DELAWARE | 75-1256622 |
(State or other jurisdiction of | (I.R.S. employer incorporation or |
organization) | identification no.) |
1650 Hwy 6 South, Suite 190 | 77478 |
Sugar Land, Texas | (Zip code) |
(Address of principal executive offices) |
1 | ||
2 | ||
3 | ||
4 | ||
5 | ||
MARCH 31, 2017 (unaudited) | DECEMBER 31, 2016 | SEPTEMBER 30, 2017 (unaudited) | DECEMBER 31, 2016 | |||||||||||||
ASSETS | (thousands of dollars) | (thousands of dollars) | ||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,045 | $ | 8,389 | ||||||||||||
Cash | $ | 4,219 | $ | 8,389 | ||||||||||||
Trade receivables, net | 24,248 | 22,193 | 22,738 | 22,193 | ||||||||||||
Inventories | 14,957 | 17,871 | 12,849 | 17,871 | ||||||||||||
Prepaid expenses and other assets | 3,481 | 3,511 | 3,276 | 3,511 | ||||||||||||
Taxes receivable | 4,143 | 3,983 | 3,764 | 3,983 | ||||||||||||
Total current assets | 50,874 | 55,947 | 46,846 | 55,947 | ||||||||||||
Plant, pipeline and equipment, net | 151,606 | 140,009 | 172,048 | 140,009 | ||||||||||||
Goodwill | 21,798 | 21,798 | 21,798 | 21,798 | ||||||||||||
Other intangible assets, net | 22,204 | 22,669 | ||||||||||||||
Intangible assets, net | 21,273 | 22,669 | ||||||||||||||
Investment in AMAK | 48,420 | 49,386 | 44,225 | 49,386 | ||||||||||||
Mineral properties in the United States | 588 | 588 | 588 | 588 | ||||||||||||
Other assets | 63 | 87 | 21 | 87 | ||||||||||||
TOTAL ASSETS | $ | 295,553 | $ | 290,484 | $ | 306,799 | $ | 290,484 | ||||||||
LIABILITIES | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 13,062 | $ | 13,306 | $ | 12,381 | $ | 13,306 | ||||||||
Current portion of derivative instruments | 34 | 58 | 7 | 58 | ||||||||||||
Accrued liabilities | 3,247 | 2,017 | 6,304 | 2,017 | ||||||||||||
Current portion of post-retirement benefit | 314 | 316 | 308 | 316 | ||||||||||||
Current portion of long-term debt | 8,061 | 10,145 | 8,061 | 10,145 | ||||||||||||
Current portion of other liabilities | 1,112 | 870 | 1,131 | 870 | ||||||||||||
Total current liabilities | 25,830 | 26,712 | 28,192 | 26,712 | ||||||||||||
Long-term debt, net of current portion | 76,092 | 73,107 | 81,011 | 73,107 | ||||||||||||
Post-retirement benefit, net of current portion | 897 | 897 | 897 | 897 | ||||||||||||
Other liabilities, net of current portion | 1,977 | 2,309 | 1,681 | 2,309 | ||||||||||||
Deferred income taxes | 24,261 | 23,083 | 24,654 | 23,083 | ||||||||||||
Total liabilities | 129,057 | 126,108 | 136,435 | 126,108 | ||||||||||||
EQUITY | ||||||||||||||||
Common stock‑authorized 40 million shares of $.10 par value; issued 24.5 million in 2017 and 2016 and outstanding 24.3 million and 24.2 million shares in 2017 and 2016, respectively | 2,451 | 2,451 | 2,451 | 2,451 | ||||||||||||
Additional paid-in capital | 54,077 | 53,474 | 55,344 | 53,474 | ||||||||||||
Common stock in treasury, at cost | (254 | ) | (284 | ) | (203 | ) | (284 | ) | ||||||||
Retained earnings | 109,933 | 108,446 | 112,483 | 108,446 | ||||||||||||
Total Trecora Resources Stockholders' Equity | 166,207 | 164,087 | 170,075 | 164,087 | ||||||||||||
Noncontrolling Interest | 289 | 289 | 289 | 289 | ||||||||||||
Total equity | 166,496 | 164,376 | 170,364 | 164,376 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 295,553 | $ | 290,484 | $ | 306,799 | $ | 290,484 |
THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||||||||||
THREE MONTHS ENDED | SEPTEMBER 30, | SEPTEMBER 30, | ||||||||||||||||||||||
MARCH 31, | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
2017 | 2016 | (thousands of dollars) | ||||||||||||||||||||||
REVENUES | (thousands of dollars) | |||||||||||||||||||||||
Petrochemical and Product Sales | $ | 50,899 | $ | 47,181 | $ | 58,030 | $ | 52,115 | $ | 165,945 | $ | 143,662 | ||||||||||||
Processing Fees | 4,643 | 5,019 | 3,478 | 5,027 | 13,220 | 14,534 | ||||||||||||||||||
55,542 | 52,200 | 61,508 | 57,142 | 179,165 | 158,196 | |||||||||||||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||||||||||||||
Cost of Sales and Processing | ||||||||||||||||||||||||
(including depreciation and amortization of $2,383 and $2,219, respectively) | 44,924 | 40,429 | ||||||||||||||||||||||
(including depreciation and amortization of $2,565, $2,373, $7,311, and $6,620, respectively) | 51,638 | 48,237 | 147,570 | 125,946 | ||||||||||||||||||||
GROSS PROFIT | 10,618 | 11,771 | 9,870 | 8,905 | 31,595 | 32,250 | ||||||||||||||||||
GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||||||||||||||||
General and Administrative | 6,221 | 5,449 | 5,660 | 4,585 | 17,621 | 15,525 | ||||||||||||||||||
Depreciation | 205 | 177 | 245 | 192 | 655 | 556 | ||||||||||||||||||
6,426 | 5,626 | 5,905 | 4,777 | 18,276 | 16,081 | |||||||||||||||||||
OPERATING INCOME | 4,192 | 6,145 | 3,965 | 4,128 | 13,319 | 16,169 | ||||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
Interest Income | 2 | 4 | ||||||||||||||||||||||
Interest Expense | (636 | ) | (628 | ) | (795 | ) | (568 | ) | (2,109 | ) | (1,803 | ) | ||||||||||||
Bargain purchase gain from acquisition | -- | -- | -- | 11,549 | ||||||||||||||||||||
Equity in Earnings (Losses) of AMAK | (966 | ) | 5,367 | (897 | ) | (2,089 | ) | (5,161 | ) | 2,261 | ||||||||||||||
Miscellaneous Expense | (44 | ) | (17 | ) | ||||||||||||||||||||
Gain from Additional Equity Issuance by AMAK | -- | 3,168 | -- | 3,168 | ||||||||||||||||||||
Miscellaneous Income (Expense) | 22 | (72 | ) | (42 | ) | 38 | ||||||||||||||||||
