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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
o | 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: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) | 52-1145429 (I.R.S. Employer Identification No.) |
Terra Centre | ||
P.O. Box 6000 | ||
600 Fourth Street | 51102-6000 | |
Sioux City, Iowa | (Zip Code) | |
(Address of principal executive offices) |
Registrant’s telephone number, including area code: (712) 277-1340
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. Yesþ Noo
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yesþ No
o Yesþ No
As April 25, 2008, the following shares of the registrant’s stock were outstanding:
Common Shares, without par value | 91,378,108 shares |
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Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
(unaudited)
March 31, | December 31, | March 31, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 817,197 | $ | 698,238 | $ | 233,310 | ||||||
Accounts receivable, less allowance for doubtful accounts of $267, $264 and $410 | 159,418 | 171,183 | 184,096 | |||||||||
Inventories | 210,237 | 129,321 | 230,651 | |||||||||
Other current assets | 44,771 | 28,833 | 26,594 | |||||||||
Current assets held for sale - discontinued operations | 45,593 | 2,335 | 14,489 | |||||||||
Total current assets | 1,277,216 | 1,029,910 | 689,140 | |||||||||
Property, plant and equipment, net | 379,746 | 389,728 | 619,554 | |||||||||
Equity method investments | 330,678 | 351,986 | 166,746 | |||||||||
Deferred plant turnaround costs, net | 34,753 | 42,190 | 36,615 | |||||||||
Intangible assets, net | 3,293 | 3,763 | 5,174 | |||||||||
Other assets | 26,235 | 27,721 | 23,125 | |||||||||
Noncurrent assets held for sale - discontinued operations | — | 43,029 | 89,908 | |||||||||
Total assets | $ | 2,051,921 | $ | 1,888,327 | $ | 1,630,262 | ||||||
Liabilities | ||||||||||||
Accounts payable | 160,661 | 110,687 | 130,567 | |||||||||
Customer prepayments | 282,397 | 299,351 | 136,047 | |||||||||
Accrued and other current liabilities | 68,479 | 102,655 | 46,353 | |||||||||
Current liabilities held for sale - discontinued operations | 16,764 | 4,993 | 16,654 | |||||||||
Total current liabilities | 528,301 | 517,686 | 329,621 | |||||||||
Long-term debt | 330,000 | 330,000 | 330,000 | |||||||||
Deferred taxes | 137,837 | 99,854 | 37,758 | |||||||||
Pension liabilities | 9,594 | 9,268 | 124,667 | |||||||||
Other liabilities | 80,172 | 84,876 | 84,236 | |||||||||
Minority interest | 107,329 | 109,729 | 98,850 | |||||||||
Noncurrent liabilities held for sale - discontinued operations | — | 739 | 4,069 | |||||||||
Total liabilities and minority interest | 1,193,233 | 1,152,152 | 1,009,201 | |||||||||
Preferred Shares- liquidation value of $120,000 | 115,800 | 115,800 | 115,800 | |||||||||
Common Shareholders’ Equity | ||||||||||||
Capital stock | ||||||||||||
Common Shares, authorized 133,500 shares; 91,382; 89,587 and 92,486 outstanding | 143,964 | 142,170 | 145,192 | |||||||||
Paid-in capital | 619,384 | 618,874 | 694,621 | |||||||||
Accumulated other comprehensive loss | (25,301 | ) | (45,328 | ) | (48,350 | ) | ||||||
Retained earnings (accumulated deficit) | 4,841 | (95,341 | ) | (286,202 | ) | |||||||
Total stockholders’ equity | 742,888 | 620,375 | 505,261 | |||||||||
Total liabilities and stockholders’ equity | $ | 2,051,921 | $ | 1,888,327 | $ | 1,630,262 | ||||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
(unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Revenues | ||||||||
Product revenues | $ | 573,202 | $ | 499,466 | ||||
Other income | 1,502 | 1,458 | ||||||
Total revenues | 574,704 | 500,924 | ||||||
Costs and Expenses | ||||||||
Cost of sales | 406,989 | 422,264 | ||||||
Selling, general and administrative expense | 12,704 | 17,057 | ||||||
Equity earnings of unconsolidated affiliates (Note 8) | (13,290 | ) | (5,617 | ) | ||||
Total cost and expenses | 406,403 | 433,704 | ||||||
Income from operations | 168,301 | 67,220 | ||||||
Interest income | 8,408 | 2,887 | ||||||
Interest expense | (7,058 | ) | (8,909 | ) | ||||
Loss on early retirement of debt | — | (38,662 | ) | |||||
Income before income taxes and minority interest | 169,651 | 22,536 | ||||||
Income tax provision | (59,504 | ) | (5,157 | ) | ||||
Minority interest | (18,126 | ) | (8,636 | ) | ||||
Equity earnings of affiliates (Note 8) | 9,284 | — | ||||||
Income from continuing operations | 101,305 | 8,743 | ||||||
Income (loss) from discontinued operations, net of tax (Note 2) | 152 | (1,533 | ) | |||||
Net income | 101,457 | 7,210 | ||||||
Preferred share dividends | (1,275 | ) | (1,275 | ) | ||||
Income Available to Common Shareholders | $ | 100,182 | $ | 5,935 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 90,165 | 91,860 | ||||||
Diluted | 104,429 | 95,258 | ||||||
Earnings per share — basic | ||||||||
Income from continuing operations | $ | 1.11 | $ | 0.08 | ||||
Income (loss) from discontinued operations (Note 2) | — | (0.02 | ) | |||||
Net income | $ | 1.11 | $ | 0.06 | ||||
Earnings per share — diluted | ||||||||
Income from continuing operations | $ | 0.97 | $ | 0.08 | ||||
Income (loss) from discontinued operations (Note 2) | — | (0.02 | ) | |||||
Net Income | $ | 0.97 | $ | 0.06 | ||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Operating Activities | ||||||||
Net income | $ | 101,457 | $ | 7,210 | ||||
