EDGAR 10-K Filing

Company CIK: 60714
Filing Year: 2021
Filename: 60714_10-K_2021_0001564590-21-008804.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
All references to “LSB Industries,” “LSB,” “the Company,” “we,” “us,” and “our” refer to LSB Industries, Inc. and its subsidiaries, except where the context makes clear that the reference is only to LSB Industries, Inc. itself and not its subsidiaries. Notes referenced throughout this document refer to consolidated financial statement footnote disclosures that are found in Item 8.
The Company was formed in 1968 as an Oklahoma corporation and became a Delaware corporation in 1977. We manufacture and market chemical products for the agricultural, industrial and mining markets. We own and operate facilities in El Dorado, Arkansas (the “El Dorado Facility”), Cherokee, Alabama (the “Cherokee Facility”), and Pryor, Oklahoma (the “Pryor Facility”), and we operate a facility on behalf of a global chemical company in Baytown, Texas (the “Baytown Facility”). Our products are sold through distributors and directly to end customers throughout the United States and parts of Mexico and Canada.
Our Business
Our business manufactures products for three principal markets:
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Agricultural Markets: ammonia, fertilizer grade ammonium nitrate (“AN” and “HDAN”) and urea ammonia nitrate (“UAN”);
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Industrial Markets: 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 (“DEF”); and
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Mining Markets: industrial grade AN (“LDAN”) and AN solutions.
The products we manufacture at our facilities are primarily derived from natural gas (a raw material feedstock). Our facilities and production processes have been designed to produce products that are marketable at nearly each stage of production. This design has allowed us to develop and deploy a business model optimizing the mix of products to capture the value opportunities in the end markets we serve with a focus on balancing our production.
The chart below highlights representative products and applications in each of our end markets.
End Market
Products
Applications
Agricultural
UAN, HDAN and ammonia
Fertilizer and fertilizer blends for corn and other crops; NPK fertilizer blends
Industrial
Nitric acid, metallurgical and commercial grade ammonia, sulfuric acid, diesel exhaust fluid and other urea solutions, Specialty E-2 ammonium nitrate and CO2
Semi-conductor and polyurethane intermediates, ordnance; Pulp and paper, alum, water treatment, metals and vanadium processing; Power plant emissions abatement, water treatment, refrigerants, metals processing; Exhaust stream additive, horticulture / greenhouse applications; refrigeration
Mining
LDAN, AN solution and HDAN
Ammonium nitrate fuel oil (ANFO) and specialty emulsions for mining applications, surface mining, quarries, and construction
The following table summarizes net sales information relating to our products:
Percentage of consolidated net sales:
Agricultural products
%
%
Industrial products
%
%
Mining products
%
%
%
%
For information regarding our net sales, operating results and total assets for the past three fiscal years, see the Consolidated Financial Statements included in this report.
Our Strategy
We pursue a strategy of balancing the sale of product as fertilizer into the agriculture markets at spot prices or short duration pre-sales and developing industrial and mining customers that purchase substantial quantities of products, primarily under contractual obligations and/or pricing arrangements that generally provide for the pass through of some raw material and other manufacturing costs. We believe this product and market diversification strategy allows us to have more consistent levels of production compared to some of our competitors and helps reduce the volatility risk inherent in the prices of our raw material feedstock and/or the changes in demand for our products.
The strategy of developing industrial and mining customers helps to moderate the risk inherent in the agricultural markets where spot sales prices of our agricultural products may not have a correlation to the natural gas feedstock costs but rather reflect market conditions for like and competing nitrogen sources. This volatility of sales pricing in our agricultural products may, from time to time, compromise our ability to recover our full cost to produce the product. Additionally, the lack of sufficient non-seasonal agricultural sales volume to operate our manufacturing facilities at optimum levels can preclude us from balancing production and storage capabilities. Looking forward, we remain focused on upgrading margins by maximizing downstream production. Our strategy calls for further development of industrial customers who assume the volatility risk associated with the raw material costs and mitigate the effects of seasonality in the agricultural sector.
Our strategy also includes evaluating acquisitions of strategic assets or companies, mergers with other companies and investment in additional production capacity where we believe those acquisitions, mergers or expansion of production capacity will enhance the value of the Company and provide appropriate returns.
Key Operating Initiatives for 2021
As discussed in more detail under “Key Operating Initiatives for 2021” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contained in Item 7 of this report, we believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following key initiatives:
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Continue Focusing on Becoming a “Best in Class” Chemical Plant Operator with respect to Safe, Reliable Operations that Produce the Highest Quality Product.
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Continue Broadening the Distribution of our Products.
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Development of a Strategy to Capitalize on Ammonia Opportunities in a Renewable Energy Focused Economy.
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Improving Our Capital Structure and Overall Cost of Capital.
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Evaluate Acquisition of Strategic Assets or Companies.
COVID-19 Pandemic
All of the facilities we operate have been designated as essential critical infrastructure based on guidelines issued by the United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service provider, and therefore, our facilities have remained operational despite the government mandated operational limitations or business closings resulting from the federal, state and local government responses to the evolving global health crisis resulting from the COVID-19 pandemic. Management has taken significant measures to ensure the health and safety of our employees and our business continuity during this challenging situation. For our personnel at our manufacturing facilities and retail agricultural centers, we have developed plans and procedures that have allowed them to operate in a safe manner in order to protect them, their families, our vendors and our customers. These include daily health screenings, including temperature checks and questionnaires, use of proper personal protection equipment, regular disinfection and cleaning of equipment and workspaces, social distancing, working from home where appropriate and quarantining of employees according to specific protocols. We intend to maintain our discipline in this regard for however long the current health risk persists.
The nitrogen chemical industry was under pressure during most of 2020. As a result of the global economic downturn caused by the COVID-19 pandemic and the resultant decline in energy prices, industry operating rates increased globally, resulting in greater supply and lower fertilizer pricing. Pricing for all major agricultural product categories was impacted by the continued oversupply of ammonia in our primary end markets, along with increased imports of some of our downstream products. Industrial and mining sales volume declined as a result of pandemic-related weakness in demand in several of our end markets.
Looking ahead to 2021, while much of the U.S. economy has a least partially reopened, uncertainty remains with respect to our various end markets. On the agricultural side, the corn market has recently experienced some positive indicators as discussed below under “Agricultural Market Conditions.” However, improvements in fertilizer pricing could be tempered from higher natural gas costs and additional imported fertilizers. With respect to industrial and mining sales volume, we are seeing gradual improvement in demand for nitric acid, industrial ammonia and ammonium nitrate as sectors such as automotive manufacturing, home building, and copper mining have increased activity. Also see discussion below under “Industrial and Mining Products” concerning a new long-term nitric acid supply contract with a customer.
On the liquidity front, as of December 31, 2020, we had approximately $58.1 million of combined cash and borrowing capacity, which, we believe, provides us with ample liquidity to fund our operations and meet our current obligations. Also see discussions under “Liquidity and Capital Resources” of our MD&A.
Our Competitive Strengths
Strategically Located Chemical Assets and Long-Standing Customer Relationships
Our business benefits from highly advantageous locations with logistical and distribution benefits. We have access to the Nustar ammonia pipeline from the U.S. Gulf at our El Dorado Facility, which provides low-cost transportation to distribution points. The El Dorado Facility also has rail access providing favorable freight logistics to our industrial and agricultural customers and cost advantaged when selling a number of our products West of the Mississippi River. Our Cherokee Facility is located east of the Mississippi River, allowing it to reach customers that are not freight logical for others. Our Cherokee Facility sits adjacent to the Tennessee River, providing barge receipt and shipping access, in addition to truck and rail delivery access. Our Pryor Facility is located in the heart of the Southern Plains with close proximity to the Port of Catoosa along with strategic rail and truck delivery access.
Advantaged Raw Material Cost Position
We produce ammonia at our El Dorado, Cherokee and Pryor Facilities, which allows us to take advantage of the spread between producing and purchasing ammonia at those facilities.
Diversified Sources of Revenue
Our business serves a broad range of end markets, which we believe diminishes the cyclicality of our financial performance. Our business serves the agricultural, industrial and mining markets. The flexible nature of our production process and storage capability allows us the ability to shift our product mix based on end market demand.
Operation of Multiple Facilities and High Production Capacity
We operate our business through several facilities. Operating multiple facilities diversifies the risk and impact of operational issues that may occur at a single plant, which gives us a strategic advantage over competitors that operate their company through a single facility. Additionally, our competitive production capacity of our combined plants allows us to decrease manufacturing costs, helping us to achieve enhanced margins.
Agricultural Market Conditions
As discussed in more detail under “Key Industry Factors” of MD&A, the price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.
Looking forward to 2021, favorable dynamics for U.S. agriculture have translated into higher prices to date for a variety of crops, including corn, which has prompted an increase in demand for fertilizers by farmers seeking to maximize yields in the coming spring planting season. Favorable grower income in 2020, coupled with significant increase in Chinese imports of agricultural commodities, lower ending U.S. corn inventory levels, and drought conditions in South America have pushed commodity prices, including corn, to their highest level in over seven years. According to certain industry sources, the estimated corn acres to be planted in 2021 is between 92 to 94 million. These factors have resulted in a price rally for fertilizers over the last several months which we expect will continue through the spring planting season.
See discussion above concerning the COVID-19 pandemic under “Our Strategy.”
Agricultural Products
We produce and sell UAN, HDAN and ammonia, all of which are nitrogen-based fertilizers. We sell these agricultural products to farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the U.S. Our nitrogen-based fertilizers are used to grow food crops, biofuel feedstock crops, pasture land for grazing livestock and forage production. We maintain long-term relationships with wholesale agricultural distributors and retailers and also sell directly to agricultural end-users through our network of wholesale and retail distribution centers.
The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities combined with international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.
During 2020, we completed a key storage project that will allow us to further maximize our production of HDAN at our El Dorado Facility, which we expect to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing.
We develop our market position in these areas by emphasizing high quality products, customer service and technical advice.
In addition, we have an agreement with a third-party purchaser, Coffeyville Resources Nitrogen Fertilizers, LLC, (“CVR”), to market and sell a portion of our UAN. Demand for sales under this agreement is based on the expected needs of the purchaser’s customers. The agreement provides the exclusive right (but not the obligation) to purchase, at market prices, substantially all of the UAN produced at our Pryor Facility. The term of the agreement runs through June 2021, with automatic one-year extensions, subject to a 180-day advance notice of termination from CVR or a 90-day advance notice from us.
We sell most of our agricultural products at the current spot market price in effect at the time of shipment, although we periodically enter into forward sales commitments for some of these products.
Industrial and Mining Market Conditions
As discussed in more detail under “Key Industry Factors” of MD&A, in our industrial markets, our sales volumes are typically driven by changes in general economic conditions, energy prices, metals market prices and our contractual arrangements with certain large customers. In our mining markets, our sales volumes are typically driven by changes in the overall North American consumption levels of mining products that can be impacted by weather. Additionally, changes in natural gas prices and demand in renewable power sources, such as wind and solar in the electrical generation sector, will impact demand for our mining products and impact competition within the other sectors of this market.
Looking forward to 2021, we are seeing gradual recovery in these end markets. As COVID-19 vaccines are increasingly distributed, demand for our products from sectors like automotive manufacturing and power generation is expected to recover to pre-pandemic levels. We expect strong metals mining prices will drive strong demand for our mining products as producers push to extract as much as possible. As it relates to the coal mining, the U.S. Energy Information Administration (“EIA”) is projecting an increase in production driven by a forecasted increase in natural gas prices for electricity generators, making coal more competitive in the electric power sector.
See discussion above concerning the COVID-19 pandemic under “Our Strategy.”
Industrial and Mining Products
We manufacture and sell industrial acids and other chemical products primarily to the polyurethane intermediates, paper, fibers, emission control, and electronics industries. In addition, we produce and sell blended and regular nitric acid and industrial and high purity ammonia for many specialty applications, including the reduction of air emissions from power plants.
Sales of our industrial and mining products are generally made to customers pursuant to sales contracts or pricing arrangements on terms that include the cost of the primary raw materials as a pass-through component in the sales price. These contractual sales stabilize the effect of commodity cost changes and fluctuations in demand for these products due to the cyclicality of the end markets.
During 2020, one of our subsidiaries, El Dorado Chemical Company (“EDC”) entered into a contract with a customer to supply nitric acid. Under the agreement, EDC will supply between 70,000 to 100,000 tons of nitric acid annually. The initial contract term began in January 2021 and extends through 2027 but includes automatic one-year renewal terms.
In addition, EDC and Koch Fertilizer LLC (“Koch Fertilizer”) are parties to an ammonia purchase and sale agreement, under which Koch Fertilizer agreed to purchase, with minimum purchase requirements, a portion of the ammonia that is in excess of EDC’s internal needs. The term of the agreement runs until June 2022, with annual renewal options thereafter.
We operate the Baytown Facility on behalf of a global chemical company, and we believe it is one of the largest and most technologically advanced nitric acid manufacturing units in the U.S. We operate and maintain this facility pursuant to a long-term operating contract. The term of this agreement runs until June 2022 with options for renewal.
Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries. Our sale prices generally vary with the market price of ammonia, sulfur or natural gas, as applicable, in our pricing arrangements with customers.
Our industrial business competes based upon service, price and location of production and distribution sites, product quality and performance and provides inventory management as part of the value-added services offered to certain customers. See our discussion concerning a new contract to capture and sell carbon dioxide out our El Dorado Facility under “Key Operating Initiatives for 2021” in our MD&A.
We also produce and sell LDAN, HDAN and AN solution to the mining industry, which are primarily used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining, and to a lesser extent, for coal mining. We have signed long-term contracts with certain customers that provide for the annual sale of LDAN, which a portion include various natural-gas-based pricing arrangements. One of our customers has a plant located at our El Dorado Facility.
Raw Materials
The products we manufacture at our facilities are primarily derived from natural gas. This raw material feedstock is a commodity and subject to price fluctuations. Natural gas is the primary raw material for producing ammonia, UAN, nitric acid and acid blends and other products at our El Dorado, Cherokee and Pryor Facilities. For 2020, we purchased approximately 30.1 million MMBtus of natural gas.
The chemical facilities’ natural gas feedstock requirements are generally purchased at spot market price. Periodically, we enter into volume purchase commitments and/or forward contracts to lock in the cost of certain of the expected natural gas requirements primarily to match quantities needed to produce product that has been sold forward. At December 31, 2020, we had natural gas contracts of approximately 11.1 million MMBtus, representing approximately 37% of our annual usage, at an average cost of $2.70 per MMBtu. These contracts extend through December 2021.
See further discussion relating to the outlook for our business under “Key Industry Factors.”
Competition
We operate in a highly competitive market with many other larger chemical companies, such as Austin Powder Company: CF Industries Holdings, Inc., Chemtrade Logistics L.L.C.; Cornerstone Chemical, OCI Partners NV, Dyno Nobel, a subsidiary of Incitec Pivot Limited, The Gavilon Group, Helm AG, Koch Industries, Norfalco, Nutrien, Orica Limited; Praxair, Inc., Quad Chemical Corporation, and Trammo Inc. (some of whom are our customers), many of whom have greater financial and other resources than we do. We believe that competition within the markets we serve is primarily based upon service, price, location of production and distribution sites, and product quality and performance.
Human Capital Management
See discussion above concerning the COVID-19 pandemic under “Our Strategy.”
As of December 31, 2020, we employed 573 persons, 188 of whom are represented by unions under agreements, including agreements being negotiated, that expire in July 2021 through November 2022. We believe we have good relationships with our employees.
Oversight & Management
Our success depends on the capabilities and strength of our workforce. Our Human Resources Director is responsible for developing and executing our human capital strategy. This strategy includes the acquisition, development, and retention of talent to deliver on our overall strategy. Our Chief Executive Officer (“CEO”) regularly updates our Board of Directors (“Board”) on the operation and status of these human capital activities including:
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Training & Development - We are committed to the continued development of our employees. Quarterly reviews of operations and talent occur across all operational business units and corporate functions. It is the responsibility of the CEO and the executive staff to review talent data on an annual basis and plan development actions to ensure succession and continuous improvement and growth.
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Engagement - We believe that we have favorable relations with our employees. Approximately 33% of our employees are represented under collective bargaining agreements. We take proactive measures, such as conducting employee surveys to understand and drive employee engagement. Additionally, we conduct benefit surveys annually in an effort to ensure that any changes to benefits are improvements or add value for employees. Each of our business units conducts roundtable
discussions to develop action plans to improve the work environment. We have continued to increase our communication efforts with employees, which our workforce has recognized favorably.
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Health and Safety - Our Health and Safety Management System continues to build to establish a consistent approach to enhance the work environment and culture at each business unit. This system is guided by a newly formed executive committee that provides focus and priority to compliance and industry best practices that protect our employees while performing work within our operations. Each business team is responsible for evaluating its unique operations and applying the defined controls to engage employees and manage injury risk. We use leading and lagging metrics, such as near miss tracking, assigning potential risk consequences to events, incident tracking, and releases to monitor our performance and effectiveness across our operations and individual business teams.
Like many other companies, we have experienced challenges resulting from the COVID-19 pandemic and have focused energy and effort on protecting our employees and their families from potential virus exposure while continuing safe and compliant operations. Since the beginning of the pandemic, we established detailed plans and protocols, executed remote work arrangements, and increased communication to employees. To date, our focused actions, which have aligned with the guidance from the Centers for Disease Control and Prevention, have not resulted in any work stoppage.
