur. We 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 loss when such loss 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 realizable and earned.

We are involved in various legal matters that require management to make estimates and assumptions as discussed in Note 7 – Commitments and Contingencies.

It is reasonably possible that the actual costs could be significantly different than our estimates.

Regulatory Compliance – As discussed under “Item 1 – Government Laws and Regulations” of this report, we are subject to numerous federal, state, and local laws and regulations, including matters regarding environmental, health and safety matters. We have developed policies and procedures related to regulatory compliance. We must continually monitor whether we have maintained compliance with such laws and regulations and the operating implications, if any, and amount of penalties, fines and assessments that may result from noncompliance. We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our chemical facilities should we discontinue the operations of a facility. Certain conditions exist which may result in a loss, but which will only be resolved when future events occur relating to these matters. We are involved in various environmental matters that require management to make estimates and assumptions, including matters discussed in “ Note 7 – Commitments and Contingencies.” As of December 31, 2024 and 2023, liabilities totaling $0.6 million and $0.4 million, respectively, have been accrued relating to these matters. It is also reasonably possible that the estimates and assumptions utilized as of December 31, 2024 could change in the near term. Actual results could differ materially from these estimates and judgments, as additional information becomes known.

Income Tax –As discussed under “Income Taxes” in Note 1 – Summary of Significant Accounting Policies and in Note 6 – Income Taxes, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. As of December 31, 2024 and 2023, our valuation allowance on deferred tax assets was $14.2 million and $15.2 million, respectively.

Non-GAAP Financial Measures

Management uses adjusted gross profit as a supplemental measure to review and assess the performance of our core business operations and for planning purposes. We define adjusted gross profit as gross profit excluding depreciation and amortization and Turnaround expenses associated with our cost of sales, which we believe are not reflective of our operating performance in a given period.

Adjusted gross profit is a metric that provides investors with greater transparency to the information used by management in its financial and operational decision-making. We believe this metric is useful to investors because it facilitates comparisons of our core business operations across periods on a consistent basis. Management believes that the non-GAAP measure presented in this Annual Report on Form 10-K, when viewed in combination with our results prepared in accordance with U.S. GAAP, provides a more complete understanding of the factors and trends affecting our business and performance.

Adjusted gross profit is not a measure of financial performance under U.S. GAAP, and should not be considered a substitute for gross profit, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted gross profit has limitations as an analytical tool, and when assessing our operating performance, investors should not consider adjusted gross profit in isolation, or as a substitute for gross profit prepared in accordance with U.S. GAAP. Adjusted gross profit may not be comparable to similarly titled measures of other companies and other companies may not calculate such measure in the same manner as we do.

The following table reconciles gross profit to adjusted gross profit.