Income (loss) from discontinued operations | 152 | (1,533 | ) | |||||
Income from continuing operations | 101,305 | 8,743 | ||||||
Adjustments to reconcile income from continuing operations to net cash flows from operating activities: | ||||||||
Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs | 19,853 | 23,626 | ||||||
Loss on sale of property, plant and equipment | 477 | — | ||||||
Deferred income taxes | 37,901 | 8,290 | ||||||
Minority interest in earnings | 18,126 | 8,636 | ||||||
Distributions less than equity earnings | (332 | ) | (5,617 | ) | ||||
Equity earnings GrowHow UK Limited | (9,284 | ) | — | |||||
Non-cash gain on derivatives | (661 | ) | (2,832 | ) | ||||
Share-based compensation | 1,264 | 2,868 | ||||||
Amortization of intangible and other assets | 1,938 | 2,341 | ||||||
Non-cash loss on early retirement of debt | — | 4,662 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 10,890 | 14,940 | ||||||
Inventories | (85,084 | ) | (18,472 | ) | ||||
Accounts payable and customer prepayments | 32,805 | 32,911 | ||||||
Other assets and liabilities, net | (30,661 | ) | 619 | |||||
Net cash flows from operating activities — continuing operations | 98,537 | 80,715 | ||||||
Net cash flows from operating activities — discontinued operations | 11,037 | (1,127 | ) | |||||
Net cash flows from operating activities | 109,574 | 79,588 | ||||||
Investing Activities | ||||||||
Purchase of property, plant and equipment | (6,472 | ) | (6,736 | ) | ||||
Plant turnaround expenditures | (627 | ) | (8,842 | ) | ||||
Proceeds from sale of property, plant and equipment | 1,614 | — | ||||||
Distributions received from unconsolidated affiliates | 6,927 | — | ||||||
Contribution settlement received from GrowHow UK Limited | 27,890 | — | ||||||
Net cash flows from investing activities — continuing operations | 29,332 | (15,578 | ) | |||||
Net cash flows from investing activities — discontinued operations | — | — | ||||||
Net cash flows from investing activities | 29,332 | (15,578 | ) | |||||
Financing Activities | ||||||||
Issuance of debt | — | 330,000 | ||||||
Payments under borrowing arrangements | — | (328,800 | ) | |||||
Payments for debt issuance costs | — | (5,429 | ) | |||||
Preferred share dividends paid | (1,275 | ) | (1,275 | ) | ||||
Common stock issuances and vestings | (5,873 | ) | 276 | |||||
Excess tax benefits from equity compensation plans | 7,695 | — | ||||||
Distributions to minority interests | (20,526 | ) | (4,474 | ) | ||||
Net cash flows from financing activities — continuing operations | (19,979 | ) | (9,702 | ) | ||||
Net cash flows from financing activities — discontinued operations | — | — | ||||||
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Consolidated Statements of Cash Flows (continued)
Three Months ended | ||||||||
March 31 | ||||||||
2008 | 2007 | |||||||
Net cash flows from financing activities | (19,979 | ) | (9,702 | ) | ||||
Effect of exchange rate changes on cash | 32 | (15 | ) | |||||
Increase to cash and cash equivalents | 118,959 | 54,293 | ||||||
Cash and cash equivalents at beginning of period | 698,238 | 179,017 | ||||||
Cash and cash equivalents at end of period | $ | 817,197 | $ | 233,310 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 11,850 | $ | 10,619 | ||||
Income tax refunds received | $ | — | $ | 100 | ||||
Income taxes paid | $ | 5,527 | $ | 4,566 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Conversion of warrants to common stock | $ | 1,486 | $ | — | ||||
Supplemental schedule of unconsolidated affiliates distributions received: | ||||||||
Equity earnings of unconsolidated affiliates | $ | 13,290 | $ | 5,617 | ||||
Distribution less than equity earnings | (332 | ) | (5,617 | ) | ||||
Distributions received from unconsolidated affiliates | 6,927 | — | ||||||
Total cash distributions received from unconsolidated affiliates | $ | 19,885 | $ | — | ||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Accumulated | (Accumulated | |||||||||||||||||||||||
Other | Deficit) | |||||||||||||||||||||||
Common | Paid-In | Comprehensive | Retained | Comprehensive | ||||||||||||||||||||
Stock | Capital | Loss | Earnings | Total | Income | |||||||||||||||||||
Balance at January 1, 2008 | $ | 142,170 | $ | 618,874 | $ | (45,328 | ) | $ | (95,341 | ) | $ | 620,375 | ||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net income | — | — | — | 101,457 | 101,457 | $ | 101,457 | |||||||||||||||||
Foreign currency translation adjustment | — | — | (2,886 | ) | — | (2,886 | ) | (2,886 | ) | |||||||||||||||
Change in fair value of derivatives, net of taxes of $12,337 | — | — | 22,913 | — | 22,913 | 22,913 | ||||||||||||||||||
Comprehensive income | $ | 121,484 | ||||||||||||||||||||||
Preferred share dividends | — | — | — | (1,275 | ) | (1,275 | ) | |||||||||||||||||
Exercise of stock options | 11 | 23 | — | — | 34 | |||||||||||||||||||
Nonvested stock | 297 | 1,491 | — | — | 1,788 | |||||||||||||||||||
Conversion of warrants | 1,486 | (1,486 | ) | — | — | — | ||||||||||||||||||
Share-based compensation | — | 482 | — | — | 482 | |||||||||||||||||||
Balance March 31, 2008 | $ | 143,964 | $ | 619,384 | $ | (25,301 | ) | $ | 4,841 | $ | 742,888 | |||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common | Paid-In | Comprehensive | Accumulated | Comprehensive | ||||||||||||||||||||
Stock | Capital | Loss | Deficit | Total | Income | |||||||||||||||||||