(1,644 | ) | 4,726 | (1,670 | ) | 439 | (7,312 | ) | 15,213 | ||||||||||||||||
INCOME BEFORE INCOME TAXES | 2,548 | 10,871 | 2,295 | 4,567 | 6,007 | 31,382 | ||||||||||||||||||
INCOME TAXES | 1,061 | 3,647 | 577 | 1,768 | 1,970 | 11,107 | ||||||||||||||||||
NET INCOME | 1,487 | 7,224 | 1,718 | 2,799 | 4,037 | 20,275 | ||||||||||||||||||
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | -- | -- | -- | -- | -- | -- | ||||||||||||||||||
NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES | $ | 1,487 | $ | 7,224 | $ | 1,718 | $ | 2,799 | $ | 4,037 | $ | 20,275 | ||||||||||||
Basic Earnings per Common Share | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources (dollars) | $ | 0.06 | $ | 0.30 | $ | 0.07 | $ | 0.12 | $ | 0.17 | $ | 0.83 | ||||||||||||
Basic Weighted Average Number of Common Shares Outstanding | 24,240 | 24,484 | 24,304 | 24,223 | 24,267 | 24,304 | ||||||||||||||||||
Diluted Earnings per Common Share | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources (dollars) | $ | 0.06 | $ | 0.29 | $ | 0.07 | $ | 0.11 | $ | 0.16 | $ | 0.81 | ||||||||||||
Diluted Weighted Average Number of Common Shares Outstanding | 25,054 | 25,085 | 25,157 | 24,921 | 25,082 | 24,964 |
TRECORA RESOURCES STOCKHOLDERS | TRECORA RESOURCES STOCKHOLDERS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMMON STOCK | ADDITIONAL PAID-IN | TREASURY | RETAINED | NON- CONTROLLING | TOTAL | COMMON STOCK | ADDITIONAL PAID-IN | TREASURY | RETAINED | NON- CONTROLLING | TOTAL | |||||||||||||||||||||||||||||||||||||||||||||||||||||
SHARES | AMOUNT | CAPITAL | STOCK | EARNINGS | TOTAL | INTEREST | EQUITY | SHARES | AMOUNT | CAPITAL | STOCK | EARNINGS | TOTAL | INTEREST | EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||
(thousands) | (thousands of dollars) | (thousands) | (thousands of dollars) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
JANUARY 1, 2017 | 24,222 | $ | 2,451 | $ | 53,474 | $ | (284 | ) | $ | 108,446 | $ | 164,087 | $ | 289 | $ | 164,376 | 24,222 | $ | 2,451 | $ | 53,474 | $ | (284 | ) | $ | 108,446 | $ | 164,087 | $ | 289 | $ | 164,376 | ||||||||||||||||||||||||||||||||
Stock options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issued to Directors | - | - | 30 | - | - | 30 | - | 30 | - | - | 90 | - | - | 90 | - | 90 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issued to Employees | - | - | 308 | - | - | 308 | - | 308 | - | - | 884 | - | - | 884 | - | 884 | ||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issued to Directors | - | - | 82 | - | - | 82 | - | 82 | - | - | 230 | - | - | 230 | - | 230 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issued to Employees | - | - | 213 | - | - | 213 | - | 213 | - | - | 801 | - | - | 801 | - | 801 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issued to Directors | 3 | - | (3 | ) | 3 | - | - | - | - | 25 | - | (79 | ) | 25 | - | (54 | ) | - | (54 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Issued to Employees | 27 | - | (27 | ) | 27 | - | - | - | - | 56 | - | (56 | ) | 56 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income | - | - | - | - | 1,487 | 1,487 | - | 1,487 | - | - | - | - | 4,037 | 4,037 | - | 4,037 | ||||||||||||||||||||||||||||||||||||||||||||||||
MARCH 31, 2017 | 24,252 | $ | 2,451 | $ | 54,077 | $ | (254 | ) | $ | 109,933 | $ | 166,207 | $ | 289 | $ | 166,496 | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | 24,303 | $ | 2,451 | $ | 55,344 | $ | (203 | ) | $ | 112,483 | $ | 170,075 | $ | 289 | $ | 170,364 |
NINE MONTHS ENDED | ||||||||
SEPTEMBER 30, | ||||||||
2017 | 2016 | |||||||
(thousands of dollars) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 4,037 | $ | 20,275 | ||||
Adjustments to Reconcile Net Income | ||||||||
To Net Cash Provided by Operating Activities: | ||||||||
Depreciation | 6,570 | 5,761 | ||||||
Amortization of Intangible Assets | 1,396 | 1,415 | ||||||
Unrealized Gain on Derivative Instruments | (51 | ) | (89 | ) | ||||
Share-based Compensation | 2,005 | 1,882 | ||||||
Deferred Income Taxes | 1,571 | 6,851 | ||||||
Postretirement Obligation | (8 | ) | 186 | |||||
Bargain purchase gain | - | (11,549 | ) | |||||
Equity in (earnings) losses of AMAK | 5,161 | (2,261 | ) | |||||
Gain from Additional Equity Issuance by AMAK | - | (3,168 | ) | |||||
Amortization of loan fees | 154 | 213 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Increase in Trade Receivables | (545 | ) | (355 | ) | ||||
Decrease in Taxes Receivable | 218 | 4,094 | ||||||
(Increase) Decrease in Inventories | 5,022 | (2,573 | ) | |||||
(Increase) Decrease in Prepaid Expenses and Other Assets | 387 | (1,494 | ) | |||||
Increase in Accounts Payable and Accrued Liabilities | 3,356 | 1,304 | ||||||
Increase (Decrease) in Other Liabilities | 281 | (418 | ) | |||||
Net Cash Provided by Operating Activities | 29,554 | 20,074 | ||||||
INVESTING ACTIVITIES | ||||||||
Additions to Plant, Pipeline and Equipment | (39,250 | ) | (25,860 | ) | ||||
Cash paid for acquisition of BASF facility | - | (2,011 | ) | |||||
Advances to AMAK, net | (86 | ) | - | |||||
Cash Used in Investing Activities | (39,336 | ) | (27,871 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Issuance of Common Stock | 25 | 11 | ||||||
Payments related to tax withholding for stock-based compensation | (80 | ) | - | |||||
Addition to Long-Term Debt | 14,000 | 3,000 | ||||||