Government Laws and Regulations
Our facilities and operations are subject to numerous federal, state and local laws and regulations, including matters regarding environmental, health and safety, many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. Certain of these laws and regulations 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.
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. These laws and regulations (including enforcement policies thereunder) 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. Historically, our subsidiaries have incurred significant expenditures in order to comply with these laws and regulations and are reasonably expected to do so in the future. 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.
Also see discussions concerning our risk factors under Item 1A of this report.
Available Information
We make available free of charge through our Internet website (www.lsbindustries.com) or by calling Investor Relations (212) 836-9607 our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition to the reports filed or furnished with the SEC, we publicly disclose material information from time to time in press releases, at annual meetings of stockholders, in publicly accessible conferences and investor presentations, and through our website. The information included in our website does not constitute part of this Annual Report on Form 10-K.
Section 16(a) of the Exchange Act requires our directors, officers, and beneficial owners of more than 10% of our common stock to file with the SEC reports of holdings and changes in beneficial ownership of our stock. Based solely on a review of copies of the Forms 3, 4 and 5 furnished to us with respect to 2020, or written representations that no Form 5 was required to be filed, we believe that during 2020 all our directors and officers and beneficial owners of more than 10% of our common stock timely filed their required Forms 3, 4, or 5.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
1.
Risks Relating to Our Liquidity
We may not be able to generate sufficient cash to service our debt and may be required to take other actions to satisfy the obligations under our debt agreements or to redeem our preferred stock, which may not be successful.
Our ability to make scheduled payments on our debt obligations and our ability to satisfy the redemption obligations for our Series E cumulative redeemable Class C preferred stock (“Series E Redeemable Preferred”) depends on our financial condition and operating performance, prevailing economic and competitive conditions, and certain financial, business and other factors, some of which may be beyond our control. We may not be able to maintain a level of cash flows sufficient to pay the principal and interest on our debt, including the $435 million principal amount of our Senior Secured Notes (the “Senior Secured Notes”), or the outstanding amount of the Working Capital Revolver Loan or to pay the cumulative dividends and redemption payment on the Series E Redeemable Preferred should the holder choose to redeem it on or after October 25, 2023, that applicable optional redemption date with respect thereto.
If cash flows and capital resources are insufficient to fund our debt, dividend or preferred stock redemption obligations, we could face substantial liquidity problems and will need to seek additional capital through the issuance of debt, the issuance of equity, asset sales or a combination of the foregoing. If we are unsuccessful, we will need to reduce or delay investments and capital expenditures, or to dispose of other assets or operations, seek additional capital, or restructure or refinance debt or redeemable equity. These alternative measures may not be successful, may not be completed on economically attractive terms, or may not be adequate for us to meet our debt or preferred stock redemption obligations when due. Additionally, our debt agreements and the operating agreements associated with our Series E Redeemable Preferred limit the use of the proceeds from many dispositions of assets or operations. As a result, we may not be permitted to use the proceeds from these dispositions to satisfy our debt or preferred stock redemption obligations. If we cannot make scheduled payments on our debt, we will be in default and the outstanding principal and interest on our debt could be declared to be due and payable, in which case we could be forced into bankruptcy or liquidation or required to substantially restructure or alter our business operations or debt obligations. In such an event, we may not have sufficient assets to repay all of our debt.
Further, if we suffer or appear to suffer from a lack of available liquidity, the evaluation of our creditworthiness by counterparties and rating agencies and the willingness of third parties to do business with us could be materially and adversely affected. In particular, our credit ratings could be lowered, suspended or withdrawn entirely at any time by the rating agencies. Downgrades in our long-term debt ratings generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease and could trigger liquidity demands pursuant to the terms of contracts, leases or other agreements. Any future transactions by us, including the issuance of additional debt, the sale of any operating assets, or any other transaction to manage our liquidity, could result in temporary or permanent downgrades of our credit ratings.
Our substantial indebtedness level, including dividend requirements relating to our preferred stock, could limit our financial and operating activities, and adversely affect our ability to incur additional debt to fund future needs.
We currently have a substantial amount of indebtedness, as well as dividend and redemption requirements relating to our preferred stock. As a result, this level could, among other things:
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require us to dedicate a substantial portion of our cash flow to the payment of principal, interest and dividends, thereby reducing the funds available for operations and future business opportunities;
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make it more difficult for us to satisfy our obligations, including our repurchase obligations;
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limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;
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limit our ability to adjust to changing economic, business and competitive conditions;
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place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;
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make us more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general economic conditions; and
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make us more susceptible to changes in credit ratings, which could affect our ability to obtain financing in the future and increase the cost of such financing.
Any of the foregoing could adversely affect our liquidity, operating results and financial condition.
Our debt agreements and our preferred stock contain covenants and restrictions that could restrict or limit our financial and business operations. A breach of these covenants or restrictions could result in an event of default under one or more of our debt agreements or contracts at different entities within our capital structure, including as a result of cross acceleration or default provisions.
Our debt agreements and our preferred stock contain various covenants and other restrictions that, among other things, limit flexibility in operating our businesses. A breach of any of these covenants or restrictions could result in a significant portion of our debt
becoming due and payable or could result in significant contractual liability. These covenants and other restrictions limit our ability to, among other things:
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incur additional debt or issue preferred shares;
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pay dividends on, repurchase or make distributions in respect of capital stock, make other restricted payments;
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or make investments;
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sell or transfer assets;
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create liens on assets to secure debt;
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engage in certain fundamental corporate changes or changes to our business activities;
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make certain material acquisitions;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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enter into transactions with affiliates;
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designate subsidiaries as unrestricted subsidiaries; and
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repay, repurchase or modify certain subordinated and other material debt.
The Working Capital Revolver Loan also contains certain affirmative covenants and requires the borrowers to comply with a fixed charge coverage ratio (as defined in the Working Capital Revolver Loan) if their excess availability (as defined in the Working Capital Revolver Loan) falls below a certain level.
These covenants and restrictions could affect our ability to operate our business and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise. Additionally, our ability to comply with these covenants may be affected by events beyond our control, including general economic and credit conditions and industry downturns.
In addition, certain failures to make payments when due on, or the acceleration of, significant indebtedness constitutes a default under some of our debt instruments, including the indenture governing the notes. Further, a breach of any of the covenants or restrictions in a debt instrument could result in an event of default under such debt instrument. Upon the occurrence of an event of default under one of these debt instruments, our lenders or noteholders could elect to declare all amounts outstanding under such debt instrument to be immediately due and payable and/or terminate all commitments to extend further credit. Such actions by those lenders or noteholders could cause cross defaults or accelerations under our other debt. If we were unable to repay those amounts, the lenders or noteholders could proceed against any collateral granted to them to secure such debt. In the case of a default under debt that is guaranteed, holders of such debt could also seek to enforce the guarantees. If lenders or noteholders accelerate the repayment of all borrowings, we would likely not have sufficient assets and funds to repay those borrowings. Such occurrence could result in our or our applicable subsidiary going into bankruptcy, liquidation or insolvency.
The age of our chemical manufacturing facilities increases the risk for unplanned downtime, which may be significant.
Our business is comprised of operating units of various ages and levels of automated control. While we have continued to make significant annual capital improvements, potential age or control related issues have occurred in the past and may occur in the future, which could cause damage to the equipment and ancillary facilities. As a result, we have experienced and may continue to experience additional downtime at our chemical facilities in the future.
The equipment required for the manufacture of our products is specialized, and the time for replacement of such equipment can be lengthy, resulting in extended downtime in the affected unit. In addition, the cost for such equipment could be influenced by changes in regulatory policies (including tariffs) of foreign governments, as well as the U.S. laws and policies affecting foreign trade and investment.
Although we use various reliability and inspection programs and maintain a significant inventory of spare equipment, which are intended to mitigate the extent of production losses, unplanned outages may still occur. As a result, these planned and unplanned downtime events at our chemical facilities have in the past and could in the future adversely affect our liquidity, operating results and financial condition.
LSB is a holding company and depends, in large part, on receiving funds from its subsidiaries to fund our indebtedness.
Because LSB is a holding company and operations are conducted through its subsidiaries, LSB’s ability to meet its obligations depends, in large part, on the operating performance and cash flows of its subsidiaries and the ability of its subsidiaries to make distributions and pay dividends to LSB.
2.
Risks Relating to Our Business
Pandemics or disease outbreaks, such as COVID-19, have and may in the future disrupt our business, which could adversely affect our financial performance.
COVID-19 has evolved into a global pandemic and the full extent of its impact will depend on future developments that are uncertain and cannot be accurately predicted, including new information that may emerge concerning the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact. Currently, all of the facilities we own and operate have been designated as
essential critical infrastructure based on guidelines issued by the United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service, and therefore, our facilities are remaining in operation despite the evolving global health crisis resulting from the COVID-19 pandemic. However, if additional mandatory closures of businesses are imposed by the federal, state and local governments to control the spread of the virus, these closures could disrupt the operations of our management, business and finance teams. In addition, a significant downturn in global economic growth, or recessionary conditions in major geographic regions, may lead to reduced demand for a portion or all our products. Legislative, regulatory, judicial or social influences related to the COVID-19 pandemic may affect our financial performance and our ability to conduct our business.
In addition, an extended period of remote work arrangements due to the COVID-19 pandemic could exacerbate cybersecurity risks. Our business depends on the proper functioning and availability of our information technology platform, including communications and data processing systems. We are also required to effect electronic transmissions with third parties including clients, vendors and others with whom we do business, and with our Board. We believe we have implemented appropriate security measures, controls and procedures to safeguard our information technology systems and to prevent unauthorized access to such systems and any data processed or stored in such systems, and we periodically evaluate and test the adequacy of such systems, measures, controls and procedures and perform third-party risk assessments; however, there can be no guarantee that such systems, measures, controls and procedures will be effective, that we will be able to establish secure capabilities with all of third parties, or that third parties will have appropriate controls in place to protect the confidentiality of our information. Security breaches could expose us to a risk of loss or misuse of our information, litigation and potential liability.
As the COVID-19 pandemic continues to impact communities, our business operations could be disrupted or delayed, and our business, financial condition, and results of operations could be adversely affected.
Terrorist attacks and other acts of violence or war, and natural disasters (such as hurricanes, etc.), have negatively affected and could negatively affect U.S. and foreign companies, the financial markets, the industries where we operate, our operations and our profitability.
Terrorist attacks in the U.S and elsewhere and natural disasters (such as hurricanes or pandemic health crises) have in the past and can in the future negatively affect our operations. We cannot predict further terrorist attacks and natural disasters in the U.S. and elsewhere. These attacks or natural disasters have contributed to economic instability in the U.S. and elsewhere, and further acts of terrorism, violence, war or natural disasters could affect the industries where we operate, our ability to purchase raw materials, our business, results of operations and financial condition. In addition, terrorist attacks and natural disasters may directly affect our physical facilities, especially our chemical facilities, or those of our suppliers or customers and could affect our sales, our production capability and our ability to deliver products to our customers. In the past, hurricanes affecting the Gulf Coast of the U.S. have negatively affected our operations and those of our customers. As previously noted, some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events. If any such effects, whether anthropogenic or otherwise, were to occur in areas where we or our clients operate, they could have an adverse effect on our business, financial condition and results of operations.
A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the production of ethanol. A decrease in ethanol production or an increase in ethanol imports could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
A major factor underlying the solid level of demand for our nitrogen-based fertilizer products is the production of ethanol in the United States and the use of corn in ethanol production. Ethanol production in the United States is highly dependent upon a myriad of federal statutes and regulations and is made significantly more competitive by various federal and state incentives and mandated usage of renewable fuels pursuant to the federal renewable fuel standards (“RFS”). To date, the RFS has been satisfied primarily with fuel ethanol blended into gasoline. However, a number of factors, including the continuing “food versus fuel” debate and studies showing that expanded ethanol usage may increase the level of greenhouse gases in the environment as well as be unsuitable for small engine use, have resulted in calls to reduce subsidies for ethanol, allow increased ethanol imports and to repeal or waive (in whole or in part) the current RFS, any of which could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand. Therefore, ethanol incentive programs may not be renewed, or if renewed, they may be renewed on terms significantly less favorable to ethanol producers than current incentive programs. Therefore, a decrease in ethanol production or an increase in ethanol imports could have a material adverse effect on our overall business, results of operations, financial condition and liquidity.
We are reliant on a limited number of key facilities.
Our nitrogen production is concentrated in four separate complexes. The suspension of operations at any of these complexes could adversely affect our ability to produce our products and fulfill our commitments and could have a material adverse effect on liquidity, financial condition, results of operations and business.
Seasonality can adversely affect our business.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results of operations will be negatively affected by any related increased storage costs) or liquidated (in which case the selling price may be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are exacerbated by the volatility of natural gas and nitrogen fertilizer prices and the relatively brief periods during which farmers can apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting our operating results. If seasonal demand is greater than we expect, we may experience product shortages, and customers of ours may turn to our competitors for products that they would otherwise have purchased from us.
Weather conditions adversely affect our business.
The products (primarily agricultural) produced and sold by us have been in the past, and could be in the future, materially affected by adverse weather conditions (such as excessive rain or drought) in the primary markets for our fertilizer and related agricultural products. In addition, weather can cause an interruption to the operations of our chemical facilities. Many scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events. These climate changes might also occur as the result of other phenomena that human activity is unable to influence, including changes in solar activity and volcanic activity. Regardless of the cause, if any of these unusual weather events occur during the primary seasons for sales of our agricultural products (March-June and September-November), this could have a material adverse effect on our agricultural sales and our financial condition and results of operations.
Our business and customers are sensitive to adverse economic cycles.
Our business can be affected by cyclical factors such as inflation, currency exchange rates, global energy policy and costs, regulatory policies (including tariffs), global market conditions and economic downturns in specific industries. Certain sales are sensitive to the level of activity in the agricultural, mining, automotive and housing industries. Therefore, substantial changes could adversely affect our operating results, liquidity, financial condition and capital resources.
There is intense competition in the markets we serve.
Substantially all of the markets in which we participate are highly competitive with respect to product quality, price, distribution, service, and reliability. We compete with many companies, domestic and foreign, that have greater financial, marketing and other resources. Competitive factors could require us to reduce prices or increase spending on product development, marketing and sales, which could have a material adverse effect on our business, results of operation and financial condition.
We compete with many U.S. producers and producers in other countries, including state-owned and government-subsidized entities. Some competitors have greater total resources and are less dependent on earnings from chemical sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Our competitive position could suffer to the extent we are not able to expand our own resources sufficiently either through investments in new or existing operations or through acquisitions, joint ventures or partnerships. An inability to compete successfully could result in the loss of customers, which could adversely affect our sales and profitability.
An increase of imported agricultural products could adversely affect our business.
Russia and Ukraine both have substantial capacity to produce and export fertilizers. Producers in these countries also benefit from below-market prices for natural gas, due to government regulation and other factors. Imports into the U.S. from those countries has increased over the last twelve months.
In addition, producers in China have substantial capacity to produce and export urea. Depending on various factors, including prevailing prices from other exporters, the price of coal, and the price of China’s export tariff, higher volumes of urea from China could be imported into the U.S. at prices that could have an adverse effect on the selling prices of other nitrogen products, including the nitrogen products we manufacture and sell.
A substantial portion of our sales is dependent upon a limited number of customers.
For 2020, eight customers accounted for approximately 42% of our consolidated net sales. The loss of, or a material reduction in purchase levels by, one or more of these customers could have a material adverse effect on our business, results of operations, financial condition and liquidity if we are unable to replace a customer with other sales on substantially similar terms.
A change in the volume of products that our customers purchase on a forward basis, or the percentage of our sales volume that is sold to our customers on a forward basis, could increase our exposure to fluctuations in our profit margins and materially adversely affect our business, financial condition, results of operations and cash flows.
We offer our customers from time-to-time, the opportunity to purchase products from us on a forward basis at prices and delivery dates we propose. Under our forward sales programs, customers generally make an initial cash down payment at the time of order and pay the remaining portion of the contract sales under their usual invoice terms when the performance obligation is satisfied. Forward sales improve our liquidity due to the cash payments received from customers in advance of shipment of the product and allow us to
improve our production scheduling and planning and the utilization of our manufacturing and distribution assets. Any cash payments received in advance from customers in connection with forward sales are reflected on our consolidated balance sheets as a current liability until the related performance obligations are satisfied, which can take up to several months. We believe the ability to purchase products on a forward basis is most appealing to our customers during periods of generally increasing prices for nitrogen fertilizers. Our customers may be less willing or even unwilling to purchase products on a forward basis during periods of generally decreasing or stable prices or during periods of relatively high fertilizer prices due to the expectation of lower prices in the future or limited capital resources. In periods of rising fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in lower profit margins than if we had not sold fertilizer on a forward basis. Conversely, in periods of declining fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in higher profit margins than if we had not sold fertilizer on a forward basis. In addition, fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time the performance obligation is satisfied.
Cost and the lack of availability of raw materials could materially affect our profitability and liquidity.
Our sales and profits are heavily affected by the costs and availability of primary raw materials. These primary raw materials are subject to considerable price volatility. Historically, when there have been rapid increases in the cost of these primary raw materials, we have sometimes been unable to timely increase our sales prices to cover all of the higher costs incurred. While we periodically enter into futures/forward contracts to economically hedge against price increases in certain of these raw materials, there can be no assurance that we will effectively manage against price fluctuations in those raw materials.