Balance at January 1, 2007 | $ | 144,976 | $ | 693,896 | $ | (63,739 | ) | $ | (292,137 | ) | $ | 482,996 | ||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net income | — | — | — | 7,210 | 7,210 | $ | 7,210 | |||||||||||||||||
Foreign currency translation adjustment | — | — | 817 | — | 817 | 817 | ||||||||||||||||||
Change in fair value of derivatives, net of taxes of $7,848 | — | — | 14,572 | — | 14,572 | 14,572 | ||||||||||||||||||
Comprehensive income | $ | 22,599 | ||||||||||||||||||||||
Preferred share dividends | — | — | — | (1,275 | ) | (1,275 | ) | |||||||||||||||||
Share-based compensation | — | 665 | — | — | 665 | |||||||||||||||||||
Exercise of stock options | 216 | 60 | — | — | 276 | |||||||||||||||||||
Balance at March 31, 2007 | $ | 145,192 | $ | 694,621 | $ | (48,350 | ) | $ | (286,202 | ) | $ | 505,261 | ||||||||||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. | Financial Statement Presentation | |
Basis of Presentation | ||
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (“Terra”, “the Company”, “our” “we” and “us”) and the results of operations for the periods presented. Because of the seasonal nature of our operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with our 2007 Annual Report on Form 10-K to Shareholders. | ||
Revenue Recognition | ||
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable. | ||
Revenues are primarily comprised of sales of our nitrogen-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. We classify amounts directly or indirectly billed to our customers for shipping and handling as revenue. | ||
Cost of Sales | ||
Cost of sales are primarily manufacturing costs related to our nitrogen-based products, including any realized hedging gains or losses related to natural gas derivatives. We classify amounts directly or indirectly billed for delivery of products to our customers or our terminals as cost of sales. | ||
Derivatives and Financial Instruments | ||
We enter into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs and to manage the prices of our nitrogen products. We report the fair value of the derivatives on our balance sheet. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in earnings in the period of change. If the derivative is designated as a hedge, and to the extent such hedge is determined to be effective, changes in fair value are reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in cost of sales in the period the offsetting hedged transaction occurs. | ||
Segment Reporting | ||
We review our reportable industry segments based upon the guidance provided in Statement of Financial Accounting Standards (SFAS) 131,Disclosures about Segments of an Enterprise and Related Information(SFAS 131). The methanol industry segment does not meet the quantitative thresholds of SFAS 131 because we have reclassified the Beaumont, Texas related assets and liabilities as held for sale and have included earnings related to these assets in discontinued operations as required by SFAS 144,Accounting for the Impairment or Disposal of Long-lived Assets(“SFAS 144”). As a wholesale nitrogen producer we are no longer reporting industry segments in a separate disclosure because the only reportable industry segment is nitrogen. |
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Inventories | ||
Inventories are stated at the lower of average cost or estimated net realizable value. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. The analysis of estimated realizable value is based on customer orders, market trends, and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. | ||
Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activity. The cost of inventories is determined using the first- in, first-out method. | ||
We estimate a reserve for obsolescence and excess of our materials and supplies inventory. Inventory is stated net of the reserve. | ||
Plant Turnaround Costs | ||
Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround, generally two years. | ||
Impairment of Long-Lived Assets | ||
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset. | ||
Use of Estimates in Preparation of the Financial Statements | ||
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
2. | Discontinued Operations | |
During 2007, we entered into an agreement for Eastman Chemical Company to purchase our Beaumont, Texas assets, including the methanol and ammonia production facilities. We anticipate closing the sale on or before January 1, 2009. In connection with this sales agreement, we evaluated our Beaumont facility for impairment. We determined that this facility’s carrying values were impaired and we recorded a $39 million impairment charge in the third quarter of 2007. | ||
Pursuant to the requirements of SFAS 144, we classified and accounted for certain assets as held for sale at March 31, 2008. As the anticipated sales date is within one year of our quarterly reporting date, the property, plant and equipment has been reclassified to other current assets as of March 31, 2008. SFAS 144 requires that assets held for sale are valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered cash flow analyses, and offers related to those assets. In accordance with the provisions of SFAS 144, assets for sale are not depreciated. |