Repayment of Long-Term Debt | (8,333 | ) | (6,250 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | 5,612 | (3,239 | ) | |||||
NET DECREASE IN CASH | (4,170 | ) | (11,036 | ) | ||||
CASH AT BEGINNING OF PERIOD | 8,389 | 18,623 | ||||||
CASH AND AT END OF PERIOD | $ | 4,219 | $ | 7,587 |
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2017 | 2016 | |||||||
(thousands of dollars) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 1,487 | $ | 7,224 | ||||
Adjustments to Reconcile Net Income of Trecora Resources | ||||||||
To Net Cash Provided by Operating Activities: | ||||||||
Depreciation | 2,123 | 1,926 | ||||||
Amortization of Intangible Assets | 465 | 469 | ||||||
Unrealized Gain on Derivative Instruments | (24 | ) | (30 | ) | ||||
Share-based Compensation | 633 | 647 | ||||||
Deferred Income Taxes | 1,178 | 1,407 | ||||||
Postretirement Obligation | (2 | ) | 2 | |||||
Equity in (earnings) losses of AMAK | 966 | (5,367 | ) | |||||
Amortization of loan fees | 68 | 68 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
(Increase) Decrease in Trade Receivables | (2,056 | ) | 695 | |||||
(Increase) Decrease in Taxes Receivable | (160 | ) | 2,177 | |||||
(Increase) Decrease in Inventories | 2,914 | (1,521 | ) | |||||
Decrease in Prepaid Expenses and Other Assets | 79 | 180 | ||||||
Increase (Decrease) in Accounts Payable and Accrued Liabilities | 989 | (1,430 | ) | |||||
Increase (Decrease) in Other Liabilities | 70 | (1,244 | ) | |||||
Net Cash Provided by Operating Activities | 8,730 | 5,203 | ||||||
INVESTING ACTIVITIES | ||||||||
Additions to Plant, Pipeline and Equipment | (13,881 | ) | (7,602 | ) | ||||
Advances to AMAK, net | (26 | ) | - | |||||
Cash Used in Investing Activities | (13,907 | ) | (7,602 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Issuance of Common Stock | - | 11 | ||||||
Addition to Long-Term Debt | 5,000 | - | ||||||
Repayment of Long-Term Debt | (4,167 | ) | (2,083 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | 833 | (2,072 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (4,344 | ) | (4,471 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 8,389 | 18,623 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 4,045 | $ | 14,152 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash payments for interest | $ | 3,034 | $ | 1,804 | ||||
Cash payments for taxes, net of refunds | $ | 227 | $ | 277 | ||||
Supplemental disclosure of non-cash items: | ||||||||
Capital expansion amortized to depreciation expense | $ | 642 | $ | 829 | ||||
Estimated earnout liability | $ | - | $ | 733 |
Supplemental disclosure of cash flow information: | ||||||||
Cash payments for interest | $ | 936 | $ | 583 | ||||
Cash payments for taxes, net of refunds | $ | - | $ | - | ||||
Supplemental disclosure of non-cash items: | ||||||||
Capital expansion amortized to depreciation expense | $ | 161 | $ | 197 |
(1) | TREC – Trecora Resources |
(2) | TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC |
(3) | SHR – South Hampton Resources, Inc. – Petrochemical segment and parent of GSPL |
(4) | GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the petrochemical segment |
(5) | TC – Trecora Chemical, Inc. – Specialty wax segment |
(6) | AMAK – Al Masane Al Kobra Mining Company – Mining equity investment – 33% ownership |
(7) | PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine - 55% ownership |
As Originally Reported | As Retrospectively Adjusted | |||||||
(in thousands) | ||||||||
Deferred income tax asset, current | $ | 1,615 | $ | - | ||||
Total current assets | 57,562 | 55,947 | ||||||
Total assets | 292,099 | 290,484 | ||||||
Deferred income tax liability, noncurrent | 24,698 | 23,083 | ||||||
Total liabilities | 127,723 | 126,108 | ||||||
Total liabilities and equity | 292,099 | 290,484 |
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(thousands of dollars) | (thousands of dollars) | |||||||||||||||
Trade receivables | $ | 24,548 | $ | 22,493 | $ | 23,038 | $ | 22,493 | ||||||||
Less allowance for doubtful accounts | (300 | ) | (300 | ) | (300 | ) | (300 | ) | ||||||||
Trade receivables, net | $ | 24,248 | $ | 22,193 | $ | 22,738 | $ | 22,193 |
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(thousands of dollars) | (thousands of dollars) | |||||||||||||||
Prepaid license | $ | 1,919 | $ | 1,919 | $ | 1,919 | $ | 1,919 | ||||||||
Prepaid catalyst | 124 | 187 | 55 | 187 | ||||||||||||
Prepaid insurance | 566 | 797 | 255 | 797 | ||||||||||||
Other prepaid expenses and assets | 872 | 608 | 1,047 | 608 | ||||||||||||
Total | $ | 3,481 | $ | 3,511 | $ | 3,276 | $ | 3,511 |
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(thousands of dollars) | (thousands of dollars) | |||||||||||||||
Raw material | $ | 3,225 | $ | 3,627 | $ | 2,390 | $ | 3,627 | ||||||||
Work in process | 27 | 12 | 66 | 12 | ||||||||||||
Finished products | 11,458 | 14,232 | 9,960 | 14,232 | ||||||||||||
Spare parts | 247 | - | �� | 433 | - | |||||||||||
Total inventory | $ | 14,957 | $ | 17,871 | $ | 12,849 | $ | 17,871 |
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(thousands of dollars) | (thousands of dollars) | |||||||||||||||
Platinum catalyst metal | $ | 1,612 | $ | 1,612 | $ | 1,612 | $ | 1,612 | ||||||||
Land | 5,376 | 5,376 | 5,428 | 5,376 | ||||||||||||
Plant, pipeline and equipment | 156,142 | 154,107 | 183,472 | 154,107 | ||||||||||||
Construction in progress | 45,093 | 33,391 | 42,930 | 33,391 | ||||||||||||
