UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014March 31, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-7677
LSB Industries, Inc.
Exact name of Registrant as specified in its charter
Delaware | 73-1015226 | |
State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. |
16 South Pennsylvania Avenue,
Oklahoma City, Oklahoma 73107
Address of principal executive offices Zip Code
(405) 235-4546
Registrant’s telephone number, including area code
None
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x NoYes ¨ No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x NoYes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ NoYes x No
The number of shares outstanding of the Registrant’s voting common stock, as of October 31, 2014April 30, 2015 was 22,611,81622,733,357 shares, excluding 4,320,462 shares held as treasury stock.
FORM 10-Q OF LSB INDUSTRIES, INC.
PART I – Financial Information | Page | ||||||||
Item 1. | 3 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 3. | 37 | ||||||||
Item 4. | Controls and Procedures | 38 | |||||||
PART II – Other Information | |||||||||
Item 1. | Legal Proceedings | 42 | |||||||
Item 1A. | Risk Factors | 42 | |||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 | |||||||
Item 3. | Defaults Upon Senior Securities | 42 | |||||||
Item 4. | |||||||||
| |||||||||
| |||||||||
| |||||||||
| |||||||||
| |||||||||
Item 5. | |||||||||
Item 6. |
FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1. | Financial Statements |
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 2014March 31, 2015 is unaudited)
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 169,824 | $ | 143,750 | $ | 161,558 | $ | 186,811 | ||||||||
Restricted cash and cash equivalents | 396 | 365 | ||||||||||||||
Short-term investments | 14,500 | — | 24,500 | 14,500 | ||||||||||||
Accounts receivable, net | 88,249 | 80,570 | 90,402 | 88,074 | ||||||||||||
Inventories: | ||||||||||||||||
Finished goods | 27,120 | 29,163 | 27,558 | 28,218 | ||||||||||||
Work in progress | 2,724 | 2,838 | 3,061 | 2,763 | ||||||||||||
Raw materials | 27,819 | 23,871 | 29,077 | 25,605 | ||||||||||||
|
|
|
| |||||||||||||
Total inventories | 57,663 | 55,872 | 59,696 | 56,586 | ||||||||||||
Supplies, prepaid items and other: | ||||||||||||||||
Prepaid insurance | 3,454 | 15,073 | 10,008 | 13,752 | ||||||||||||
Precious metals | 12,350 | 14,927 | 11,541 | 12,838 | ||||||||||||
Supplies | 15,117 | 13,523 | 16,430 | 15,927 | ||||||||||||
Prepaid income taxes | 5,835 | 12,644 | ||||||||||||||
Prepaid and refundable income taxes | 2,754 | 7,387 | ||||||||||||||
Other | 4,237 | 3,867 | 5,237 | 5,438 | ||||||||||||
|
|
|
| |||||||||||||
Total supplies, prepaid items and other | 40,993 | 60,034 | 45,970 | 55,342 | ||||||||||||
Deferred income taxes | 8,198 | 13,613 | 16,934 | 17,204 | ||||||||||||
|
|
|
| |||||||||||||
Total current assets | 379,427 | 353,839 | 399,456 | 418,882 | ||||||||||||
Property, plant and equipment, net | 561,270 | 416,801 | 687,047 | 619,205 | ||||||||||||
Other assets: | ||||||||||||||||
Noncurrent restricted cash and cash equivalents | 76,804 | 80,974 | — | 45,969 | ||||||||||||
Noncurrent restricted investments | 50,000 | 209,990 | 25,000 | 25,000 | ||||||||||||
Debt issuance costs, net | 6,917 | 8,027 | ||||||||||||||
Other, net | 19,226 | 13,466 | 29,066 | 27,949 | ||||||||||||
|
|
|
| |||||||||||||
Total other assets | 152,947 | 312,457 | 54,066 | 98,918 | ||||||||||||
|
|
|
| |||||||||||||
$ | 1,093,644 | $ | 1,083,097 | $ | 1,140,569 | $ | 1,137,005 | |||||||||
|
|
|
|
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Information at September 30, 2014March 31, 2015 is unaudited)
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 75,567 | $ | 61,775 | $ | 92,544 | $ | 81,456 | ||||||||
Short-term financing | 1,513 | 13,749 | 8,389 | 11,955 | ||||||||||||
Accrued and other liabilities | 34,306 | 49,107 | 37,696 | 51,166 | ||||||||||||
Current portion of long-term debt | 10,597 | 9,262 | 25,499 | 10,680 | ||||||||||||
|
|
|
| |||||||||||||
Total current liabilities | 121,983 | 133,893 | 164,128 | 155,257 | ||||||||||||
Long-term debt | 448,773 | 453,705 | 430,237 | 446,638 | ||||||||||||
Noncurrent accrued and other liabilities | 17,636 | 17,086 | 18,234 | 17,934 | ||||||||||||
Deferred income taxes | 72,825 | 66,698 | 86,034 | 83,128 | ||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Series B 12% cumulative, convertible preferred stock, $100 par value; 20,000 shares issued and outstanding | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
Series D 6% cumulative, convertible Class C preferred stock, no par value; 1,000,000 shares issued and outstanding | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
Common stock, $.10 par value; 75,000,000 shares authorized, 26,920,053 shares issued (26,846,470 at December 31, 2013) | 2,692 | 2,685 | ||||||||||||||
Common stock, $.10 par value; 75,000,000 shares authorized, 27,044,903 shares issued (26,968,212 shares at December 31, 2014) | 2,704 | 2,697 | ||||||||||||||
Capital in excess of par value | 169,578 | 167,550 | 172,069 | 170,537 | ||||||||||||
Retained earnings | 285,531 | 266,854 | 292,537 | 286,188 | ||||||||||||
|
| |||||||||||||||
460,801 | 440,089 |
|
| |||||||||||||
470,310 | 462,422 | |||||||||||||||
Less treasury stock, at cost: | ||||||||||||||||
Common stock, 4,320,462 shares | 28,374 | 28,374 | 28,374 | 28,374 | ||||||||||||
|
|
|
| |||||||||||||
Total stockholders’ equity | 432,427 | 411,715 | 441,936 | 434,048 | ||||||||||||
|
|
|
| |||||||||||||
$ | 1,093,644 | $ | 1,083,097 | $ | 1,140,569 | $ | 1,137,005 | |||||||||
|
|
|
|
See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(Unaudited)
Nine and Three Months Ended September 30,March 31, 2015 and 2014 and 2013
Nine Months | Three Months | |||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(In Thousands, Except Per Share Amounts) | (In Thousands, Except Per Share Amounts) | |||||||||||||||||||||||
Net sales | $ | 551,233 | $ | 530,252 | $ | 171,046 | $ | 177,350 | $ | 193,858 | $ | 178,525 | ||||||||||||
Cost of sales | 429,256 | 417,262 | 146,660 | 128,441 | 151,499 | 129,803 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Gross profit | 121,977 | 112,990 | 24,386 | 48,909 | 42,359 | 48,722 | ||||||||||||||||||
Selling, general and administrative expense | 77,364 | 74,685 | 25,208 | 25,069 | 28,191 | 27,658 | ||||||||||||||||||
Provisions for (recovery of) losses on accounts receivable | (86 | ) | 182 | 70 | (84 | ) | ||||||||||||||||||
Provision for (recovery of) losses on accounts receivable | 22 | (159 | ) | |||||||||||||||||||||
Property insurance recoveries in excess of losses incurred | (5,147 | ) | — | — | — | — | (5,147 | ) | ||||||||||||||||
Other expense, net | 1,418 | 2,992 | 305 | 781 | ||||||||||||||||||||
Other expense (income), net | (77 | ) | 509 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating income (loss) | 48,428 | 35,131 | (1,197 | ) | 23,143 | |||||||||||||||||||
Operating income | 14,223 | 25,861 | ||||||||||||||||||||||
Interest expense, net | 17,458 | 6,662 | 5,079 | 5,395 | 3,398 | 6,708 | ||||||||||||||||||
Loss on extinguishment of debt | — | 1,296 | — | 1,296 | ||||||||||||||||||||
Non-operating other income, net | (242 | ) | (10 | ) | (89 | ) | (34 | ) | (35 | ) | (77 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income (loss) from continuing operations before provisions (benefit) for income taxes and equity in earnings of affiliate | 31,212 | 27,183 | (6,187 | ) | 16,486 | |||||||||||||||||||
Provisions (benefit) for income taxes | 12,286 | 9,967 | (2,415 | ) | 6,345 | |||||||||||||||||||
Income from continuing operations before provisions for income taxes and equity in earnings of affiliate | 10,860 | 19,230 | ||||||||||||||||||||||
Provisions for income taxes | 4,181 | 7,654 | ||||||||||||||||||||||
Equity in earnings of affiliate | (79 | ) | (452 | ) | — | (109 | ) | — | (67 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income (loss) from continuing operations | 19,005 | 17,668 | (3,772 | ) | 10,250 | |||||||||||||||||||
Net loss (income) from discontinued operations | 28 | 49 | 5 | (10 | ) | |||||||||||||||||||
Income from continuing operations | 6,679 | 11,643 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net income (loss) | 18,977 | 17,619 | (3,777 | ) | 10,260 | |||||||||||||||||||
Net loss from discontinued operations | 30 | 2 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Net income | 6,649 | 11,641 | ||||||||||||||||||||||
Dividends on preferred stocks | 300 | 300 | — | — | 300 | 300 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income (loss) applicable to common stock | $ | 18,677 | $ | 17,319 | $ | (3,777 | ) | $ | 10,260 | |||||||||||||||
Net income applicable to common stock | $ | 6,349 | $ | 11,341 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Weighted-average common shares: | ||||||||||||||||||||||||
Basic | 22,558 | 22,447 | 22,596 | 22,478 | 22,675 | 22,533 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted | 23,662 | 23,587 | 22,596 | 23,597 | 23,047 | 23,640 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income (loss) per common share: | ||||||||||||||||||||||||
Income per common share: | ||||||||||||||||||||||||
Basic | $ | 0.28 | $ | 0.50 | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 0.83 | $ | 0.78 | $ | (0.17 | ) | $ | 0.46 | |||||||||||||||
Net loss from discontinued operations | — | (0.01 | ) | — | — | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net income (loss) | $ | 0.83 | $ | 0.77 | $ | (0.17 | ) | $ | 0.46 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted | $ | 0.28 | $ | 0.49 | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 0.80 | $ | 0.76 | $ | (0.17 | ) | $ | 0.43 | |||||||||||||||
Net loss from discontinued operations | — | (0.01 | ) | — | — | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income (loss) | $ | 0.80 | $ | 0.75 | $ | (0.17 | ) | $ | 0.43 | |||||||||||||||
|
|
|
|
See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
NineThree Months Ended September 30, 2014March 31, 2015
Common Stock Shares | Non- Redeemable Preferred Stock | Common Stock Par Value | Capital in Excess of Par Value | Retained Earnings | Treasury Stock- Common | Total | Common Stock Shares | Non- Redeemable Preferred Stock | Common Stock Par Value | Capital in Excess of Par Value | Retained Earnings | Treasury Stock- Common | Total | |||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 26,846 | $ | 3,000 | $ | 2,685 | $ | 167,550 | $ | 266,854 | $ | (28,374 | ) | $ | 411,715 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2014 | 26,968 | $ | 3,000 | $ | 2,697 | $ | 170,537 | $ | 286,188 | $ | (28,374 | ) | $ | 434,048 | ||||||||||||||||||||||||||||||||||||||||||
Net income | 18,977 | 18,977 | 6,649 | 6,649 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid on preferred stocks | (300 | ) | (300 | ) | (300 | ) | (300 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 1,386 | 1,386 | 619 | 619 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 74 | 7 | 642 | 649 | 75 | 7 | 735 | 742 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for services | 2 | 49 | 49 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Excess income tax benefit associated with stock-based compensation | 129 | 129 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2014 | 26,920 | $ | 3,000 | $ | 2,692 | $ | 169,578 | $ | 285,531 | $ | (28,374 | ) | $ | 432,427 | ||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2015 | 27,045 | $ | 3,000 | $ | 2,704 | $ | 172,069 | $ | 292,537 | $ | (28,374 | ) | $ | 441,936 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NineThree Months Ended September 30, 2014March 31, 2015
2014 | 2013 | 2015 | 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Cash flows from continuing operating activities | ||||||||||||||||
Net income | $ | 18,977 | $ | 17,619 | $ | 6,649 | $ | 11,641 | ||||||||
Adjustments to reconcile net income to net cash provided by continuing operating activities: | ||||||||||||||||
Net loss from discontinued operations | 28 | 49 | ||||||||||||||
Deferred income taxes | 11,542 | 6,170 | 3,176 | 5,999 | ||||||||||||
Gains on property insurance recoveries associated with property, plant and equipment | (5,147 | ) | — | — | (5,147 | ) | ||||||||||
Depreciation, depletion and amortization of property, plant and equipment | 26,421 | 20,062 | 9,001 | 8,679 | ||||||||||||
Other | 2,433 | 5,008 | (795 | ) | (111 | ) | ||||||||||
Cash provided (used) by changes in assets and liabilities (net of effects of discontinued operations): | ||||||||||||||||
Accounts receivable | (7,326 | ) | (317 | ) | (2,348 | ) | (9,876 | ) | ||||||||
Inventories | (917 | ) | 5,446 | (1,477 | ) | 150 | ||||||||||
Prepaid insurance | 11,619 | 8,364 | 3,744 | 3,772 | ||||||||||||
Prepaid and accrued income taxes | 5,593 | (9,459 | ) | 4,640 | 8,247 | |||||||||||
Other supplies, prepaid items and other | 1,454 | (5,525 | ) | 932 | 3,540 | |||||||||||
Accounts payable | 5,160 | (7,141 | ) | 1,629 | 8,179 | |||||||||||
Accrued interest | (8,131 | ) | 5,581 | (8,086 | ) | (7,547 | ) | |||||||||
Customer deposits | (3,003 | ) | (322 | ) | ||||||||||||
Other current and noncurrent liabilities | (4,807 | ) | (579 | ) | (1,459 | ) | (5,515 | ) | ||||||||
Deferred gain on insurance recoveries | — | (1,383 | ) | |||||||||||||
|
|
|
| |||||||||||||
Net cash provided by continuing operating activities | 56,899 | 45,278 | 12,603 | 20,306 | ||||||||||||
Cash flows from continuing investing activities | ||||||||||||||||
Expenditures for property, plant and equipment | (164,160 | ) | (113,727 | ) | (66,837 | ) | (45,308 | ) | ||||||||
Acquisition of working interests in natural gas properties | — | (9,205 | ) | |||||||||||||
Proceeds from property insurance recovery associated with property, plant and equipment | 5,147 | 23,671 | — | 5,147 | ||||||||||||
Proceeds from sales of property and equipment | 220 | 1,439 | ||||||||||||||
Purchase of short-term investments | (14,500 | ) | — | |||||||||||||
Purchases of short-term investments | (10,000 | ) | — | |||||||||||||
Proceeds from noncurrent restricted cash and cash equivalents | 169,276 | — | 45,969 | — | ||||||||||||
Deposits of current and noncurrent restricted cash and cash equivalents | (165,106 | ) | (110,015 | ) | (31 | ) | (165,106 | ) | ||||||||
Proceeds from noncurrent restricted investments | 209,990 | — | — | 209,990 | ||||||||||||
Purchase of noncurrent restricted investments | (50,000 | ) | (169,988 | ) | ||||||||||||
Other investing activities | (1,814 | ) | (818 | ) | (1,049 | ) | 386 | |||||||||
|
|
|
| |||||||||||||
Net cash used by continuing investing activities | (10,947 | ) | (378,643 | ) | ||||||||||||
Net cash provided (used) by continuing investing activities | (31,948 | ) | 5,109 | |||||||||||||
Cash flows from continuing financing activities | ||||||||||||||||
Proceeds from senior secured notes, net of pay off of secured term loan and fees | — | 350,957 | ||||||||||||||
Proceeds from long-term debt, net of fees | — | 39,825 | ||||||||||||||
Payments on long-term debt | (7,853 | ) | (6,657 | ) | (2,881 | ) | (2,322 | ) | ||||||||
Payments of debt issuance costs | — | (1,607 | ) | |||||||||||||
Payments on short-term financing | (12,236 | ) | (8,351 | ) | (3,566 | ) | (4,073 | ) | ||||||||
Proceeds from exercise of stock options | 649 | 865 | ||||||||||||||
Proceeds from exercises of stock options | 742 | 78 | ||||||||||||||
Excess income tax benefit associated with stock-based compensation | — | 411 | 129 | 300 | ||||||||||||
Dividends paid on preferred stocks | (300 | ) | (300 | ) | (300 | ) | (300 | ) | ||||||||
|
|
|
| |||||||||||||
Net cash provided (used) by continuing financing activities | (19,740 | ) | 375,143 | |||||||||||||
Net cash used by continuing financing activities | (5,876 | ) | (6,317 | ) | ||||||||||||
Cash flows of discontinued operations: | ||||||||||||||||
Operating cash flows | (138 | ) | (145 | ) | (32 | ) | (65 | ) | ||||||||
|
|
|
| |||||||||||||
Net increase (decrease) in cash and cash equivalents | 26,074 | 41,633 | (25,253 | ) | 19,033 | |||||||||||
Cash and cash equivalents at beginning of period | 143,750 | 98,020 | 186,811 | 143,750 | ||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of period | $ | 169,824 | $ | 139,653 | $ | 161,558 | $ | 162,783 | ||||||||
|
|
|
|
See accompanying notes.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
For a complete discussion of our significant accounting policies, refer to the notes to our audited consolidated financial statements included in our Form 10-K for the year ended December 31, 20132014 (“20132014 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 27, 2014.2015.
Basis of Consolidation and Presentation -LSB Industries, Inc. (“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying condensed consolidated financial statements. We are involved in manufacturing and marketing operations. We are primarily engaged in the manufacture and sale of chemical products (the “Chemical Business”) and the manufacture and sale of water source and geothermal heat pumps and air handling products (the “Climate Control Business”). LSB is a holding company with no significant operations or assets other than cash, cash equivalents, and investments in its subsidiaries. Our Chemical Business’ ownership of working interests in natural gas properties is accounted for as an undivided interest, whereby we reflect our proportionate share of the underlying assets, liabilities, revenues and expenses. Our working interest represents our share of the costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while our net revenue interest represents our share of the revenues from the sale of natural gas. The net revenue interest is less than our working interest as the result of royalty interest due to others. We are not the operator of these natural gas properties. Entities that are 20% to 50% owned and for which we have significant influence are accounted for on the equity method. All material intercompany accounts and transactions have been eliminated.