Natural gas represents the primary raw material feedstock in the production of most of our chemical products. Although we enter into contracts with certain customers that provide for the pass-through of raw material costs, we have a substantial amount of sales that do not provide for the pass-through of raw material costs. Also, the spot sales prices of our agricultural products may not correlate to the cost of natural gas but rather reflect market conditions for similar and competing nitrogen sources. This lack of correlation can compromise our ability to recover our full cost to produce the products in this market. As a result, in the future, we may not be able to pass along to all of our customers the full amount of any increases in raw material costs. Future price fluctuations in our raw materials may have an adverse effect on our business, financial condition, liquidity and results of operations.
Additionally, we depend on certain vendors to deliver natural gas and other key components that are required in the production of our products. Any disruption in the supply of natural gas and other key components could result in lost production or delayed shipments.
The price of natural gas in North America and worldwide has been volatile in recent years and has declined on average due in part to the development of significant natural gas reserves, including shale gas, and the rapid improvement in shale gas extraction techniques, such as hydraulic fracturing and horizontal drilling. Future production of natural gas from shale formations could be reduced by regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by reduction in oil exploration and development prompted by lower oil prices and resulting in production of less associated natural gas. Additionally, increased demand for natural gas, particularly in the Gulf Coast Region, due to increased industrial demand and increased natural gas exports could result in increased natural gas prices.
We have suspended in the past, and could suspend in the future, production at our chemical facilities due to, among other things, the high cost or lack of availability of natural gas and other key components, which could adversely affect our competitiveness in the markets we serve. Accordingly, our business, financial condition, liquidity and results of operations could be materially affected in the future by the lack of availability of natural gas and other key components and increase costs relating to the purchase of natural gas and other key components.
Our business is subject to risks involving derivatives and the risk that our hedging activities might not be effective.
We may utilize natural gas derivatives to hedge our financial exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen-based products. We may use futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges to hedge our risk. Our use of derivatives can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives that do not qualify for, or to which we do not apply, hedge accounting. To the extent that our derivative positions lose value, we may be required to post collateral with our counterparties, adversely affecting our liquidity. We have also used fixed-price, physical purchase and sales contracts to hedge our exposure to natural gas price volatility. Hedging arrangements are imperfect and unhedged risks will always exist. In addition, our hedging activities may themselves give rise to various risks that could adversely affect us. For example, we are exposed to counterparty credit risk when our derivatives are in a net asset position. The counterparties to our derivatives are multi-national commercial banks, major financial institutions or large energy companies. Our liquidity could be negatively impacted by a counterparty default on settlement of one or more of our derivative financial instruments or by the trigger of any cross-default provisions or credit support requirements. Additionally, the International Swaps and Derivative Association master netting arrangements for most of our derivative instruments contain credit-risk-related contingent features, such as cross-default and/or acceleration provisions and credit support requirements. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net
liability position. At other times we may not utilize derivatives or derivative strategies to hedge certain risks or to reduce the financial exposure of price volatility. As a result, we may not prevent certain material adverse impacts that could have been mitigated through the use of derivative strategies.
Our transportation and distribution activities rely on third-party providers, which subject us to risks and uncertainties beyond our control that may adversely affect our operations.
We rely on railroad, trucking, pipeline and other transportation service providers to transport raw materials to our manufacturing facilities, to coordinate and deliver finished products to our storage and distribution system and our retail centers and to ship finished products to our customers. These transportation operations, equipment and services are subject to various hazards, including adverse operating conditions, extreme weather conditions, system failures, work stoppages, equipment and personnel shortages, delays, accidents such as spills and derailments and other accidents and operating hazards.
In the event of a disruption of existing transportation or terminaling facilities for our products or raw materials, alternative transportation and terminaling facilities may not have sufficient capacity to fully serve all of our customers or facilities. An extended interruption in the delivery of our products to our customers or the supply of natural gas, ammonia or sulfur to our production facilities could adversely affect sales volumes and margins.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, terrorism or increasing concerns regarding transportation of potentially hazardous substances, local, provincial, state and federal governments could implement new regulations affecting the transportation of raw materials or our finished products. If transportation of our products is delayed or we are unable to obtain raw materials as a result of any third party’s failure to operate properly or the other hazards described above, or if new and more stringent regulatory requirements are implemented affecting transportation operations or equipment, or if there are significant increases in the cost of these services or equipment, our revenues and cost of operations could be adversely affected. In addition, we may experience increases in our transportation costs, or changes in such costs relative to transportation costs incurred by our competitors.
Future technological innovation could affect our business.
Future technological innovation, such as the development of seeds that require less crop nutrients, or developments in the application of crop nutrients, if they occur, could have the potential to adversely affect the demand for our products and results of operations.
Cyber security risks could adversely affect our business.
As we continue to increase our dependence on information technologies to conduct our operations, including as a result of remote work environments due to COVID-19, the risks associated with cyber security also increase. We rely on our enterprise resource planning software (“ERP”) and other information systems, among other things, to manage our manufacturing, supply chain, accounting and financial functions. Additionally, third parties on whose systems we place significant reliance for the conduct of our business are also subject to cyber security risks. We are significantly dependent upon internet connectivity and a third-party cloud hosting vendor. We have implemented security procedures and measures in order to protect our information from being vulnerable to theft, loss, damage or interruption from a number of potential sources or events. Although we believe these measures and procedures are appropriate, we may not have the resources or technical sophistication to anticipate, prevent, or recover from rapidly evolving types of cyber-attacks. Compromises to our information systems could have an adverse effect on our business, results of operations, liquidity and financial condition.
3.
Risks Relating to Legal, Regulatory and Compliance Matters
Our operations and the production and handling of our products involve significant risks and hazards.
Our operations are subject to hazards inherent in the manufacture, transportation, storage and distribution of chemical products, including some products that are highly toxic and corrosive. These hazards include, among other things, explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks, pipelines and rail cars; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled plant downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage and may result in suspension of operations for an extended period of time and/or the imposition of civil or criminal penalties and liabilities. We periodically experience minor releases of ammonia related to leaks from our equipment. Similar events may occur in the future. As a result, such events could have a material adverse effect on our results of operations and financial condition.
Current and future legislative or regulatory requirements affecting our business may result in increased costs and decreased revenues, cash flows and liquidity or could have other negative effects on our business.
Our business is subject to numerous health, safety, security and environmental laws and regulations. The manufacture and distribution of chemical products are activities that entail health, safety and environmental risks and impose obligations under health, safety and environmental laws and regulations, many of which provide for substantial fines and potential criminal sanctions for violations. Although we believe we have established processes to monitor, review and manage our businesses to comply with the numerous
health, safety and environmental laws and regulations, we previously were, and in the future, may be, subject to fines, penalties and sanctions for violations and substantial expenditures for cleanup costs and other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of effluents at or from our chemical facilities. Further, a number of our chemical 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 results of operation and financial condition. These operating permits are subject to modification, renewal and revocation. In addition, third parties may contest our ability to receive or renew certain permits that we need to operate, which can lengthen the application process or even prevent us from obtaining necessary permits. We regularly monitor and review our operations, procedures and policies for compliance with permits, laws and regulations. Despite these compliance efforts, risk of noncompliance or permit interpretation is inherent in the operation of our business.
There can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. We try to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of compliance.
Changes to the production equipment at our chemical facilities that are required in order to comply with health, safety and environmental regulations may require substantial capital expenditures.
Explosions and/or losses at other chemical facilities that we do not own (such as the April 2013 explosion in West, Texas) could also result in new or additional legislation or regulatory changes, particularly relating to public health, safety or any of the products manufactured and/or sold by us or the inability on the part of our customers to obtain or maintain insurance as to certain products manufactured and/or sold by us, which could have a negative effect on our revenues, cash flow and liquidity.
In summary, new or changed laws and regulations or the inability of our customers to obtain or maintain insurance in connection with any of our chemical products could have an adverse effect on our operating results, liquidity and financial condition.
We may not have adequate insurance.
While we maintain liability, property and business interruption insurance, including certain coverage for environmental contamination, it is subject to coverage limits and policies that may exclude coverage for some types of damages. Although there may currently be sources from which such coverage may be obtained, the coverage may not continue to be available to us on commercially reasonable terms or the possible types of liabilities that may be incurred by us may not be covered by our insurance. In addition, our insurance carriers may not be able to meet their obligations under the policies, or the dollar amount of the liabilities may exceed our policy limits. Even a partially uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Furthermore, we are subject to litigation for which we could be obligated to bear legal, settlement and other costs, which may be in excess of any available insurance coverage. If we are required to incur all or a portion of the costs arising out of any litigation or investigation as a result of inadequate insurance proceeds, if any, our business, results of operations, financial condition and liquidity could be materially adversely affected. For further discussion of our litigation, please see “Other Pending, Threatened or Settled Litigation” in Note 8 to the Consolidated Financial Statements included in this report.
We may be required to modify or expand our operating, sales and reporting procedures and to install additional equipment in order to comply with current and possible future government regulations.
The chemical industry in general, and producers and distributors of ammonia and AN specifically, are scrutinized by the government, industry and public on security issues. Under current and proposed regulations, we may be required to incur substantial additional costs relating to security at our chemical facilities and distribution centers, as well as in the transportation of our products. These costs could have a material effect on our results of operations, financial condition, and liquidity. The cost of such regulatory changes, if significant, could lead some of our customers to choose other products over ammonia and AN, which may have a significant adverse effect on our business.
The “Secure Handling of Ammonium Nitrate Act of 2007” was enacted by the U.S. Congress, and subsequently the U.S. Department of Homeland Security (“DHS”) published a notice of proposed rulemaking in 2011. This regulation proposes to require sellers, buyers, their agents and transporters of solid AN and certain solid mixtures containing AN to possess a valid registration issued by DHS, keep certain records, report the theft or unexplained loss of regulated materials, and comply with certain other new requirements. We and others affected by this proposal have submitted appropriate comments to DHS regarding the proposed regulation. It is possible that DHS could significantly revise the requirements currently being proposed. Depending on the provisions of the final regulation to be promulgated by DHS and on our ability to pass these costs to our customers, these requirements may have a negative effect on the profitability of our AN business and may result in fewer distributors who are willing to handle the product. DHS has not finalized this rule, and has indicated that its next action, and the timing of such an action, is undetermined.
On August 1, 2013, U.S. President Obama issued an executive order addressing the safety and security of chemical facilities in response to recent incidents involving chemicals such as the explosion at West, Texas. The President directed federal agencies to
enhance existing regulations and make recommendations to the U.S. Congress to develop new laws that may affect our business. In January 2016, the U.S. Chemical Safety and Hazard Investigation Board (“CSB”) released its final report on the West, Texas incident. The CSB report identifies several federal and state regulations and standards that could be strengthened to reduce the risk of a similar incident occurring in the future. While the CSB does not have authority to directly regulate our business, the findings in this report, and other activities taken in response to the West, Texas incident by federal, state, and local regulators may result in additional regulation of our processes and products.
In January 2017, the U.S. Environmental Protection Agency (“EPA”) finalized revisions to its Risk Management Program (“RMP”). The revisions include new requirements for certain facilities to perform hazard analyses, third-party auditing, incident investigations and root cause analyses, emergency response exercises, and to publicly share chemical and process information. Compliance with many of the rule’s new requirements will be required beginning in 2021. The EPA temporarily delayed the rule’s effective date however, the delay was subsequently vacated with an immediate effective date. On December 3, 2018, the EPA published a final rule that incorporates amendments to the RMP under 40 CFR Part 68. However, on November 21, 2019, EPA finalized its Risk Management Program Reconsideration Rule which rescinded third-party auditing, incident investigation and root cause analysis, and the public sharing of specific chemical and process information. The passage of the Reconsideration Rule has reduced the potential negative effect on the profitability of our AN business compared to the January 2017 RMP amendments. The Occupational Safety and Health Administration (“OSHA”) is likewise considering changes to its Process Safety Management standards. In addition, DHS, the EPA, and the Bureau of Alcohol, Tobacco, Firearms and Explosives updated a joint chemical advisory on the safe storage, handling, and management of AN. While these actions may result in additional regulatory requirements or changes to our operators, it is difficult to predict at this time how these and any other possible regulations, if and when adopted, will affect our business, operations, liquidity or financial results.
Proposed and existing governmental laws and regulations relating to greenhouse gas and other air emissions may subject certain of our operations and customers to significant new costs and restrictions on their operations and may reduce sales of our products.
Our chemical manufacturing facilities use significant amounts of electricity, natural gas and other raw materials necessary for the production of their chemical products that result, or could result, in certain greenhouse gas emissions into the environment. Federal and state legislatures and administrative agencies, including the EPA, are considering the scope and scale of greenhouse gas or other air emission regulation. Legislation and administrative actions have been considered that would regulate greenhouse gas emissions at some point in the future for our facilities, and existing and possible actions have already affected certain of our customers, leading to closure or rate reductions of certain facilities.
In response to findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and the environment, the EPA adopted regulations pursuant to the federal Clean Air Act to reduce greenhouse gas emissions from various sources. For example, the EPA requires certain large stationary sources to obtain preconstruction and operating permits for pollutants regulated under the Prevention of Significant Deterioration and Title V programs of the Clean Air Act. Facilities required to obtain preconstruction permits for such pollutants are also required to meet “best available control technology” standards that are being established by the states. These regulatory requirements could adversely affect our operations and restrict or delay our ability to obtain air permits for new or modified sources.
Although greenhouse gas regulation could: increase the price of the electricity and other energy sources purchased by our chemical facilities; increase costs for natural gas and other raw materials (such as ammonia); potentially restrict access to or the use of certain raw materials necessary to produce our chemical products; and require us to incur substantial expenditures to retrofit our chemical facilities to comply with the proposed new laws and regulations regulating greenhouse gas emissions. Federal, state and local governments may also pass laws mandating the use of alternative energy sources, such as wind power and solar energy, which may increase the cost of energy use in certain of our chemical and other manufacturing operations. For instance, the EPA published a rule, known as the Clean Power Plan, to limit greenhouse gases from electric power plants. The EPA is currently reviewing the Clean Power Plan however, it could result in increased electricity costs due to increased requirements for use of alternative energy sources, and a decreased demand for coal-generated electricity.
Laws, regulations or other issues related to climate change could have a material adverse effect on us.
If we, or other companies with which we do business become subject to laws or regulations related to climate change, it could have a material adverse effect on us. The United States may enact new laws, regulations and interpretations relating to climate change, including potential cap-and-trade systems, carbon taxes and other requirements relating to reduction of carbon footprints and/or greenhouse gas emissions. Other countries have enacted climate change laws and regulations, and the United States has been involved in discussions regarding international climate change treaties. The federal government and some of the states and localities in which we operate have enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions. Although these laws and regulations have not had any known material adverse effect on us to date, they could result in substantial costs, including compliance costs, monitoring and reporting costs and capital. Furthermore, our reputation could be damaged if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future
interpretations of current laws and regulations, related to climate change will affect our business, results of operations, liquidity and financial condition. Lastly, the potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages and changing temperatures. Any of these matters could have a material adverse effect on us.
4.
Risks Relating to Debt
Despite our current levels of debt, we may still incur more debt ranking senior or equal in right of payment with our existing obligations, including secured debt, which would increase the risks described herein.
The agreements relating to our debt, including the Senior Secured Notes Indenture and the credit agreement governing our Working Capital Revolver Loan, limit but do not prohibit our ability to incur additional debt, including additional secured debt. Notwithstanding the fact that the Senior Secured Notes Indenture and the credit agreement governing our Working Capital Revolver Loan limit our ability to incur additional debt or grant certain liens on our assets, the restrictions on the incurrence of additional indebtedness and liens are subject to a number of important qualifications and exceptions, and the additional indebtedness and liens incurred in compliance with these restrictions could be substantial. If new debt is added to our current debt levels, the related risks that we now face could intensify.
Borrowings under our Working Capital Revolver Loan bear interest at a variable rate, which subjects us to interest rate risk and could cause our debt service obligations to increase.
All of our borrowings under our Working Capital Revolver Loan are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on this variable rate indebtedness would increase even though the amount borrowed remained the same. Although we may enter into interest rate swaps to reduce interest rate volatility, we cannot provide assurances that we will be able to do so or that such swaps will be effective.
5.
Risks Relating to Human Capital
Loss of key personnel could negatively affect our business.
Our performance has been and will continue to be dependent upon the efforts of our principal executive officers. We cannot ensure that our principal executive officers will continue to be available. Although we have employment agreements with certain of our principal executive officers, including Mark T. Behrman and Cheryl A. Maguire, we do not have employment agreements with all of our key personnel. The loss of any of our principal executive officers could have a material adverse effect on us. We believe that our future success will depend in large part on our continued ability to attract and retain highly skilled and qualified personnel.
We are subject to collective bargaining agreements with certain employees.
Approximately 33% of our employees are covered by collective bargaining agreements. We may not be able to renew our collective bargaining agreements on terms similar to current terms or renegotiate collective bargaining agreements on terms acceptable to us. The prolonged failure to renew or renegotiate a collective bargaining agreement could result in work stoppages. Additionally, if a collective bargaining agreement is negotiated at higher-than-anticipated cost, absorbing those costs or passing them through to customers in the form of higher prices may make us less competitive.
6.
Risks Relating to Shareholders
Certain of our stockholders control a significant amount of our voting stock, and their interests could conflict with interests of other stockholders.