Total plant, pipeline and equipment | 208,223 | 194,486 | 233,442 | 194,486 | ||||||||||||
Less accumulated depreciation | (56,617 | ) | (54,477 | ) | (61,394 | ) | (54,477 | ) | ||||||||
Net plant, pipeline and equipment | $ | 151,606 | $ | 140,009 | $ | 172,048 | $ | 140,009 |
March 31, 2017 | ||||||||||||
Intangible assets subject to amortization (Definite-lived) | Gross | Accumulated Amortization | Net | |||||||||
Customer relationships | $ | 16,852 | $ | (2,808 | ) | $ | 14,044 | |||||
Non-compete agreements | 94 | (48 | ) | 46 | ||||||||
Licenses and permits | 1,471 | (311 | ) | 1,160 | ||||||||
Developed technology | 6,131 | (1,532 | ) | 4,599 | ||||||||
24,548 | (4,699 | ) | 19,849 | |||||||||
Intangible assets not subject to amortization (Indefinite-lived) | ||||||||||||
Emissions Allowance | 197 | - | 197 | |||||||||
Trade name | 2,158 | - | 2,158 | |||||||||
Total | $ | 26,903 | $ | (4,699 | ) | $ | 22,204 |
September 30, 2017 | ||||||||||||
Intangible assets subject to amortization (Definite-lived) | Gross | Accumulated Amortization | Net | |||||||||
Customer relationships | $ | 16,852 | $ | (3,370 | ) | $ | 13,482 | |||||
Non-compete agreements | 94 | (57 | ) | 37 | ||||||||
Licenses and permits | 1,471 | (364 | ) | 1,107 | ||||||||
Developed technology | 6,131 | (1,839 | ) | 4,292 | ||||||||
24,548 | (5,630 | ) | 18,918 | |||||||||
Intangible assets not subject to amortization (Indefinite-lived) | ||||||||||||
Emissions Allowance | 197 | - | 197 | |||||||||
Trade name | 2,158 | - | 2,158 | |||||||||
Total | $ | 26,903 | $ | (5,630 | ) | $ | 21,273 |
December 31, 2016 | ||||||||||||
Intangible assets subject to amortization (Definite-lived) | Gross | Accumulated Amortization | Net | |||||||||
Customer relationships | $ | 16,852 | $ | (2,527 | ) | $ | 14,325 | |||||
Non-compete agreements | 94 | (43 | ) | 51 | ||||||||
Licenses and permits | 1,471 | (285 | ) | 1,186 | ||||||||
Developed technology | 6,131 | (1,379 | ) | 4,752 | ||||||||
24,548 | (4,234 | ) | 20,314 | |||||||||
Intangible assets not subject to amortization (Indefinite-lived) | ||||||||||||
Emissions Allowance | 197 | - | 197 | |||||||||
Trade name | 2,158 | - | 2,158 | |||||||||
Total | $ | 26,903 | $ | (4,234 | ) | $ | 22,669 |
Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Remainder of 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||||||||||||||||||||
Customer relationships | $ | 843 | $ | 1,123 | $ | 1,123 | $ | 1,123 | 1,123 | $ | 8,710 | $ | 282 | $ | 1,123 | $ | 1,123 | $ | 1,123 | 1,123 | $ | 8,710 | ||||||||||||||||||||||||||
Non-compete agreements | 14 | 19 | 12 | - | - | - | 5 | 19 | 12 | - | - | - | ||||||||||||||||||||||||||||||||||||
Licenses and permits | 80 | 106 | 106 | 106 | 106 | 656 | 26 | 106 | 106 | 106 | 106 | 656 | ||||||||||||||||||||||||||||||||||||
Developed technology | 460 | 613 | 613 | 613 | 613 | 1,687 | 153 | 613 | 613 | 613 | 613 | 1,687 | ||||||||||||||||||||||||||||||||||||
Total future amortization expense | $ | 1,397 | $ | 1,861 | $ | 1,854 | $ | 1,842 | $ | 1,842 | $ | 11,053 | $ | 466 | $ | 1,861 | $ | 1,854 | $ | 1,842 | $ | 1,842 | $ | 11,053 |
Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | |||||||||||||||||||||||
Per Share | Per Share | |||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Basic Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 1,487 | 24,240 | $ | 0.06 | $ | 7,224 | 24,484 | $ | 0.30 | ||||||||||||||
Unvested restricted stock grant | 321 | 282 | ||||||||||||||||||||||
Dilutive stock options outstanding | 493 | 319 | ||||||||||||||||||||||
Diluted Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 1,487 | 25,054 | $ | 0.06 | $ | 7,224 | 25,085 | $ | 0.29 |
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||
Per Share | Per Share | |||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Basic Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 1,718 | 24,304 | $ | 0.07 | $ | 2,799 | 24,223 | $ | 0.12 | ||||||||||||||
Unvested restricted stock grant | 379 | 304 | ||||||||||||||||||||||
Dilutive stock options outstanding | 474 | 394 | ||||||||||||||||||||||
Diluted Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 1,718 | 25,157 | $ | 0.07 | $ | 2,799 | 24,921 | $ | 0.11 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Per Share | Per Share | |||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Basic Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 4,037 | 24,267 | $ | 0.17 | $ | 20,275 | 24,304 | $ | 0.83 | ||||||||||||||
Unvested restricted stock grant | 360 | 297 | ||||||||||||||||||||||
Dilutive stock options outstanding | 455 | 363 | ||||||||||||||||||||||
Diluted Net Income per Share: | ||||||||||||||||||||||||
Net Income Attributable to Trecora Resources | $ | 4,037 | 25,082 | $ | 0.16 | $ | 20,275 | 24,964 | $ | 0.81 |
September 30, 2017 | December 31, 2016 | |||||||
(thousands of dollars) | ||||||||
Accrued property taxes | $ | 2,188 | $ | - | ||||
Accrued payroll | 1,563 | 1,097 | ||||||
Accrued officer compensation | 900 | - | ||||||
Accrued shortfall fees | 586 | - | ||||||
Other | 1,067 | 920 | ||||||
Total | $ | 6,304 | $ | 2,017 |
The Second Amendment also reduces the Minimum Consolidated Fixed Charge Coverage Ratio of 1.25x to 1.10x at March 31, 2017, 1.05x at June 30, 2017 and September 30, 2017, 1.10x at December 31, 2017, before reverting to the original financial covenant of 1.25x at March 31, 2018.
Also, under the terms of the Second Amendment, two additional levels of pricing were added – levels 4 and 5.