In the opinion of management, the unaudited condensed consolidated financial statements of the Company as of September 30, 2014March 31, 2015 and for the nine and three-month periods ended September 30,March 31, 2015 and 2014 and 2013 include all adjustments and accruals, consisting of normal, recurring accrual adjustments which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in connection with our audited consolidated financial statements and notes thereto included in our 20132014 Form 10-K.
Use of Estimates - The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -–Investments, which consist of highly liquid investments with original maturities of three months or less, are considered cash equivalents.
Short-Term Investments - Investments, which consist of certificates of deposit with an original maturity ofno more than 26 weeks, are considered short-term investments. These investments are carried at cost which approximates fair value.
Noncurrent Restricted Cash and Cash Equivalents - Noncurrent restricted cash and cash equivalents consistconsisted of balances that arewere designated by us for specific purposes relating to capital projects.
Noncurrent Restricted Investments - Noncurrent restricted investments consist of investment balances that are designated by us for specific purposes relating to capital projects. At September 30, 2014, theThe balance includes investments in certificates of deposits with an original maturity no longer than approximately 26 weeks. The investments in certificates of deposits are carried at cost, which approximates fair value.
Concentration of Credit Risks for Cash, Cash Equivalents, and Investments at Financial Institutions -–Financial instruments relating to cash, cash equivalents, and investments (certificates of deposits) potentially subject us to concentrations of credit risk. At September 30, 2014,March 31, 2015, the total balance of these financial instruments exceeded the FDIC-insured limits by approximately $64$49.0 million. All of these financial instruments were held by financial institutions within the U.S.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
Recognition of Insurance Recoveries - If an insurance claim relates to a recovery of our losses, we recognize the recovery when it is probable and reasonably estimable. If our insurance claim relates to a contingent gain, we recognize the recovery when it is realized or realizable and earned. Amounts recoverable from our insurance carriers, if any, are included in accounts receivable. An insurance recovery in excess of recoverable costs relating to a business interruption claim, if any, is a reduction to cost of sales. An insurance recovery in excess of recoverable costs relating to a property insurance claim, if any, is included in property insurance recoveries in excess of losses incurred.
Correction of Accounting Errors -During three months ended September 30, 2014, we determined that certain invoices had not been properly recorded during the three months ended June 30, 2014 associated with repairs and maintenance expenses relating to our Chemical Business. As a result, we recorded additional expenses classified as cost of sales of approximately $405,000 for the three months ended September 30, 2014. In addition, we determined that numerous repair parts (an average cost of approximately $100 per part) included in our Chemical Business’ supplies were considered obsolete. We estimate that these parts became obsolete over a span of many years prior to 2014. As a result, we recorded additional expenses classified as cost of sales of approximately $324,000 for the nine and three months ended September 30, 2014. For the nine months ended September 30, 2014, the effect of the obsolescence adjustment (net of income taxes) decreased basic and diluted net income per share by $.01. For the three months ended September 30, 2014, the effect of both adjustments (net of income taxes) increased basic and diluted net loss per share by $.02.
Management of the Company evaluated the impact of these accounting errors and concluded the effect of these adjustments were immaterial to the Company’s consolidated financial statements as of June 30, 2014 and for the six and three-months ended June 30, 2014, the consolidated financial statements prior to 2014 as well as the projected consolidated financial statements for the year ending December 31, 2014.
Reclassifications - Reclassifications have been made in our condensed consolidated statement of cash flows for the nine months ended September 30, 2013 to conform to our condensed consolidated statement of cash flows for the nine months ended September 30, 2014, which reclassifications expanded or combined various operating activities line items. These reclassifications did not impact the total amount of net cash provided by continuing operating activities for the nine months ended September 30, 2013.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update 2014-09-Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are evaluating our existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements. The effects may include identifying performance obligations in existing arrangements, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard isoriginal effective date for us onof this standard is January 1, 2017. Early adoption is not permitted.However, the FASB has proposed a one-year deferral of the effective date to January 1, 2018 with the option to early adopt using the original effective date. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We are currently evaluating the transition method that will be elected.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2: Income (Loss) Per Common Share
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(Dollars in Thousands, Except Per Share Amounts) | (Dollars In Thousands, Except Per Share Amounts) | |||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income (loss) | $ | 18,977 | $ | 17,619 | $ | (3,777 | ) | $ | 10,260 | |||||||||||||||
Net income: | $ | 6,649 | $ | 11,641 | ||||||||||||||||||||
Dividends on Series B Preferred | (240 | ) | (240 | ) | — | — | (240 | ) | (240 | ) | ||||||||||||||
Dividends on Series D Preferred | (60 | ) | (60 | ) | — | — | (60 | ) | (60 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total dividends on preferred stocks | (300 | ) | (300 | ) | — | — | (300 | ) | (300 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Numerator for basic net income (loss) per common share - net income (loss) applicable to common stock | 18,677 | 17,319 | (3,777 | ) | 10,260 | |||||||||||||||||||
Numerator for basic net income per common share - net income applicable to common stock | 6,349 | 11,341 | ||||||||||||||||||||||
Dividends on preferred stocks assumed to be converted, if dilutive | 300 | 300 | — | — | 60 | 300 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Numerator for diluted net income (loss) per common share | $ | 18,977 | $ | 17,619 | $ | (3,777 | ) | $ | 10,260 | |||||||||||||||
Numerator for diluted net income per common share | $ | 6,409 | $ | 11,641 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Denominator: | ||||||||||||||||||||||||
Denominator for basic net income (loss) per common share - weighted-average shares | 22,557,935 | 22,446,557 | 22,595,634 | 22,477,974 | ||||||||||||||||||||
Denominator for basic net income per common share - weighted- average shares | 22,674,739 | 22,532,522 | ||||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Convertible preferred stocks | 916,666 | 916,666 | — | 916,666 | 250,000 | 916,666 | ||||||||||||||||||
Stock options | 187,026 | 223,352 | — | 202,645 | 121,763 | 190,519 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Dilutive potential common shares | 1,103,692 | 1,140,018 | — | 1,119,311 | 371,763 | 1,107,185 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Denominator for diluted net income (loss) per common share - adjusted weighted-average shares and assumed conversions | 23,661,627 | 23,586,575 | 22,595,634 | 23,597,285 | ||||||||||||||||||||
Denominator for dilutive net income per common share - adjusted weighted-average shares and assumed conversions | 23,046,502 | 23,639,707 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Basic net income (loss) per common share | $ | 0.83 | $ | 0.77 | $ | (0.17 | ) | $ | 0.46 | |||||||||||||||
Basic net income per common share | $ | 0.28 | $ | 0.50 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted net income (loss) per common share | $ | 0.80 | $ | 0.75 | $ | (0.17 | ) | $ | 0.43 | |||||||||||||||
Diluted net income per common share | $ | 0.28 | $ | 0.49 | ||||||||||||||||||||
|
|
|
|
|
|
The following weighted-average shares of securities were not included in the computation of diluted net income (loss) per common share as their effect would have been antidilutive:
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Convertible preferred stocks | — | — | 916,666 | — | 666,666 | — | ||||||||||||||||||
Stock options | 335,757 | 249,000 | 673,415 | 243,000 | 700,388 | 280,000 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
335,757 | 249,000 | 1,590,081 | 243,000 | 1,367,054 | 280,000 | |||||||||||||||||||
|
|
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3: Accounts Receivable net
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Trade receivables | $ | 87,361 | $ | 77,899 | $ | 88,927 | $ | 86,402 | ||||||||
Insurance claims | — | 1,865 | ||||||||||||||
Other | 1,492 | 1,633 | 2,335 | 2,498 | ||||||||||||
|
|
|
| |||||||||||||
88,853 | 81,397 | 91,262 | 88,900 | |||||||||||||
Allowance for doubtful accounts | (604 | ) | (827 | ) | (860 | ) | (826 | ) | ||||||||
|
|
|
| |||||||||||||
$ | 88,249 | $ | 80,570 | $ | 90,402 | $ | 88,074 | |||||||||
|
|
|
|
One of our subsidiaries, El Dorado Chemical Company (“EDC”) is a party to an agreement with Bank of America, N.A. (the “Bank”) to sell our accounts receivables generated from product sales to a certain customer. We agreed to enter into this agreement as a courtesy to this customer. The term of this agreement matures in August 2015, with renewal options, but either party has an option to terminate the agreement pursuant to the terms of the agreement. In addition, we amended our sales agreement with the customer to offer extended payment terms under the condition that they pay an extended payment terms premium equal to the discount taken by the Bank when the accounts receivables are sold. Thus, there is no gain or loss from the sale of these receivables to the Bank. We have no continuing involvement or risks associated with the transferred accounts receivable. Pursuant to the terms of the agreement, EDC is to receive payment from the Bank no later than one business day after the Bank’s acceptance of EDC’s offer to sell the accounts receivables. As of September 30, 2014,March 31, 2015, EDC has been paid by the Bank for the accounts receivables sold to the Bank. We account for these transfers as sales under ASC 860 -– Transfers and Servicing.
Note 4: Inventories
At September 30, 2014March 31, 2015 and December 31, 2013,2014, inventory reserves for certain slow-moving inventory items (Climate Control products) were $1,436,000$1,775,000 and $1,389,000,$1,653,000, respectively. In addition, because cost exceeded the net realizable value, inventory reservesadjustments for certain nitrogen-based inventories provided by our Chemical Business were $680,000$221,000 and $1,623,000$1,976,000 at September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively.
Note 5: Current and Noncurrent Accrued and Other Liabilities
Our current and noncurrent accrued and other liabilities consist of the following:
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Accrued warranty costs | $ | 8,169 | $ | 7,297 | $ | 9,034 | $ | 8,817 | ||||||||
Deferred revenue on extended warranty contracts | 7,737 | 7,407 | 7,923 | 7,806 | ||||||||||||
Accrued payroll and benefits | 5,946 | 8,981 | 7,075 | 8,743 | ||||||||||||
Accrued interest | 5,794 | 13,925 | 5,802 | 13,888 | ||||||||||||
Customer deposits | 4,985 | 5,500 | 3,830 | 6,833 | ||||||||||||
Other | 19,311 | 23,083 | 22,266 | 23,013 | ||||||||||||
|
|
|
| |||||||||||||
51,942 | 66,193 | 55,930 | 69,100 | |||||||||||||
Less noncurrent portion | 17,636 | 17,086 | 18,234 | 17,934 | ||||||||||||
|
|
|
| |||||||||||||
Current portion of accrued and other liabilities | $ | 34,306 | $ | 49,107 | $ | 37,696 | $ | 51,166 | ||||||||
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6: Accrued Warranty Costs
Our Climate Control Business sells equipment that has an expected life, under normal circumstances and use, which extends over several years. As such, we provide warranties after equipment shipment/start-up covering defects in materials and workmanship. Generally for commercial/institutional products, the base warranty coverage for most of the manufactured equipment in the Climate Control Business is limited to eighteen months from the date of shipment or twelve months from the date of start-up, whichever is shorter, and to ninety days for spare parts. For residential products, the base warranty coverage for manufactured equipment in the Climate Control Business is limited to ten years from the date of shipment for material and to five years from the date of shipment for labor associated with the repair. The warranty provides that most equipment is required to be returned to the factory or an authorized representative and the warranty is limited to the repair and replacement of the defective product, with a maximum warranty of the refund of the purchase price. Furthermore, companies within the Climate Control Business generally disclaim and exclude warranties related to merchantability or fitness for any particular purpose and disclaim and exclude any liability for consequential or incidental damages. In some cases, the customer may purchase, or a specific product may be sold with, an extended warranty. The above discussion is generally applicable to such extended warranties, but variations do occur depending upon specific contractual obligations, certain system components, and local laws.
Changes in our product warranty obligation (accrued warranty costs) are as follows:
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 7,297 | $ | 6,172 | $ | 7,701 | $ | 6,944 | $ | 8,817 | $ | 7,297 | ||||||||||||
Amounts charged to costs and expenses | 5,621 | 5,860 | 1,926 | 1,849 | ||||||||||||||||||||
Amounts charged to SG&A | 2,099 | 2,227 | ||||||||||||||||||||||
Costs incurred | (4,749 | ) | (4,820 | ) | (1,458 | ) | (1,581 | ) | (1,882 | ) | (1,946 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Balance at end of period | $ | 8,169 | $ | 7,212 | $ | 8,169 | $ | 7,212 | $ | 9,034 | $ | 7,578 | ||||||||||||
|
|
|
|
|
|
Note 7: Asset Retirement Obligations
Currently, we have various legal requirements related to operations of our Chemical Business facilities, including the disposal of wastewater generated at certain of these facilities. Additionally, we have certain facilities in our Chemical Business that contain asbestos insulation around certain piping and heated surfaces, which we plan to maintain or replace, as needed, with non-asbestos insulation through our standard repair and maintenance activities to prevent deterioration. Currently, there is insufficient information to estimate the fair value for most of our asset retirement obligations (“AROs”).obligations. In addition, we currently have no plans to discontinue the use of these facilities, and the remaining life of the facilities is indeterminable. As a result, a liability for only a minimal amount relating to AROs associated with these facilities has been established. However, we will continue to review these obligations and record a liability when a reasonable estimate of the fair value can be made. In addition, our Chemical Business owns working interests in certain natural gas properties. We recognized AROs associated with the obligation to plug and abandon wells when the natural gas reserves in the wells are depleted. At September 30, 2014March 31, 2015 and December 31, 2013,2014, our accrued liability for AROs was $310,000$368,000 and $304,000,$340,000, respectively.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Long-Term Debt
Our long-term debt consists of the following:
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Working Capital Revolver Loan (A) | $ | — | $ | — | $ | — | $ | — | ||||||||
7.75% Senior Secured Notes due 2019 (B) | 425,000 | 425,000 | 425,000 | 425,000 | ||||||||||||
Secured Promissory Note | 24,520 | 29,555 | ||||||||||||||
Other | 9,850 | 8,412 | ||||||||||||||
Secured Promissory Note due 2016, with a current interest rate of 3.26% | 21,091 | 22,814 | ||||||||||||||
Other, with a current weighted-average interest rate of 4.34%, most of which is secured primarily by machinery and equipment | 9,645 | 9,504 | ||||||||||||||
|
|
|
| |||||||||||||
459,370 | 462,967 | 455,736 | 457,318 | |||||||||||||
Less current portion of long-term debt | 10,597 | 9,262 | 25,499 | 10,680 | ||||||||||||
|
|
|
| |||||||||||||
Long-term debt due after one year | $ | 448,773 | $ | 453,705 | $ | 430,237 | $ | 446,638 | ||||||||
|
|
|
|
(A) |
(B) |
The Senior Secured Notes are general senior secured obligations of LSB. The Senior Secured Notes are jointly and severally and fully and unconditionally guaranteed by all of LSB’s current wholly-owned subsidiaries, with all of the guarantees, except two, being senior secured guarantees and two being senior unsecured guarantees. The Senior Secured Notes rank equally in right of payment to all of LSB and the guarantors’ existing and future senior secured debt, including the Amended Working Capital Revolver Loan discussed above, and are senior in right of payment to all of LSB and the guarantors’ future subordinated indebtedness. LSB does not have independent assets or operations. Approximately $67.2 million of the proceeds from Senior Secured Notes was used to pay all outstanding borrowings, including a prepayment premium, under a secured term loan facility. As a result of the payoff of the secured term loan facility, we incurred a loss on extinguishment of debt of $1.3 million in 2013, consisting of the prepayment premium and writing off unamortized debt issuance costs.
Note 9: Commitments and Contingencies
Termination of Sales Commitment - Ammonium nitrate supply agreement—Pursuant to a long-term cost-plus supply agreement, EDC agreed to supply Orica International Pte Ltd with an annual minimum of 240,000 tons of industrial grade AN produced at our El Dorado Facility. The agreement included a provision for Orica to pay for product not taken. The agreement also included a required notice of termination of one year, with the termination date to be no sooner than April 9, 2015. On March 31, 2014, EDC sent to Orica the required one-year notice that EDC would not renew the agreement. As a result, the agreement was terminated on April 9, 2015.
Planned Capital Project Commitments -Additions –A subsidiary of EDC is party to various agreements with Leidos Constructors, LLC and others to engineer, procure and construct an ammonia plant and certain support facilities. The estimated cost for this project ranges from $275 million to $300 million, of which $99$172 million has been incurred and capitalized at September 30, 2014.March 31, 2015.
EDC is party to an agreement with Weatherly Inc. for the licensing, engineering, and procurement of major manufacturing equipment for a new 65% strength nitric acid plant (“Nitric Acid Plant”) to be constructed at our chemical production facility located in El Dorado Arkansas (the “El Dorado Facility”).Facility. EDC is also party to various agreements with Leidos Constructors, LLC and others to engineer, procure and construct the Nitric Acid Plant, a nitric acid concentrator and certain support facilities at the El Dorado Facility. The estimated cost for this project ranges from $125 million to $130 million, of which $85$105 million has been incurred and capitalized at September 30, 2014.March 31, 2015.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Commitments and Contingencies (continued)
Notification of Termination of Sales Commitment
Ammonium nitrate supply agreement - Pursuant to a long-term cost-plus supply agreement, EDC supplies Orica International Pte Ltd (“Orica”) with an annual minimum of 240,000 tons of industrial grade ammonium nitrate (“AN”) produced at our El Dorado Facility. The agreement includes a provision for Orica to pay for product not taken. The agreement also includes a required notice of termination of one year, with the termination date to be no sooner than April 9, 2015. On March 31, 2014, EDC sent to Orica the required one-year notice that EDC will not renew the agreement on or after April 9, 2015.
Legal Matters -Following is a summary of certain legal matters involving the Company:
A. | Environmental Matters |
Our facilities and operations are subject to numerous federal, state and local environmental laws (“Environmental Laws”) and to other laws regarding health and safety matters (“Health Laws”).matters. In particular, the manufacture, production and distribution of products by our Chemical Business are activities that entail environmental and public health risks and impose obligations under the Environmental Laws and the Health Laws, many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. 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. The Environmental Laws and Health Laws and 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, significant expenditures have been incurred by subsidiaries within our Chemical Business in order to comply with the Environmental Laws and Health Laws and are reasonably expected to be incurred in the future. We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our Chemical Business facilities should we discontinue the operations of a facility. We do not operate the natural gas wells where we own ana working interest and compliance with Environmental Laws and Health Laws is controlled by others, with our Chemical Business being responsible for its proportionate share of the costs involved. As of September 30, 2014,March 31, 2015, our accrued liabilities for environmental matters totaled $456,000$514,000 relating primarily to matters discussed below. It is reasonably possible that a change in the estimate of our liability could occur in the near term. Also see discussion in Note 7 - Asset Retirement Obligations.