LSB Funding LLC (“LSB Funding”), our largest voting shareholder, owned 4,069,324 shares of common stock and one share of Series F redeemable Class C preferred stock (the “Series F Redeemable Preferred”), which has voting rights equal to 456,225 shares of common stock, which together represents approximately 15.3% of the voting power of our common stock and the Series F Redeemable Preferred as of December 31, 2020.
Jack E. Golsen (“J. Golsen”), Barry H. Golsen and certain of their related parties (collectively, the “Golsen Holders”) owned as of December 31, 2020, an aggregate of 2,531,810 shares of our common stock and 686,855 shares of our voting preferred stock (673,360 of which shares have 0.875 votes per share, or 589,190 votes), which together vote as a class and represent approximately 10.5% of the voting power (prior to conversion of the shares of voting preferred) of our issued and outstanding voting securities as of that date. The series of preferred represented by the 13,495 shares of voting preferred is convertible into an aggregate of 449,835 shares of our common stock.
Pursuant to a Board Representation and Standstill Agreement, as amended, entered into in connection with LSB Funding’s purchase of preferred stock in, LSB Funding has the right to designate two directors on our Board, and the Golsen Holders have the right to appoint two directors on our Board, subject to reduction in each case in certain circumstances. This is in addition to their ability to vote generally in the election of directors. As a result, each of LSB Funding and the Golsen Holders have significant influence over the election of directors to our Board.
The interests of LSB Funding and the Golsen Holders may conflict with interests of other stockholders (as well as with each other). As a result of the voting power and board designation rights of LSB Funding and the Golsen Holders, the ability of other stockholders to influence our management and policies could be limited.
We are subject to a variety of factors that could discourage other parties from attempting to acquire us.
Our certificate of incorporation provides for a staggered Board and, except in limited circumstances, a two-thirds vote of outstanding voting shares to approve a merger, consolidation or sale of all, or substantially all, of our assets. In addition, we have entered into severance agreements with our executive officers and some of the executive officers of certain subsidiaries that provide, among other things, that if, within a specified period of time after the occurrence of a change in control of LSB, these officers are terminated, other than for cause, or the officer terminates his employment for good reason, the officer would be entitled to certain severance benefits. Certain of our preferred stock series and debt instruments also provide special rights in a change of control, including in some cases the ability to be repaid in full or redeemed.
We have authorized and unissued (including shares held in treasury) 45,791,355 shares of common stock and 4,090,231 shares of preferred stock as of December 31, 2020. These unissued shares could be used by our management to make it more difficult, and thereby discourage an attempt to acquire control of us.
The foregoing provisions and agreements may discourage a third-party tender offer, proxy contest, or other attempts to acquire control of us and could have the effect of making it more difficult to remove incumbent management. In addition, LSB Funding and the Golsen Holders have significant voting power and rights to designate board representatives, all of which may further discourage a third-party tender offer, proxy contest, or other attempts to acquire control of us.
Delaware has adopted an anti-takeover law which, among other things, will delay for three years business combinations with acquirers of 15% or more of the outstanding voting stock of publicly-held companies (such as us), unless:
•
prior to such time the Board of the corporation approved the business combination that results in the stockholder becoming an invested stockholder;
•
the acquirer owned at least 85% of the outstanding voting stock of such company prior to commencement of the transaction;
•
two-thirds of the stockholders, other than the acquirer, vote to approve the business combination after approval thereof by the Board; or
•
the stockholders of the corporation amend its articles of incorporation or by-laws electing not to be governed by this provision.
We have not paid dividends on our outstanding common stock in many years.
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. Although our Board of Directors (the “Board”) has not made a decision whether or not to pay dividends on our common stock in 2021, it is unlikely we will pay dividends on our common stock until we have repaid or refinanced our debt and our preferred stock. In addition, there are certain limitations contained in our loan and securities purchase agreements that may limit our ability to pay dividends on our outstanding common stock.
Future issuances or potential issuances of our common stock or preferred stock could adversely affect the price of our common stock and our ability to raise funds in new stock offerings and could dilute the percentage ownership or voting power of our common stockholders.
Future sales of substantial amounts of our common stock, preferred stock or equity-related securities in the public market, or the issuance of a substantial amount of our common stock as the result of the conversion of our outstanding convertible preferred stocks, or the perception that such sales or conversions could occur, could adversely affect prevailing trading prices of our common stock and could dilute the value of common stock held by our existing stockholders. No prediction can be made as to the effect, if any, that future sales of common stock, preferred stock, or equity-related securities, conversions of our outstanding preferred stocks into shares of common stock, or the availability of shares of common stock for future sale will have on the trading price of our common stock. Such future sales or conversions could also significantly reduce the percentage ownership and voting power of our existing common stockholders.
7.
General Risk Factors
Deterioration of global market and economic conditions could have a material adverse effect on our business, financial condition, results of operations and cash flow.
A slowdown of, or persistent weakness in, economic activity caused by a deterioration of global market and economic conditions could adversely affect our business in the following ways, among others: conditions in the credit markets could impact the ability of our customers and their customers to obtain sufficient credit to support their operations; the failure of our customers to fulfill their purchase obligations could result in increases in bad debts and affect our working capital; and the failure of certain key suppliers could increase our exposure to disruptions in supply or to financial losses. We also may experience declining demand and falling prices for
some of our products due to our customers’ reluctance to replenish inventories. The overall impact of a global economic downturn or reduced overall global trade on us is difficult to predict, and our business could be materially adversely impacted.
In addition, conditions in the international market for nitrogen fertilizer significantly influence our operating results. The international market for fertilizers is influenced by such factors as the relative value of the U.S. currency and its impact on the importation of fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets and other regulatory policies (including tariffs) of foreign governments, as well as the U.S. laws and policies affecting foreign trade and investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933 (as amended, the “Securities Act”) and Section 21E of the Securities Exchange Act. All statements in this report other than statements of historical fact are Forward-Looking Statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the Company to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “could” and similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained herein include, but are not limited to, the following: our ability to invest in projects that will generate best returns for our stockholders;
•
our ability to invest in projects that will generate the best returns for our stockholders
•
our future liquidity outlook;
•
the outlook our chemical products and related markets;
•
the amount, timing and effect on the nitrogen market from the current nitrogen expansion projects;
•
the effect from the lack of non-seasonal volume;
•
our belief that competition is based upon service, price, location of production and distribution sites, and product quality and performance;
•
our outlook for the coal industry;
•
the availability of raw materials;
•
the result of our product and market diversification strategy;
•
changes in domestic fertilizer production;
•
the increasing output and capacity of our existing production facilities;
•
production volumes at our production facilities;
•
our ability to moderate risk inherent in agricultural markets;
•
the sources to fund our cash needs and how this cash will be used;
•
the ability to enter into the additional borrowings;
•
the anticipated cost and timing of our capital projects;
•
certain costs covered under warranty provisions;
•
our ability to pass to our customers cost increases in the form of higher prices;
•
our belief as to whether we have sufficient sources for materials and components;
•
annual natural gas requirements;
•
compliance by our facilities with the terms of our permits;
•
the costs of compliance with environmental laws, health laws, security regulations and transportation regulations;
•
our belief as to when Turnarounds will be performed and completed;
•
expenses in connection with environmental projects;
•
the effect of litigation and other contingencies;
•
the increase in interest expense;
•
our ability to comply with debt servicing and covenants;
•
our ability to meet debt maturities or redemption obligations when due;
•
the effects of the ongoing COVID-19 pandemic and relate response; and
•
our beliefs as to whether we can meet all required covenant tests for the next twelve months.
While we believe, the expectations reflected in such Forward-Looking Statements are reasonable, we can give no assurance such expectations will prove to have been correct. There are a variety of factors which could cause future outcomes to differ materially from those described in this report, including, but not limited to, the following:
•
changes in general economic conditions, both domestic and foreign;
•
material reductions in revenues;
•
material changes in interest rates;
•
our ability to collect in a timely manner a material amount of receivables;
•
increased competitive pressures;
•
adverse effects on increases in prices of raw materials;
•
changes in federal, state and local laws and regulations, especially environmental regulations or the American Reinvestment and Recovery Act, or in the interpretation of such;
•
changes in laws, regulations or other issues related to climate change;
•
releases of pollutants into the environment exceeding our permitted limits;
•
material increases in equipment, maintenance, operating or labor costs not presently anticipated by us;
•
the requirement to use internally generated funds for purposes not presently anticipated;
•
the inability to secure additional financing for planned capital expenditures or financing obligations due in the near future;
•
our substantial existing indebtedness;
•
material changes in the cost of natural gas and certain precious metals;
•
limitations due to financial covenants;
•
changes in competition;
•
the loss of any significant customer;
•
increases in cost to maintain internal controls over financial reporting;
•
changes in operating strategy or development plans;
•
an inability to fund the working capital and expansion of our businesses;
•
changes in the production efficiency of our facilities;
•
adverse results in our contingencies including pending litigation;
•
unplanned downtime at one or more of our chemical facilities;
•
changes in production rates at any of our chemical plants;
•
an inability to obtain necessary raw materials and purchased components;
•
material increases in cost of raw materials;
•
material changes in our accounting estimates;
•
significant problems within our production equipment;
•
fire or natural disasters;
•
an inability to obtain or retain our insurance coverage;
•
difficulty obtaining necessary permits;
•
difficulty obtaining third-party financing;
•
risks associated with proxy contests initiated by dissident stockholders;
•
changes in fertilizer production;
•
reduction in acres planted for crops requiring fertilizer;
•
decreases in duties for products we sell resulting in an increase in imported products into the U.S.;
•
adverse effects from regulatory policies, including tariffs;
•
volatility of natural gas prices;
•
weather conditions;
•
increases in imported agricultural products;
•
other factors described in the MD&A contained in this report; and
•
other factors described in “Risk Factors” contained in this report.
Given these uncertainties, all parties are cautioned not to place undue reliance on such Forward-Looking Statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the Forward-Looking Statements contained herein to reflect future events or developments.
Defined Terms
The following is a list of terms used in this report.
ADEQ
-
The Arkansas Department of Environmental Quality.
AN
-
Ammonium nitrate.
ARO
-
Asset retirement obligation.
ASU
-
Accounting Standard Update.
Baytown Facility
-
The nitric acid production facility located in Baytown, Texas.
Board
-
Board of Directors
CAO
-
A consent administrative order.
CARES
-
Coronavirus Aid, Relief, and Economic Security Act.
CEO
-
Chief Executive Officer.
Cherokee Facility
-
Our chemical production facility located in Cherokee, Alabama.
Chevron
-
Chevron Environmental Management Company.
COVID-19
-
The novel coronavirus disease of 2019.
CVR
-
Coffeyville Resources Nitrogen Fertilizers, LLC.
DD&A
-
Depreciation, depletion and amortization.
DEF
-
Diesel Exhaust Fluid.
DHS
-
The U.S. Department of Homeland Security.
EDA
-
El Dorado Ammonia L.L.C.
EDC
-
El Dorado Chemical Company.
EDN
-
El Dorado Nitrogen L.L.C.
EIA
-
U.S. Energy Information Administration
El Dorado Facility
-
Our chemical production facility located in El Dorado, Arkansas.
Environmental and Health Laws
-
Numerous federal, state and local environmental, health and safety laws.
EPA
-
The U.S. Environmental Protection Agency.
EUC
-
Environmental Use Control.
Financial Covenant
-
Certain springing financial covenants associated with the working capital revolver loan.
GAAP
-
U.S. Generally Accepted Accounting Principles.
Global
-
Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to LSB and EDC.
Golsen Holders
-
Jack E. Golsen, Barry H. Golsen and certain of their related parties identified as beneficial owners of our securities.
Hallowell Facility
-
A chemical facility previously owned by two of our subsidiaries located in Kansas.
HDAN
-
High density ammonium nitrate prills used in the agricultural industry.
Interim Loan
-
A loan agreement between EDC and a lender with up to $7.5 million of available borrowing for the construction of certain equipment.
Interim Loan Period
-
The time period covered by the Interim Loan for certain equipment construction between EDC and a lender.
IRS
-
U.S. Internal Revenue Service.
J. Golsen
-
Jack E. Golsen.
KDHE
-
The Kansas Department of Health and Environment.
Koch Fertilizer
-
Koch Fertilizer L.L.C.
LDAN
-
Low density ammonium nitrate prills used in the mining industry.
Leidos
-
Leidos Constructors L.L.C.
Liquidation Preference
-
The Series E Redeemable Preferred liquidation preference of $1,000 per share plus accrued and unpaid dividends plus the participation rights value.
LSB
-
LSB Industries, Inc.
LSB Funding
-
LSB Funding L.L.C.
MD&A
-
Management’s Discussion and Analysis of Financial Condition and Results of Operations found in Item 7 of this report.
New Notes
-
The notes issued on June 21, 2019 with an interest rate of 9.625%, which mature in May 2023.
NOL
-
Net Operating Loss.
Note
-
A note in the accompanying notes to the consolidated financial statements.
Notes
-
The notes issued on April 28, 2018 with an interest rate of 9.625%, which mature in May 2023.
NPDES
-
National Pollutant Discharge Elimination.
NPK
-
Compound fertilizer products which are a solid granular fertilizer product for which the nutrient content is a combination of nitrogen, phosphorus, and potassium.
ODEQ
-
The Oklahoma Department of Environmental Quality.
OSHA
-
Occupational Safety and Health Administration.
PAR
-
Permit Appeal Resolution
PBRS
-
Performance-based restricted stock.
PCC
-
Pryor Chemical Company.
PP&E
-
Plant, property and equipment.
PPP
-
Paycheck Protection Program
Pryor Facility
-
Our chemical production facility located in Pryor, Oklahoma.
Purchaser
-
LSB Funding L.L.C.
Retirement Date
-
Date of retirement of Jack E. Golsen as Executive Chairman of the Board, December 31, 2017.
RFS
-
Federal renewable fuel standards.
RMP
-
Risk Management Program.
RSU
-
Restricted stock unit.
SBA
-
U.S. Small Business Administration.
SEC
-
The U.S. Securities and Exchange Commission.
Secured Financing due 2023
-
A secured financing arrangement between EDC and an affiliate of LSB Funding L.L.C. which matures in June 2023.
Secured Financing due 2025
-
A secured financing arrangement between EDA and an affiliate of LSB Funding L.L.C. which matures in August 2025.
Secured Loan Agreement due 2025
-
A secured loan agreement between EDC and an affiliate of LSB Funding L.L.C. which matures in March 2025.
Secured Promissory Note due 2021
-
A secured promissory note between EDC and a lender which matures in March 2021.
Secured Promissory Note due 2023
-
A secured promissory note between EDA and a lender which was paid off during August 2020 with a portion of the proceeds from the Secured Financing due 2025.
Senior Secured Notes
-
The Senior Secured Notes due on May 1, 2023 with a stated interest rate of 9.625%.
Series B Preferred
-
The Series B 12% cumulative convertible Class C Preferred stock.
Series D Preferred
-
The Series D 6% cumulative convertible Class C preferred stock.
Series E Redeemable Preferred
-
The 14% Series E Redeemable Preferred stock with participating rights and liquidating distributions based on a certain number of shares of our common stock, including the amended terms discussed in Note 10 to the Consolidated Financial Statements.
Series F Redeemable Preferred
-
The Series F Redeemable Preferred stock with one share to vote as a single class on all matters with our common stock equal to 456,225 shares of our common stock, including the amended terms discussed in Note 10 to the Consolidated Financial Statements.
SG&A
-
Selling, general and administrative expense.
Transition Agreement
-
An agreement between Jack E. Golsen and LSB, dated June 30, 2017.
TSR
-
Total shareholder return.
Turnaround
-
A planned major maintenance activity.
UAN
-
Urea ammonia nitrate.
U.S.
-
United States.
USDA
-
United States Department of Agriculture.
WASDE
-
World Agricultural Supply and Demand Estimates Report.
West Fertilizer
-
West Fertilizer Company.
Working Capital
Revolver Loan
-
Our secured revolving credit facility.
2005 Agreement
-
A death benefit agreement with Jack E. Golsen.
2008 Plan
-
The 2008 Incentive Stock Plan.
2016 Plan
-
The 2016 Long Term Incentive Plan.
2019 Crop
-
Corn crop marketing year (September 1 - August 31), which began in 2018 and ended in 2019 and primarily relates to corn planted and harvested in 2018.
2020 Crop
-
Corn crop marketing year (September 1 - August 31), which began in 2019 and ended in 2020 and primarily relates to corn planted and harvested in 2019.
2021 Crop
-
Corn crop marketing year (September 1 - August 31), which began in 2020 and will end in 2021 and primarily relates to corn planted and harvested in 2020.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The following table presents our significant properties for 2020:
Facility
El Dorado
Facility
Cherokee
Facility
Pryor Facility
Baytown
Facility
Chemical
Distribution
Centers
Location
El Dorado, AR
Cherokee, AL
Pryor, OK
Baytown, TX
(A)
Plant Area (acres)
Site Area (acres)
1,400
1,300
(B)
Site Status
Owned
Owned
Owned
Operating
Agreement
(A)
Ammonia Production Capacity (tons)
493,000 (C)
188,000 (D)
246,000 (E)
Not Applicable
(A)
We distribute our agricultural products through 10 wholesale and retail distribution centers, with 9 of the centers located in Texas (8 of which we own and 1 of which we lease); and 1 center located in Missouri (owned).
(B)
This facility is located within a chemical production complex owned by a global chemical company.
(C)
The ammonia production capacity is based on optimal 1,350 tons per day of production for the year.