We were in compliance with all covenants at On July 25, 2017, Texas Oil & Chemical Co. II, Inc. ("TOCCO"), South Hampton Resources, Inc. ("SHR"), Gulf State Pipe Line Company, Inc. ("GSPL"), and Trecora Chemical, Inc. ("TC") (SHR, GSPL and TC collectively the "Guarantors") entered into a Third Amendment to Amended and Restated Credit Agreement ("3rd Amendment") with the lenders which from time to time are parties to the Amended and Restated Credit Agreement (collectively, the "Lenders") and Bank of America, N.A., a national banking association, as Administrative Agent for the Lenders. The 3rd Amendment increased the Revolving Facility from $40,000,000 to $60,000,000. There were no other changes to the Revolving Facility. Under the ARC as amended, we have a Under the ARC, we also borrowed $70.0 million in a single advance term loan (the "Acquisition Loan") to partially finance the acquisition of TC. Interest on the Acquisition Loan is payable quarterly using a ten year commercial style amortization. Principal is also payable on the last business day of each March, June, September and December in an amount equal to $1,750,000, provided that the final installment on the September 30, 2019, maturity date shall be in an amount equal to the then outstanding unpaid principal balance of the Acquisition Loan. At 11 Under the ARC, we also had the right to borrow $25.0 million in a multiple advance loan ("Term Loans"). Borrowing availability under the Term Loans ended on December 31, 2015. The Term Loans converted from a multiple advance loan to a "mini-perm" loan once certain obligations were fulfilled such as certification that construction of D-Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier. Interest on the Term Loans is paid monthly. At Debt issuance costs of approximately $0.6 million and $0.7 million for the periods ended
11. FAIR VALUE MEASUREMENTS The following items are measured at fair value on a recurring basis subject to disclosure requirements of ASC Topic 820 at Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value of cash, Interest Rate Swap In March 2008 we entered into an interest rate swap agreement with Bank of America related to a $10.0 million term loan secured by plant, pipeline and equipment. The interest rate swap was designed to minimize the effect of changes in the London InterBank Offered Rate ("LIBOR") rate. We had designated the interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and Hedging; however, due to the ARC, we felt that the hedge was no longer entirely effective. Due to the time required to make the determination and the immateriality of the hedge, we began treating it as ineffective as of October 1, 2014. 12 We assess the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy). We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. See discussion of our derivative instruments in Note Interest Rate Swap In March 2008, we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to a $10.0 million (later increased to $14 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017. The notional amount of the interest rate swap was
Due to the ARC discussed in Note
13. STOCK-BASED COMPENSATION Stock-based compensation Restricted Stock Unit Awards On June 16, 2017, we awarded approximately 127,000 shares of restricted stock units to officers at a grant date price of $11.40. One-half of the restricted stock units vest ratably over three years. The other half vests at the end of three years based upon the performance metrics of return on invested capital and earnings per share growth. The number of shares actually granted will be adjusted based upon relative performance to our peers. Compensation expense recognized during the three and nine months ended September 30, 2017, was approximately $121,000 and $161,000, respectively. Director compensation of approximately $56,000 and Officer compensation of approximately Director compensation of approximately Director compensation of approximately $19,000 and $19,000 during the three months and $56,000 and $40,000 during the nine months ended Employee compensation of approximately $108,000 and $108,000 during the three months and $323,000 and $323,000 for the nine months ended Restricted stock units activity in the first
Stock Option and Warrant Awards A summary of the status of our stock option awards and warrants is presented below:
The fair value of the options granted were calculated using the Black Scholes option valuation model with the assumptions as disclosed in prior quarterly and annual filings. Employee compensation of approximately Post-retirement compensation of approximately $0 and 14 2009. On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders. The Company is litigating its right to withdraw the options and benefits and as such, these options and benefits continue to be shown as outstanding. See further discussion in Note See the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for additional information. We operate through business segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by our key decision maker, who is our Chief Executive Officer. Segment data may include rounding differences. Our petrochemical segment includes SHR and GSPL. Our specialty wax segment
15
*Profit (loss) before taxes for the specialty wax segment includes a bargain purchase gain of $11.5 million.