1. | Discharge Water Matters |
Each of our chemical manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control streams, contact storm water (rain water inside the facility area that picks up contaminants) and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental agencies as authorized by the United States Environmental Protection Agency, (“EPA”), subject to oversight by the EPA. These permits limit the type and amount of effluents that can be discharged and controls the method of such discharge. The following are discharge water matters in relation to the respective permits.
The El Dorado Facility is subject to a state National Pollutant Discharge Elimination System (“NPDES”) discharge water permit issued by the Arkansas Department of Environmental Quality (“ADEQ”).Quality. The El Dorado Facility is currently operating under an NPDES discharge water permit, which became effective in 2004 (“2004 NPDES permit”).2004. In November 2010, a preliminary draft of a discharge water permit renewal for the El Dorado Facility, which contains more restrictive limits, was issued by the ADEQ.
EDC believes that the El Dorado Facility has generally demonstrated its ability to comply with applicable ammonia and nitrate permit limits, but has, from time to time, had difficulty demonstrating consistent compliance with the more restrictive dissolved minerals permit levels. As part of the El Dorado Facility’s long-term compliance plan, EDC has pursued a rulemaking and permit modification with the ADEQ as to the discharge requirements relating to its dissolved minerals. The ADEQ approved a rule change, but the EPA formally disapproved the rule change. In October 2011, EDC filed a lawsuit against the EPA in the United States District Court, El Dorado, Arkansas, appealing the EPA’s decision disapproving the rule change. In March 2013, the District Court affirmed the EPA’s decision. EDC had appealed the District Court’s decision but the appeal was denied by the Eighth Circuit Court of Appeals.levels We do not believe this matter regarding meeting the permit requirements as to the
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Commitments and Contingencies (continued)
dissolved minerals will continue to be anis a continuing issue sinceas the result of the El Dorado Facility is currently disposing its wastewater by(beginning in September 2013), via a pipeline constructed by the City of El Dorado, Arkansas, which EDC is a party to an operating agreement with the city associated with this pipeline. The initial term of the operating agreement is through December 2053.Arkansas.
During 2012, EDC paid a penalty of $100,000 to settle an Administrative Complaint issued by the EPA, and thereafter handled by the United States Department of Justice, (“DOJ”), relating to certain alleged violations of EDC’s 2004 NPDES permit for alleged violations through December 31, 2010. The DOJ advised that some action would be taken for alleged violations occurring after December 31, 2010. As of the date of this report, no action has been filed by the DOJ. TheDOJ against EDC. As a result, the cost (or range of costs) cannot currently be reasonably estimated regarding this matter. Therefore, no liability has been established at September 30, 2014.March 31, 2015.
In addition, the El Dorado Facility is currently operating under a consent administrative order (“2006 CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater. The 2006 CAO required EDC to continue semiannual groundwater monitoring, to continue operation of a groundwater recovery system and to submit a human health and ecological risk assessment to the ADEQ relating to the El Dorado Facility. The risk assessment was submitted in August 2007. The final
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Commitments and Contingencies (continued)
remedy for shallow groundwater contamination, should any remediation be required, will be selected pursuant to a new consent administrative order and based upon the risk assessment. The cost of any additional remediation that may be required will be determined based on the results of the investigation and risk assessment, of which cost (or range of costs) cannot currently be reasonably estimated. Therefore, no liability has been established at September 30, 2014,March 31, 2015, in connection with this matter.
2. | Air Matters |
One of our subsidiaries, Pryor Chemical Company (“PCC”),PCC, within our Chemical Business, has been advised that the ODEQOklahoma Department of Environmental Quality is conducting an investigation into whether the chemical production facility located in Pryor, Oklahoma (the “Pryor Facility”) was in compliance with certain rules and regulations of the ODEQ and whether PCC’s reports of certain air emissions relating primarily to 2011 were intentionally reported incorrectly to the ODEQ. Pursuant to the request of the ODEQ, PCC submitted information and a report to the ODEQ as to the reports filed by the Pryor Facility relating to the air emissions in question. In February 2013, investigators with the ODEQ obtained documents from the Pryor Facility in connection with this investigation pursuant to a search warrant and interviewed several employees at the facility. PCC has cooperated with the ODEQ in connection with this investigation. As of September 30, 2014,March 31, 2015, we are not aware of any recommendations made or to be made by the ODEQ with respect to legal action to be taken or recommended as a result of this ongoing investigation.
In September 2014, PCC and the EPA reached a settlement for $37,500 relating to an ammonia release during February 2014, at the Pryor Facility.
3. | Other Environmental Matters |
During May 2014, the EPA conducted a Risk Management inspection of our Cherokee Facility. During October 2014, our Cherokee Facility received a notice of violation from the EPA as a result of the inspection listing eleven alleged violations. Our Cherokee Facility has had numerous conference calls and provided the EPA with written responses. During a March 2015 conference call with the EPA, the EPA provided our Cherokee Facility with some preliminary penalties as a result of the alleged violations. We anticipate receiving a formal notice of violation during 2015 from the EPA, which notice will state the amount of the penalty that the EPA will assert against the Cherokee Facility. As a result, we have accrued an estimated amount for penalties of approximately $112,000, which is included in our accrued liabilities for environmental matters discussed above.
In 2002, two subsidiaries within our Chemical Business sold substantially all of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained ownership of the real property. Even though we continued to own the real property, we did not assess our continuing involvement with our former Hallowell Facility to be significant and therefore accounted for the sale as discontinued operations. Our subsidiary retained the obligation to be responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property and develop a corrective action strategy based on the investigation. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters. Based on the assessment discussed above, we account for transactions associated with the Hallowell Facility as discontinued operations.
The successor (“Chevron”) of a prior owner of the Hallowell Facility has agreed in writing, within certain limitations, to pay and has been paying one-half of the costs of the investigation and interim measures relating to this matter as approved by the Kansas Department of Environmental Quality, subject to reallocation.
Our subsidiary and Chevron are pursuing with the state of Kansas, including the Kansas Department of Health and Environmental, a course ofcorrective action strategy relating to the Hallowell Facility. This strategy currently includes a long-term surface and groundwater monitoring to track the natural decline in contamination. During December 2014, the KDHE approved a corrective action study work plan, and the KDHE is to consider and recommend restoration or replacement pursuant to the work plan and/or whether to seek compensation. The KDHE will consider the recommendations in its evaluation. Currently, ourit is unknown what remediation and damages the KDHE would require, if any, but we believe that certain remediation activities will be required to begin during 2016. The ultimate required remediation, if any, is currently unknown. Our subsidiary and Chevron have retained an environmental consultant to perform the corrective action study work plan as to the appropriate method to remediate the Hallowell Facility, which study is not scheduled to be completed until the end of 2015. We have been advised by our consultant that until the study has been completed there are intoo many unknowns to have a meaningful and reliable estimate as to the processcost of performing additional surface and groundwater testing.the remediation. We have accrued for our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which is included in our accrued liabilities for environmental matters discussed above. The estimated amount is not discounted to its present value. As more information becomes available relating to the study during 2015, our estimated accrual will be refined.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Commitments and Contingencies (continued)
In addition during 2010, the Kansas Department of Health and Environment (“KDHE”) notified our subsidiary and Chevron that the Hallowell Facility has been referred to the KDHE’s Natural Resources Trustee, which is to consider and recommend restoration, replacement and/or whether to seek compensation. KDHE will consider the recommendations in its evaluation. Currently, it is unknown what damages the KDHE would claim, if any. The ultimate required remediation, if any, is unknown.
The nature and extent of a portion of the requirements are also not currently defined, and the associated costs (or range of costs) are not currently reasonably estimable. Therefore, no liability has been established at September 30, 2014, in connection with the KDHE’s Natural Resources Trustee matter.
B. | Other Pending, Threatened or Settled Litigation |
During AprilIn 2013, an explosion and fire occurred at the West Fertilizer Co. (“West Fertilizer”), located in West, Texas, causing death, bodily injury and substantial property damage. West Fertilizer is not owned or controlled by us, but West Fertilizer had been a customer of EDC, purchasing AN from EDC from time to time. LSB and EDC previously received letters from counsel purporting to represent subrogated insurance carriers, personal injury claimants and persons who suffered property damages informing them that their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether AN manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether such AN may have been one of the contributing factors of the explosion. Other manufacturers of AN also supplied AN to West Fertilizer. Initially, the lawsuits that had been filed named West Fertilizer and another supplier of AN as defendants. There have been certain responses to discovery in connection with the pending lawsuits that possibly some of the AN products at West Fertilizer at the time of the explosion may have been produced by EDC. During the first quarter ofIn 2014, EDC and LSB were named as defendants, together with other AN manufacturesmanufacturers and brokers that arranged the transport and delivery of AN to West Fertilizer, in the case styledCity of West, Texas v CF Industries, Inc., et al,in the District Court of McLennan County, Texas. Plaintiffs are alleging, among other things, that LSB and EDC were negligent in the production and marketing of fertilizer products sold to West Fertilizer resulting in death, personal injury and property damage. EDC has retained a firm specializing in cause and origin investigations, with particular experience with fertilizer facilities, to assist EDC in its own investigation. LSB and EDC have placed its liability insurance carrier on notice, which carrier is handling the defense for LSB and EDC concerning this matter. Our product liability insurance policies have aggregate limits of general liability totaling $100 million, with a self-insured retention of $250,000. DueOur legal counsel in this matter has represented to us that while it is extremely early in this litigation, they believe our insurance coverage andchances of ultimately confirming the amount thereof,merits of EDC’s legal position are probable. However, if there is an adverse outcome in this matter as to EDC, we are unable to estimate a possible range of September 30, 2014,loss at this time. As of March 31, 2015, no liability has been established in connection with this matter, but we have incurred professional fees up to our self-insured retention amount.
We are also involved in various other claims and legal actions including claims for damages resulting from water leaks related to our Climate Control products and other product liability occurrences. Most of the product liability claims are covered by our general liability insurance, which generally includes a deductible of $250,000 or $500,000 per claim.claim, depending on the policy period. For any claims or legal actions that we have assessed the likelihood of our liability as probable, we have recognized our estimated liability up to the applicable deductible. At September 30, 2014,March 31, 2015, our accrued general liability insurance claims were $526,000$576,000 and are included in accrued and other liabilities. It is possible that the actual future development of claims could be different from our estimates but, after consultation with legal counsel, we believe that changes in our estimates will not have a material effect on our business, financial condition, results of operations or cash flows.
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits
We currentlyPeriodically, we have twothree classes of contracts that are accounted for on a fair value basis, which are commodities futures/forward contracts (“commodities contracts”), foreign exchange contracts and interest rate contracts as discussed below. All of these contracts are used as economic hedges for risk management purposes but are not designated as hedging instruments. In addition as discussed below, we are issued climate reserve tonnes (“carbon credits”), of which a certain portion of the carbon credits are to be sold and the proceeds given to Bayer Material Science LLC (“Bayer”).Bayer. The assets for carbon credits are accounted for on a fair value basis as discussed below. Also, the contractual obligations to give the related proceeds to Bayer are accounted for on a fair value basis (as discussed below) unless we enter into a firm sales commitment to sell the carbon credits. The valuations of these assets and liabilities were determined based on quoted market prices or, in instances where market quotes are not available, other valuation techniques or models used to estimate fair values.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At September 30, 2014,March 31, 2015, the valuations of contracts classified as Level 2 related to certain futures/forward natural gas contracts, a foreign exchange contract and an interest rate swap contracts.contract.
For these contracts, we utilize valuation software and market data from third-party providers. For the natural gas contracts, these contracts are valued using the prices pursuant to the terms of the contracts and using market information for futures/forward natural gas prices. At September 30, 2014,March 31, 2015, the valuation inputs included the contractual weighted-average cost of $3.93$3.09 per MMBtu and the estimated weighted-average market value of $3.97$2.73 per MMBtu.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
For foreign exchange contracts, these contracts are valued using the foreign currency exchange rates pursuant to the terms of the contract and using market information for foreign currency exchange rates. The valuation inputs included the total contractual exchange rate of 1.27 and the total estimated market exchange rate of 1.07 (U.S. Dollar/Euro). For interest rate swap contracts, thesewe utilize valuation software and market data from a third-party provider. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the contracts and using market information for forward interest-rate yield curves. At September 30, 2014,March 31, 2015, the valuation inputs included the contractual weighted-average pay rate of 3.23% and the estimated market weighted-average receive rate of 0.56%0.44%. No valuation input adjustments were considered necessary relating to nonperformance risk for the contracts as discussed above.
The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. At September 30, 2014March 31, 2015 and December 31, 2013,2014, the valuations ($2.50 and $1.00 per carbon credit, respectively)for both periods) of the carbon credits and the contractual obligations associated with these carbon credits are classified as Level 3 and are based on the most recent sales transaction and reevaluated for market changes, if any, and on the range of ask/bid prices obtained from a broker adjusted for minimal market volume activity, respectively. The valuations are using undiscounted cash flows based on management’s assumption that the carbon credits would be sold and the associated contractual obligations would be extinguished in the near term. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the carbon credits and associated contractual obligations.
Commodities Contracts
Raw materials for use in our manufacturing processes include copper used by our Climate Control Business and anhydrous ammonianatural gas and natural gasplatinum used by our Chemical Business. As part of our raw material price risk management, we periodically enter into futures/forward contracts for these materials, which contracts may be required to be accounted for on a mark-to-market basis. At September 30, 2014March 31, 2015, our futures/forward copper contracts include 1,950,000 pounds of copper and extend through December 2015 at a weighted-average cost of $2.96 per pound. At December 31, 2013, we did not have any2014, our futures/forward copper contracts.contracts include 1,750,000 pounds of copper, extend through May 2015 at a weighted-average cost of $2.98 per pound. At September 30, 2014,March 31, 2015, our futures/forward natural gas contracts included the firm purchase commitments(accounted for on a mark-to-market basis) include approximately 7,792,0006,406,000 MMBtu of natural gas and extend through June 2016 (includes contractual costs indexed to future New York Mercantile ExchangeNYMEX prices) at a weighted-average cost of $3.93$3.09 per MMBtu. At December 31, 2013,2014, our futures/forward natural gas contracts were for 1,530,000include 8,279,000 MMBtu of natural gas and extend through October 2014June 2016 at a weighted-average cost of $3.98$3.24 per MMBtu. At March 31, 2015, our futures/forward platinum contracts include 3,000 ounces of platinum and extend through July 2015 at a weighted-average cost of $1,120.87 per ounce. At December 31, 2014, our futures/forward platinum contracts include 3,000 ounces of platinum and extend through April 2015 at a weighted-average cost of $1,224.26 per ounce. The cash flows relating to these contracts are included in cash flows from continuing operating activities.
Foreign Exchange Contracts
One of our business operations purchases industrial machinery and related components from vendors outside of the United States. As part of our foreign currency risk management, we periodically enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange rates. At March 31, 2015, our foreign exchange contract was for the receipt of approximately 648,000 Euros through May 2015 at the contractual exchange rate of 1.27 (U.S. Dollar/Euro). At December 31, 2014, our foreign exchange contract was for the receipt of approximately 819,000 Euros through May 2015 at the contractual exchange rate of 1.27 (U.S. Dollar/Euro). These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. The cash flows relating to these contracts are included in cash flows from continuing operating activities.