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Results of the Beaumont operations are reported for all periods presented on a net of tax basis as discontinued operations. In addition, assets and liabilities of the business held for sale have been reclassified to assets and liabilities held for sale accounts in the accompanying Balance Sheet. | ||
Summarized Financial Results of Discontinued Operations |
Three months ended | ||||
(in thousands) | March 31, | |||
2008 | ||||
Operating revenue | $ | 1,421 | ||
Operating and other expenses | (1,187 | ) | ||
Pretax income from operations of discontinued components | 234 | |||
Income tax expense | (82 | ) | ||
Income from discontinued operations | $ | 152 | ||
2007 | ||||
Operating revenue | $ | 1,362 | ||
Operating and other expenses | (3,912 | ) | ||
Pretax loss from operations of discontinued components | (2,550 | ) | ||
Income tax benefit | 1,017 | |||
Loss from discontinued operations | $ | (1,533 | ) | |
The major classes of assets and liabilities held for sale and related to discontinued operations as of March 31, 2008, December 31, 2007 and March 31, 2007 are as follows: |
March 31, | December 31, | March 31, | ||||||||||
(in thousands) | 2008 | 2007 | 2007 | |||||||||
Trade receivables | $ | 232 | $ | 45 | $ | 12,213 | ||||||
Inventory | 2,203 | 2,203 | 2,203 | |||||||||
Other current assets | 43,158 | 87 | 73 | |||||||||
Current Assets | $ | 45,593 | $ | 2,335 | $ | 14,489 | ||||||
Property, plant and equipment — net | $ | — | $ | 42,212 | $ | 89,091 | ||||||
Other non-current assets | — | 817 | 817 | |||||||||
Non-current assets | $ | — | $ | 43,029 | $ | 89,908 | ||||||
Accounts payable | $ | 302 | $ | 18 | $ | 5 | ||||||
Other current liabilities | 16,462 | 4,975 | 16,649 | |||||||||
Current liabilities | $ | 16,764 | $ | 4,993 | $ | 16,654 | ||||||
Other non-current liabilities | $ | — | $ | 739 | $ | 4,069 | ||||||
Non-current liabilities | $ | — | $ | 739 | $ | 4,069 | ||||||
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3. | Income (Loss) Per Share | |
Basic income (loss) per share data is based on the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share. | ||
The following table provides a reconciliation between basic and diluted income (loss) per share for the three-month period ended March 31, 2008 and 2007: |
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands, except per-share amounts) | 2008 | 2007 | ||||||
Basic income (loss) per share computation: | ||||||||
Income from continuing operations | $ | 101,305 | $ | 8,743 | ||||
Less: Preferred share dividends | (1,275 | ) | (1,275 | ) | ||||
Income from continuing operations available to common shareholders | 100,030 | 7,468 | ||||||
Income (loss) from discontinued operations available to common shareholders | 152 | (1,533 | ) | |||||
Weighted average shares outstanding | 90,165 | 91,860 | ||||||
Income per share — continuing operations | 1.11 | 0.08 | ||||||
Income (loss) per share — discontinued operations | — | (0.02 | ) | |||||
Net income per share | $ | 1.11 | $ | 0.06 | ||||
Diluted income (loss) per share computation: | ||||||||
Income from continuing operations available to common shareholders | $ | 100,030 | $ | 7,468 | ||||
Add: Preferred share dividends | 1,275 | — | ||||||
Income available to common shareholders and assumed conversions | $ | 101,305 | $ | 7,468 | ||||
Weighted average shares outstanding | 90,165 | 91,860 | ||||||
Add incremental shares from assumed conversions: | ||||||||
Preferred shares | 12,048 | — | ||||||
Nonvested stock | 397 | 607 | ||||||
Common stock warrants | 1,815 | 2,610 | ||||||
Common stock options | 4 | 181 | ||||||
Dilutive potential common shares | 104,429 | 95,258 | ||||||
Income per share — continuing operations | $ | 0.97 | $ | 0.08 | ||||
Income (loss) per share — discontinued operations | — | (0.02 | ) | |||||
Net income per share | $ | 0.97 | $ | 0.06 | ||||
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For the three-month period ending March 31, 2007, 120,000 preferred shares were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method. | ||
4. | Inventories | |
Inventories consisted of the following: |
March 31, | December 31, | March 31, | ||||||||||
(in thousands) | 2008 | 2007 | 2007 | |||||||||
Raw materials | $ | 15,766 | $ | 17,765 | $ | 20,694 | ||||||
Supplies | 33,736 | 35,909 | 55,445 | |||||||||
Finished goods | 160,735 | 75,647 | 154,512 | |||||||||
Total | $ | 210,237 | $ | 129,321 | $ | 230,651 | ||||||
Inventory is valued at actual first-in, first-out cost. Costs include raw material, labor and overhead. | ||
5. | Derivative Financial Instruments | |
We manage risk using derivative financial instruments for changes in natural gas supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk and market risk. | ||
To manage credit risk, we enter into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. We will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles. | ||
We classify a derivative financial instrument as a hedge if all of the following conditions are met: |
1. | The item to be hedged must expose us to price risk. | ||
2. | It must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item). | ||
3. | The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge. |
Natural gas supplies to meet production requirements at our North American production facilities are purchased at market prices. Natural gas market prices are volatile and we effectively fix prices for a portion of our natural gas production requirements and inventory through the use of swaps, basis swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our North American production facilities are purchased at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. |