We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service ("IRS") in November 2016 31, 2016, we recognized no material adjustments in connection with uncertain tax positions. The effective tax rate varies from the federal statutory rate of 35% primarily as a result of state tax expense and stock In January 2008 an amended retirement agreement was entered into with Mr. Hatem El Khalidi; however, on May 9, 2010, the Board of Directors terminated the agreement due to actions of Mr. El Khalidi. See Notes In July 2015 we entered into a retirement agreement with former CEO, Nicholas Carter. As of See the Company's Annual Report on Form 10-K for the year ended December 31, 2016, for additional information. In July 2016 AMAK issued four million shares to provide additional funds for ongoing exploration work and mine start-up activities. Arab Mining Co. ("Armico") purchased 3.75 million shares at 20 Saudi Riyals per share (USD$5.33 per share) and the remaining 250,000 shares are for future use as employee incentives. We did not participate in the offering, thereby reducing our ownership percentage in AMAK to 33.44% from 35.25%. 16 As of AMAK's financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal (SR). In June 1986 the SR was officially pegged to the U. S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR. The summarized results of operation and financial position for AMAK are as follows: Results of Operations
Gain on Depreciation and amortization was
Financial Position
The equity in the income or loss of AMAK reflected on the consolidated statements of income for the three and nine months ended
17
See our Annual Report on Form 10-K for the year ended December 31, 2016, for additional information. 18. RELATED PARTY TRANSACTIONS Consulting fees of approximately Consulting fees of approximately $19,000 and Guarantees – On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund ("SIDF") whereby we agreed to guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million) (the "Loan"). The term of the loan is through June 2019. As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate Guarantees; as a result, our guarantee is for approximately 135.33 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs. We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment. The total amount outstanding to the SIDF at Litigation - From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future. On March 21, 2011, Mr. El Khalidi filed suit against the Company in Texas alleging breach of contract and other claims. The 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution in this matter on July 24, 2013. The Ninth Court of Appeals subsequently affirmed the dismissal for want of prosecution and the Supreme Court of Texas denied Mr. El Khalidi's petition for review. On May 1, 2014, Mr. El Khalidi refiled his lawsuit against the Company for breach of contract and defamation in the 356th Judicial District Court of Hardin County, Texas. The case was transferred to the 88th Judicial District Court of Hardin County, Texas. On September 1, 2016, the Court dismissed all of Mr. El Khalidi's claims and causes of action with prejudice. Mr. El Khalidi 18 Environmental Remediation - Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately FORWARD LOOKING AND CAUTIONARY STATEMENTS Except for the historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment; the Company's failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the Company's pension plans; ineffective internal controls; the Company's use of accounting estimates; competitive conditions; the Company's ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations; impact of changes in market liquidity conditions and customer credit risk on receivables; the Company's ability to successfully manage acquisitions and alliances; general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; industry cycles; specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company's filings with the U.S. Securities and Exchange Commission, including this release, all of which are difficult to predict and many of which are beyond the Company's control. Overview The following discussion and analysis of our financial results, as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of our management. Our accounting and financial reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products and synthetic waxes. Our business model involves the manufacture and sale of tangible products and the provision of custom processing services. Our consistent approach to providing high purity products and quality services to our customers has helped to The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2016. We believe we are well-positioned to benefit from capital investments We Review of We reported We reported year-to-date 2017 earnings of $4.0 million down from $20.3 million from the first nine months of 2016. Diluted earnings per share of $0.16 were reported for 2017, down from $0.81 in the first nine months of 2016. During the first nine months of 2016 we recorded a bargain purchase gain on the BASF acquisition of $11.5 million and a gain on the additional equity issuance by AMAK of $3.2 million, which significantly impacted both earnings and earnings per share. Sales volume 20 of our petrochemical products increased 4.3%, and sales revenue from our petrochemical products increased 14.1% as compared to the first nine months of 2016. Prime product petrochemical sales volumes (which exclude by-product sales) were up 6.5% over the first nine months of 2016. Wax sales revenue was up 27.6% from first nine months of 2016. Gross profit margin declined from 20.4% to 17.6%. This was largely due to higher feedstock costs, higher operating costs, and costs related to Hurricane Harvey. Hurricane Harvey Impact The financial impact of Hurricane Harvey to our company was significant. Harvey made landfall on the Texas Gulf Coast on August 25 and affected operations at both SHR and TC. We estimate the total negative impact to EBITDA was approximately $1.5 million to $1.8 million. This includes expenses related to generator rentals, overtime labor, and maintenance and repairs of approximately $0.7 million. This estimate also includes lost sales due to outages at customer and supplier facilities. Neither of our facilities suffered any significant damage. Non-GAAP Financial Measures We include in this Quarterly Report the non-GAAP financial measures of EBITDA, Adjusted EBITDA and Adjusted Net Income and provide reconciliations from our most directly comparable financial measures to those measures. We define EBITDA as net income plus interest expense including derivative gains and losses, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus share-based compensation, plus or minus equity in AMAK's earnings and losses or gains from equity issuances and plus or minus gains or losses on acquisitions. We define Adjusted Net Income as net income plus or minus tax effected equity in AMAK's earnings and losses and plus or minus tax effected gains or losses on acquisitions. These measures are not measures of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), nor as an indicator of cash flows reported in accordance with U.S. GAAP. These measures are used as supplemental financial measures by management and external users of our financial statements such as investors, banks, research analysts and others. We believe that these non-GAAP measures are useful as they exclude transactions not related to our core cash operating activities. The following table presents a reconciliation of net income, our most directly comparable GAAP financial performance measure for each of the periods presented, to EBITDA, Adjusted EBITDA, and Adjusted Net Income.