(D)
The ammonia production capacity is based on 515 tons per day of production for the year.
(E)
The ammonia production capacity is based on 675 tons per day of production for the year.
For 2020, our facilities produced approximately 827,000 tons of ammonia. During 2020, we did not perform any ammonia plant Turnarounds at the El Dorado, Cherokee or Pryor Facilities.
Most of our real property and equipment located at our chemical facilities are being used to secure our long-term debt. All of the properties utilized by our businesses are suitable and adequate to meet the current needs of that business and relate to domestic operations.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
See Legal Matters under Note 8 to the Consolidated Financial Statements included in this report.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is trading on the New York Stock Exchange under the symbol “LXU”.
Stockholders
As of February 16, 2021, we had approximately 382 record holders of our common stock. This number does not include investors whose ownership is recorded in the name of their brokerage company.
Equity Compensation Plans
Discussions relating to our equity compensation plans under Item 12 of Part III are incorporated by reference to our definitive proxy statement which we intend to file with the SEC on or before April 30, 2021.
Sale of Unregistered Securities
There were no unregistered sales of equity securities in 2020 that have not been previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA (1)
Year ended December 31,
(In Thousands, Except Per Share Data)
Selected Statement of Operations Data in Dollars:
Net sales (2)
$
351,316
$
365,070
$
378,160
$
427,504
$
374,585
Operating loss
(15,535
)
(39,091
)
(23,025
)
(34,091
)
(90,223
)
Interest expense, net
51,115
46,389
43,064
37,267
30,945
Provisions (benefit) for income taxes
(4,749
)
(20,924
)
1,740
(40,759
)
(41,956
)
Loss from continuing operations
(61,911
)
(63,417
)
(72,226
)
(30,293
)
(88,133
)
Income from discontinued operations, net of taxes (3)
-
-
-
1,076
200,301
Net income (loss)
(61,911
)
(63,417
)
(72,226
)
(29,217
)
112,168
Net income (loss) income attributable to common stockholders
$
(99,419
)
$
(96,441
)
$
(102,741
)
$
(59,447
)
$
64,760
Income (loss) per common share attributable to
common stockholders:
Basic:
Loss from continuing operations
$
(3.53
)
$
(3.44
)
$
(3.74
)
$
(2.22
)
$
(5.28
)
Income from discontinued operations, net of taxes
$
-
$
-
$
-
$
0.04
$
7.82
Net income (loss)
$
(3.53
)
$
(3.44
)
$
(3.74
)
$
(2.18
)
$
2.54
Diluted:
Loss from continuing operations
$
(3.53
)
$
(3.44
)
$
(3.74
)
$
(2.22
)
$
(5.28
)
Income from discontinued operations, net of taxes
$
-
$
-
$
-
$
0.04
$
7.82
Net income (loss)
$
(3.53
)
$
(3.44
)
$
(3.74
)
$
(2.18
)
$
2.54
Selected Balance Sheet Data in Dollars:
Total assets
$
1,053,302
$
1,088,489
$
1,148,333
$
1,189,182
$
1,270,420
Long-term debt, including current portion, net
$
484,190
$
459,044
$
425,199
$
409,399
$
420,220
Redeemable preferred stocks
$
272,101
$
234,893
$
202,169
$
174,959
$
145,029
Stockholders' equity
$
149,643
$
247,327
$
342,197
$
438,196
$
492,513
Selected Other Data in Dollars:
Cash dividends declared per common share
$
-
$
-
$
-
$
-
$
-
(1)
The following selected consolidated financial data were derived from our audited consolidated financial statements and should be read in conjunction with, and are qualified by reference, to the MD&A contained in Item 7 of Part II of this report. The financial information presented may not be indicative of our future performance.
(2)
Upon adoption of ASC 606, net sales for the years 2016 and 2017 have not been adjusted under the modified retrospective method.
(3)
See discussion of our discontinued operations in Note 2 to the Consolidated Financial Statements included in our 2017 Form 10-K, filed on February 26, 2018.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A should be read in conjunction with a review of the other Items included in this Form 10-K and our December 31, 2020 consolidated financial statements included elsewhere in this report. A reference to a “Note” relates to a note in the accompanying notes to the consolidated financial statements. Certain statements contained in this MD&A may be deemed to be forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Overview
General
LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining, and industrial markets. We own and operate facilities in Cherokee, Alabama; El Dorado, Arkansas; and Pryor, Oklahoma, and operate a facility on behalf of a global chemical company in Baytown, Texas. Our products are sold through distributors and directly to end customers throughout the U.S. and parts of Mexico and Canada.
Key Operating Initiatives for 2021
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following key initiatives:
•
Continue Focusing on Becoming a “Best in Class” Chemical Plant Operator with respect to Safe, Reliable Operations that Produce the Highest Quality Product.
▪
We believe that high safety standards are critical and a precursor to improved plant performance. With that in mind, we implemented and are currently managing enhanced safety programs at our facilities that focus on improving our safety culture that will reduce risks and continuously improve our safety performance.
▪
We have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce more products for sale while lowering our cost of production. Those initiatives are focused on, operations excellence through enhancements in the operating procedure program, asset health monitoring optimization and asset care excellence maintenance programs, and product quality programs focused on providing products to the customer that meet the highest quality standards.
•
Continue Broadening the Distribution of our Products. To further leverage our plants current production capacity, we are continuing to expand the distribution of our industrial and mining products by partnering with customers to take product into different markets both within and outside the U.S.
▪
In October 2020, we announced a new long-term nitric acid supply contract with a customer. Under the agreement, we agreed to supply between 70,000 to 100,000 tons of nitric acid per year, with sales beginning the first quarter of 2021. This contract advances our focus to leverage underutilized nitric acid production capacity at our El Dorado Facility.
▪
We also executed a new contract to capture and sell carbon dioxide out of our El Dorado Facility, where our customer is building a guest plant. We expect to begin sales under this agreement in the fourth quarter of 2021.
▪
Additionally, early in the second quarter of 2020, we completed a key storage project that will allow us to further maximize our production of HDAN at our El Dorado Facility, which we expect to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing.
•
Development of a Strategy to Capitalize on Ammonia Opportunities in a Renewable Energy Focused Economy. As there is a heightened global focus on significantly increasing the use of renewable energy to reduce carbon emissions, we are currently developing a strategy to enter the market for low-carbon or no carbon ammonia, a rapidly emerging trend referred to as “blue-green ammonia.” Many studies have shown that ammonia is the best carrier for hydrogen, given higher energy content and relative ease of storage via hydrogen gas. Ammonia can also be used as zero carbon fuel in the maritime sector, a carbon free fertilizer and as a coal substitute in energy constrained countries. If ammonia were to be used for energy consumption globally, this would equate to 5 times the amount of current global annual production of ammonia, or approximately 50 times of the current seaborne trade. We believe we are well-placed to partake in this opportunity given the ability to retrofit our existing plants rather than the need to invest in greenfield projects thereby reducing the time to market and the upfront capital expenditures which will help the overall economics.
•
Improving Our Capital Structure and Overall Cost of Capital. We are actively seeking ways to improve our capital structure and reduce our overall cost of capital. We believe that continued improvement in operating performance combined with improving fundamentals in the agriculture market and the continued economic recovery from the COVID-19 pandemic will be a benefit in achieving those efforts.
•
Evaluate Acquisitions of Strategic Assets or Companies. We are evaluating opportunities to acquire strategic assets or companies, mergers with other companies and investment in additional production capacity where we believe those acquisitions, mergers or expansion of production capacity will enhance the value of the Company and provide appropriate returns.
We may not successfully implement any or all of these initiatives. Even if we successfully implement the initiatives, they may not achieve the results that we expect or desire.
Business Developments-2020
COVID-19 Pandemic
All of the facilities we operate have been designated as essential critical infrastructure based on guidelines issued by the United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service provider, and therefore, our facilities have remained operational despite the government mandated operational limitations or business closings resulting from the federal, state and local government responses to the evolving global health crisis resulting from the COVID-19 pandemic. Management has taken significant measures to ensure the health and safety of our employees and our business continuity during this challenging situation. For our personnel at our manufacturing facilities and retail agricultural centers, we have developed plans and procedures that have allowed them to operate in a safe manner in order to protect them, their families, our vendors and our customers. These include daily health screenings, including temperature checks and questionnaires, use of proper personal protection equipment, regular disinfection and cleaning of equipment and workspaces, social distancing, working from home where appropriate and quarantining of employees according to specific protocols. We intend to maintain our discipline in this regard for however long the current health risk persists.
The nitrogen chemical industry was under pressure during most of 2020. As a result of the COVID-19 global economic downturn and the resultant decline in energy prices, industry operating rates globally have risen, resulting in greater supply and lower fertilizer pricing. Pricing for all major agricultural product categories was impacted by the continued oversupply of ammonia in our primary end markets, along with increased imports of some of our downstream products. In addition, our industrial and mining sales volume declined as a result of pandemic-related weakness in demand in several of our end markets.
Looking ahead to 2021, while much of the U.S. economy has a least partially reopened and we have seen a healthy recovery of the economy, we are not yet back to pre-pandemic operating levels and uncertainty still remains for some of our end markets. With respect to our agricultural business, the corn market has experienced positive indicators beginning during the latter part of 2020. According to certain industry sources, the estimated corn acres to be planted in 2021 ranges between 92 to 94 million. Also, the U.S. Department of Agriculture (the “USDA”) currently estimates the U.S. ending corn stocks to be approximately 38.2 million metric tons, compared to 48.8 million metric tons relating to the 2020 crop. In addition, demand from ethanol-related consumption has increased since the second quarter of 2020, although overall demand continues to be lower compared to 2019 due to the stay-at-home orders, we experienced in the U.S. Increased Chinese import of corn and lower than expected ending corn inventory is currently improving corn pricing and is driving higher fertilizer pricing thus far for the 2021 spring season. However, improvements in fertilizer pricing could be tempered higher natural gas costs and from additional imported fertilizers. With respect to our industrial and mining business, we are seeing gradual improvement in demand for nitric acid, industrial ammonia and ammonium nitrate as sectors such as automotive manufacturing, home building, and copper mining have increased activity. Also see discussion below concerning a new long-term nitric acid supply contract with a customer.
On the liquidity front, as of December 31, 2020, we had approximately $58.1 million of combined cash and borrowing capacity, which, we believe, provides us with ample liquidity to fund our operations and meet our current obligations.
As discussed in footnotes (D) and (G) of Note 6, in April 2020, we received a $10 million loan through the PPP within the CARES Act stimulus package. The funds from this loan, along with the decisive action we implemented to defer expenses and capital expenditures, have enabled us to avoid the need to furlough or terminate employees to counteract the lost volume and pricing impacts we have seen or expect as a result of the COVID-19 pandemic. Also, during August 2020, EDA entered into a $30 million secured financing arrangement with an affiliate of LSB Funding with an interest rate of 8.75%. 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 $30 million financing arrangement is secured by an ammonia storage tank and is guaranteed by LSB. A portion of the proceeds from this secured financing arrangement was used to pay off the Secured Promissory Note that was scheduled to mature in May 2023.
Also see discussions below under “Liquidity and Capital Resources.”
Long-Term Nitric Acid Supply Contract
During October 2020, EDC entered into a new long-term nitric acid supply contract with a customer. Under the agreement, EDC agreed to supply between 70,000 to 100,000 tons of nitric acid annually, with sales beginning in the first quarter of 2021. The initial
contract term extends through 2027 but includes automatic one-year renewal terms unless terminated by either party pursuant to the terms of the contract.
Settlements with Certain Vendors
As discussed in Note 8, in June 2020, EDC and certain vendors mediated settlements totaling $7.6 million for EDC to recover certain costs associated with our new nitric acid plant at our El Dorado Facility. The construction of this plant was completed and began production in 2016. Of the $7.6 million, approximately $5.7 million is classified as a reduction to cost of sales and approximately $1.9 million is classified as a reduction to PP&E. The recovery amount was applied against the original classification of the underlying costs.
Business Development-February 2021
On February 21, 2021, we began the phased restart of our Pryor Facility, which was taken out of service on February 12, 2021 after extreme cold weather caused a surge in natural gas prices in the region, along with the curtailment of gas distribution by the operator of the pipeline that supplies natural gas to the facility.
As weather across the middle of the country has improved and temperatures have warmed, natural gas prices have normalized and supply volumes have been restored to levels required for full operation of our facilities. The Pryor Facility is in the process of restarting and we expect the facility to return to pre-shutdown production volume levels as safely and as soon as practicable.
Also, as a result of unprecedented cold weather conditions, on February 17, 2021, the primary natural gas supplier to our El Dorado Facility asserted a claim of force majeure and materially restricted the supply of gas to the facility. However, effective February 23, 2021, the force majeure was lifted and the facility’s ammonia plant is currently in production.
Notably, our Cherokee Facility was not materially impacted by the extreme cold weather and related natural gas price and supply issues and operated at targeted levels throughout February.
Key Industry Factors
Supply and Demand
Agricultural
See discussion above concerning the COVID-19 pandemic under “Business Developments-2020.”
The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics, including the impact from the Phase 1 trade agreement between the U.S and China. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.
From a farmers’ perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted.
Additionally, changes in corn prices and those of soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely effecting prices.
For 2020 as noted in the table below, the USDA estimates the number of acres of corn planted in the U.S. was approximately 91 million acres and U.S ending stocks to be approximately 38 million metric tons, a 22% decrease from a year ago.
The following February estimates are associated with the corn market:
2021 Crop
2020 Crop
2019 Crop
(2020 Harvest)
(2019 Harvest)
Percentage
(2018 Harvest)
Percentage
February Report (1)
February Report (1)
Change (2)
February Report (1)
Change (3)
U.S. Area Planted (Million acres)
90.8
89.7
1.2
%
88.9
2.1
%
U.S. Yield per Acre (Bushels)
172.0
167.5
2.7
%
176.4
(2.5
%)
U.S. Production (Million bushels)
14,182
13,620
4.1
%
14,340
(1.1
%)
U.S. Ending Stocks (Million metric tons)
38.2
48.8
(21.7
%)
56.4
(32.3
%)
World Ending Stocks (Million metric tons)
286.5
303.0
(5.4
%)
320.1
(10.5
%)
(1)
Information obtained from WASDE report dated February 9, 2021 (“February Report”) for the 2020/2021 (“2021 Crop”), 2019/2020 (“2020 Crop”) and 2018/2019 (“2019 Crop”) corn marketing years. The marketing year is the twelve-month period during which a crop normally is marketed. For example, the marketing year for the current corn crop is from September 1 of the current year to August 31 of the next year. The year begins at the harvest and continues until just before harvest of the following year.
(2)
Represents the percentage change between the 2021 Crop amounts compared to the 2020 Crop amounts.
(3)
Represents the percentage change between the 2021 Crop amounts compared to the 2019 Crop amounts.
After a challenging 2019 for U.S. corn farmers, the number of planted corn acres in 2020 increased slightly and corn production increased 4% year over year. Despite the national restrictions and stay at home orders placed on traveling during 2020, in an attempt to slow the spread of the COVID-19 pandemic, the USDA estimates a slight demand increase in corn for ethanol production compared to last year. Most gasoline has 10% ethanol content. Ethanol is commonly made from corn and ethanol production is the largest user of U.S. corn, representing roughly 40% of total U.S. corn demand. Lastly, due to the overall demand for corn, the USDA significantly decreased the U.S. ending corn stocks to approximately 38 million metric tons, compared to 49 million metric tons relating to the 2020 crop.
For 2021, this decrease in ending corn stocks has elevated current and projected corn prices not seen in seven years, which may positively impact fertilizer demand and prices for the spring planting season.
On the supply side, given the low price of natural gas in North America over the last several years, North American fertilizer producers have become the global low-cost producers for delivered fertilizer products to the Midwest U.S. Several years ago, the market believed that low natural gas prices would continue. That belief, combined with favorable fertilizer pricing, stimulated investment in numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities. Following the expansions, global nitrogen fertilizer supply outpaced global nitrogen fertilizer demand causing oversupply in the global and North American markets. In addition, the new domestic supply of ammonia and other fertilizer products changed the physical flow of ammonia in North America placing pressure on nitrogen fertilizer selling prices as the new capacity was absorbed by the market.
Beginning in late 2019 and into 2020, ammonia pricing was under pressure due to inordinately inclement weather, followed by sluggish industrial demand throughout 2020, as a result of pandemic related weakness, which led to increased supply and resultant lower overall pricing for ammonia. Also, in 2020, ammonia prices in the Southern Plains market were under additional pricing pressure relating to the closure of the Magellan ammonia pipeline during 2019, which also led to a build-up in ammonia supply in this market.
Beginning in the latter half of 2019 and throughout 2020, UAN prices traded at a discount to urea on a nitrogen equivalent basis, due in part to European anti-dumping duties that were imposed on imports from certain countries, including the U.S., which resulted in increased imports of UAN into the U.S. primarily from Trinidad and Russia and decreased exports from the U.S., resulting in increased overall supply in the U.S market.
Looking forward to 2021, favorable dynamics for U.S. agriculture have translated into higher prices to date for a variety of crops, including corn, which has prompted an increase in demand for fertilizers by farmers seeking to maximize yields in the coming spring planting season. Favorable grower income in 2020, coupled with significant increase in Chinese imports of agricultural commodities, lower ending U.S. corn inventory levels, and drought conditions in South America have pushed commodity prices, including corn, to their highest level in over seven years. According to certain industry sources, the estimated corn acres to be planted in 2021 is between 92 to 94 million. These factors have resulted in a price rally for fertilizers over the last several months, which we expect will continue through the spring planting season.