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A swap is a financial instrument whereby we agree to pay a counterparty a fixed rate, and the counterparty pays us a variable rate. Option contracts give the holder the right to either own or sell a futures or swap contract. The option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from us for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements. | ||
We may also use a collar structure where we will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes us to large price increases. At March 31, 2008 there were no collars outstanding. | ||
The following summarizes open natural gas derivative contracts at March 31, 2008 and 2007 and December 31, 2007: |
Other | Other | |||||||||||||||
Current | Current | Deferred | Net | |||||||||||||
(in thousands) | Assets | Liabilities | Taxes | Asset (Liability) | ||||||||||||
March 31, 2008 | $ | 28,001 | $ | (902 | ) | $ | (9,315 | ) | $ | 17,784 | ||||||
December 31, 2007 | $ | 4,798 | $ | (14,733 | ) | $ | 3,022 | $ | (6,913 | ) | ||||||
March 31, 2007 | $ | 11,037 | $ | (3,949 | ) | $ | (1,474 | ) | $ | 5,614 |
Certain derivatives outstanding at March 31, 2008 and 2007, which settled during April 2008 and 2007, respectively, are included in the position of open natural gas derivatives in the table above. The April 2008 derivatives settled for an approximate $9.4 million gain compared to the April 2007 derivatives which settled for an approximate $1.0 million gain. Substantially all open derivatives will settle during the next twelve months. | ||
We determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $0.5 million and $2.9 million, respectively, to cost of sales for the three-month period ending March 31, 2008 and 2007, respectively. | ||
The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX natural gas contract prices. |
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The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended March 31, 2008 and 2007 follows: |
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
(in thousands) | Gross | Net of tax | Gross | Net of tax | ||||||||||||
Beginning accumulated loss | $ | (8,635 | ) | $ | (5,612 | ) | $ | (18,210 | ) | $ | (11,836 | ) | ||||
Reclassification into earnings | (7,497 | ) | (4,873 | ) | 2,727 | 1,773 | ||||||||||
Net change in market value | 42,747 | 27,786 | 19,693 | 12,799 | ||||||||||||
Ending accumulated gain | $ | 26,615 | $ | 17,301 | $ | 4,210 | $ | 2,736 | ||||||||
Approximately $26.6 million of the net accumulated gain at March 31, 2008 will be reclassified into earnings during the next twelve months. | ||
At times, we also use forward derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes. At March 31, 2008, we did not have any open contracts for nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three-month period ending March 31, 2008, there were no gains or losses on nitrogen forward derivative instruments. For the three-month period ending March 31, 2007, we recognized a loss of $0.9 million on nitrogen forward derivative instruments. | ||
6. | Fair Value Measurements | |
On January 1, 2008, we adopted SFAS 157,Fair Value Measurements(SFAS 157), which, among other things, requires enhanced disclosure of assets and liabilities measured and reported at fair value. In February 2008, the FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157,which delayed for one year the applicability of SFAS 157’s fair-value measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008, except as it applies to those nonfinancial assets and liabilities as affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on our financial statements. | ||
SFAS 157 establishes a three level hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of asset or liability and their characteristics. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. | ||
The three levels are defined as follows: |
• | Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. | ||
• | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
• | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
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We evaluated our assets and liabilities to determine which items should be disclosed according to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value. The inputs included in the fair value measurement of our derivative contract use adjusted quoted prices from an active market which are classified at level 2 as a significant other observable input in the disclosure hierarchy framework as defined by SFAS 157. |
The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of March 31, 2008: |
Quoted Market | Significant Other | Significant | ||||||||||
Prices in Active | Observable | Unobservable | ||||||||||
Markets | Inputs | Inputs | ||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | ||||||||||||
Derivative contracts | $ | — | $ | 28,001 | $ | — | ||||||
Total | $ | — | $ | 28,001 | $ | — | ||||||
Liabilities | ||||||||||||
Derivative contracts | $ | — | �� | $ | 902 | $ | — | |||||
Total | $ | — | $ | 902 | $ | — | ||||||
7. | Other Liabilities | |
Other liabilities consisted of the following: |
March 31, | December 31, | March 31, | ||||||||||