Interest Rate Contracts
As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. In February 2011, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.23% on a declining balance (from $23.8 million to $18.8 million) for the period beginning in April 2012 through March 2016. This contract is a free-standing derivative and is accounted for on a mark-to-market basis. During the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, no cash flows occurred relating to the purchase or sale of interest rate contracts. The cash flows associated with the interest rate swap payments are included in cash flows from continuing operating activities.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Carbon Credits and Associated Contractual Obligation
Periodically, we are issued carbon credits by the Climate Action Reserve in relation to a greenhouse gas reduction project (“Project”) performed at Bayer’s nitric acid plant (the “Baytown Facility”).the Baytown Facility. Pursuant to the terms of the agreement with Bayer, a certain portion of the carbon credits are to be used to recover the costs of the Project, and any balance thereafter to be allocated between Bayer and our subsidiary that who operates the Baytown Facility .EDN. We have no obligation to reimburse Bayer for their costs associated with the Project, except through the transfer or sale of the carbon credits when such credits are issued to us. The assets for carbon credits are accounted for on a fair value basis and the contractual obligations associated with these carbon credits are also accounted for on a fair value basis (unless we enter into a sales commitment to sell the carbon credits). At September 30, 2014March 31, 2015 and December 31, 2013,2014, we had approximately 669,0001,086,000 and 1,284,0001,112,000 carbon credits, respectively, all of which were subject to contractual obligations. The cash flows associated with the carbon credits and the associated contractual obligations are included in cash flows from continuing investing activities.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2014March 31, 2015 and December 31, 2013:2014:
Fair Value Measurement at September 30, 2014 Using | ||||||||||||||||||||
Description | Total Fair Value At September 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at December 31, 2013 | |||||||||||||||
(In Thousands) | ||||||||||||||||||||
Assets - Supplies, prepaid items and other: | ||||||||||||||||||||
Commodities contracts | $ | 343 | $ | — | $ | 343 | $ | — | $ | 31 | ||||||||||
Carbon credits | 1,673 | — | — | 1,673 | 1,284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,016 | $ | — | $ | 343 | $ | 1,673 | $ | 1,315 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities - Current and noncurrent accrued and other liabilities: | ||||||||||||||||||||
Contractual obligations - carbon credits | $ | 1,673 | — | — | 1,673 | 1,284 | ||||||||||||||
Interest rate contract | 801 | — | 801 | — | 1,240 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,474 | $ | — | $ | 801 | $ | 1,673 | $ | 2,524 | ||||||||||
|
|
|
|
|
|
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Fair Value Measurements at March 31, 2015 Using | ||||||||||||||||||||
Description | Total Fair Value at March 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at December 31, 2014 | |||||||||||||||
(In Thousands) | ||||||||||||||||||||
Assets - Supplies, prepaid items and other: | ||||||||||||||||||||
Commodities contracts | $ | 68 | $ | 68 | $ | — | $ | — | $ | — | ||||||||||
Carbon credits | 2,716 | — | — | 2,716 | 2,779 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,784 | $ | 68 | $ | — | $ | 2,716 | $ | 2,779 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities - Current and noncurrent accrued and other liabilities: | ||||||||||||||||||||
Commodities contracts | $ | 2,696 | $ | 421 | $ | 2,275 | $ | — | $ | 2,440 | ||||||||||
Contractual obligations - carbon credits | 2,716 | — | — | 2,716 | 2,779 | |||||||||||||||
Interest rate contracts | 551 | — | 551 | — | 671 | |||||||||||||||
Foreign exchange contracts | 129 | — | 129 | — | 44 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 6,092 | $ | 421 | $ | 2,955 | $ | 2,716 | $ | 5,934 | ||||||||||
|
|
|
|
|
|
|
|
|
|
None of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and Level 2 classifications for the periods presented below except for certain futures/forward natural gas contracts (an asset with an estimated fair value of $31,000 at Decemberthree months ended March 31, 2013) that were transferred from Level 1 to Level 2 since a portion of these contracts are now expected to be settled on dates that quoted prices are not available. As a result, we are utilizing observable market data other than quoted prices to value these contracts. The classification transfer of the contracts was deemed to occur in the first quarter of 2014.2015. In addition, the following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,284 | $ | 91 | $ | (1,284 | ) | $ | (91 | ) | $ | 1,673 | $ | 625 | $ | (1,673 | ) | $ | (625 | ) | ||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers out of Level 3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total realized and unrealized gains (losses) included in operating results | 1,925 | 546 | (1,634 | ) | (546 | ) | — | — | — | — | ||||||||||||||||||||||
Purchases | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Issuances | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Sales | (1,536 | ) | (12 | ) | — | — | — | — | — | — | ||||||||||||||||||||||
Settlements | — | — | 1,245 | 12 | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance | $ | 1,673 | $ | 625 | $ | (1,673 | ) | $ | (625 | ) | $ | 1,673 | $ | 625 | $ | (1,673 | ) | $ | (625 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total gains (losses) for the period included in operating results attributed to the change in unrealized gains or losses on assets and liabilities still held at the reporting date | $ | 1,004 | $ | 534 | $ | (1,004 | ) | $ | (534 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Assets | Liabilities | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(In Thousands) | ||||||||||||||||
Beginning balance | $ | 2,779 | $ | 1,284 | $ | (2,779 | ) | $ | (1,284 | ) | ||||||
Transfers into Level 3 | — | — | — | — | ||||||||||||
Transfers out of Level 3 | — | — | — | — | ||||||||||||
Total realized and unrealized gains (losses) included in earnings | (30 | ) | 1,925 | 30 | (1,634 | ) | ||||||||||
Purchases | — | — | — | — | ||||||||||||
Issuances | — | — | — | — | ||||||||||||
Sales | (33 | ) | (1,536 | ) | — | — | ||||||||||
Settlements | — | — | 33 | 1,245 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending balance | $ | 2,716 | $ | 1,673 | $ | (2,716 | ) | $ | (1,673 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Total gains (losses) for the period included in earnings attributed to the change in unrealized gains or losses on assets and liabilities still held at the reporting date | $ | — | $ | 1,004 | $ | — | $ | (1,004 | ) | |||||||
|
|
|
|
|
|
|
|
Net gains (losses) included in operating resultsearnings and the income statement of operations classifications are as follows:
Nine Months Ended September 30, | Three Months Ended September 30, | Three Months Ended | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | March 31, | ||||||||||||||||||||
(In Thousands) | 2015 | 2014 | ||||||||||||||||||||||
Total net gains (losses) included in operating results: | ||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Total net gains (losses) included in earnings: | ||||||||||||||||||||||||
Cost of sales - Undesignated commodities contracts | $ | 1,897 | $ | (275 | ) | $ | (214 | ) | $ | — | $ | (1,978 | ) | $ | 2,216 | |||||||||
Cost of sales - Undesignated foreign exchange contracts | $ | (93 | ) | $ | — | |||||||||||||||||||
Other income - Carbon credits | 1,925 | 546 | — | — | (30 | ) | 1,925 | |||||||||||||||||
Other expense - Contractual obligations relating to carbon credits | (1,634 | ) | (546 | ) | — | — | 30 | (1,634 | ) | |||||||||||||||
Interest expense - Undesignated interest rate contract | (43 | ) | (1 | ) | 14 | (90 | ) | |||||||||||||||||
Interest expense - Undesignated interest rate contracts | (31 | ) | (20 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 2,145 | $ | (276 | ) | $ | (200 | ) | $ | (90 | ) | $ | (2,102 | ) | $ | 2,487 | |||||||||
|
|
|
|
|
|
At September 30, 2014March 31, 2015 and December 31, 2013,2014, we did not have any financial instruments with fair values significantly different from their carrying amounts, except for the Senior Secured Notes. At September 30,March 31, 2015 and December 31, 2014, the estimated fair value of the Senior Secured Notes exceeded the carrying value by approximately $30$17 million based on a quoted price of 107.0. At December 31, 2013, the estimated fair value of the Senior Secured Notes exceeded the carrying by approximately $20 million based on a range of ask/bid prices (104.5 to 104.9).104.0. These valuations are classified as Level 2. The valuations of our other long-term debt agreements are classified as Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The fair value measurements of our other long-term debt agreements are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for our debt agreements. 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. Also see discussions concerning certain assets and liabilities initially accounted for on a fair value basis under Note 7 - Asset Retirement Obligations.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Income Taxes
Provisions (benefit) for income taxes are as follows:
Three Months Ended | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | (529 | ) | $ | 3,000 | $ | 660 | $ | 2,216 | $ | 158 | $ | 980 | |||||||||||
State | 1,273 | 797 | 31 | 500 | 847 | 675 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Current | 744 | 3,797 | 691 | 2,716 | $ | 1,005 | $ | 1,655 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | 10,825 | 5,536 | (2,568 | ) | 3,256 | $ | 2,846 | $ | 5,393 | |||||||||||||||
State | 717 | 634 | (538 | ) | 373 | 330 | 606 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Deferred | 11,542 | 6,170 | (3,106 | ) | 3,629 | $ | 3,176 | $ | 5,999 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Provisions (benefit) for income taxes | $ | 12,286 | $ | 9,967 | $ | (2,415 | ) | $ | 6,345 | |||||||||||||||
Provisions for income taxes | $ | 4,181 | $ | 7,654 | ||||||||||||||||||||
|
|
|
|
|
|
For the nine and three months ended September 30,March 31, 2015 and 2014, and 2013, the current provisions (benefit) for federal income taxes shown above includes regular federal income tax provision (benefit) after the consideration of permanent and temporary differences between income for GAAP and tax purposes, including the benefit related to the retroactive tax relief for certain tax provisions that expired in 2012 as discussed below.purposes. For the nine and three months ended September 30,March 31, 2015 and 2014, and 2013, the current provisions for state income taxes shown above includes regular state income tax and provisions for uncertain state income tax positions.
Our annual estimated effective tax rate for 20132015 includes the impact of permanent tax differences, such as the domestic manufacturer’s deduction, the advanced energy credittax credits and other permanent items. In connection with the American Taxpayer Relief Act of 2012 that was signed into law in January 2013, we recorded a one-time benefit of approximately $0.5 million related to the retroactive tax relief for certain tax provisions that expired in 2012. Because the legislation was signed into law after December 31, 2012, the retroactive effects of the law reduced the current provision for the nine months ended September 30, 2013 and impacted the estimated effective tax rate for 2013.
The tax provision for the ninethree months ended September 30,March 31, 2015 and 2014 and 2013 was $ 12.3$4.2 million (39% of pre-tax income) and $10.0$7.7 million (38%(40% of pre-tax income, excluding the impact of the 2012 retroactive tax benefits)income), respectively.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the 2011-2013 years remain open for all purposes of examination by the U.S. Internal Revenue Service and other major tax jurisdictions.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Other Expense, Income and Non-Operating Other Income, net
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In Thousands) | ||||||||||||||||
Other expense: | ||||||||||||||||
Realized and unrealized losses on contractual obligations associated with carbon credits | $ | 1,634 | $ | 546 | $ | — | $ | — | ||||||||
Losses on sales and disposals of property and equipment | 1,414 | 677 | 406 | 677 | ||||||||||||
Dismantle and demolition expense (1) | 559 | 2,364 | — | 264 | ||||||||||||
Miscellaneous penalties | 6 | 806 | 3 | 10 | ||||||||||||
Miscellaneous expense | 181 | 314 | 58 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other expense | $ | 3,794 | $ | 4,707 | $ | 467 | $ | 951 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other income: | ||||||||||||||||
Realized and unrealized gains on carbon credits | $ | 1,925 | $ | 546 | $ | — | $ | — | ||||||||
Settlements of litigation and potential litigation (2) | — | 545 | — | — | ||||||||||||
Gain (losses) on sales and disposals of property and equipment | — | — | — | (179 | ) | |||||||||||
Miscellaneous income | 451 | 624 | 162 | 349 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income | $ | 2,376 | $ | 1,715 | $ | 162 | $ | 170 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other expense, net | $ | 1,418 | $ | 2,992 | $ | 305 | $ | 781 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Non-operating other expense (income), net: | ||||||||||||||||
Interest income | $ | (262 | ) | $ | (64 | ) | $ | (88 | ) | $ | (52 | ) | ||||
Miscellaneous income | — | — | — | — | ||||||||||||
Miscellaneous expense | 20 | 54 | (1 | ) | 18 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total non-operating other income, net | $ | (242 | ) | $ | (10 | ) | $ | (89 | ) | $ | (34 | ) | ||||
|
|
|
|
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13:12: Segment Information
Three Months Ended | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||
Net sales: | ||||||||||||||||||||||||
Chemical (1) | $ | 345,744 | $ | 303,017 | $ | 94,767 | $ | 104,199 | $ | 126,814 | $ | 115,221 | ||||||||||||
Climate Control | 196,585 | 217,490 | 73,485 | 69,863 | 65,198 | 60,349 | ||||||||||||||||||
Other | 8,904 | 9,745 | 2,794 | 3,288 | 1,846 | 2,955 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 551,233 | $ | 530,252 | $ | 171,046 | $ | 177,350 | $ | 193,858 | $ | 178,525 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Gross profit (loss): (2) | ||||||||||||||||||||||||
Chemical (1)(3) | $ | 57,161 | $ | 39,116 | $ | (521 | ) | $ | 24,610 | |||||||||||||||
Gross profit: (2) | ||||||||||||||||||||||||
Chemical (1) (3) | $ | 21,830 | $ | 28,426 | ||||||||||||||||||||
Climate Control | 61,628 | 70,553 | 23,862 | 23,168 | 19,962 | 19,264 | ||||||||||||||||||
Other | 3,188 | 3,321 | 1,045 | 1,131 | 567 | 1,032 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 121,977 | $ | 112,990 | $ | 24,386 | $ | 48,909 | $ | 42,359 | $ | 48,722 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating income (loss): (4) | ||||||||||||||||||||||||
Chemical (1)(3) | $ | 46,815 | $ | 20,259 | $ | (5,587 | ) | $ | 17,680 | |||||||||||||||
Chemical (1) (3) | $ | 16,660 | $ | 28,813 | ||||||||||||||||||||
Climate Control | 17,396 | 24,387 | 8,452 | 8,547 | 4,312 | 4,332 | ||||||||||||||||||
Other | 1,298 | 1,198 | 397 | 444 | (2 | ) | 387 | |||||||||||||||||
General corporate expenses (5) | (17,081 | ) | (10,713 | ) | (4,459 | ) | (3,528 | ) | (6,747 | ) | (7,671 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
48,428 | 35,131 | (1,197 | ) | 23,143 | 14,223 | 25,861 | ||||||||||||||||||
Interest expense, net (6) | 17,458 | 6,662 | 5,079 | 5,395 | 3,398 | 6,708 | ||||||||||||||||||
Loss on extinguishment of debt | — | 1,296 | — | 1,296 | ||||||||||||||||||||
Non-operating other income, net: | ||||||||||||||||||||||||
Non-operating expense (income), net: | ||||||||||||||||||||||||
Chemical | (213 | ) | (1 | ) | (73 | ) | (1 | ) | (33 | ) | (77 | ) | ||||||||||||
Corporate and other business operations | (29 | ) | (9 | ) | (16 | ) | (33 | ) | (2 | ) | — | |||||||||||||
Provisions (benefit) for income taxes | 12,286 | 9,967 | (2,415 | ) | 6,345 | |||||||||||||||||||
Equity in earnings of affiliate-Climate Control | (79 | ) | (452 | ) | — | (109 | ) | |||||||||||||||||
Provisions for income taxes | 4,181 | 7,654 | ||||||||||||||||||||||
Equity in earnings of affiliate - Climate Control | — | (67 | ) | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income (loss) from continuing operations | $ | 19,005 | $ | 17,668 | $ | (3,772 | ) | $ | 10,250 | |||||||||||||||
Income from continuing operations | $ | 6,679 | $ | 11,643 | ||||||||||||||||||||
|
|
|
|
|
|
(1) | During the first quarter of 2014, our Chemical Business experienced downtime at the Pryor Facility resulting in lost production and adverse effect on operating results. |
(2) | Gross profit |
(3) |
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: Segment Information (continued)
(4) | Our chief operating decision makers use operating income (loss) by business segment for purposes of making decisions that include resource allocations and performance evaluations. Operating income (loss) by business segment represents gross profit (loss) by business segment less selling, general and administrative expense (“SG&A”) incurred by each business segment plus other income and other expense earned/incurred by each business segment before general corporate expenses. |
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Segment Information (continued)
(5) |
Three Months Ended | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||
Selling, general and administrative: | ||||||||||||||||||||||||
Personnel costs | $ | (6,478 | ) | $ | (6,194 | ) | $ | (2,134 | ) | $ | (1,899 | ) | $ | (2,602 | ) | $ | (1,715 | ) | ||||||
Fees and expenses relating to certain activist shareholders’ proposals (A) | (4,163 | ) | — | — | — | |||||||||||||||||||
Fees and expenses relating to shareholders (A) | (1,679 | ) | (4,200 | ) | ||||||||||||||||||||
Professional fees | (3,333 | ) | (3,431 | ) | (1,185 | ) | (1,222 | ) | (1,544 | ) | (1,188 | ) | ||||||||||||
All other | (3,162 | ) | (1,634 | ) | (1,145 | ) | (404 | ) | (897 | ) | (591 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total selling, general and administrative | (17,136 | ) | (11,259 | ) | (4,464 | ) | (3,525 | ) | (6,722 | ) | (7,694 | ) | ||||||||||||
Other income | 69 | 587 | 19 | 3 | 24 | 23 | ||||||||||||||||||
Other expense | (14 | ) | (41 | ) | (14 | ) | (6 | ) | (49 | ) | — | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total general corporate expenses | $ | (17,081 | ) | $ | (10,713 | ) | $ | (4,459 | ) | $ | (3,528 | ) | $ | (6,747 | ) | $ | (7,671 | ) | ||||||
|
|
|
|
|
|
(A) |
(6) | During the |
Information about our total assets by business segment is as follows:
September 30, 2014 | December 31, 2013 | |||||||
(In Thousands) | ||||||||
Chemical | $ | 889,593 | $ | 842,725 | ||||
Climate Control | 148,570 | 159,960 | ||||||
Other | 7,386 | 6,832 | ||||||
Corporate assets | 48,095 | 73,580 | ||||||
|
|
|
| |||||
Total assets | $ | 1,093,644 | $ | 1,083,097 | ||||
|
|
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
March 31, | December 31, | |||||||
2015 | 2014 | |||||||
(In Thousands) | ||||||||
Chemical | $ | 945,147 | $ | 929,745 | ||||
Climate Control | 130,784 | 133,183 | ||||||
Other | 5,995 | 5,960 | ||||||
Corporate assets | 58,643 | 68,117 | ||||||
|
|
|
| |||||
Total assets | $ | 1,140,569 | $ | 1,137,005 | ||||
|
|
|
|
Note 14:13: Related Party Transactions
Golsen Group
In March 2013During the first quarter of 2015 and February 2014, we paid or declared dividends totaling $300,000, respectively, on our Series B Preferred and our Series D Preferred. The Series B Preferred and Series D Preferred are non-redeemable preferred stocks issued in 1986 and 2001, respectively, of which all outstanding shares are owned by Jack E.the Golsen our Chairman of the Board and Chief Executive Officer, members of his immediate family (spouse and children), including Barry H. Golsen, our Vice Chairman, President and Chief Operating Officer, Steven J. Golsen, our President and Chief Operating Officer of our Climate Control Business, entities owned by them and trusts for which they possess voting or dispositive power as trustee (together, the “Golsen Group”).Group.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 15:14: Supplemental Cash Flow Information
The following provides additional information relating to cash flow activities:
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(In Thousands) | ||||||||
Cash payments (refunds) for income taxes, net | $ | (4,864 | ) | $ | 12,865 | |||
Noncash investing and financing activities: | ||||||||
Insurance claims receivable associated with property, plant and equipment | $ | — | $ | 250 | ||||
Accounts payable and long-term debt associated with additions of property, plant and equipment | $ | 23,017 | $ | 19,488 | ||||
Long-term debt associated with additions of capitalized internal-use software and software development | $ | 4,256 | $ | 2,775 | ||||
Secured term loan extinguished | $ | — | $ | 66,563 | ||||
Debt issuance costs incurred associated with senior secured notes | $ | — | $ | 6,498 | ||||
Debt issuance costs written off associated with secured term loan | $ | — | $ | 630 | ||||
Prepayment premium incurred associated with secured term loan | $ | — | $ | 666 |
Three Months Ended | ||||||||
March 31, | ||||||||
2015 | 2014 | |||||||
(In Thousands) | ||||||||
Cash refunds for income taxes, net | $ | (3,786 | ) | $ | (6,895 | ) | ||
Noncash investing and financing activities: | ||||||||
Accounts payable and long-term debt associated with additions of property, plant and equipment | $ | 44,618 | $ | 13,601 | ||||
Accounts payable, long-term debt associated with additions of capitalized internal-use software and software development | $ | 1,299 | $ | 1,239 |
Note 15: Subsequent Event
On April 30, 2015, a class action lawsuit was filed against our subsidiary, ClimateMaster, Inc. (“CM”), in the case styledEmmert, et al. v. ClimateMaster, Inc., in the United States District Court, Western District of Oklahoma. CM is a subsidiary within our Climate Control Business. The lawsuit alleges that a manufacturing defect in the air conditioning and heat pump equipment manufactured by CM has caused failures in certain valves used in such equipment resulting in damages sustained by consumers and the contractors, and further alleges that CM sold the equipment despite knowing of these defects. The plaintiffs are alleging that there are more than 100 class members and that the aggregate amount in controversy exceeds $5 million, exclusive of interest and costs. Plaintiffs seek actual and punitive damages, together with recovery of certain expenses. Because we have just been notified of this lawsuit, we have not had an opportunity to investigate the claims contained therein, but intend to vigorously defend this matter. We are also investigating whether such claims come within our insurance coverage, and, as of the date hereof, have not determined if the claims alleged in the lawsuit are covered under our insurance policy.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q including our September 30, 2014March 31, 2015 condensed consolidated financial statements included elsewhere in this report. 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 Industries, Inc. (“LSB”) is a manufacturing and marketing company operating through our subsidiaries. LSB and its wholly ownedwholly-owned subsidiaries (the “Company”, “We”, “Us”, or “Our”) own the following core businesses:
Items Affecting Comparability of Results
Chemical Business
Property and Business Interruption Insurance Claims and Recoveries
In January 2014, we settled a claim with our insurance carriers for the aggregate amount of approximately $43.5 million related to business interruption and property damage at our Cherokee Facility. In the first nine monthsquarter of 2013.