Industrial and Mining
See discussion above concerning the COVID-19 pandemic under “Business Developments-2020.”
Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries. According to the American Chemistry Council, the U.S. economic indicators are improving and pointing towards continued improvement despite continuing COVID-19 pandemic related difficulties in the markets we serve. Our sales prices generally vary with the market price of ammonia or natural gas, as applicable, in our pricing arrangements with customers. See discussion above concerning a new long-term nitric acid supply contract under “Business Developments-2020.”
Our mining products are LDAN and AN solution, which are primary used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining, and to a lesser extent, for coal. In our mining markets, our sales volumes are typically driven by changes in the overall North American consumption levels of mining products that can be impacted by weather. Metals mining prices have seen strong pricing during 2020 which in turn we expect will drive strong demand for our mining products for 2021 as producers push to extract as much as possible. Also, although U.S. coal production decreased by 24% during 2020, the EIA is projecting a 12% increase in 2021 because of a forecast 41% increase in natural gas prices for electricity generators, making coal more competitive in the electric power sector. We believe our plants are well located to support the more stable quarry and construction industries and the metals mining industries.
Farmer Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted.
Natural Gas Prices
Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive position and that of other North American nitrogen fertilizer producers has been positively affected.
We historically have purchased natural gas either on the spot market, through forward purchase contracts, or a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems. The following table shows the annual volume of natural gas we purchased and the average cost per MMBtu:
Natural gas volumes (MMBtu in millions)
30.1
27.4
Natural gas average cost per MMBtu
$
2.09
$
2.55
Transportation Costs
Costs for transporting nitrogen-based products can be significant relative to their selling price. For example, ammonia is a hazardous gas at ambient temperatures and must be transported in specialized equipment, which is more expensive than other forms of nitrogen fertilizers. In recent years, a significant amount of the ammonia consumed annually in the U.S. was imported. Therefore, nitrogen fertilizers prices in the U.S. are influenced by the cost to transport product from exporting countries, giving domestic producers who transport shorter distances an advantage. However, we continue to evaluate the recent rising costs of rail and truck freight domestically. Additionally, the Magellan ammonia pipeline, which had an annual capacity to transport approximately 900,000 tons per year, most of which was produced in Oklahoma and Texas and delivered via the pipeline in the Midwest has been permanently shut down. Without the pipeline in place for ammonia transport, producers that relied on the pipeline to transport their ammonia now have to rely on other transportation modes, primarily trucks, but will also include rail and barge transport of ammonia. Due to increases in demand for ammonia trucks during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers. As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs.
Key Operational Factors
Facility Reliability
Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds (primarily associated with our ammonia plants), is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors. Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance. All Turnarounds result in
lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs and maintenance, which repair and maintenance costs are expensed as incurred.
Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle with the next ammonia plant Turnaround planned in the third quarter of 2021.
Our El Dorado and Pryor Facilities are currently on a three-year ammonia plant Turnaround cycle with the next ammonia plant Turnaround planned in the third quarter of 2022.
Ammonia Production
Ammonia is the basic product used to produce all of our upgraded products. The ammonia production rates of our plants affect the total cost per ton of each product produced and the overall sales of our products.
Total ammonia production in 2020 was 827,000 tons. For 2021, we are targeting total ammonia production of approximately 830,000 tons to 850,000 tons despite a 30-day Turnaround at our Cherokee Facility, which will lower ammonia production during the third quarter by approximately 15,000 tons.
We believe that our focus on continuous improvement in reliability as discussed in key operating initiatives will result in year over year improvement in ammonia production for 2021.
Forward Sales Contracts
We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon, with dates typically occurring within 12 months. We use this program to varying degrees during the year depending on market conditions and our view of changing price environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.
Consolidated Results for 2020
Our consolidated net sales for 2020 were $351.3 million compared to $365.1 million for 2019. Our consolidated operating loss was $15.5 million compared to $39.1 million for 2019. The items affecting our operating results are discussed below and under “Results of Operations.”
Items Affecting Comparability of Results
Selling Prices
For 2020, average agricultural selling prices for our ammonia, UAN, and HDAN decreased 29%, 25% and 11%, respectively, compared to 2019. As discussed above under “Key Industry Factors,” the COVID-19 economic downturn and the resultant decline in energy prices has led to lower natural gas prices globally. These factors have led to an increase in operating rates for nitrogen producers around the globe, resulting in greater supply of nitrogen products and lower fertilizer pricing. This, combined with elevated ammonia inventory levels from the inordinately inclement weather throughout the Midwest in 2019 and the closure of the Magellan ammonia pipeline in September 2019, has led to excess ammonia supply in the Southern Plains market. Also pricing pressures were driven by the impact of ammonia producers selling ammonia that would otherwise have been sold into the industrial market but was instead sold into the agricultural market due to the pandemic-related slowdown of the industrial market. UAN prices were negatively impacted by European anti-dumping duties, which resulted in less exports of UAN from the U.S. and more imports of UAN from Russia and Trinidad into the U.S. HDAN prices were impacted by the overall decline in agricultural commodity prices.
Our 2020 average industrial selling prices for our products were lower compared to the same period of 2019 as a result of the aforementioned negative impact on the markets we serve from the COVID-19 pandemic and the elevated ammonia inventory levels. The Tampa Ammonia pricing declined 6% compared to 2019, which led to a decrease in industrial selling prices as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. Our 2020 average mining selling prices were lower compared to 2019 primarily as a result of certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.
Legal Fees-Leidos
For 2020 and 2019, certain legal fees were approximately $5.7 million and $9.6 million, respectively. These fees relate to claims we are pursuing against Leidos to recover damages and losses associated with the construction of the ammonia plant at the El Dorado Facility as discussed in footnote B of Note 8. Due to the impact from the COVID-19 pandemic, the trial date has been delayed, which resulted in reduced costs in 2020. We are awaiting a new trial date.
Settlements with Certain Vendors (2020 only)
As discussed above under “Business Developments-2020”, EDC and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility. As a result, a recovery from these settlements was recognized which includes approximately $5.7 million classified as a reduction to cost of sales.
Ammonia Plant Turnaround Activities (2019 only)
When an ammonia plant Turnaround is performed, overall results are negatively impacted. This impact includes lost contribution margin from lost sales, lost fixed cost absorption from lower production, and increased costs associated with repairs and maintenance. The effects of our ammonia plant Turnarounds, exclusive of the impacts due to lost production during the downtime, are shown below:
Turnaround
Turnaround Expense
Estimated Lost Production
Facility
2019 Related Period
Downtime
(In Thousands)
(In Tons)
Pryor Facility
3rd/4th Quarter
67 days
$
9,088
45,000
El Dorado Facility
3rd Quarter
18 days
2,702
24,000
$
11,790
69,000
Charge Associated with Assets Held for Sale (2019 only)
In 2019, we recognized a non-cash charge of $9.7 million associated with assets held for sale, which amount is included in other expense.
Benefit for Income Taxes
For 2020, the benefit for income taxes was $4.7 million, with an effective benefit rate of 7.1%. The effective tax rate was impacted by adjustments made to our valuation allowances. For 2019, the benefit for income taxes was $20.9 million and the resulting increase in the effective benefit rate for 2019 was 24.8%, which includes changes to the state deferred tax assets and liabilities resulting from state tax law changes enacted and due to federal and state indefinite lived carryforward benefits that can be realized through the reversal of deferred tax liabilities.
Results of Operations
The following Results of Operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2020 and 2019 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A. You should carefully review and consider the information in the MD&A of our 2019 Form 10-K, filed with the SEC on February 25, 2020, for an understanding of our results of operations and liquidity discussions and analysis comparing 2019 to 2018.
We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the consolidated financial statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table contains certain financial information:
Percentage
Change
Change
(Dollars In Thousands)
Net sales:
Agricultural products
$
180,036
$
187,641
$
(7,605
)
(4
)%
Industrial and mining products
171,280
177,429
(6,149
)
(3
)%
Total net sales
$
351,316
$
365,070
$
(13,754
)
(4
)%
Gross profit:
Agricultural products (1)
$
19,348
$
28,453
$
(9,105
)
(32
)%
Industrial and mining products (1)
61,612
58,005
3,607
%
Adjusted gross profit by market (1)
80,960
86,458
(5,498
)
(6
)%
Depreciation and amortization (2)
(69,500
)
(68,263
)
(1,237
)
%
Turnaround expense
(76
)
(13,210
)
13,134
Recovery from settlements with certain vendors (3)
5,664
-
5,664
Total gross profit
17,048
4,985
12,063
%
Selling, general and administrative expense
32,084
34,172
(2,088
)
(6
)%
Other expense, net
9,904
(9,405
)
Operating loss
(15,535
)
(39,091
)
23,556
(60
)%
Interest expense, net (4)
51,115
46,389
4,726
%
Non-operating other expense (income), net
(1,139
)
1,149
Benefit for income taxes
(4,749
)
(20,924
)
16,175
Net loss
$
(61,911
)
$
(63,417
)
$
1,506
(2
)%
Other information:
Gross profit percentage (5)
4.9
%
1.4
%
3.5
%
Property, plant and equipment expenditures
$
30,471
$
36,081
$
(5,610
)
(16
)%
(1)
Represents a non-GAAP measure since the amount excludes unallocated depreciation and amortization, Turnaround expenses and a recovery from settlements.
(2)
Represents amount classified as cost of sales.
(3)
See discussion above under “Business Developments - 2020.”
(4)
Includes interest expense of $1.6 million associated with a litigation judgment issued during 2020 as discussed in footnote (B) of Note 8.
(5)
As a percentage of total net sales.
The following table provides certain financial information by market (dollars in thousands):
Change
Agricultural
Products
Industrial
and
Mining
Products
Agricultural
Products
Industrial
and
Mining
Products
Agricultural
Products
Industrial
and
Mining
Products
Net sales
$
180,036
$
171,280
$
187,641
$
177,429
$
(7,605
)
$
(6,149
)
Adjusted gross profit by market (1)
$
19,348
$
61,612
$
28,453
$
58,005
$
(9,105
)
$
3,607
Adjusted gross profit percentage
by market (2)
10.7
%
36.0
%
15.2
%
32.7
%
(4.5
)%
3.3
%
(1)
Represents a non-GAAP measure since the amount excludes depreciation and amortization, Turnaround expenses and a recovery from settlements. See reconciliation included in the financial information table above.
(2)
As a percentage of the respective net sales.
The following tables provide key sales metrics for the agricultural products:
Percentage
Product (tons sold)
Change
Change
UAN
498,738
359,905
138,833
%
HDAN
292,679
277,820
14,859
%
Ammonia
97,367
83,924
13,443
%
Other
18,024
19,655
(1,631
)
(8
)%
Total
906,808
741,304
165,504
%
Percentage
Gross Average Selling Prices (price per ton)
Change
Change
UAN
$
$
$
(50
)
(25
)%
HDAN
$
$
$
(29
)
(11
)%
Ammonia
$
$
$
(94
)
(29
)%
With respect to sales of industrial products, the following tables indicate key operating metrics of our major products:
Percentage
Product (tons sold)
Change
Change
Ammonia
269,485
275,253
(5,768
)
(2
)%
Nitric Acid
94,395
99,544
(5,149
)
(5
)%
Other Industrial Products
47,875
35,107
12,768
%
Total
411,755
409,904
1,851
-
%
Tampa Ammonia Benchmark (price per metric ton)
$
$
$
(15
)
(6
)%
With respect to sales of mining products, the following tables indicate key operating metrics of our major products:
Percentage
Product (tons sold)
Change
Change
LDAN/HDAN/AN Solution
161,516
151,935
9,581
%
Net Sales
•
Agricultural product sales decreased driven by lower selling prices for all of our agricultural products. The impact from the decline in selling prices was partially offset by an increase in sales volume of all our major agricultural products, including UAN as a result of higher production from the Pryor Facility as a result of the new Urea reactor which was installed in the fourth quarter of 2019.
•
Industrial products sales decreased primarily from lower selling prices due primarily to lower Tampa Ammonia benchmark pricing. The average Tampa ammonia pricing was approximately $15 per ton lower compared to 2019. Additionally, overall sales volumes were slightly higher into markets we serve, as a result of higher production, despite the impact from the COVID-19 pandemic.
•
Mining products sales increase slightly primarily as the result of overall higher sales volumes as customer demand has recently improved in certain markets we serve partially offset by lower selling prices. Certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.
Gross Profit
As noted in the tables above, we recognized a gross profit of $17 million for 2020 compared to $5 million for 2019, or an increase of approximately $12 million. Overall, our gross profit percentage increased to 4.9% for 2020 compared to 1.4% for 2019.
Our agricultural products adjusted gross profit percentage decreased to 11% for 2020 from 15% for 2019 due primarily to decreased selling prices for all of our agricultural products partially offset by increased sales volumes for all of our major products as discussed above.
Industrial and mining products adjusted gross profit percentage increased for 2020 to 36% from 33% for 2019 primarily driven by a shift of product mix, lower production costs and higher sales volumes of our mining products and certain industrial products partially offset by lower overall Tampa Ammonia pricing, which averaged approximately $233 per metric ton during 2020 compared to approximately $248 per metric ton for 2019 as discussed above.
The net negative effect on gross profit from activity discussed above was offset by approximately $13.9 million in lower natural gas costs per MMBtu and the result of settlements with certain vendors resulting in a recovery of approximately $5.7 million as discussed in Note 8. Also, during 2019, we incurred Turnaround costs totaling approximately $13.2 million (no Turnarounds were performed during 2020).
Selling, General and Administrative
Our SG&A expenses were $32.1 million for 2020, a decrease of $2.1 million compared to 2019. This net decrease was primarily driven by lower professional fees of $3.3 million, including legal fees discussed above under “Items Affecting Comparability”, partially offset by an increase in compensation-related and other miscellaneous costs of $1.2 million.
Other Expense, net
Other expense for 2019 was $9.9 million primarily relating to a non-cash charge associated with assets held for sale (minimal for 2020).
Interest Expense, net
Interest expense for 2020 was $51.1 million compared to $46.4 million for 2019. The net increase relates primarily to interest expense incurred associated with the issuance of the New Notes in 2019, the Secured Financing due 2023 and the Secured Financing Agreement due 2025 as discussed in Note 6 in addition to a litigation judgment discussed in footnote (B) of Note 8.
Benefit for Income Taxes
The benefit for income taxes for 2020 was $4.7 million compared to $20.9 million for 2019. The resulting benefit rate for 2020 was 7.1% compared to 24.8% for 2019. For 2020, the effective tax rate was impacted by adjustments made to our valuation allowances. The 2019 effective tax rate was impacted primarily due to changes to the state deferred tax assets and liabilities resulting from state tax law changes enacted during 2019 and due to federal and state indefinite lived carryforward benefits that can be realized through the reversal of deferred tax liabilities. Also, see discussion in Note 7.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash flow activities for 2020 and 2019:
Change
(In Thousands)
Net cash flows from operating activities
$
(2,513
)
$
2,099
$
(4,612
)
Net cash flows from investing activities
$
(28,426
)
$
(35,925
)
$
7,499
Net cash flows from financing activities
$
24,412
$
30,569
$
(6,157
)
Net Cash Flow from Operating Activities
Net cash used by operating activities was $2.5 million for 2020 compared net cash provided of $2.1 million for 2019, a decrease of $4.6 million.
For 2020, net cash used is the result of a net loss of $61.9 million plus adjustments of $69.6 million for depreciation and amortization of PP&E, and other adjustments of $9.4 million less an adjustment of $4.8 million for deferred taxes and net cash used of approximately $14.8 million primarily from our working capital, including accounts payable, accounts receivable and prepaid deposits.
For 2019, net cash provided is the result of a net loss of $63.4 million plus adjustments of $68.3 million for depreciation and amortization of PP&E, non-cash charge of $9.7 million associated assets held for sale, and other adjustments of $7.0 million less an adjustment of $20.9 million for deferred taxes and net cash provided of approximately $1.4 million primarily from our working capital.
Net Cash Flow from Investing Activities
Net cash used by investing activities was $28.4 million for 2020 compared to $35.9 million for 2019, a change of $7.5 million.
For 2020 and 2019, net cash used relates primarily to expenditures for PP&E.
Net Cash Flow from Financing Activities
Net cash provided by financing activities was $24.4 million for 2020 compared to $30.6 million for 2019, a change of $6.2 million.
For 2020, net cash provided primarily consists of proceeds of $57.2 million from other long-term debt and insurance premium short-term financing partially offset by payments on other long-term debt and short-term financing of $32.3 million and payments of $0.5 million for other financing activities.
For 2019, net cash provided primarily consists of net proceeds of $35.1 million from the New Notes, net proceeds of $7.5 million, net of payments, from other long-term debt and insurance premium short-term financing partially offset by net payments of $10 million on the Working Capital Revolver Loan, and payments of $2.0 million for other financing activities.