(in thousands) | 2008 | 2007 | 2007 | |||||||||
Unrecognized tax benefit | $ | 33,560 | $ | 33,560 | $ | 33,560 | ||||||
Long-term medical and closed facility reserve | 24,316 | 24,368 | 23,321 | |||||||||
Long-term deferred revenue | 10,656 | 10,885 | — | |||||||||
Accrued phantom shares | 5,018 | 9,231 | 5,525 | |||||||||
Long-term retiree medical and post employment reserve | 6,099 | 6,112 | 7,381 | |||||||||
Other | 523 | 720 | 14,449 | |||||||||
$ | 80,172 | $ | 84,876 | $ | 84,236 | |||||||
8. | Equity Investments | |
Trinidad and United States |
Our investment in companies that are accounted for on the equity method of accounting and included in operations consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (“PLNL”) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO2 at our Verdigris nitrogen plant. These investments were $145.4 million at March 31, 2008. We include the net earnings of these investments as an element of income from operations as the investees’ operations provide additional capacity to our operations. |
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The combined results of operations and financial position of our equity method investments are summarized below: |
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2008 | 2007 | ||||||
Condensed income statement information: | ||||||||
Net sales | $ | 98,535 | $ | 29,363 | ||||
Net income | $ | 31,281 | $ | 7,112 | ||||
Terra’s equity in earnings of unconsolidated affiliates | $ | 13,290 | $ | 5,617 | ||||
March 31, | March 31, | |||||||
(in thousands) | 2008 | 2007 | ||||||
Condensed balance sheet information: | ||||||||
Current assets | $ | 72,576 | $ | 53,018 | ||||
Long-lived assets | 186,981 | 204,146 | ||||||
Total assets | $ | 259,557 | $ | 257,164 | ||||
Current liabilities | $ | 47,464 | $ | 25,356 | ||||
Long-term liabilities | 11,265 | — | ||||||
Equity | 200,828 | 231,808 | ||||||
Total liabilities and equity | $ | 259,557 | $ | 257,164 | ||||
The carrying value of these investments at March 31, 2008 was $45.0 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately fifteen years. Our equity in earnings of unconsolidated subsidiaries is different than our ownership interest in income reported by the unconsolidated subsidiaries due to deferred profits on intergroup transactions and amortization of basis differences. |
We have transactions in the normal course of business with PLNL whereby we are obliged to purchase 50% of the ammonia produced by PLNL at current market prices. During the three-month period ending March 31, 2008, we purchased approximately $33.3 million of ammonia from PLNL. During the three-month period ending March 31, 2007, we purchased approximately $22.2 million of ammonia from PLNL. During the first quarter of 2007, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by us. |
We received $18.8 million and $17.5 million in distributions from PLNL in the 2008 and 2007 first quarters, respectively. |
United Kingdom |
On September 14, 2007, we completed the formation of GrowHow UK Limited (GrowHow), a joint venture between us and Kemira GrowHow Oyj (Kemira). Pursuant to the joint venture agreement, we contributed our United Kingdom subsidiary Terra Nitrogen (UK) Limited to the joint venture for a 50% interest. Subsequent to September 14, 2007, we have accounted for our investment in GrowHow as an equity method investment. This investment was $185.3 million at March 31, 2008. |
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Our interest in the joint venture is classified as a nonoperating equity investment. We do not include the net earnings of this investment as an element of income from operations since the investees’ operations do not provide additional capacity to us, nor are its operations integrated with our supply chain in North America. |
The results of operations and financial position of our equity method investment in GrowHow at March 31, 2008 were: |
(in thousands) | 2008 | |||
Condensed income statement information: | ||||
Net sales | $ | 266,827 | ||
Net income | $ | 21,366 | ||
Terra’s equity in earnings of unconsolidated affiliates | $ | 9,284 | ||
Condensed balance sheet information: | ||||
Current assets | $ | 260,910 | ||
Long-lived assets | 263,130 | |||
Total assets | $ | 524,040 | ||
Current liabilities | $ | 143,182 | ||
Long-term liabilities | 173,942 | |||
Equity | 206,916 | |||
Total liabilities and equity | $ | 524,040 | ||
The carrying value of these investments at March 31, 2008 was $81.8 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately twelve years. Our equity earnings of GrowHow are different than our ownership interest in GrowHow’s net income due to the amortization of basis differences. |
We contributed Terra Nitrogen (UK) Limited to the joint venture for a 50% interest in the joint venture, and Kemira contributed its Kemira GrowHow UK Limited subsidiary for the remaining 50% interest. The GrowHow joint venture in the United Kingdom includes the Kemira site at Ince and our Teeside and Severnside sites. Pursuant to the GrowHow Agreements with Kemira, we are eligible to receive a balancing consideration payment from GrowHow in 2011. We will receive a minimum balancing consideration payment of £20 million, and have the right to receive up to £60 million, based on GrowHow’s calculation of earnings and cash flows. |