Economic Conditions2014, we recognized the remaining $28.0 million of this claim, of which approximately $22.9 million was recognized as a reduction to cost of sales and $5.1 million was recognized as property insurance recoveries in excess of losses incurred.
SinceDebt and Interest Expense
During August 2013, in connection with a major expansion of our two core business segments serve several diverse markets, we consider fundamentals for each market individually as we evaluate economic conditions. From a macro standpoint, we believeEl Dorado Facility, LSB sold $425 million of 7.75% Senior Secured Notes. During the U.S. economy is poised for modest growth,first quarter of 2014 and 2015, interest expense was $6.7 million and $3.4 million, respectively net of capitalized interest of $2.3 million and $5.6 million, respectively. Interest was capitalized based upon certain economic reports, including the Conference Board Composite Indexconstruction in progress of Leading Indicators.
Chemical Business - Our Chemical Business’ primary markets are agricultural, industrial and mining. We use natural gas to produce anhydrous ammonia in two of our four facilities. The ammonia is either sold or used as a feedstock to produce nitrogen fertilizers. We also produce agricultural grade and industrial grade AN from purchased ammonia, which current cost is significantly higher than producing it from natural gas, resulting in a cost disadvantage compared to nitrogen fertilizers and industrial AN producers that manufacture from natural gas. As previously reported, we are proceeding with the construction of an ammonia plant at the El Dorado Facility, to eliminate this current cost disadvantageexpansion and increase capacity.certain other capital projects.
OurKey Industry Factors
Chemical Business
Supply and Demand
Agricultural
The price at which our agricultural sales volumes and prices primarily depend uponproducts are ultimately sold depends on numerous factors, including the supply of and the demand for fertilizer,nitrogen fertilizers which, in turn, depends onupon, among other factors, world grain demand and production levels, the cost and availability of transportation, storage, weather conditions, competitive pricing and the availability of imports. An expansion or upgrade of competitors’ facilities, international political and economic developments and other factors are likely to continue to play an important role in nitrogen fertilizer industry economics. These factors can impact, among other things, the level of inventories in the market, fundamentalsresulting in price volatility and product margins.
As reported in Green Markets and based upon the January USDA release of its 2014 Crop Production Summary and the WASDE Report dated April 9, 2015, for crops includingthe 2014/2015 corn wheat, cotton and forage. U.S. farmers were delayed inseason, production is estimated at 14.2 billion bushels or 351 million metric tons, 3% above the applicationprior season. Additionally, the average U. S. yield for the 2014/2015 corn season was an estimated record of nitrogen fertilizers due in part to a delayed corn harvest. We believe there is still time for a pre-planting application of anhydrous ammonia once farmers complete the harvest and as a long as soil conditions are favorable.
USDA’s World Agricultural Supply and Demand Estimates are currently estimating a near record U.S. corn harvest at 174171.0 bushels per acre 14.5compared to 158.1 bushels per acre in the prior season. WASDE also estimated the ending U.S. corn stocks to be 46.4 million bushels, and a stock–to-use ratio of 15.2% all three significantly higher thanmetric tons compared to 31.3 million metric tons at the previous three years.same time last season for the same period. Due to the expectation of the abundant supply, corn prices are very low;low relative to pricing over the last three years; most recently slightly above $3.00reported at $3.81 per bushel. The low cornCorn prices have created uncertainty as toaffect the number of acres that will beof corn planted in a given year and harvested for the 2015-16 season. The number of acres planted will drive nitrogen fertilizer consumption and demand which likely will drive ammonia, UAN and urea prices. Current WASDE estimates are for 88-89 million acres of corn to be planted in 2015 compared to approximately 91 million planted in 2014. However with fewer acres, farmers will expect better yields requiring increased nitrogen fertilizers. Notwithstanding the current conditions, the fundamentals continue to be positive for nitrogen fertilizer products we produce and sell and gross margins are still strong,continue to be favorable, with the current exception of AN produced at the El Dorado Facility from purchased ammonia. However,ammonia, which is one of the fertilizer outlook could change if there are changes in domestic fertilizer production capacity, acres plantedreasons for the current construction project of crops requiring fertilizer,an ammonia plant at our El Dorado Facility. Additionally, while unfavorable weather conditions continued low selling prices or increases in imported urea from China.
Industrial
Our industrial acidsproducts 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 continue to be mostly positive. Our sales prices generally vary with the market price of our feedstock (ammonia, natural gas or sulfur, as applicable) in our pricing arrangements with customers.
Mining
Our mining sales volumesproducts are being impacted by lower customer demand for industrial grade AN which we believe isand AN solutions. The primary uses are as ammonium nitrate fuel oil, specialty emulsions primarily due to lower demandin surface mining of coal and for coal because natural gas is currently a more attractive alternative fuel than coal for utility companies.usage in quarries and the construction industry. As reported by the U.S. Energy Information Administration, (“EIA”), during 2013,annual coal production for 2014 was downup 1% over 2013. EIA is forecasting a 7% decline in coal production for 2015, before growing 2% in 2016 with the Appalachia region expected to drive the decline in coal production with expected declines of approximately 13% in 2015. For 2015, the Powder River Basin and the Illinois Basin regions are estimated to decline 6% and 2%, respectively. We believe that coal production in the U.S. will face significant challenges assuming that natural gas prices remain at current levels and given that export demand could be lower due to the current strong U.S. currency. While we believe our plants are well-located to support the regions that are more stable in the upcoming years, our current mining sales volumes are being impacted by overall lower customer demand for industrial grade AN.
Farmer Economics
The demand for fertilizer is affected by 3.2%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 farmers’ financial resources, soil conditions, weather patterns and the types of crops planted.
Natural Gas Prices
Natural gas is the primary feedstock for the production of nitrogen fertilizers at our Cherokee and Pryor Facilities. Over the last five years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which have reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, we believe that our competitive position and that of other North American nitrogen fertilizer producers have been positively impacted.
We historically have purchased natural gas in the spot market or through the use of forward purchase contracts, or a combination of both. We historically 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. Over the past several years, natural gas prices have experienced significant fluctuations, which has have an impact on our cost of producing nitrogen fertilizer. The following table shows the first quarter volume of natural gas we purchased and the average cost per MMBtu:
Natural gas volumes (MMBtu in millions) Natural gas average cost per MMBtu 2015 2014 3.3 2.5 $ 3.32 $ 4.61
Beginning in December 2014, Henry Hub natural gas prices have trended below $4.00 averaging approximately $2.90 in the first quarter of 2015.
Ammonia Prices
Ammonia is the primary feedstock for the production of agricultural and industrial grade AN at our El Dorado Facility. Ammonia pricing is based on a published Tampa, Florida market index. The Tampa index is commonly used in annual contracts for both the agricultural and industrial sectors, and is based on the most recent major industry transactions in the Tampa market. Pricing considerations for ammonia incorporate international supply-demand, ocean freight and production factors. Additionally, the El Dorado Facility’s cost to produce agricultural grade AN from purchased ammonia can periodically exceed our selling price (a cost disadvantage as compared to producing ammonia from natural gas) as discussed below. Subject to availability, the El Dorado Facility has the ability to source a portion of its ammonia requirements from our Pryor Facility, which cost is significantly lower than current market prices. Once our new ammonia production plant at the El Dorado Facility commences production (expected to begin in the first quarter of 2016), we believe this cost disadvantage will be eliminated. Over the past several years, ammonia prices have experienced large fluctuations. The table below shows the El Dorado Facility’s first quarter volume of ammonia purchased and the average cost per short ton:
2015 | 2014 | |||||||
Ammonia volumes (tons in thousands) | 38 | 40 | ||||||
|
|
|
| |||||
Ammonia average cost per short ton | $ | 488 | $ | 419 | ||||
|
|
|
|
Based upon full plant production, the El Dorado Facility would normally purchase 200,000 to 220,000 tons per year of ammonia feedstock. In the first quarters of 2015 and 2014, the purchased ammonia was less than the amount required for full production due to tons paid for but coal inventories declinednot taken by 41 million tons, or 17%,Orica, normal seasonal first quarter agricultural AN demand and lower nitric acid capacity in both periods due to the loss of the DSN plant in 2012. It is expected that this trend will continue in 2015 as El Dorado marketing continues to rebuild sales volumes after the Orica contract expiration, negatively impacted our operating results.
As mentioned above, our El Dorado Facility produces agricultural grade AN, nitric acid and industrial grade AN from purchased ammonia, which is currently at a cost disadvantage compared to products produced from natural gas. During the first quarter of 2015, the spread difference per ton between the ammonia purchased by the El Dorado Facility as compared to the cost had the facility produced ammonia using natural gas was approximately $290 per ton. This cost disadvantage resulted in an operating loss for the facility during the same period. With such inventory decreases,period of approximately $4 million.
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 coal industry is expectedammonia consumed annually in the U.S was imported. Therefore, nitrogen fertilizer prices in the U.S. are influenced by the cost to see production growth of 1.4%. According to the EIA, coal production is expected to remain at approximately the 1 billion ton level through 2016.transport product from exporting countries, giving domestic producers that transport shorter distances an advantage.
Climate Control Business
Construction Markets - From a market sector perspective, our
Our Climate Control Business serves the new and renovation commercial/institutional and residential construction sectors, and we believe the majority of our business is associated with the construction of new facilities. Information available from the McGraw-Hill Construction MarketCMFS forecast indicates that construction activity in the commercial/institutional and single-familymarkets we serve (including multi-family residential sectorsstructures) is expected to increase 7% in aggregate during 2014, although2015 and is near 2007 pre-recession levels and single-family residential construction is expected to grow 15% during 2015, however, still remain significantlywell below pre-recession levels. In particular, the hospitality, education and multi-family vertical end markets of the commercial/institutional sector are expected to grow faster than other vertical end markets we serve.
ResultsWe expect the Climate Control Business to experience sales growth in the short-term. Although a part of the Climate Control Business’ commercial/institutional sales are products that are used for renovation and replacement applications, sales increases in the Third Quartermedium-term and long-term are expected to be primarily driven by growth in new construction, as well as the introduction of 2014
new products specifically in the hospitality, education and healthcare verticals end markets. Our consolidated net salesexpectations for our residential products, which are all GHPs, are that they will experience minimal growth due to the third quarterhigher relative total system purchase cost of 2014 were $171.0 million, a net decrease of $6.3 millionour higher efficiency GHP product offerings as compared to traditional HVAC systems creating a longer payback period in most regions due to low natural gas prices than in previous years with higher natural gas prices. We continue to focus our sales and marketing efforts to increase our share of the same periodexisting market for our products as well as expand the markets for and application of 2013. The net decrease in sales includes a decrease of $9.4 million in our products, especially utilizing high efficiency/“green” technology.
Key Operational Factors
Chemical Business partially offset by an increase of $3.6 million in
Facility Reliability
Consistent, reliable and safe operations at our Climate Control Business.
Our consolidated operating loss was $1.2 million for the third quarter of 2014 comparedchemical plants are critical to an operating income of $23.1 million for the same period of 2013. The decrease in operatingour financial performance and results of $24.3 million relates primarilyoperations. Unplanned downtime of the plants typically results in lost contribution margin, increased maintenance expense and decreased inventory for sale. The financial impact of planned downtime, including Turnarounds maintenance, is mitigated through a diligent planning process that takes into the market, the availability of resources to a decrease of $23.3 million in our Chemical Business due primarily to downtime associated with extensiveperform the needed maintenance, activities performed at ourfeedstock logistics and other factors. Our Cherokee and Pryor Facilities in third quarter of 2014. The Cherokee Facility performed an extended (42 day) planned major maintenance activity (“Turnaround”), which included the replacement of certain long-lived assets and catalysts nearing the end of their normal useful lives and increased level of inspection and repairs in order to transition from an annualhave historically undergone a facility Turnaround cycle to a bi-annual Turnaround cycle. At the Pryor Facility, a maintenance project previously scheduled for the fourth quarter of 2014 was moved forward and performed during the third quarter while certain repairs were being made to the urea plant. The impact of these maintenance activities to our operating results is further discussed below.
Our effective income tax rate for the third quarters of 2014 and 2013 was 39% and 38%, respectively.
Chemical Business
Our Chemical Business sales for the third quarter of 2014 were $94.8 million, a net decrease of $9.4 million compared to the same period of 2013, which includes a $12.5 million decrease in agricultural products sales, a $2.0 million decrease in mining products sales, partially offset by a $3.8 million increase in industrial acids and other products sales and a $1.3 million increase in natural gas sales.
Forevery year. In the third quarter of 2014, our Chemical Business reported an operating loss of $5.6 million compared to operating income of $17.7 million for the same period last year, a difference of $23.3 million. The difference was primarily due to the maintenance activities performed in the third quarter of 2014 that resulted in production downtime at the Cherokee and Pryor Facilities, and to precious metals and insurance recoveries of $4.5 million and $4.2 million, respectively, recognized in the third quarter of 2013. The following provides additional detail on the quarterly comparison:
Prepay 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 increaseopportunity to purchase product on a forward basis at prices and delivery dates that we propose. We use this program to varying degrees during the year depending on market conditions and our view as to whether price environments will be increasing or decreasing. Fixing the selling prices of our products months in maintenance expenses. The Cherokee Facility resumed ammonia productionadvance 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 endtime of Augustshipment.
Climate Control Business
Product Orders, Sales and has produced steadily at its traditional average rateEnding Backlog
Our Climate Control Business’ first quarter 2015 total new product bookings were $66.5 million, an increase of approximately 500 tons per day.
Although we believe this is only a temporary market condition, the El Dorado Facility’s cost to produce agricultural grade AN from purchased ammonia at current market prices ($640 per metric ton) exceeds the current selling prices (a cost disadvantage as compared to producing ammonia from natural gas). However, the El Dorado Facility has the option to source a portion of its ammonia requirements from our Pryor Facility, which cost is significantly lower than current market prices. Once our new ammonia production plant commences production (expected to begin incommercial bookings increased 7% over the first quarter of 2016)2014, whereas our residential product bookings declined 7%.
Excluding Carrier heat pump activity, commercial and residential bookings increased 19% and 15%, we believe this plant should reduce or eliminate this cost disadvantage.
The percentage changerespectively. Our backlog significantly improved in sales (volume and dollars) for the third quarter of2015 over 2014 compared to the third quarter of 2013 is as follows (excluding natural gas):
Percentage Change of | ||||||||
Tons | Dollars | |||||||
Chemical products: | ||||||||
Agricultural | (35 | )% | (27 | )% | ||||
Industrial acids and other | (6 | )% | 10 | % | ||||
Mining | (27 | )% | (12 | )% | ||||
Total weighted-average change | (19 | )% | (10 | )% |
The decrease in agricultural sales was primarily due to lower UAN volumes as the result of the maintenance activities performed at our Cherokee and Pryor Facilities as discussed above. During the third quarter, UAN selling prices were lower. The lower UAN volume was partially offset by higher sales volume and prices for agricultural grade AN produced at our El Dorado Facility.
The increase in industrial acids and other sales was primarily due to increased volumes of ammoniaorders for our hydronic fan coils and blend nitric acid from our Cherokee Facility, increased selling priceslarger custom air handlers as a result of higher ammonia prices passed-through to customers pursuant to contractual agreements, offset by lower volumes from our Baytown Facility due to customer outages.
The decrease in mining sales was primarily due to reduced volumes from our El Dorado Facility as a result of low customer demand due primarily to tons not taken but paid for pursuant to the terms of a supply agreement discussed below.
Our primary raw material feedstocks (anhydrous ammonia and natural gas) are commodities subject to significant price fluctuations. Generally, we purchase at prices in effect at the time of delivery; however, periodically, we enter into contracts to purchase natural gas for anticipated production needs, which contract prices will vary from the spot market prices. In addition, our Chemical Business owns working interests in certain natural gas properties. We consider these working interests as a partial economic hedge against a potential rise in natural gas pricesincrease quote activity in the future. During the third quarter of 2014, our average cost for natural gas (not including the impact from hedging activities) and ammonia compared to the same period in 2013 were as follows:
2014 | 2013 | |||||||
Natural gas average cost per MMBtu | $ | 4.16 | $ | 3.63 | ||||
|
|
|
| |||||
Ammonia average cost per short ton | $ | 513 | $ | 488 | ||||
|
|
|
|
As previously reported, pursuant to a long-term cost-plus supply agreement, EDC supplies Orica International Pte Ltd (“Orica”) with an annual minimum of 240,000 tons of industrial grade AN produced at our El Dorado Facility. The agreement includes a provision for Orica to pay for that portion of the annual minimum of the product not taken. The agreement also includes an exclusivity arrangement that provides that EDC will not sell industrial grade AN to the commercial explosives market during the term of the agreement and that Orica will market EDC’s industrial grade AN to the commercial explosives market during the term of the agreement. The agreement provides that it may be terminated by one of the parties giving the other a one-year written notice that the agreement will not be renewed. On March 31, 2014, EDC sent to Orica the required one-year notice that EDC will not renew the agreement on or after April 9, 2015. During the first nine months of 2014 and for the year 2013, net sales to Orica represented approximately 5% and 6% of LSB’s consolidated net sales, respectively, which sales included approximately $11 million and $13 million, respectively, for fixed overhead costs and gross profit for tons not taken by Orica, pursuant to the terms of the agreement.
When the term of the supply agreement with Orica ends in April 2015, our El Dorado Facility plans to commence sales of industrial grade AN to the commercial explosives market. Currently,vertical markets we have executed cost-plus sales contracts to supply approximately half of the annual 240,000 tons of AN previously committed to Orica, and we are pursuing similar agreements for the balance of the volume under the Orica contract.serve.