21 Liquidity and Capital Resources Working Capital Our approximate working capital days are summarized as follows:
Our days sales outstanding in accounts receivable Cash The change in cash
Operating Activities Cash provided by operating activities totaled Factors leading to an increase in cash provided by operating activities included:
These sources of cash were partially offset by the following decrease in cash provided by operations:
22 Investing Activities Cash used by investing activities during the first Financing Activities Cash provided by financing activities during the first projects. During 2016 we drew $3.0 million on our line of credit made principal payments on our acquisition loan of Anticipated Cash Needs We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with borrowings under our ARC. Results of Operations Comparison of Three Months Ended Specialty Petrochemical Segment
*Includes ** Included in cost of sales Gross Revenue Gross Revenue increased during Petrochemical Product Sales Petrochemical product sales increased by 23 reasons. First, by-product selling prices were significantly higher in the third quarter of 2017 compared to the third quarter of 2016; and second, a large portion of our prime product sales are contracted with pricing formulas which are tied to prior month Natural Gas Liquid (NGL) prices which is our primary feedstock. Feedstock prices were Processing Processing revenues Cost of Sales Cost of Sales increased Volume processed in the oil/petrochemical markets and generally is readily available. The price of natural gasoline normally correlates approximately 90% with the price of crude oil. We expect our advanced reformer unit which is due online in Total Operating Expense Total Operating Expense decreased The cost of natural gas purchased increased Labor costs were storm. Transportation costs were In addition, in third quarter 2016 we saw increases in plant maintenance and expenses associated with installation of a processing unit for which we were reimbursed at cost plus a markup fee. These were minimal during 2017. General and Administrative Expense General and Administrative costs for Depreciation Depreciation increased 24 Capital Expenditures Capital Expenditures increased 74.2% during third quarter 2017 from 2016 primarily due to the new advanced reformer unit project. See additional detail above under "Investing Activities". Due to delays caused by the impact of the hurricane and issues with improper welding by the supplier of certain equipment in the reactor section of the new unit, we now expect the advanced reformer unit to come online toward the end of first quarter 2018. Specialty Wax Segment
*Includes $1,187 and $1,082 for 2017 and 2016, respectively, which is included in cost of sales Product Sales Product sales revenue increased 14.9% during third quarter 2017 from third quarter 2016 as we continued to see strong growth in wax sales both domestically and in export. Polyethylene wax sales remained steady during the quarter. However, volumes of our traditional products were impacted by the storm due to outages at our wax feed suppliers. We continue to make progress in growing sales in our new products for our Hot Melt Adhesives ("HMA") and PVC Lubricant markets. These products are characterized by generally higher margins and growth rates. Sales of these products were down from the second quarter primarily due to summer slowdown at European customers and inventory build at one of our distributors. In third quarter 2016, sales for these products were insignificant. Processing Processing revenues decreased 7.6% during third quarter 2017 from third quarter 2016 primarily due to the impact of the hurricane. The entire facility was down for a full week during the storm, and when you are selling time, it means zero custom processing revenue for that week. Additionally, we experienced start-up difficulties with the hydrogenation unit resulting in negligible processing revenues from that unit. Further, faulty equipment in one of the units in the original plant caused an extended shutdown resulting in further loss of revenues. This unit will be starting up shortly and running on a high value project through the end of the year. Cost of Sales Cost of Sales increased 22.5% during third quarter 2017 from third quarter 2016 primarily due to increases in labor, freight, equipment maintenance, and natural gas utilities. These cost increases were primarily attributable to the start-up of the hydrogenation/distillation unit. General and Administrative Expense General and Administrative costs decreased 10.6% during third quarter 2017 from 2016 primarily due to a decrease in other compensation expense, accounting fees and security service expense. Depreciation Depreciation increased 9.3% during third quarter 2017 from 2016 primarily due to the hydrogenation/distillation unit coming online. 25 Capital Expenditures Capital Expenditures decreased 51.0% during third quarter 2017 from third quarter 2016 primarily due to a decrease in expenditures for construction in progress including the hydrogenation/distillation project. The project came online in second and third quarters 2017. Corporate Segment
General and Administrative Expenses General corporate expenses increased during third quarter 2017 from third quarter 2016 primarily due to an increase in officer compensation. Officer compensation increased due to the accrual for 2017 executive bonuses and the reversal of certain accrued expenses in the third quarter of 2016, including the accrual for bonuses when it was determined they would not be awarded. Equity in Losses of AMAK Equity in losses of AMAK decreased during third quarter 2017 from third quarter 2016. Since the AMAK facility was idle during 2016, they had no sales. They recorded sales in third quarter 2017 which offset some of their expenses. AMAK Summarized Income Statement
AMAK continues to upgrade leadership and personnel at the site while filling all significant personnel vacancies. Sixteen percent more copper concentrate was shipped to the port in third quarter 2017 than in second quarter 2017. Zinc concentrate to the port was up 38% quarter on quarter. There was one shipment of lower quality copper and zinc concentrate during the quarter. Although AMAK is not yet fully at target throughputs and notwithstanding ongoing water quality and minor plant reliability issues; throughput rates, concentrate quality and recoveries continue to steadily improve. We reported on initial Guyan exploration results. Exploration continues both at Guyan and the surrounding areas with a similar geological profile. Exploration results which are expected to extend the life of the copper and zinc mine assets are anticipated later this year. 26 Comparison of Nine Months Ended September 30, 2017 and 2016 Specialty Petrochemical Segment