In January 2008 GrowHow closed the Severnside manufacturing facility. Pursuant to the agreement with Kemira, we are responsible for any remediation costs required to prepare the Severnside site for disposal. We anticipate remediation costs to be approximately $5.0 million to $10.0 million. We have an option to purchase the Severnside land for a nominal amount at any time prior to sale. If we elect not to exercise this option we are still entitled to receive the sales proceeds. We anticipate that the proceeds related to the sale of the Severnside land would exceed the total cost of reclamation of site. |
We received $27.9 million from GrowHow during the 2008 first quarter for the refund of working capital contributions in excess of amounts specified in the Joint Venture Contribution Agreement. |
There were no distributions from the United Kingdom equity investment since the inception in 2007. |
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9. | Long-term Debt | |
Long-term debt consisted of the following: |
March 31, | December 31, | March 31, | ||||||||||
(in thousands) | 2008 | 2007 | 2007 | |||||||||
Unsecured Senior Notes, 7.0% due 2017 | $ | 330,000 | $ | 330,000 | $ | 330,000 | ||||||
Second Priority Senior Secured Notes, 11.5%, due 2010 | — | — | 2,500 | |||||||||
Total long-term debt | 330,000 | 330,000 | 332,500 | |||||||||
Less current maturities | — | — | 2,500 | |||||||||
Total long-term debt | $ | 330,000 | $ | 330,000 | $ | 330,000 | ||||||
In February 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries (see Note 14). These notes and guarantees are unsecured and will rank equal in right of payment with any existing and future senior obligations of such guarantors. We recorded a $38.8 million loss on the early retirement of debt. |
The Indenture governing these notes contains covenants that limit, among other things, our ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make certain investments, sell any of our principal production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by our restricted subsidiaries, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of our assets or merge with or into other companies, and reduce our insurance coverage. |
We are obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type. |
In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. The revolving credit facility is secured by substantially all of our assets. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of our consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at our option, a London Interbank Offered Rate (LIBOR). At March 31, 2008, the LIBOR rate was 2.71%. The base rate is the highest of (1) Citibank, N.A.’s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margins for base rate loans and LIBOR loans were 0.50% 1.75%, respectively, at March 31, 2008. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed. |
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At March 31, 2008, we had no outstanding revolving credit borrowings and $10.3 million in outstanding letters of credit. The $10.3 million in outstanding letters of credit reduced our borrowing availability to $189.7 million at March 31, 2008. The credit facilities require that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. If our borrowing availability falls below $60 million, we are required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters. |
10. | Pension Plans | |
We maintain defined benefit and defined contribution pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans’ assets consist principally of equity securities and corporate and government debt securities. We also have certain non-qualified pension plans covering executives, which are unfunded. We accrue pension costs based upon annual actuarial valuations for each plan and fund these costs in accordance with statutory requirements. | ||
The estimated components of net periodic pension expense follow: |
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2008 | 2007 | ||||||
Service cost | $ | 778 | $ | 748 | ||||
Interest cost | 4,412 | 6,231 | ||||||
Expected return on plan assets | (4,516 | ) | (6,056 | ) | ||||
Amortization of prior service cost | (9 | ) | (9 | ) | ||||
Amortization of actuarial loss | 468 | 1,409 | ||||||
Termination charge | — | 123 | ||||||
Pension expense | $ | 1,133 | $ | 2,446 | ||||
Cash contributions to the defined benefit pension plans for the three months ended March 31, 2008 and 2007 were $0.4 million and $8.9 million, respectively. |
We also sponsor defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of our contributions to these plans for the three-month periods ending March 31, 2008 and 2007 totaled $1.0 million and $1.2 million, respectively. |
We provide health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid. |
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11. | Accumulated Other Comprehensive Income (Loss) |
Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net income (loss). Our accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of our foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in our financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as a cash flow hedge) recorded on the balance sheet, and (d) pension and post-retirement benefit liabilities adjustments. |
The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2008 and 2007 follow: |
Foreign | ||||||||||||||||
Currency | Pension and Post- | |||||||||||||||