Climate Control Business
Our Climate Control sales for the third quarter of 2014 were $73.5 million, or $3.6 million higher than the same period in 2013. The increase was primarily driven by a $3.4 million increase in other HVAC products, primarily related to our engineering and construction services as a result of an increase in contract awards and an increase in our custom air handlers sales (as a result of timing of customer scheduled shipments). We did not experience a significant change in sales of water source and geothermal heat pump and hydronic fan coils. From a market sector perspective, the sales increase included a $4.6 million improvement in commercial/institutional product sales and a $1.0 million decline in residential product sales. Generally, average pricing of hydronic fan coils and water source and geothermal heat pumps increased due to product, features and customer mix.
We continue to follow economic indicators and monitor their potential impact on the commercial/institutional and residential construction sectors that we serve, including, but not limited to, new construction and/or renovation of facilities in the following sectors:
During the third quarter of 2014, approximately 84% of our Climate Control Business’ sales were to the commercial/institutional and multi-family construction markets, and the remaining 16% were sales of geothermal heat pumps (“GHPs”) to the single-family residential market.
The following table shows information relating to our product order intake level, net sales and backlog of confirmed customer product orders of our Climate Control Business:
New Orders (1) | Net Sales | Ending Backlog (1) | New Orders (1) | Net Sales | Ending Backlog (1) | |||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||
(In Millions) | (In Millions) | |||||||||||||||||||||||||||||||||||||||||||||||
First Quarter | $ | 63.2 | $ | 67.5 | $ | 60.3 | $ | 70.3 | $ | 44.7 | $ | 57.3 | $ | 66.5 | $ | 63.2 | $ | 65.2 | $ | 60.3 | $ | 68.6 | $ | 44.7 | ||||||||||||||||||||||||
Second Quarter | $ | 83.1 | $ | 65.4 | $ | 62.8 | $ | 77.3 | $ | 68.1 | $ | 48.9 | $ | 83.1 | $ | 62.8 | $ | 68.1 | ||||||||||||||||||||||||||||||
Third Quarter | $ | 74.1 | $ | 64.6 | $ | 73.5 | $ | 69.9 | $ | 73.5 | $ | 46.3 | $ | 74.1 | $ | 73.5 | $ | 73.5 | ||||||||||||||||||||||||||||||
Fourth Quarter | $ | 58.8 | $ | 67.5 | $ | 39.7 | $ | 58.0 | $ | 68.8 | $ | 64.9 | ||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Fiscal Year | $ | 278.4 | $ | 265.4 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
(1) | Our product order level consists of confirmed purchase orders from customers that have been accepted and received credit approval. Our backlog consists of confirmed customer orders for product to be shipped at a future date. Historically, we have not experienced significant cancellations relating to our backlog of confirmed customer product orders, and we typically expect to ship substantially all of these orders within the next twelve months. However, the |
For October 2014,April 2015, our new orders received were approximately $24$22.0 million and our backlog was approximately $76$69.8 million at OctoberApril 30, 2015.
Operational Excellence Activities
We are in the second full year of our operational excellence initiatives to become a world class company in terms of safety, quality, delivery and cost. We believe world class performance will benefit our Climate Control Business through a high level of customer satisfaction, enhanced employee engagement, faster growth and improved margins. During the past two years, we completed value analysis/value engineering activities that are part of our operational excellence initiatives at each of our companies within our Climate Control Business. In addition, we have laid the foundation for the continuous improvement culture desired in our organization. Key metrics include measurements and targets for sales volume, material, direct labor, safety, quality, delivery and asset management.
Results of Operations
The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2014.2015 and 2014 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.
Our GHPs use a formWe present the following information about our results of renewable energy that we believe, can reduce energy usage, under certain conditions, upoperations for our two core business segments: the Chemical Business and the Climate Control Business. The business operation classified as “Other” primarily sells industrial machinery and related components to 80% comparedmachine tool dealers and end users. Net sales by business segment include net sales to some conventional HVAC systems. Tax legislation (effective through December 31, 2016) continues to provide incentives forunaffiliated customers purchasing products using forms of renewable energy.
As previouslyas reported in November 2013, Carrier Corporation (“Carrier”) advisedthe consolidated financial statements. Intersegment net sales are not significant. Gross profit by business segment represents net sales less cost of sales. In addition, our chief operating decision makers use operating income by business segment for purposes of making decisions that include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less SG&A incurred by each business segment plus other income and other expense earned/incurred by each business segment before general corporate expenses. General corporate expenses consist of SG&A, other income and other expense that are not allocated to one of our subsidiaries, business segments.
The following table contains certain information about our continuing operations in different business segments on a consolidated basis for the three months ended March 31,
2015 | 2014 | |||||||
(In Thousands) | ||||||||
Net sales: | ||||||||
Chemical | $ | 126,814 | $ | 115,221 | ||||
Climate Control | 65,198 | 60,349 | ||||||
Other | 1,846 | 2,955 | ||||||
|
|
|
| |||||
$ | 193,858 | $ | 178,525 | |||||
|
|
|
| |||||
Gross profit: | ||||||||
Chemical | $ | 21,830 | $ | 28,426 | ||||
Climate Control | 19,962 | 19,264 | ||||||
Other | 567 | 1,032 | ||||||
|
|
|
| |||||
$ | 42,359 | $ | 48,722 | |||||
|
|
|
| |||||
Operating income (loss): | ||||||||
Chemical | $ | 16,660 | $ | 28,813 | ||||
Climate Control | 4,312 | 4,332 | ||||||
Other | (2 | ) | 387 | |||||
General corporate expenses | (6,747 | ) | (7,671 | ) | ||||
|
|
|
| |||||
14,223 | 25,861 | |||||||
Interest expense, net | 3,398 | 6,708 | ||||||
Non-operating expense (income), net: | ||||||||
Chemical | (33 | ) | (77 | ) | ||||
Corporate and other business operations | (2 | ) | — | |||||
Provisions for income taxes | 4,181 | 7,654 | ||||||
Equity in earnings of affiliate - Climate Control | — | (67 | ) | |||||
|
|
|
| |||||
Income from continuing operations | $ | 6,679 | $ | 11,643 | ||||
|
|
|
| |||||
Additions to property, plant and equipment: | ||||||||
Chemical | $ | 76,689 | $ | 43,444 | ||||
Climate Control | 113 | 483 | ||||||
Other | 24 | 4 | ||||||
Corporate | — | 69 | ||||||
|
|
|
| |||||
$ | 76,826 | $ | 44,000 | |||||
|
|
|
| |||||
Depreciation, depletion and amortization of property, plant and equipment: | ||||||||
Chemical | $ | 7,679 | $ | 7,389 | ||||
Climate Control | 1,167 | 1,137 | ||||||
Other | 9 | 8 | ||||||
Corporate | 146 | 145 | ||||||
|
|
|
| |||||
$ | 9,001 | $ | 8,679 | |||||
|
|
|
|
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Chemical Business
The following table contains certain information about our net sales, gross profit and operating income in our Chemical segment for the three months ended March 31,
2015 | 2014 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Agricultural products | $ | 68,355 | $ | 59,523 | $ | 8,832 | 14.8 | % | ||||||||
Industrial acids and other chemical products | 40,508 | 37,189 | 3,319 | 8.9 | % | |||||||||||
Mining products | 16,867 | 14,433 | 2,434 | 16.9 | % | |||||||||||
Other products | 1,084 | 4,076 | (2,992 | ) | (73.4 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total Chemical | $ | 126,814 | $ | 115,221 | $ | 11,593 | 10.1 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit - Chemical | $ | 21,830 | $ | 28,426 | $ | (6,596 | ) | (23.2 | )% | |||||||
|
|
|
|
|
| |||||||||||
Gross profit percentage - Chemical (1) | 17.2 | % | 24.7 | % | (7.5 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income - Chemical | $ | 16,660 | $ | 28,813 | $ | (12,153 | ) | (42.2 | )% | |||||||
|
|
|
|
|
|
(1) | As a percentage of net sales |
Net Sales – Chemical
Our Chemical Business sales in the agricultural markets were primarily at the spot market price in effect at the time of sale or at a negotiated future price. Most of our Chemical Business sales in the industrial and mining markets were pursuant to sales contracts and/or pricing arrangements on terms that include the cost of raw material feedstock as a pass through component in the sales price. Our first quarter 2015 production and sales volumes were higher in the agricultural products market and stable in our other two primary markets due to consistent customer demand and improved on-stream production rates at the Pryor and Cherokee Facilities.
Gross Profit - Chemical
Operating Income - Chemical
Climate Master, Inc. (“CM”), thatControl Business
The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the three months ended March 31,
2015 | 2014 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Water source and geothermal heat pumps | $ | 37,494 | $ | 38,482 | $ | (988 | ) | (2.6 | )% | |||||||
Hydronic fan coils | 16,475 | 15,279 | 1,196 | 7.8 | % | |||||||||||
Other HVAC products | 11,229 | 6,588 | 4,641 | 70.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total Climate Control | $ | 65,198 | $ | 60,349 | $ | 4,849 | 8.0 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit - Climate Control | $ | 19,962 | $ | 19,264 | $ | 698 | 3.6 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit percentage - Climate Control (1) | 30.6 | % | 31.9 | % | (1.3 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income - Climate Control | $ | 4,312 | $ | 4,332 | $ | (20 | ) | (0.5 | )% | |||||||
|
|
|
|
|
|
(1) | As a percentage of net sales |
Net Sales – Climate Control
Despite the loss of the Carrier heat pump contractscontracts. Excluding Carrier heat pump sales, sales increased from $32.2 million in the first quarter of 2014 to $37.3 million in the first quarter of 2015, or 16%, with CM, we expectcommercial/institutional product sales up 14% and residential product sales up approximately 22%. Overall, the number of units sold declined but the unit average unit selling price increased due to lower Carrier sales. From a commercial/institutional market perspective, gains were seen in the retail and multi-family sectors with a slight decline in the education sector. Incoming orders, excluding Carrier, for commercial/institutional products and residential products increased 11% and 15%, respectively.
Gross Profit - Climate Control
Operating Income - Climate Control
Interest Expense, net
Interest expense for the first quarter of 2015 was $3.4 million compared to $6.7 million for the same period in 2014. The decrease is due primarily to capitalized interest on capital projects under development and construction during 2015 of $5.6 million compared to $2.3 million capitalized during 2014.
Provision for Income Taxes
The provision for income taxes for the first quarter of 2015 was approximately $4.2 million compared to $7.7 million for the same period in 2014. The resulting effective tax rate for the first quarters of 2015 and 2014 was 39% and for 2015 due to higher sales of our LSB branded climate control products.40%.
Liquidity and Capital Resources
Historically, our primary cash needs have been for operating expenses, working capital and capital expenditures. We have financed our cash requirements primarily through internally generated cash flow and various forms of financing. See additional discussions concerning cash flow relating to our Chemical and Climate Control Businesses under “Overview” and “Results of Operations included in this MD&A. Before discussing our capitalization and capital projects in detail, the following summarizes our cash flow activities for the three months ended March 31, 2015:
Cash Flow from Continuing Operating Activities
Net cash provided by continuing operating activities was $12.6 million primarily as the result of net income of $6.6 million plus adjustments of $9.0 million for depreciation, depletion and amortization of PP&E.
Cash Flow from Continuing Investing Activities
Net cash used by continuing investing activities was $31.9 million that consisted primarily of $66.8 million used for expenditures for PP&E primarily for the benefit of our Chemical Business and purchases of short-term investments of $10.0 million, partially offset by proceeds of $46.0 million from restricted cash and cash equivalents primarily representing cash designated by management for specific capital projects relating to our Chemical Business.
Cash Flow from Continuing Financing Activities
Net cash used by continuing financing activities was $5.9 million that primarily related to payments on short-term financing andlong-term debt.
Capitalization
The following is our cash and cash equivalents, short-term investments, noncurrent restricted cash and cash equivalents and investments, long-term debt and stockholders’ equity:
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(In Millions) | (In Millions) | |||||||||||||||
Cash and cash equivalents and short-term investments | $ | 184.3 | $ | 143.8 | $ | 186.1 | $ | 201.3 | ||||||||
Noncurrent restricted cash and cash equivalents and investments (1) | 126.8 | 291.0 | 25.0 | 71.0 | ||||||||||||
|
|
|
| |||||||||||||
$ | 311.1 | $ | 434.8 | |||||||||||||
Total current and noncurrent cash and investments | $ | 211.1 | $ | 272.3 | ||||||||||||
|
|
|
| |||||||||||||
Long-term debt: | ||||||||||||||||
Senior Secured Notes | $ | 425.0 | $ | 425.0 | $ | 425.0 | $ | 425.0 | ||||||||
Secured Promissory Note | 24.5 | 29.6 | 21.1 | 22.8 | ||||||||||||
Other | 9.9 | 8.4 | 9.6 | 9.5 | ||||||||||||
|
|
|
| |||||||||||||
Total long-term debt, including current portion | $ | 459.4 | $ | 463.0 | $ | 455.7 | $ | 457.3 | ||||||||
|
|
|
| |||||||||||||
Total stockholders’ equity | $ | 432.4 | $ | 411.7 | $ | 441.9 | $ | 434.0 | ||||||||
|
|
|
|
(1) | At |
As of September 30, 2014,March 31, 2015, our cash, cash equivalents, short-term investments,current and noncurrent restricted cash and cash equivalents and investments totaled $311.1$211.1 million. In addition, our $100 million revolving credit facility was undrawn and available to fund operations as discussed below, if needed, subject to the amount of our eligible collateral and outstanding letters of credit.
For the remainder of 2014 and 2015, we have extensive planned capital expenditures. Our primary cash needs for this period of time will be to fund theseour planned capital expenditures,spending program, as well as our operations, our general obligations, and our interest payment requirements. WeBased upon our projections for 2015, we expect to fund these cash needs from working capital, the noncurrent restricted cash and investments (provided from the proceeds from the Senior Secured Notes), working capital, internally generated cash flows, and third-party financing. In April 2015, we received approximately $16 million to finance a natural gas pipeline being constructed at our El Dorado Facility. We are currently in discussion with certain lenders to finance threetwo other separately identifiable pieces of equipment that are included in the planned expansion project. SubjectWe are in final discussions regarding financing $21 million related to the construction of a cogeneration facility and $20 million related to the construction of an ammonia storage tank at our El Dorado Facility, subject to the terms of our existing loan agreements, including the Senior Secured Notes. We believe that neither the Senior Secured Notes nor the total secured borrowings being considered and under discussion is approximately $50 million.Amended Working Capital Revolver Loan will preclude us from entering into the additional borrowings. See additional discussions below under “Capital Expenditures”Additions”. Our internally generated cash flows and liquidity have been, and could be, affected by possible declines in sales volumes resulting from the uncertainty regarding current economic conditions and production inefficiency of our facilities.
We are party to an indenture (the “Indenture”)Indenture governing the Senior Secured Notes. The Indenture contains covenants that, among other things, limit LSB’s ability, with certain exceptions and as defined in the Indenture, to certain transactions.
In addition, weWe and certain of our subsidiaries (the “Borrowers”) are party to an amended and restated revolving credit facility (the “Amended Working Capital Revolver Loan”).facility. Pursuant to the terms of the Amended Working Capital Revolver Loan, the principal amount the Borrowers may borrow is up to $100.0 million, based on specific percentages of eligible accounts receivable and inventories. At September 30, 2014,March 31, 2015, there were no outstanding borrowings under the Amended Working Capital Revolver Loan and the net credit available for borrowings was approximately $74.2$75.6 million, based on our eligible collateral, less outstanding letters of credit as of that date.
Due to the overall increase in our outstanding long-term debt, our interest payment obligations have increased and will continue during future periods. A portion of our interest has been, and will be capitalized relating to major capital projects.
Income Taxes
We recognize and pay federal income taxes at regular corporate tax rates. With few exceptions, the 2010-2012 years remain open for all purposes of examination by the U.S. Internal Revenue Service and other major tax jurisdictions. We had approximately $1.2 million accrued for various uncertain tax liabilities at September 30, 2014.
Capital ExpendituresAdditions
Capital Expenditures-First Nine MonthsAdditions – First Quarter of 20142015
Capital expendituresadditions during the first nine monthsquarter of 20142015 were $177.8$78.5 million, including $170.0$76.7 million for the benefit of our Chemical Business. The Chemical Business capital expendituresadditions included $121.2$69.1 million for expansion projects at our El Dorado Facility, approximately $16.1$5.0 million associated with maintaining compliance with environmental laws, regulations and guidelines, approximately $19.0$3.8 million for various major renewal and improvement projects, and $5.4$1.3 million for the development of natural gas leaseholds. The capital expendituresadditions were funded primarily from noncurrent restricted cash and investments and working capital. Due to the increase in the amount of capital expendituresadditions incurred and planned, our depreciation, depletion and amortization expenses have increased and are expected to continue to increase during the remainder of 20142015 and future years.
Planned Capital ExpendituresAdditions
Planned Capital Expenditures | ||||||||||||||||||||||||||||||||||||||||||||||||
Remainder of 2014 | 2015 | Total | Planned Capital Additions For the Remainder of 2015 | |||||||||||||||||||||||||||||||||||||||||||||
(In Millions) | (In Millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Chemical: | ||||||||||||||||||||||||||||||||||||||||||||||||
El Dorado Facility Expansion Projects | $ | 80 | — | $ | 93 | $ | 200 | — | $ | 222 | $ | 280 | — | $ | 315 | $ | 162 | – | $ | 187 | ||||||||||||||||||||||||||||
Development of Natural Gas Leaseholds | 1 | — | 3 | 14 | — | 18 | 15 | — | 21 | 2 | – | 4 | ||||||||||||||||||||||||||||||||||||
Environmental Projects | 5 | — | 7 | 5 | — | 7 | 10 | — | 14 | 14 | – | 18 | ||||||||||||||||||||||||||||||||||||
Major Renewal and Improvement Projects | 14 | — | 18 | 34 | — | 40 | 48 | — | 58 | 19 | – | 22 | ||||||||||||||||||||||||||||||||||||
Other (1) | 4 | — | 8 | 13 | — | 16 | 17 | — | 24 | 20 | – | 25 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Total Chemical | $ | 104 | — | $ | 129 | $ | 266 | — | $ | 303 | $ | 370 | — | $ | 432 | $ | 217 | – | $ | 256 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
Climate Control | 2 | — | 3 | 7 | — | 10 | 9 | — | 13 | 5 | – | 10 | ||||||||||||||||||||||||||||||||||||
Corporate and Other | 2 | — | 3 | 7 | — | 10 | 9 | — | 13 | 5 | – | 10 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||
$ | 108 | — | $ | 135 | $ | 280 | — | $ | 323 | $ | 388 | — | $ | 458 | $ | 227 | – | $ | 276 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes cost associated with savings initiatives, new market development, and other capital projects. |
At September 30, 2014, we had planned capital expenditures as indicated in the table above for the remainder of 2014 and for 2015. Included in planned capital expenditures is capitalized interest of approximately $5.1$14.9 million for the remainder of 20142015. The planned capital expenditures for Corporate and $22.2Other are primarily for the replacement of our enterprise resource planning, financial and operations management system. The new ERP system replaces our legacy systems, which are out-of-date and largely unsupported, and will improve our access to operational and financial information utilized to manage the business and improve our security and regulatory compliance capability. This project began in 2013 and is expected to be fully implemented in 2016 at a total cost of $25.0 million for 2015. to $27.0 million.