*Includes $4,142 and $3,743 for 2017 and 2016, respectively, which is included in operating expense ** Included in cost of sales Gross Revenue Gross Revenue increased during the first nine months of 2017 from 2016 by approximately 12.2% primarily due to an increase in the average selling price of 9.4% and an increase in volume of 4.3% offset by a decrease in processing fees. Petrochemical Product Sales Petrochemical product sales revenue increased by 14.1% during the first nine months of 2017 from 2016 due to an increase in the average selling price of 9.4% and an increase in volume of 4.3%. Our average selling price increased because of higher prices for prime products and by-products, driven by higher feedstock costs. A large portion of our prime product sales are contracted with formulas which are tied to Natural Gas Liquid (NGL) prices which is our primary feedstock. NGL prices were relatively stable during the first nine months of 2017 but were significantly higher than the first nine months of 2016. Foreign sales volume decreased to 19.6% of total petrochemical volume from 22.7% in the first nine months of 2016. Processing Processing revenues decreased 25.0% during the first nine months of 2017 from 2016 due to reduced fees associated with a new customer who reimbursed us for installation expenses plus a markup during the first nine months of 2016 and outages associated with the hurricane in 2017. Cost of Sales Cost of Sales increased 14.3% during the first nine months of 2017 from 2016 due to the increase in NGL prices as mentioned above. Our average feedstock cost per gallon increased 17.6%; whereas volume processed remained steady. We use natural gasoline as feedstock which is the heavier liquid remaining after ethane, propane and butanes are removed from liquids produced by natural gas wells. The material is a commodity product in the oil/petrochemical markets and generally is readily available. The price of natural gasoline normally correlates approximately 90% with the price of crude oil. The benchmark price of Mont Belvieu natural gasoline increased approximately 21% for the first nine months of 2017 compared to the same period in 2016. The increase in feedstock cost compressed margins for the spot or non-formula portion of prime product sales. These are sales which do not have pricing formulas tied to feedstock costs. This factor contributed to the decline in gross margin percentage from 21.2% to 19.7%. Our advanced reformer unit (due online in first quarter 2018) will allow us to convert many of the by-products into higher value products, thereby allowing us to sell our byproducts at higher prices. 27 Total Operating Expense Total Operating Expense decreased 0.8% during the first nine months of 2017 from 2016. Natural gas, labor, and transportation are the largest individual expenses in this category; however, not all of these decreased. The cost of natural gas purchased increased 47.4% during 2017 from 2016 due to an increase in the average per unit cost and consumption. The average price per MMBTU for the first nine months of 2017 was $3.32 whereas, for 2016 the per-unit cost was $2.44. Volume consumed increased to approximately 1,075,000 MMBTU from about 989,000 MMBTU. Labor costs were lower by 1.7% primarily due to maintenance labor being capitalized to construction in progress. Transportation costs were higher by 2.6% primarily due to an increase in the number of isocontainer shipments during the first nine months of 2017. These shipments increased 112.6% and are generally used for overseas shipments. In addition, during 2016 we saw increases in plant maintenance and expenses associated with installation of a processing unit for which we were reimbursed at cost plus a markup fee. These were minimal during 2017. General and Administrative Expense General and Administrative costs for the first nine months of 2017 from 2016 increased by 16.0% primarily due to an increase in our property tax accrual because of the expiration of abatements. Group insurance and administrative labor costs also increased. Depreciation Depreciation increased 11.2% during the first nine months of 2017 from 2016 primarily due to 2016 capital expenditures increasing our depreciable base. Capital Expenditures Capital Expenditures increased Specialty Wax Segment
*Includes Product Sales Product sales increased Processing Processing revenues Cost of Sales Cost of Sales increased Material cost General and Administrative Expense General and Administrative costs Depreciation Depreciation Capital Expenditures Capital Expenditures increased Corporate Segment
General and Administrative Expenses General corporate expenses increased 16.6% during first Equity in Earnings (Losses) of AMAK/Gain from Additional Equity Issuance by AMAK Equity in earnings (losses) of AMAK decreased during first 17 to the consolidated financial statements for the impact on our statements). Also, during 2016 the facility was not operating; therefore, their expenses were less. AMAK Summarized Income Statement
The Guarantee of Saudi Industrial Development Fund ("SIDF") Loan to AMAK As discussed in Note
Critical Accounting Policies and Estimates Inventories - Finished products and feedstock are recorded at the lower of cost, determined on the first-in, first-out method (FIFO); or market for SHR. For TC, inventory is recorded at the lower of cost or market as follows: (1) raw material cost is calculated using the weighted-average cost method and (2) product inventory cost is calculated using the specific cost method. Other critical accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates, assumptions and judgments are subject to an inherent degree of uncertainty. We base our estimates, assumptions and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. Estimates, assumptions and judgments are reviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material 30 changes to our critical accounting policies and estimates compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, except for the change in inventory valuation method from LIFO to FIFO as described in Note 5. Recent and New Accounting Standards See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance. Derivative Instrument Risk Refer to Note Interest Rate Risk Refer to Note There have been no material changes in the Company's exposure to market risk from the disclosure included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Material Weakness in Internal Control over Financial Reporting As described in Management's Report On Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, we determined that we did not maintain effective internal control over the accounting for our investment in AMAK. Specifically, controls were not appropriately designed, adequately documented and operating effectively related to the accounting for: (1) our equity in earnings of AMAK; and (2) changes in our ownership percentage in AMAK as the result of the sale and issuance of shares of AMAK to other investors. As a result of this material weakness, we restated our financial statements for the three months ended June 30, 2016, and September 30, 2016, respectively. This control deficiency did not result in any material adjustments to our consolidated financial statements for the year ended December 31, 2016. Although we have made progress in the remediation of this issue, as indicated below, sufficient time needs to pass before we can conclude that newly implemented controls are operating effectively and that the material weakness has been adequately remediated. Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the interim condensed consolidated financial statements and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented. Remediation of Material Weakness in Internal Control over Financial Reporting 31
There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The following documents are filed or incorporated by reference as exhibits to this Report. Exhibits marked with an asterisk (*) are
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: (Registrant) By: /s/Sami Ahmad Sami Ahmad Chief Financial Officer |