Capitalization
The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity:
December 31,
(In Millions)
Cash and cash equivalents
$
16.3
$
22.8
Revolving credit facility and long-term debt:
Working Capital Revolver Loan
-
-
Senior Secured Notes due 2023
435.0
435.0
Secured Promissory Note due 2021
1.2
4.7
Unsecured Loan Agreement due 2022 (1)
10.0
-
Secured Financing due 2023
10.7
13.5
Secured Loan Agreement due 2025
6.8
5.2
Secured Financing due 2025 (1)
28.6
-
Secured Promissory Note due 2023 (1)
-
12.7
Other
0.5
0.2
Unamortized discount and debt issuance costs
(8.6
)
(12.3
)
Total long-term debt, including current portion, net
484.2
$
459.0
Series E and F redeemable preferred stock (2)
272.1
$
234.9
Total stockholders' equity
149.6
$
247.3
(1)
See discussions below under “Loan Agreements and Redeemable Preferred Stock” concerning these financing transactions during 2020.
(2)
Liquidation preference of $278.0 million as of December 31, 2020.
See discussion above concerning the COVID-19 pandemic under “Business Developments - 2020.”
We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of December 31, 2020, our Working Capital Revolver Loan was undrawn and had approximately $41.8 million of availability.
We expect capital expenditures to be approximately $30 million for 2021, which includes approximately $5 million for margin enhancement projects. The remaining capital spending is planned for reliability and maintenance capital projects.
We believe that the combination of our cash on hand, 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 twelve months.
Compliance with Long - Term Debt Covenants
As discussed below under “Loan Agreements,” the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of December 31, 2020, no trigger event had occurred.
Loan Agreements and Redeemable Preferred Stock
Senior Secured Notes due 2023 - LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, as discussed in footnote (B) of Note 6. Interest is to be paid semiannually on May 1st and November 1st, maturing May 1, 2023.
Secured Promissory Note due 2021 - EDC is party to a secured promissory note due in March 2021. This promissory note bears interest at the annual rate of 5.25%. Principal and interest are payable in monthly installments.
Unsecured Loan Agreement due 2022 - As discussed in footnote (D) of Note 6, LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020. We have used all or substantially all of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness. Under the current terms of the PPP loan, loan forgiveness applications are due within 10 months after the end of the loan forgiveness covered period, which period began on the date the PPP loan was disbursed and ends either 8-weeks or 24-weeks after disbursement of the loan. Once the SBA notifies the lender the amount of the loan which has been approved for forgiveness, the lender will determine the date that the equal monthly principal and interest payments will begin for the remaining loan balance, if any. As of December 31, 2020, the loan matures in April 2022, which term may be extended to April 2025 if mutually agreed to by the parties. As for the potential loan forgiveness, once the PPP loan is,
wholly or partially, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.
Secured Financing due 2023 - EDC 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.
Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding, which provided for available borrowings (the “Interim Loan”) during the construction of certain equipment (the “Interim Loan Period”), subject to certain conditions. During the Interim Loan Period, interest only was payable in monthly installments. Effective February 28, 2020, the Interim Loan Period ended, and the Interim Loan was replaced by a secured promissory note due in March 2025. Under the terms of the note, principal and interest are payable in 60 equal monthly installments.
Secured Financing due 2025 - As discussed in footnote (G) of Note 6, EDA is party to a $30 million secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.
Working Capital Revolver Loan - At December 31, 2020, the Working Capital Revolver Loan was undrawn and the net credit available for borrowings under our Working Capital Revolver Loan was approximately $41.8 million, based on our eligible collateral, less outstanding standby letters of credit as of that date. Also see discussion above under “Compliance with Long-Term Debt Covenants.
Redemption of Series E Redeemable Preferred - At December 31, 2020, there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $278.0 million.
At any time on or after October 25, 2023, each Series E holder has the right to elect to have such holder’s shares redeemed by us at a redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the participation rights value (the “Liquidation Preference”). Additionally, at our option, we may redeem the Series E Redeemable Preferred at any time at a redemption price per share equal to the Liquidation Preference of such share as of the redemption date. Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares of Series E Redeemable Preferred and (ii) all other required approvals, including under any principal U.S. securities exchange on which our common stock is then listed for trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of common stock having an aggregate common stock price equal to the amount of the aggregate Liquidation Preference of such shares being redeemed in shares of common stock in lieu of cash at the redemption date.
In the event of liquidation, the Series E Redeemable Preferred is entitled to receive its Liquidation Preference before any such distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other junior stock. In the event of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding at the Liquidation Preference.
Since carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder, this accretion has and will continue to affect income (loss) per common share. However, this accretion will change if the expected redemption date changes.
Also, see discussion in Note 10.
Capital Expenditures - 2020
For 2020, capital expenditures relating to PP&E were $30.5 million, which expenditures include approximately $1.8 million associated with maintaining compliance with environmental laws, regulations and guidelines. The capital expenditures were funded primarily from cash and working capital.
See discussion above under “Capitalization” for our expected annual capital expenditures for 2021.
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 $4.0 million in 2020 in connection with environmental projects. For 2021, we expect to incur expenses ranging from $4.1 million to $4.6 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.
Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the current annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate will increase beginning on April 25, 2021 as discussed in Note 10. Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when
declared by our Board. In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the current annual rate of 14%, but such annual rate will increase beginning on April 25, 2021. The current semi-annual compounded dividend is approximately $136.29 per share for the current aggregate semi-annual dividend of $19.0 million. We also must declare a dividend on the Series E Redeemable Preferred on a pro rata basis with our common stock. As long as the Purchaser holds at least 10% of the Series E Redeemable Preferred, we may not declare dividends on our common stock and other preferred stocks unless and until dividends have been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash. As of December 31, 2020, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $138.2 million.
Dividends on the Series D 6% cumulative convertible Class C preferred stock (the “Series D Preferred”) and Series B 12% cumulative convertible Class C Preferred Stock (the “Series B Preferred”) are payable annually, only when declared by our Board, as follows:
•
$0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate dividend of $60,000, and
•
$12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate dividend of $240,000.
As of December 31, 2020, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.6 million. All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Holders and an immediate family member. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred.
Seasonality
We believe fertilizer products sold to the agricultural industry are seasonal while sales into the industrial and mining sectors generally are less susceptible. 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 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, 2020, we have agreed to indemnify the sureties for payments, up to $10 million, made by them in respect of such bonds. All of these insurance bonds are expected to expire or be renewed in 2021.
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, 2020, our aggregate contractual obligations are summarized in the following table:
Payments Due in the Year Ending December 31,
Contractual Obligations
Total
Thereafter
(In Thousands)
Long-term debt:
Senior Secured Notes
$
435,000
$
-
$
-
$
435,000
$
-
$
-
$
-
Other
57,838
16,893
12,641
11,291
7,427
9,586
-
Total long-term debt
492,838
16,893
12,641
446,291
7,427
9,586
-
Interest payments on long-term debt (1)
114,998
45,670
44,823
22,931
1,200
-
Series E redeemable preferred stock (2)
139,768
-
-
139,768
-
-
-
Dividends earned - Series E redeemable preferred stock (2)
276,783
-
-
276,783
-
-
-
Capital expenditures (3)
30,000
30,000
-
-
-
-
-
Operating leases
31,468
8,585
7,398
6,422
4,799
2,319
1,945
Firm purchase commitments
10,631
10,631
-
-
-
-
-
Natural gas pipeline commitment (4)
3,780
Other contractual obligations
10,863
2,636
1,095
3,573
1,095
1,095
1,369
Other contractual obligations included in
noncurrent accrued and other liabilities (5)
5,017
-
3,552
1,465
-
-
-
Total
$
1,116,146
$
115,135
$
70,229
$
897,953
$
15,241
$
14,094
$
3,494
(1)
The estimated interest payments are based on interest rates at December 31, 2020 which debt is all fixed interest rate debt.
(2)
The Series E redeemable preferred stock (including dividends) are assumed to be redeemed and paid on the earliest possible redemption date by the holder (October 25, 2023) and that dividends are accrued until that date.
(3)
Capital expenditures include only the budgeted amounts at December 31, 2020.
(4)
Our proportionate share of the minimum costs to ensure capacity relating to a gathering and pipeline system.
(5)
The future cash flows relating to executive and death benefits are based on estimates at December 31, 2020. The participation rights value associated with embedded derivative of our Series E redeemable preferred stock is based on the value of our common stock at December 31, 2020 and is based on the earliest possible redemption date by the holder, October 25, 2023.
New Accounting Pronouncements
Refer to Note 1 for recently issued accounting standards.
Critical Accounting Policies and 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, 2020, 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 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 realizable and earned.
We are involved in various legal matters that require management to make estimates and assumptions, including costs relating to the lawsuit styled City of West, Texas v CF Industries, Inc., et al, discussed under “Other Pending, Threatened or Settled Litigation” of Note 8.
It is reasonably possible that the actual costs could be significantly different than our estimates.
Regulatory Compliance - As discussed under “Government Laws and Regulations” in Item 1 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. However, 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 under footnote A of Note 8. At December 31, 2020 and 2019, liabilities totaling $0.5 million and $0.2 million, respectively, have been accrued relating to these matters. It is also reasonably possible that the estimates and assumptions utilized as of December 31, 2020 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 and in Note 7, 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. At December 31, 2020 and 2019, our valuation allowance on deferred tax assets was $64.7 million and $51.6 million, respectively.
Redeemable Preferred Stocks - Our outstanding Series E and F Redeemable Preferred are redeemable outside of our control and are classified as temporary/mezzanine equity on our consolidated balance sheet. In addition, certain embedded features (the “embedded derivative”) included in the Series E Redeemable Preferred required bifurcation and are classified as derivative liabilities.
Currently, the carrying values of the redeemable preferred stocks are being increased by periodic accretions (recorded to retained earnings and included in determining income or loss per share) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder. Approximately $37 million of accretion (including the amount for earned dividends) was recorded to retained earnings in 2020. At December 31, 2020, the carrying value of these redeemable preferred stocks was $272.1 million.
For the embedded derivative, changes in fair value are recorded in our statement of operations. At December 31, 2020 and 2019, we had estimated that the contingent redemption features had fair value since we had assessed that it was probable that a portion of the shares of this preferred stock would have been redeemed prior to October 25, 2023.
At December 31, 2020 and 2019, the fair value of the embedded derivative was $1.0 million and $1.1 million, respectively, primarily relating to the participation rights based on the equivalent of 303,646 shares of our common stock at $3.39 and $4.20 per share, respectively. The valuation is classified as Level 3.
Management’s judgment and estimates in the above areas are based on information available from internal and external resources at that time. Actual results could differ materially from these estimates and judgments, as additional information becomes known.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Our results of operations and operating cash flows are affected by changes in market prices of ammonia and natural gas and changes in market interest rates.
Forward Sales Commitments Risk
Periodically, we enter into forward firm sales commitments for products to be delivered in future periods. As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices at the end of a reporting period. At December 31, 2020, we had no embedded losses associated with sales commitments with firm sales prices.
Commodity Price Risk
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Since we are exposed to commodity price risk, we periodically enter into contracts to purchase natural gas for anticipated production needs to manage risk related to changes in prices of natural gas commodities. Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these contracts are exempt from the accounting and reporting requirements relating to derivatives. As discussed in Note 9, during 2020, we entered into certain natural gas contracts, which are accounted for on a mark-to-market basis. At December 31, 2020, these natural gas contracts included 7.3 million MMBtus of natural gas and therefore a $0.10 change in natural gas price would impact pre-tax operating results by approximately $0.7 million.
Interest Rate Risk
Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility. As of December 31, 2020, we had no outstanding borrowings on this credit facility and no other variable rate borrowings. We currently do not hedge our interest rate risk associated with these variable interest loans.
The following table presents principal amounts and related weighted-average interest rates by maturity date for our interest rate sensitive debt agreements as of December 31, 2020:
Years ending December 31,
Thereafter
Total
(Dollars In Thousands)
Expected maturities of long-term debt (1):
Fixed interest rate debt
$
16,893
$
12,641
$
446,291
$
7,427
$
9,586
$
-
$
492,838
Weighted-average interest rate
9.42
%
9.53
%
9.54
%
8.75
%
8.75
%
-
9.51
%
(1)
The debt balances and weighted-average interest rate are based on the aggregate amount of debt outstanding as of December 31, 2020.
At December 31, 2020 and 2019, we did not have any financial instruments with fair values materially different from their carrying amounts (which excludes issuance costs, if applicable). 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have included the financial statements and supplementary financial information required by this item immediately following Part IV of this report and hereby incorporate by reference the relevant portions of those statements and information into this Item 8.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These include
controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective. There were no changes to our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Our internal control system is a process, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 Framework). Based on our assessment, we believe that, as of December 31, 2020, our internal control over financial reporting is effective based on those criteria.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III
Item 10, Item 11, Item 12, Item 13 and Item 14 are incorporated by reference to our definitive proxy statement which we intend to file with the SEC on or before April 30, 2021.
PART IV

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

---

ITEM 11. EXECUTIVE COMPENSATION

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following consolidated financial statements of the Company appear immediately following this Part IV:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2020
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2020
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
(a) (2) Financial Statement Schedule
The Company has included the following schedule in this report:
II - Valuation and Qualifying Accounts
We have omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in our Consolidated Financial Statements, including the notes to those statements.
(a)(3) Exhibits
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
3(i).1
Restated Certificate of Incorporation of LSB Industries, Inc., dated January 21, 1977, as amended August 27, 1987
Exhibit 3(i).1 to the Company’s Form 10-K filed on February 28, 2013
3(ii).1
Amended and Restated Bylaws of LSB Industries, Inc. dated August 20, 2009, as amended February 18, 2010, January 17, 2014, February 4, 2014 and August 21, 2014
Exhibit 3(ii).1 to the Company’s Form 8-K filed August 27, 2014
3(ii).2
Fifth Amendment to the Amended and Restated Bylaws of LSB Industries, Inc., dated as of April 26, 2015
Exhibit 3(ii) to the Company’s Form 8-K filed April 30, 2015
3(ii).3
Sixth Amendment to the Amended and Restated Bylaws of LSB Industries, Inc., dated as of December 2, 2015
Exhibit 3(ii) to the Company’s Form 8-K filed December 8, 2015
3(ii).4
Seventh Amendment to the Amended and Restated Bylaws of LSB Industries, Inc., dated as of December 22, 2015
Exhibit 3(ii) to the Company’s Form 8-K filed December 29, 2015
3.1
Certificate of Designations of Series G Class C Preferred Stock of LSB Industries, Inc., as filed with the Secretary of State of the State of Delaware on July 6, 2020
Exhibit 3.1 to the Company’s Form 8-K filed July 6, 2020
4.1(P)
Specimen Certificate for the Company’s Series B Preferred Stock
Exhibit 4.27 to the Company’s Registration Statement on Form S-3 No. 33-9848
4.2
Specimen Certificate for the Company’s Series D 6% Cumulative, Convertible Class C Preferred Stock
Exhibit 4.3 to the Company’s Form 10-K filed March 3, 2011
4.3
Specimen Certificate for the Company’s Common Stock
Exhibit 4.3 to the Company’s Registration Statement on Form S-3 ASR filed November 16, 2012
4.4
Certificate of Designations of Series E Cumulative Redeemable Class C Preferred Stock of LSB Industries, Inc., dated as of December 4, 2015
Exhibit 4.1 to the Company’s Form 8-K filed December 8, 2015
4.5
Certificate of Designations of Series E-1 Cumulative Redeemable Class C Preferred Stock of LSB Industries, Inc., dated as of October 18, 2018
Exhibit 4.1 to the Company’s Form 8-K filed October 19, 2018
4.6
Certificate of Correction to Certificate of Designations of the Series E-1 Cumulative Redeemable Class C Preferred Stock of LSB Industries, Inc.
Exhibit 4.1 to the Company’s Form 8-K filed November 2, 2018
4.7
Certificate of Designations of Series F Cumulative Redeemable Class C Preferred Stock of LSB Industries, Inc., dated as of December 4, 2015
Exhibit 4.2 to the Company’s Form 8-K filed December 8, 2015
4.8
Certificate of Designations of Series Redeemable Class C Preferred Stock of LSB Industries, Inc., dated as of October 18, 2018
Exhibit 4.2 to the Company’s Form 8-K filed October 19, 2018
4.9
Section 382 Rights Agreement, dated as of July 6, 2020, between LSB Industries, Inc. and Computershare Trust Company, N.A., as rights agent
Exhibit 4.1 to the Company’s Form 8-K filed July 6, 2020
4.10
Indenture, dated August 7, 2013, among LSB Industries, Inc., the guarantors named therein and UMB Bank, n.a., as trustee
Exhibit 4.1 to the Company’s Form 8-K filed August 14, 2013
4.11
First Supplemental Indenture, dated as of September 7, 2016, by and among LSB Industries, Inc., the guarantors party thereto and UMB Bank, n.a., as trustee and notes collateral agent
Exhibit 4.1 to the Company’s Form 8-K filed October 4, 2016.
4.12
Intercreditor Agreement, dated August 7, 2013, by and among Wells Fargo Capital Finance, Inc., as agent and UMB Bank, n.a., as collateral agent, and acknowledged and agreed to by LSB Industries, Inc. and the other grantors named therein
Exhibit 99.1 to the Company’s Form 8-K filed August 14, 2013
4.13
Indenture, dated as of April 25, 2018, among LSB Industries, Inc., the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent.
Exhibit 4.1 to the Company’s Form 8-K filed April 25, 2018
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
4.14
Form of 9.625% Senior Secured Notes due 2023 (included in Exhibit 4.1).