Planned capital expenditures are presented as a range to provide for engineering estimates, the status of bidding, variable material costs, unplanned delays in construction, and other contingencies. As the engineering, design, and bidding processes progress and project construction proceeds, the estimated costs are more certain and the range of estimates narrows. The planned capital expenditures include investments that we anticipate making for expansion and development projects, environmental requirements, and major renewal and improvement projects. These capital expenditures are subject to economic conditions, which are continually reviewed by us, and may increase or decrease as new information is obtained or circumstances change. We plan to fund the planned capital expenditures from working capital, noncurrent restricted cash cash equivalents and investments, internally generated cash flows, and third-party financing, and if necessary, availability underfinancing.
As discussed below, the Amended Working Capital Revolver Loan.
The planned capital expenditures for Corporate and Otherconstruction of the El Dorado Expansion projects are primarily for the replacement of our enterprise resource planning, financial and operations management (“ERP”) system. The new ERP system replaces our legacy systems, which are out-of-date and largely unsupported, and will improve our access to operational and financial information utilized to manage the business and improve our security and regulatory compliance capability. This project began in 2013 and is expected to be fully implemented in 2016 at a total costcompleted by the end of $20.02015. Beyond 2015, specific capital projects are less identified but are expected to include approximately $40 million to $25.0$60 million. per year at our chemical facilities for ongoing capital maintenance, including environmental compliance, major renewal and improvement projects, and other capital projects, and approximately $28 million from 2016-2019 to fully develop our natural gas working interests. We plan to fund these expenditures from working capital, internally generated cash flows, and possibly third-party financing.
El Dorado Facility Expansion Projects
The El Dorado Facility has certain expansion projects underway, whichunderway. These expansion projects include an ammonia production plant; a new 65% strength nitric acid plant and concentrator; and other support infrastructure, all of which were analyzed and evaluated based on their forecasted return on investment. The expected costs of these projects are outlined below, which planned amounts are included in the table above.
Planned Capital Expenditures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capitalized To Date | Remainder of 2014 | 2015 | Total | Capitalized To Date | Planned Capital Additions For the Remainder of 2015 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In Millions) | (In Millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ammonia Plant | $ | 99 | $ | 50 | — | $ | 60 | $ | 126 | — | $ | 141 | $ | 275 | — | $ | 300 | $ | 172 | $ | 113 | – | $ | 128 | $ | 285 | – | $ | 300 | |||||||||||||||||||||||||||||||||||||||
Nitric Acid Plant and Concentrator | 85 | 11 | — | 12 | 29 | — | 33 | 125 | — | 130 | 105 | 20 | – | 25 | 125 | – | 130 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other Support Infrastructure | 21 | 19 | — | 21 | 45 | — | 48 | 85 | — | 90 | 56 | 29 | – | 34 | 85 | – | 90 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 205 | $ | 80 | — | $ | 93 | $ | 200 | — | $ | 222 | $ | 485 | — | $ | 520 | $ | 333 | $ | 162 | – | $ | 187 | $ | 495 | – | $ | 520 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our El Dorado Facility produces nitric acid and agricultural and industrial grade AN from purchased ammonia, which is currently at a cost disadvantage compared to products produced from natural gas. The El Dorado Facility historically purchased 600-700 tons of ammonia per day when operating at full capacity. We are constructing a 1,150 ton per day anhydrous ammonia production plant at the El Dorado Facility, which we believe should eliminate the cost disadvantage, increase capacity, and improve efficiency of the El Dorado Facility. The construction of this project is expected to be complete byin late 2015. The planned capital expenditures for the ammonia plant include approximately $16 million for the construction of a natural gas pipeline to supply the ammonia plant. We originally planned for the pipeline to be owned by a third-party but the economics of constructing2015 and owning the pipeline are better.operational in early 2016.
In addition, we are constructing a new 1,100 ton per day, 65% strength nitric acid plant and concentrator to replace the concentrated nitric acid capacity lost in May 2012. These plants are scheduled to begin production in early to mid-2015the third quarter of 2015 and are designed to be more efficient and provide increased nitric acid production capacity.
As a result of the increased production capacity at the El Dorado Facility, it is necessary to expand and improve certain support infrastructure, including utility capacity, control room facilities, inventory storage and handling, and ammonia distribution. Also, other cost reduction and cost recovery equipment, including an electric cogeneration plant, are being added to improve efficiency and lower the cost of production.
Plant Turnarounds
Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. Unplanned downtime of the plants typically result in lost contribution margin, increased maintenance expense and decreased inventory for sale. The estimated costs forfinancial impact of planned downtime, such as major Turnaround maintenance, is mitigated through a diligent planning process that takes into consideration the market, the availability of resources to perform the needed maintenance, feedstock logistics and other support infrastructure have increased as the various components are designed and bid and as construction has progressed.
Estimated Plant Turnaround Costs - Remainder of 2014 and for 2015
Our Chemical Business recognizes as cost of sales the costs for Turnarounds as they are incurred.factors. Based on our current plan for Turnarounds we do not anticipate performing any Turnarounds for the remainder of 2014. For 2015, we estimate that we will incur approximately $2.0$1.8 million to $3.0$2.3 million of these Turnaround costs. However, it is possible that the actual costs could be significantly different from our estimates. These costs do not include the impact on operating results relating to lost absorption or reduced margins due to the associated plants being shut down. We plan to fund these expenditures from our available working capital.
Expenses Associated with Environmental Regulatory Compliance
Our Chemical Business is subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, our Chemical Business incurred expenses of $4.1$1.3 million in the first nine monthsquarter of 20142015 in connection with environmental projects. For the remainder of 2014,2015, we expect to incur expenses ranging from $1.1$3.6 million to $1.4$4.1 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates. Weestimates, including costs relating to a corrective action study work plan approved by the KDHE discussed under footnote 3 – Other Environmental Matters of Note 9 of Notes to fundCondensed Consolidated Financial Statements.
Fees and Expenses Related to Shareholders
For the first quarter of 2015 and 2014, we incurred shareholder-related fees and expenses of $1.7 million and $4.2 million, respectively. These fees and expenses include costs associated with evaluating and analyzing proposals received from certain
activist shareholders and dealing, negotiating and settling with those shareholders in order to avoid proxy contests. For the second quarter of 2015, we currently estimate that these expenditures from our available working capital.expenses will range between $1.5 million to $2.0 million.
Dividends
LSB is a holding company and, accordingly, its ability to pay cash dividends on its preferred stock and common stock depends in large part on its ability to obtain funds from its subsidiaries. Payment of dividends by LSB is limited under certain limited conditions under the terms of the Amended Working Capital Loan Agreement and the Senior Secured Notes.
Holders of our common stock and preferred stocks are entitled to receive dividends only when and if declared by our Board of Directors. 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. However, our Board of Directors has not made a decision whether or not to pay such dividends on our common stock in 2014.2015.
During the first quarter of 2014,2015, dividends totaling $300,000 were declared and paid on our outstanding preferred stock using funds from our working capitalcapital. Each share of preferred stock is entitled to receive an annual dividend, only when declared by our Board of Directors, payable as follows:
Each share of preferred stock is entitled to receive an annual dividend, but a dividend payment is made only after the dividend is declared by our Board of Directors. All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Group. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred.
Compliance with Long - Term Debt Covenants
The Amended Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants, including a minimum fixed charge coverage ratio of not less than 1.10 to 1, if at any time the excess availability (as defined by the Amended Working Capital Revolver Loan), under the Amended Working Capital Revolver Loan, is less than or equal to $12.5 million. This ratio will be measured monthly on a trailing twelve-monthtwelve month basis and as defined in the agreement. As of September 30, 2014,March 31, 2015, as defined in the agreement, the fixed charge coverage ratio was 4.893.7 to 1. Currently, our forecast is that we will be able to meet all financial covenant requirements for the next twelve months.
Seasonality
We believe that our only significant seasonal products are fertilizer and related chemical products sold by our Chemical Business to the agricultural industry.industry are seasonal while sales into the industrial and mining sectors are not. The selling seasons for thoseagricultural 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 in which the majority of our agricultural products are distributed. As a result, our Chemical Business typically increases its inventory of agricultural productsAN prior to the beginning of each planting season. In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control.
Related Party Transactions
See discussion above under “Liquidity and Capital Resources-Dividends” relating to the Golsen Group.
Results of Operations
Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
Chemical Business
The following table contains certain information about our net sales, gross profit and operating income in our Chemical segment for the nine months ended September 30,
2014 | 2013 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Agricultural products | $ | 169,046 | $ | 139,943 | $ | 29,103 | 20.8 | % | ||||||||
Industrial acids and other chemical products | 118,202 | 109,219 | 8,983 | 8.2 | % | |||||||||||
Mining products | 48,466 | 48,825 | (359 | ) | (0.7 | )% | ||||||||||
Natural gas | 10,030 | 5,030 | 5,000 | 99.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total Chemical | $ | 345,744 | $ | 303,017 | $ | 42,727 | 14.1 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit - Chemical | $ | 57,161 | $ | 39,116 | $ | 18,045 | 46.1 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit percentage - Chemical (1) | 16.5 | % | 12.9 | % | 3.6 | % | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income - Chemical | $ | 46,815 | $ | 20,259 | $ | 26,556 | 131.1 | % | ||||||||
|
|
|
|
|
|
Net Sales - Chemical
Our Chemical Business reported a sales increase for the first nine months of 2014 as a result of the following:
Gross Profit - Chemical
Our Chemical Business’ gross profit during the first nine months was $57.2 million, including a $22.9 million business interruption insurance recovery. For the first nine months of 2013, our Chemical Business’ gross profit was $39.1 million, including an $18.4 million business interruption insurance recovery and a recovery of precious metals of $4.5 million. Excluding the insurance and precious metals recoveries, the increase in gross profit of $18.1 million was primarily attributable to the improved production at the Cherokee and Pryor Facilities during the first six months of 2014 as discussed above. The impact from the improved production during the first six months was partially offset by lower production in the third quarter of 2014 resulting in lower margins from the decline in fixed overhead absorption and the increase in maintenance expenses associated with the planned major maintenance activities performed at the Cherokee and Pryor Facilities, as discussed above. In addition, the improved gross profit generated from the higher on stream rates at the Cherokee and Pryor Facilities during the nine months of 2014 was partially offset by a decline in the margin per ton of nitrogen fertilizers due to lower selling prices and higher feedstock costs. Natural gas feedstock cost increased approximately 15% partially offset by a 15% decrease in ammonia feedstock costs, while UAN selling prices decreased 5%, negatively affecting gross profit margins on our nitrogen fertilizer sales. Also in the first nine months of 2014, gross profit was lower by $1.2 million on purchased UAN that was sold at a loss to honor forward sales commitments in excess of available production. These purchases were necessitated by lower than projected urea production at the Cherokee Facility primarily during the first quarter of 2014.
Operating Income - Chemical
Our Chemical Business’ operating income during the first nine months was $46.8 million, an increase of $26.6 million over the first nine months of 2013. In addition to the $18.1 million increase in gross profit as discussed above, results for the first nine months of 2014 include a $5.1 million property insurance recovery recognized (classified as property insurance recoveries in excess of losses incurred). The first nine months of 2013 include $0.9 million in connection with the settlement of EPA enforcement initiatives regarding the Clean Air Act and demolition and dismantling expenses incurred at the El Dorado Facility of $2.4 million compared to $0.6 million for the same period in 2014.
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the nine months ended September 30,
2014 | 2013 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Water source and geothermal heat pumps | $ | 126,849 | $ | 138,009 | $ | (11,160 | ) | (8.1 | )% | |||||||
Hydronic fan coils | 44,234 | 48,813 | (4,579 | ) | (9.4 | )% | ||||||||||
Other HVAC products | 25,502 | 30,668 | (5,166 | ) | (16.8 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total Climate Control | $ | 196,585 | $ | 217,490 | $ | (20,905 | ) | (9.6 | )% | |||||||
|
|
|
|
|
| |||||||||||
Gross profit - Climate Control | $ | 61,628 | $ | 70,553 | $ | (8,925 | ) | (12.7 | )% | |||||||
|
|
|
|
|
| |||||||||||
Gross profit percentage - Climate Control (1) | 31.3 | % | 32.4 | % | (1.1 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income - Climate Control | $ | 17,396 | $ | 24,387 | $ | (6,991 | ) | (28.7 | )% | |||||||
|
|
|
|
|
|
Net Sales - Climate Control
Gross Profit - Climate Control
The decrease in gross profit in our Climate Control Business was primarily the result of the lower net sales as discussed above and reduced labor efficiencies and overhead absorption related to fewer units sold in the first and second quarters of 2014.
Operating Income - Climate Control
Operating income decreased primarily as a result of the lower gross profit discussed above, partially offset by lower operating expenses.
General Corporate Expenses
General corporate expenses consist of SG&A, other income and expense that are not allocated to one of our business segments. General corporate expenses for the first nine months of 2014 were $17.1 million compared to $10.7 million for the same period in 2013. The increase is primarily the result of incurring approximately $4.2 million in fees and expenses related to evaluating and analyzing proposals from and settling with certain activist shareholders and an increase of consulting fees and personnel costs of $1.1 million. During the first nine months of 2013, we recognized other income of $0.5 million relating to a litigation settlement.
Interest Expense, net
Interest expense for the first nine months of 2014 was $17.5 million compared to $6.7 million for the same period in 2013. The increase is due primarily to the issuance of the Senior Secured Notes in August 2013 partially offset by $9.2 million of capitalized interest on capital projects (while under development and construction) during the first nine months of 2014 compared to $2.1 million capitalized during the same period in 2013.
Loss on Extinguishment of Debt
As the result of the payoff of a secured term loan in August 2013, we incurred a loss on extinguishment of debt of $1.2 million, consisting of a prepayment premium and writing off unamortized debt issuance costs.
Provision For Income Taxes
The provision for income taxes for the first nine months of 2014 was $12.3 million compared to $10.0 million for the same period in 2013. The resulting effective tax rate for the first nine months of 2014 and 2013 was 39% and 38% (excluding the benefit associated with the retroactive tax relief on certain 2012 tax provisions that expired in 2012), respectively.
Three months ended September 30, 2014 compared to three months ended September 30, 2013
Chemical Business
The following table contains certain information about our net sales, gross profit (loss) and operating income (loss) in our Chemical segment for the three months ended September 30,
2014 | 2013 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Agricultural products | $ | 34,133 | $ | 46,671 | $ | (12,538 | ) | (26.9 | )% | |||||||
Industrial acids and other chemical products | 42,692 | 38,884 | 3,808 | 9.8 | % | |||||||||||
Mining products | 15,333 | 17,354 | (2,021 | ) | (11.6 | )% | ||||||||||
Natural gas | 2,609 | 1,290 | 1,319 | 102.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total Chemical | $ | 94,767 | $ | 104,199 | $ | (9,432 | ) | (9.1 | )% | |||||||
|
|
|
|
|
| |||||||||||
Gross profit (loss) - Chemical | $ | (521 | ) | $ | 24,610 | $ | (25,131 | ) | (102.1 | )% | ||||||
|
|
|
|
|
| |||||||||||
Gross profit (loss) percentage - Chemical (1) | (0.5 | )% | 23.6 | % | (24.1 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income (loss) - Chemical | $ | (5,587 | ) | $ | 17,680 | $ | (23,267 | ) | (131.6 | )% | ||||||
|
|
|
|
|
|
Our Chemical Business reported a net sales decrease for the third quarter of 2014 primarily due to lower UAN volumes as the result of a 42 day Turnaround performed at our Cherokee Facility during the third quarter of 2014, and a planned maintenance project performed at our Pryor Facility. The extended Turnaround performed at the Cherokee Facility was due to replacement of certain long-lived assets and catalysts, and increased levels of inspection and repair in order to transition from an annual Turnaround cycle to a bi-annual Turnaround cycle. The planned maintenance project performed at the Pryor Facility was moved forward from the fourth quarter of 2014 and performed during the third quarter while certain repairs were being made to the urea plant. The Cherokee Facility resumed ammonia production at the end of August and has produced steadily at its traditional average rate and the Pryor Facility resumed ammonia production in early September and has produced consistently since that time.
Natural gas sales relate to working interests in certain natural gas properties acquired in 2012 and August 2013 by a subsidiary within our Chemical Business. The increase in natural gas sales is primarily due to higher production
|
Gross Profit (Loss) - Chemical
As noted in the table above, our Chemical Business incurred a loss of $0.5 million for the third quarter of 2014 compared to a gross profit of $24.6 million in2013, a decline of $25.1 million. Excluding insurance recoveries and precious metals recoveries of $4.2 million and $4.5 million, respectively, recognized in the third quarter of 2013, the decrease in gross profit of $16.4 million was primarily attributable to the planned major maintenance activities performed our Cherokee and Pryor Facilities, as discussed above. In addition, maintenance expense at our El Dorado Facility increased primarily relating to $1.6 million associated with a sulfuric acid plant. Gross profit was also impacted by increased raw material costs related to natural gas and ammonia and decreased selling prices for UAN compared to the third quarter of 2013. Natural gas and ammonia feedstock costs increased approximately 15% and 5%, respectively, while UAN selling prices decreased approximately 4%, negatively affecting gross profit margins on our nitrogen fertilizer sales.
Operating Income (Loss) - Chemical
Our Chemical Business’ operating results decreased primarily as the result of the decrease in gross profit as discussed above, partially offset by a reduction in professional, consulting and other fees.
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the three months ended September 30,
2014 | 2013 | Change | Percentage Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Water source and geothermal heat pumps | $ | 46,469 | $ | 46,624 | $ | (155 | ) | (0.3 | )% | |||||||
Hydronic fan coils | 16,534 | 16,151 | 383 | 2.4 | % | |||||||||||
Other HVAC products | 10,482 | 7,088 | 3,394 | 47.9 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total Climate Control | $ | 73,485 | $ | 69,863 | $ | 3,622 | 5.2 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit - Climate Control | $ | 23,862 | $ | 23,168 | $ | 694 | 3.0 | % | ||||||||
|
|
|
|
|
| |||||||||||
Gross profit percentage - Climate Control (1) | 32.5 | % | 33.2 | % | (0.7 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating income - Climate Control | $ | 8,452 | $ | 8,547 | $ | (95 | ) | (1.1 | )% | |||||||
|
|
|
|
|
|
Net Sales - Climate Control
Gross Profit - Climate Control
The increase in gross profit in our Climate Control Business was primarily the result of the increased net sales as discussed above.
Operating Income - Climate Control
Operating income decreased primarily as a result of the higher operating expenses including variable selling expenses related to the increased sales volume, partially offset by the higher gross profit discussed above.
General Corporate Expenses
General corporate expenses for the third quarter of 2014 were approximately $4.5 million compared to $3.5 million for the same period in 2013, which increase primarily relates to personnel costs and consulting fees.
Interest Expense, net
Interest expense for the third quarter of 2014 was $5.1 million compared to $5.4 million for the same period in 2013. The decrease is due primarily $3.9 million of capitalized interest on capital projects (while under development and construction) during the third quarter of 2014 compared to $1.2 million capitalized during the third quarter of 2013 partially offset by the interest expense incurred associated with the issuance of the Senior Secured Notes in August 2013.
Loss on Extinguishment of Debt
As the result of the payoff of a secured term loan in August 2013, we incurred a loss on extinguishment of debt of $1.2 million, consisting of a prepayment premium and writing off unamortized debt issuance costs.
Provision (Benefit) For Income Taxes
The income tax benefit for the third quarter of 2014 was $2.4 million compared to an income tax provision of $6.3 million for the same period in 2013. The resulting effective tax rate for the third quarters of 2014 and 2013 was 39% and 38% respectively.
Cash Flow From Continuing Operating Activities - Nine Months Ended September 30, 2014
Historically, our primary cash needs have been for operating expenses, working capital and capital expenditures. We have financed our cash requirements primarily through internally generated cash flow and various forms of financing. See additional discussions concerning cash flow relating to our Chemical and Climate Control Businesses under “Overview” and “Liquidity and Capital Resources” of this MD&A.
Net cash provided by continuing operating activities was $56.9 million primarily as the result of net income of $19.0 million plus adjustments of $26.4 million for depreciation, depletion and amortization of PP&E and $11.5 million for deferred income taxes.
Cash Flow from Continuing Investing Activities - Nine Months Ended September 30, 2014
Net cash used by continuing investing activities was $10.9 million that consisted primarily of $164.2 million for expenditures for PP&E, primarily for the benefit of our Chemical Business and $14.5 million purchase of short-term investments, partially offset by net proceeds of $164.2 million from restricted noncurrent cash, cash equivalents and investments, and proceeds of $5.1 million from property insurance recovery associated with PP&E.
Cash Flow from Continuing Financing Activities - Nine Months Ended September 30, 2014
Net cash used by continuing financing activities was $19.7 million that primarily related to payments on short-term financing and long-term debt.
Critical Accounting Policies and Estimates
See our discussion on critical accounting policies and estimates in Item 7 of our 20132014 Form 10-K. In addition, 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.contingencies and fair values. For the first nine monthsquarter of 2014,2015, we did not experience a material change in accounting estimates. However, it is reasonably possible that the estimates and assumptions utilized as of September 30, 2014March 31, 2015 could change in the near term.near-term.
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 September 30, 2014,March 31, 2015, we have agreed to indemnify the sureties for payments, up to $15.0$11.0 million, made by them in respect of such bonds. All of these insurance bonds are expected to expire or be renewed in 2015.
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
In the operation of our businesses, we enter into contracts, leases and borrowing arrangements. As discussed in our 20132014 Form 10-K, we had certain contractual obligations as of December 31, 2013,2014, with various maturity dates, showing payments due for the next five years and thereafter related to the following:
During June 2014, a subsidiary within the Chemical Business entered into a contract to purchase natural gas through June 2016 for anticipated production needs at one of our chemical facilities. See additional discussions concerning our futures/forward natural gas contracts below under “Commodity Price Risk” of Item 3 - Quantitative and Qualitative Disclosures about Market Risk.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
General
Our results of operations and operating cash flows are impacted by changes in market prices of copper, steel, anhydrous ammonia and natural gas, changes in market currency exchangeinterest rates, and changes in market interestcurrency exchange rates.
Forward Sales Commitments Risk
Periodically, our Chemical and Climate Control Businesses 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 September 30, 2014,March 31, 2015, we had a minimal amount of embedded losses associated with sales commitments with firm sales prices relating to our Chemical Business.
Commodity Price Risk
Our Chemical Business buys substantial quantities of anhydrous ammonia and natural gas as feedstocks(as a feedstock) and platinum (as a catalyst in the manufacturing process) generally at market prices and our Climate Control Business buys substantial quantities of copper and steel for use in manufacturing processes. As part of our raw material price risk management, periodically, our Chemical Business enters into firm purchase commitments and/or futures/forward contracts for anhydrous ammonia and natural gas and our Climate Control Business enters into futures contracts for copper. Our Chemical Business has also acquired working interests in natural gas properties to serve as an economic hedge against potential higher natural gas prices for a portion of our future natural gas requirements.
Certain subsidiaries within the Chemical Business entered into contracts to purchase natural gas for anticipated production needs. At September 30, 2014, allA portion of the outstanding natural gasthese contracts wereare considered derivatives and wereare accounted for on a mark-to-market basis. basis and a portion of 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 and are documented as such. These contracts are exempt from the accounting and reporting requirements relating to derivatives.
At September 30, 2014, theseMarch 31, 2015, the natural gas contracts included firm purchase commitmentsaccounted for on a mark-to-market basis were for approximately 7.86.4 million MMBtu of natural gasgas. These contracts extend through June 2016 (includes contractual costs indexed to future New York Mercantile ExchangeNYMEX prices) at a weighted-average cost of $3.93$3.09 per MMBtu ($30.619.8 million) and a weighted-average market value of $3.97$2.73 per MMBtu ($30.917.5 million).
At March 31, 2015, our futures/forward natural gas contracts which are exempt from mark-to-market accounting included the firm purchase commitments of approximately 2.4 million MMBtu of natural gas. These contracts extend through December 2015 at a weighted-average cost of $3.20 per MMBtu ($7.6 million) and a weighted-average market value of $2.78 per MMBtu ($6.6 million).
At September 30, 2014, we had no outstandingMarch 31, 2015, our platinum contracts, which are accounted for on a mark-to-market basis, included 3,000 ounces of platinum, extend through July 2015 at a weighted-average cost of $1,120.87 per ounce ($3.36 million) and a weighted-average market value of $1,143.40 per ounce ($3.43 million).
At March 31, 2015, our futures/forward copper contracts.contracts, which are accounted for on a mark-to-market basis, included 1,950,000 pounds of copper, extend through December 2015 at a weighted-average cost of $2.96 per pound ($5.8 million) and a weighted-average market value of $2.74 per pound ($5.3 million).
Interest Rate Risk
Our interest rate risk exposure results from our debt portfolio that is impacted by short-term rates, primarily variable-rate borrowings from commercial banks, and long-term rates, primarily fixed-rate notes, some of which prohibit prepayment or require a substantial premium payment with the prepayment.
As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. At September 30, 2014,March 31, 2015, we have an interest rate swap, which sets a fixed three-month LIBOR of 3.23% on a declining balance (from $23.8 million to $18.8 million) for the period beginning April 2012 through March 2016. This contract is a free-standing derivative and is accounted for on a mark-to-market basis. At September 30, 2014,March 31, 2015, the fair value of these contracts (unrealized loss) was $0.8$0.6 million.
At September 30, 2014,March 31, 2015, we did not have any financial instruments with fair values significantly different from their carrying amounts, except for the Senior Secured Notes. At September 30, 2014,March 31, 2015, the estimated fair value of the Senior Secured Notes exceeded the carrying value by approximately $30$17 million based on a quoted price of 107.0.104.0. This valuation is classified as Level 2. The valuations of our other long-term debt agreements are classified as Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The fair value measurement of our long-term debt agreements are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for our debt agreements. 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.
Item 4. Controls and Procedures
Item 4. | 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 Securities Exchange Act of 1934). 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 September 30, 2014March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the third quarter of 2014, we began implementing a new enterprise resource planning system. We plan to implementare implementing this system in discreet phases during the next few years. As a result, this implementation requires us to monitor and maintain appropriate internal control over financial reporting during this transition. ItWhile we expect that our internal controls over financial reporting will remain largely similar or unchanged, it is possible that during each future phase of the implementation, we may make changes to our internal control over financial reporting that could materially affect our internal control over financial reporting. In addition, it is possible that during each phase of the implementation, we may make changes to our internal control over financial reporting that did not materially affect our internal control over financial reporting, but, when fully implemented, the cumulative effect of the changes made may be considered material.
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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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”, and similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained herein relateinclude, but not limited to, among other things:the following:
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;
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.
Amended Working Capital Revolver Loan – The senior secured revolving credit facility, amended effective December 31, 2013.
AN - Ammonium nitrate.
ARO - Asset retirement obligation.
Bayer - Bayer MaterialScience LLC.
Baytown Facility - The nitric acid production facility operated by a subsidiary of EDN located in Baytown, Texas.
Borrowers – LSB and certain of its subsidiaries that are party to the Amended Working Capital Revolver Loan.
Carrier - Carrier Corporation.
Chemical Business – LSB’s business segment that manufactures and sells nitrogen-based chemical products for the agricultural, industrial, and mining markets.
Cherokee Facility - Our chemical production facility located in Cherokee, Alabama.
Climate Control Business – LSB’s business segment manufactures and sells a broad range of HVAC products that include water source and geothermal heat pumps, hydronic fan coils, large custom air handlers, modular geothermal and other chillers, and other related products and services.
CM - Climate Master, Inc.
CMFS - The Dodge Data & Analytics Construction Market Forecasting Service.
DSN –A 98% strength nitric acid plant which was located at the El Dorado Facility
EDC - El Dorado Chemical Company.
EDN –El Dorado Nitric LLC
EIA – The U.S. Energy Information Administration.
El Dorado Facility - Our chemical production facility located in El Dorado, Arkansas.
Environmental Laws - Numerous federal, state and local environmental laws.
EPA - The U.S. Environmental Protection Agency.
ERP - Enterprise resource planning.
FASB – Financial Accounting Standards Board
GHP– Geothermal heat pump.
Golsen Group - Jack E. Golsen, our Executive Chairman of the Board of Directors, members of his immediate family, including Barry H. Golsen, our Chief Executive Officer and President, entities owned by them and trusts for which they possess voting or dispositive power as trustee.
Health Laws – Numerous federal, state and local health and safety laws.
Indenture – The agreement governing the Senior Secured Notes.
LSB - LSB Industries, Inc.
MD&A - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MMBtu - Million Metric British thermal units.
Nitric Acid Plant – A new nitric acid plant being constructed at our El Dorado Facility.
NYMEX -New York Mercantile Exchange
OEM - An original equipment manufacturer.
Orica - Orica International Pte Ltd.
PCC - Pryor Chemical Company.
PP&E - Plant, property and equipment.
Pryor Facility - Our chemical production facility located in Pryor, Oklahoma.
SEC - The U.S. Securities and Exchange Commission.
Senior Secured Notes - The $425 million aggregate principal amount of 7.75% Senior Secured Notes due August 1, 2019.
SG&A - Selling, general and administrative expense.
Turnaround - A planned major maintenance activity.
UAN - Urea ammonium nitrate.
U.S. - United States.
WASDE - World Agricultural Supply and Demand Estimates Report
PART II
OTHER INFORMATION
Item 1. | Legal Proceedings |
There are no material legal proceedings or material developments in any such legal proceedings pending against us not reported in Item 3 of our 20132014 Form 10-K, or in Item 1 of Part II of our March 31, 2014 and June 30, 2014 Form 10-Q’s, except as follows:
We previously reported that our subsidiary, Pryor Chemical Company, within our Chemical Business, was the subject of a potential proceedingfor possible penalties relating to an alleged ammonia release during February, 2014a Risk Management inspection conducted by the EPA at its chemical facility. During September 2014, this matter was settled forthe Cherokee Facility discussed under footnote 3 – Other Environmental Matters of Note 9 of Notes to Condensed Consolidated Financial Statements and a paymentclass action lawsuit filed against CM discussed under Note 15 of $37,500.Notes to Condensed Consolidated Financial Statements.
We further previously reported that our subsidiary, El Dorado Chemical Company (“EDC”), had sued the U.S. Environmental Protection Agency (“EPA”) during October 2011, in connection with the EPA’s decision to disapprove certain rule changes as to discharges relating to dissolved minerals. We previously reported that in March 2013, the U.S. District Court, El Dorado, Arkansas, affirmed the EPA’s decision and that EDC appealed this decision to the U.S. Eighth Circuit Court of Appeals. The Eighth Circuit Court of Appeals has denied our appeal.
Item 1A. | Risk Factors |
In addition to ourThere are no material changes from the risk factors as previous disclosed in Item 1A to Part I of our 20132014 Form10-K,10-K. we have the following:
Current and future legislative or regulatory requirements impacting our Chemical Business and/or activities at other chemical facilities not owned by our Chemical Business may result in increased costs and/or decreased revenues, cash flows and liquidity or could have other negative impacts on our Chemical Business.
Our businesses are subject to numerous health, safety, security and environmental laws and regulations, primarily relating to our Chemical Business. The manufacture and distribution of chemical products are activities which 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, our Chemical Business has in the past, and may in the future, 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 the Chemical Business’ facilities. Further, a number of our Chemical Business’ facilities are dependent on environmental permits to operate, the loss or modification of which could have a material adverse effect on their operations and our financial condition.
Changes to the production equipment at our chemical facilities as may be required in order to comply with health, safety and environmental regulations may require substantial capital expenditures.
Explosions and/or losses at other chemical facilities not owned by us (such as the explosion in West, Texas discussed in Note 9 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements contained in this report) 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 our Chemical Business or the inability on the part of our Chemical Business’ customers to obtain or maintain insurance as to certain products manufactured and/or sold by our Chemical Business, which could have a negative impact on the revenues, cash flow and/or liquidity of our Chemical Business.
In summary, new or changed laws and regulations or the inability of the customers of our Chemical Business 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.
Risks associated with capital projects may prevent the completion of those projects on budget, on schedule or at all.
We are undertaking capital projects and may undertake additional capital projects in the future. Capital projects entail risks, including, but not limited to:
Construction, equipment or staffing problems or difficulties in obtaining any of the requisite licenses, permits and authorizations from regulatory authorities could increase the total cost, delay or prevent the construction or completion of a capital project. In addition, our inability to obtain adequate sources of funding could negatively impact a capital project and we could be required to obtain additional debt or equity financing to complete a capital project. As a result, we may not be able to obtain other debt or equity financing on acceptable terms or at all. Moreover, if we are able to complete a capital project, production levels at our facilities or general market conditions may not meet our expectations. As a result of these factors, our results of operations, liquidity and financial condition could be adversely impacted.
Risks generally associated with implementation of an enterprise resource planning (“ERP”) system may adversely affect our business operation and the effectiveness of internal control over financial reporting.
We have begun to implement an ERP system, which, when completed, will handle the business and financial processes of our subsidiaries’ operations and our corporate and administrative functions, such as:
ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities that can continue for several years. ERP implementations also require transformation of business and financial processes in order to benefit from a new ERP system. Our results of operations, liquidity and financial condition may be adversely affected if we experience operating problems and cost overruns during the ERP implementation process or if the ERP system (and the associated process changes) do not generate the expected benefits. Additionally, if we do not effectively implement the ERP system as planned or if the system does not operate as intended, it could adversely affect our financial reporting.
Cyber security risks could adversely affect our business operations.
As we continue to increase our dependence on information technologies to conduct our operations, the risks associated with cyber security also increase. We rely on our ERP and other information systems, among other things, to manage our manufacturing, supply chain, accounting and financial functions. This risk not only applies to us, but also to third parties on whose systems we place significant reliance for the conduct of our business. 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 affect on our results of operations, liquidity and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable
Item 3. Defaults upon Senior Securities
Item 3. | Defaults upon Senior Securities |
Not applicable
Item 4. Mine Safety Disclosures
Item 4. | Mine Safety Disclosures |
Not applicable
Item 5. | Other Information |
Not applicable
Item 6. | Exhibits |
(a) | Exhibits The Company has included the following exhibits in this report: |
3(ii) | Amended and Restated Bylaws of LSB Industries, Inc., dated August 20, 2009, as amended February 18, 2010, January 17, 2014, February 4, 2014, | ||
10.1 | |||
10.2 | Employment Agreement, dated April 27, 2015, by and among the Company and Barry H. Golsen, which the Company hereby incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K, filed April 30, 2015. | ||
10.3 | Employment Agreement, dated April 27, 2015, by and among the Company and Mark T. Behrman, which the Company hereby incorporates by reference from Exhibit 99.4 to the Company’s Form 8-K, filed April 30, 2015. | ||
10.4 | Offer Letter, dated February 5, 2014, by and among the Company to Mark T. Behrman, which the Company hereby incorporates by reference from Exhibit 99.5 to the Company’s Form 8-K, filed April 30, 2015. | ||
10.5 | Amendment and Restated Severance Agreement, dated April 27, 2015, by and among the Company and Tony M. Shelby, which the Company hereby incorporates by reference from Exhibit 99.6 to the Company’s Form 8-K, filed April 30, 2015. Substantially similar Amended and Restated Severance Agreements, each dated April 27, 2015, between the Company and each of David R. Goss, Phil Gough, Greg Withrow, James Murray, III, Michael Tepper, Paul Rydlund, Steven Golsen, Heidi Brown, and David Shear are not attached hereto, but will be provided to the Securities and Exchange Commission upon request. |
10.6 | 2015 Amendment to Severance Agreement, dated April 27, 2015, by and among the Company and Jack E. Golsen, which the Company hereby incorporates by reference from Exhibit 99.7 to the Company’s Form 8-K, filed April 30, 2015. | |
31.1 | Certification of | |
31.2 | Certification of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley Act of 2002, Section 302. | |
32.1 | Certification of | |
32.2 | Certification of Tony M. Shelby, Chief Financial Officer, furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has caused the undersigned, duly authorized, to sign this report on its behalf on this 67th day of November 2014.May 2015.
LSB INDUSTRIES, INC. |
/s/ Tony M. Shelby |
Tony M. Shelby |
Executive Vice President of Finance and Chief Financial Officer
|
/s/ Harold L. Rieker, Jr. |
Harold L. Rieker, Jr. |
Vice President and Corporate Controller
|
4944