Exhibit 4.2 to the Company’s Form 8-K filed April 25, 2018
4.15(a)
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1*
Form of Death Benefit Plan Agreement, dated April 1, 1981
Exhibit 10.2 to the Company’s Form 10-K filed March 31, 2006
10.2*
LSB Industries, Inc. Outside Directors Stock Purchase Plan, dated May 24, 1999
Exhibit 99.2 to the Company’s Form 8-K filed October 23, 2014
10.3*
LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5, 2008, as amended by First Amendment, effective June 5, 2014
Exhibit 99.3 to the Company’s Form 8-K filed June 11, 2014
10.4*
Form of Restricted Stock Agreement
Exhibit 10.3 to the Company’s Form 8-K filed January 8, 2016
10.5*
Form of Incentive Stock Option Agreement for 2008 Plan
Exhibit 10.8 to the Company’s Form 10-K filed February 29, 2016
10.6*
LSB Industries, Inc. 2016 Long Term Incentive Plan
Exhibit 4.8 to the Company’s Form S-8 filed June 28, 2016
10.7*
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan Stock Option Agreement
Exhibit 4.9 to the Company’s Form S-8 filed June 28, 2016
10.8*
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan Restricted Stock Unit Agreement (Director Award)
Exhibit 4.10 to the Company’s Form S-8 filed June 28, 2016
10.9*
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan Restricted Stock Agreement
Exhibit 4.11 to the Company’s Form S-8 filed June 28, 2016
10.10*
Form of Time-Based Restricted Stock Agreement of LSB Industries, Inc.
Exhibit 10.4 to the Company’s Form 8-K filed January 3, 2019
10.11*
Form of Performance-Based Restricted Stock Agreement of LSB Industries, Inc.
Exhibit 10.5 to the Company’s Form 8-K filed January 3, 2019
10.12*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Mark Behrman
Exhibit 10.12 to the Company’s Form 10-K filed February 26, 2019
10.13*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Mark Behrman
Exhibit 10.4 to the Company’s Form 10-Q filed October 24, 2018
10.14*
Employment Agreement, dated December 30, 2018, between LSB Industries, Inc. and Mark T. Behrman
Exhibit 10.1 to the Company’s Form 8-K filed January 3, 2019
10.15*
Restricted Stock Agreement by and between LSB Industries, Inc. and Mark Behrman, dated as of December 31, 2015
Exhibit 10.17 to the Company’s Form 10-K filed February 29, 2016
10.16*
Employment Agreement by and between LSB Industries, Inc. and Daniel D. Greenwell, dated as of December 31, 2015
Exhibit 10.1 to the Company’s Form 8-K/A filed January 7, 2016
10.17*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Daniel D. Greenwell
Exhibit 10.3 to the Company’s Form 10-Q filed October 24, 2018
10.18*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Daniel D. Greenwell
Exhibit 10.18 to the Company’s Form 10-K filed February 26, 2019
10.19*
General Release Agreement by and between LSB Industries, Inc. and Daniel D. Greenwell, dated as of January 14, 2019
Exhibit 10.19 to the Company’s Form 10-K filed February 26, 2019
10.20*
Restricted Stock Agreement by and between LSB Industries, Inc. and Daniel D. Greenwell, dated as of December 31, 2015
Exhibit 10.2 to the Company’s Form 8-K/A filed January 7, 2016
10.21*
Employment Agreement by and between LSB Industries, Inc. and Michael Foster, dated as of January 5, 2016
Exhibit 10.25 to the Company’s Form 10-K filed February 29, 2016
10.22*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Michael J. Foster
Exhibit 10.5 to the Company’s Form 10-Q filed October 24, 2018
10.23*
Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc. and Michael J. Foster
Exhibit 10.23 to the Company’s Form 10-K filed February 26, 2019
10.24*
Employment Agreement, dated December 30, 2018, between LSB Industries, Inc. and Michael J. Foster
Exhibit 10.3 to the Company’s Form 8-K filed January 3, 2019
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
10.25*
Restricted Stock Agreement by and between LSB Industries, Inc. and Michael Foster, dated as of January 5, 2016
Exhibit 10.26 to the Company’s Form 10-K filed February 29, 2016
10.26*
Employment Agreement by and between LSB Industries, Inc. and John Diesch, executed as of July 21, 2016
Exhibit 10.1 to the Company’s Form 8-K filed August 2, 2016
10.27*
Employment Agreement by and between LSB Industries, Inc. and John Diesch, executed as of February 8, 2019
Exhibit 10.1 to the Company’s Form 8-K filed February 11, 2019
10.28*
Employment Agreement, dated December 30, 2018, between LSB Industries, Inc. and Cheryl Maguire
Exhibit 10.2 to the Company’s Form 8-K filed January 3, 2019
10.29*
Employment Agreement, dated December 20, 2019 and to be effective not later than February 3, 2020, between LSB Industries, Inc. and John Burns
Exhibit 10.30 to the Company’s Form 10-K filed February 25, 2019
10.30*
Severance and Change in Control Agreement, dated April 6, 2020, between LSB Industries, Inc. and Kristy Carver
Exhibit 10.1 to the Company’s Form 10-Q filed May 7, 2020
10.31*
Form of Retention Bonus Agreement
Exhibit 10.28 to the Company’s Form 10-K filed February 29, 2016
10.32
Indemnification Agreement, dated October 14, 2015, by and between the Company and Jack E. Golsen, together with a schedule identifying other substantially identical agreements between the Company and each of the other directors identified on the schedule
Exhibit 10.1 to the Company’s Form 8-K filed October 19, 2015
10.33
Indemnification Agreement, dated October 14, 2015 by and between the Company and David M. Shear, together with a schedule identifying other substantially identical agreements between the Company and each of its executive officers identified on the schedule
Exhibit 10.2 to the Company’s Form 8-K filed October 19, 2015
10.34
Indemnification Agreement, dated as of December 4, 2015, by and between LSB Industries, Inc. and Jonathan S. Bobb, together with a schedule identifying other substantially identical agreements between the Company and each of the other directors identified on the schedule
Exhibit 10.5 to the Company’s Form 8-K filed December 8, 2015
10.35
Asset Purchase Agreement, dated as of December 6, 2002, by and among Energetic Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal Tech Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and Slurry Explosive Manufacturing Corporation, LLC
Exhibit 2.1 to the Company’s Form 8-K dated December 27, 2002
10.36
Exhibits and Disclosure Letters to the Asset Purchase Agreement, dated as of December 6, 2002, by and among Energetic Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal Tech Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and Slurry Explosive Manufacturing Corporation, LLC
Exhibit 10.1b to the Company’s Form 10-Q filed August 6, 2010
10.37
Ammonia Purchase and Sale Agreement by and between El Dorado Chemical Company and Koch Fertilizer, LLC, dated as of November 2, 2015
Exhibit 10.49 to the Company’s Form 10-K filed February 29, 2016
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #33502, DATED APRIL 4, 2016, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
10.38
Second Amendment to Ammonia Purchase and Sale Agreement Between Koch Fertilizer, LLC and El Dorado Chemical Company, dated as of September 30, 2019
Exhibit 10.1 to the Company’s Form 10-Q filed October 29, 2019
CERTAIN CONFIDENTIAL INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED.
10.39
Urea Ammonium Nitrate Purchase and Sale Agreement dated as of March 3, 2016 and effective as of June 1, 2016 between Coffeyville Resources Nitrogen Fertilizers, LLC and Pryor Chemical Company
Exhibit 10.1 to the Company’s Form 10-Q filed August 8, 2016
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #33783. DATED AUGUST 30, 2016, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.40
Stock Purchase Agreement by and among Consolidated Industries L.L.C. The Climate Control Group, Inc., NIBE Energy Systems Inc. and, solely for purposes of Sections 6.8, 6.19 and 11.15 therein, LSB Industries, Inc., and solely for purposes of Section 11.16 therein, NIBE Industrier AB (publ), dated as of May 11, 2016.
Exhibit 10.1 to the Company’s Form 8-K filed May 13, 2016
10.41
Contract on the supply of Basic Engineering Package, Detail Engineering Package, Tagged Major Equipment and related Advisory Services, between Weatherly Inc. and El Dorado Chemical Company, dated November 30, 2012
Exhibit 99.2 to the Company’s Form 8-K filed December 6, 2012
10.42
Engineering, Procurement and Construction Agreement, dated August 12, 2013, between El Dorado Ammonia L.L.C. and SAIC Constructors, LLC
Exhibit 10.1 to the Company’s Form 8-K filed August 15, 2013
10.43
Construction Agreement-DMW2, dated November 6, 2013, between El Dorado Chemical Company and SAIC Constructors, LLC
Exhibit 99.1 to the Company’s Form 8-K filed November 12, 2013
10.44
Construction Agreement - NACSAC, dated November 6, 2013, between El Dorado Chemical Company and SAIC Constructors, LLC
Exhibit 99.2 to the Company’s Form 8-K filed November 12, 2013
10.45
Engineering, Procurement and Construction Agreement, dated December 31, 2013, between El Dorado Chemical Company and SAIC Constructors, LLC
Exhibit 99.1 to the Company’s Form 8-K filed January 7, 2014
10.46
Engineering, Procurement and Construction Contract, Amendment No. 1 dated October 20, 2015, by and between El Dorado Ammonia LLC and SAIC Constructors, LLC
Exhibit 10.1 to the Company’s Form 8-K filed October 26, 2015
10.47
Settlement Agreement, dated April 26, 2015, by and among the Company and Starboard Value LP and its certain affiliates and associates
Exhibit 99.1 to the Company’s Form 8-K filed April 30, 2015
10.48
Consent Decree, dated May 28, 2014, by and among, LSB Industries, Inc., El Dorado Chemical Co., Cherokee Nitrogen Co., Pryor Chemical Co., El Dorado Nitrogen, L.P., the U.S. Department of Justice, the U.S. Environmental Protection Agency, the Alabama Department of Environmental Management, and the Oklahoma Department of Environment Quality
Exhibit 99.1 to the Company’s Form 8-K filed June 3, 2014
10.49
Second Amended and Restated Loan and Security Agreement, dated December 31, 2013, by and among LSB Industries, Inc., each of its subsidiaries that are signatories thereto, the lenders signatories thereto, and Wells Fargo Capital Finance, LLC
Exhibit 4.9 to the Company’s Form 10-K filed February 27, 2014
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
10.50
Amendment No. 1 to the Second Amended and Restated Loan and Security Agreement, dated as of June 11, 2015, by and among LSB Industries, Inc. its subsidiaries identified on the signature pages thereof, the lenders identified on the signature pages thereof and Wells Fargo Capital Finance, LLC, as the arranger and administrative agent for the Lenders
Exhibit 99.1 to the Company’s Form 8-K filed June 17, 2015
10.51
Amendment No. 2 to the Second Amended and Restated Loan and Security Agreement, dated as of November 9, 2015, by and among LSB Industries, Inc., its subsidiaries identified on the signature pages thereof, the lenders identified on the signature pages thereof, and Wells Fargo Capital Finance, LLC, as the arranger and administrative agent for the Lenders
Exhibit 10.3 to the Company’s Form 8-K filed November 16, 2015
10.52
Third Amended and Restated Loan and Security Agreement, dated as of January 17, 2017, by and among LSB Industries, Inc., the subsidiaries of LSB Industries, Inc. party thereto, the lenders party thereto, and Wells Fargo Capital Finance, LLC, as the arranger and administrative agent.
Exhibit 10.1 to the Company’s Form 8-K filed January 20, 2017
10.53
First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of April 16, 2018, by and among Wells Fargo Capital Finance, LLC, as the arranger and administrative agent, the lenders party thereto, LSB Industries, Inc. and its subsidiaries identified on the signature pages thereto as borrowers and the Company’s subsidiaries identified on the signature pages thereto as guarantors.
Exhibit 10.1 to the Company’s Form 8-K filed April 20, 2018
10.54
Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of February 26, 2019, by and among Wells Fargo Capital Finance, LLC, as the arranger and administrative agent, the lenders party thereto, LSB Industries, Inc. and its subsidiaries identified on the signature pages thereto as borrowers and the Company’s subsidiaries identified on the signature pages thereto as guarantors.
Exhibit 4.1 to the Company’s Form 8-K filed February 28, 2019
10.55
Third Amendment to Third Amended and Restated Loan and Security Agreement, dated as of April 20, 2020, by and among Wells Fargo Capital Finance, LLC, as the arranger and administrative agent, the lenders party thereto, LSB Industries, Inc. and its subsidiaries identified on the signature pages thereto as borrowers and the Company’s subsidiaries identified on the signature pages thereto as guarantors
Exhibit 10.3 to the Company’s Form 10-Q filed May 7, 2020
10.56
Security Agreement dated as of August 7, 2013, among LSB Industries, Inc. and the other grantors identified therein in favor of UMB Bank, N.A. as Collateral Agent
Exhibit 10.72 to the Company’s Form 10-K filed February 29, 2016
10.57
Supplement No. 1 to Security Agreement February 12, 2014 among LSB Industries, Inc. and the other grantors identified therein in favor of UMB Bank, N.A., as Collateral Agent
Exhibit 10.73 to the Company’s Form 10-K filed February 29, 2016
10.58
Note Purchase Agreement, dated November 9, 2015, by and among LSB Industries, Inc., the guarantors party thereto and LSB Funding LLC
Exhibit 10.1 to the Company’s Form 8-K filed November 16, 2015
10.59
Promissory Note, dated November 9, 2015, by LSB Industries, Inc.
Exhibit 10.2 to the Company’s Form 8-K filed November 16, 2015
10.60
Joinder Agreement to Intercreditor Agreement, dated November 9, 2015, by and among LSB Funding LLC, Wells Fargo Capital Finance, Inc., as ABL Agent, UMB Bank, N.A., as Notes Agent, LSB Industries, Inc. and the guarantors party thereto
Exhibit 10.4 to the Company’s Form 8-K filed November 16, 2015
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
10.61
Amendment No. 1 to Intercreditor Agreement, dated as of April 25, 2018, among Wells Fargo Capital Finance, LLC, UMB Bank, n.a. and Wilmington Trust, National Association, and acknowledged by LSB Industries, Inc. and the subsidiary guarantors party thereto.
Exhibit 10.1 to the Company’s Form 8-K filed April 25, 2018
10.62
Joinder Agreement to Security Agreement, dated November 9, 2015, by and among LSB Funding LLC, UMB Bank, N.A., as Collateral Agent, LSB Industries, Inc. and the guarantors party thereto
Exhibit 10.5 to the Company’s Form 8-K filed November 16, 2015
10.63
Securities Purchase Agreement by and among LSB Industries, Inc., LSB Funding LLC, and Security Benefit Corporation, dated as of December 4, 2015
Exhibit 10.1 to the Company’s Form 8-K filed December 8, 2015
10.64
Board Representation and Standstill Agreement by and among LSB Industries, Inc., LSB Funding LLC, Security Benefit Corporation, Todd Boehly and the Golsen Holders (as defined therein), dated as of December 4, 2015
Exhibit 10.3 to the Company’s Form 8-K filed December 8, 2015
10.65
Registration Rights Agreement by and between LSB Industries, Inc. and LSB Funding LLC, dated as of December 4, 2015
Exhibit 10.4 to the Company’s Form 8-K filed December 8, 2015
10.66
Letter Agreement, dated as of August 12, 2016, by and among LSB Industries, Inc., LSB Funding LLC and Security Benefit Corporation
Exhibit 10.1 to the Company’s Form 8-K filed August 12, 2016
10.67
Securities Exchange Agreement, dated as of October 18, 2018, by and between LSB Industries, Inc. and LSB Funding LLC
Exhibit 10.1 to the Company’s Form 8-K filed October 19, 2018
10.68*
Transition Agreement dated June 30, 2017 by and between Jack E. Golsen and LSB Industries, Inc.
Exhibit 10.1 to the Company’s Form 8-K filed on June 30, 2017
10.69
Amendment, dated October 26, 2017, to the Board Representation and Standstill Agreement by and between LSB Industries, Inc., LSB Funding LLC, Security Benefit Corporation, Todd Boehly, Jack E. Golsen, Barry H. Golsen, Linda Golsen Rappaport, Golsen Family LLC, SBL LLC and Golsen Petroleum Corp., dated as of December 4, 2015
Exhibit 10.1. to the Company’s Form 8-K Filed on October 26, 2017
10.70
Amendment to Board Representation and Standstill Agreement, dated as of October 18, 2018, by and among LSB Industries, Inc., LSB Funding LLC, Security Benefit Corporation, Todd Boehly and the Golsen Holders (as defined therein)
Exhibit 10.2 to the Company’s Form 8-K filed October 19, 2018
21.1(a)
Subsidiaries of the Company
23.1(a)
Consent of Independent Registered Public Accounting Firm
31.1(a)
Certification of Mark T. Behrman, Chief Executive Officer, pursuant to Sarbanes-Oxley Act of 2002, Section 302
31.2(a)
Certification of Cheryl A. Maguire, Chief Financial Officer, pursuant to Sarbanes-Oxley Act of 2002, Section 302
32.1(b)
Certification of Mark T. Behrman, Chief Executive Officer, furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906
32.2(b)
Certification of Cheryl A. Maguire, Chief Financial Officer, furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906
101.INS(a)
Inline XBRL Instance Document
101.SCH(a)
Inline XBRL Taxonomy Extension Schema Document
101.CAL(a)
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(a)
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(a)
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE(a)
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit Number
Exhibit Title
Incorporated by Reference to the Following
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Executive Compensation Plan or Arrangement
(a)
Filed herewith
(b)
Furnished herewith
(P)
Paper copy filed
LSB Industries, Inc.