Translation | Fair Value of | Retirement Benefit | ||||||||||||||
(in thousands) | Adjustment | Derivatives | Liabilities | Total | ||||||||||||
Balance January 1, 2008 | $ | (22,364 | ) | $ | (5,612 | ) | $ | (17,352 | ) | $ | (45,328 | ) | ||||
Change in foreign translation adjustment | (2,886 | ) | — | — | (2,886 | ) | ||||||||||
Reclassification to earnings | — | (4,873 | ) | — | (4,873 | ) | ||||||||||
Change in fair value of derivatives | — | 27,786 | — | 27,786 | ||||||||||||
Balance March 31, 2008 | $ | (25,250 | ) | $ | 17,301 | $ | (17,352 | ) | $ | (25,301 | ) | |||||
Balance January 1, 2007 | $ | 24,518 | $ | (11,836 | ) | $ | (76,421 | ) | $ | (63,739 | ) | |||||
Change in foreign translation adjustment | 817 | — | — | 817 | ||||||||||||
Reclassification to earnings | — | 1,773 | — | 1,773 | ||||||||||||
Change in fair value of derivatives | — | 12,799 | — | 12,799 | ||||||||||||
Balance March 31, 2007 | $ | 25,335 | $ | 2,736 | $ | (76,421 | ) | $ | (48,350 | ) | ||||||
12. | Commitments and Contingencies |
We are involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote. |
We have entered into physical natural gas supply agreements through March 2009 for approximately 44.5 million MMBtu’s. As of March 31, 2008, these natural gas commitments were $1.7 million above the respective index prices. |
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13. | New Accounting Pronouncements |
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R,Business Combination(SFAS 141R), which changes the way we account for business acquisitions. SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. We are currently evaluating the future impacts and disclosures of SFAS 141R. In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,(SFAS 160). SFAS 160 improves the comparability and transparency of financial statements when reporting minority interest. Entities with a noncontrolling interest will be required to clearly identify and present the ownership interest in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest will be identified and presented on the face of the consolidated statement of income. The statement offers further guidance on changes in ownership interest, deconsolidation, and required disclosures. The statement is effective for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We are currently assessing the impact SFAS 160 may have on our financial statements. |
In March 2008, the FASB issued SFAS 161,Disclosures about Derivative Instruments and Hedging Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133,Accounting for Derivative Instruments and Hedging Activities(SFAS 133). To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the future impacts and disclosures of SFAS 161. |
14. | Guarantor Subsidiaries |
The consolidating statement of financial position of Terra Industries Inc. (the “Parent”), Terra Capital, Inc. (“TCAPI”), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Unsecured Senior Notes due 2017 for March 31, 2008; December 31, 2007; and March 31, 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations and statements of cash flows for the three months ended March 31, 2008 and 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The guarantees of the Guarantor Subsidiaries are full and unconditional. The Subsidiary issuer and the Guarantor Subsidiaries guarantees are joint and several with the Parent. |
Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa; Yazoo City, Mississippi, and Beaumont, Texas plants; Terra Environmental Technologies as well as the corporate headquarters facility in Sioux City, Iowa. The Beaumont, Texas facility is classified as held for sale pursuant to SFAS 144. All guarantor subsidiaries are wholly owned by the Parent. All other company facilities are owned by non-guarantor subsidiaries. |
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Consolidating Balance Sheet as of March 31, 2008: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 35,231 | $ | 310,402 | $ | 978,875 | $ | (507,311 | ) | $ | 817,197 | |||||||||||
Accounts receivable, net | 1 | — | 111,676 | 47,741 | — | 159,418 | ||||||||||||||||||
Inventories | — | — | 140,864 | 57,856 | 11,517 | 210,237 | ||||||||||||||||||
Other current assets | 17,715 | 38 | 6,115 | 20,903 | — | 44,771 | ||||||||||||||||||
Current assets held for sale – discontinued operations | — | — | 45,593 | — | — | 45,593 | ||||||||||||||||||
Total current assets | 17,716 | 35,269 | 614,650 | 1,105,375 | (495,794 | ) | 1,277,216 | |||||||||||||||||
Property, plant and equipment, net | — | — | 259,627 | 120,119 | — | 379,746 | ||||||||||||||||||
Equity investment – operating | — | — | 10,376 | 135,015 | — | 145,391 | ||||||||||||||||||
Equity investment – nonoperating | — | — | — | 185,287 | — | 185,287 | ||||||||||||||||||
Intangible assets, other assets and deferred plant turnaround costs | 6,732 | 8,039 | 15,944 | 38,757 | (5,191 | ) | 64,281 | |||||||||||||||||
Investments in and advances to (from) affiliates | 742,888 | 376,734 | 1,936,618 | 132,417 | (3,188,657 | ) | — | |||||||||||||||||
Noncurrent assets held for sale – discontinued operations | — | — | — | — | — | — | ||||||||||||||||||
Total assets | $ | 767,336 | $ | 420,042 | $ | 2,837,215 | $ | 1,716,970 | $ | (3,689,642 | ) | $ | 2,051,921 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 1,992 | $ | — | $ | 109,614 | $ | 49,055 | $ | — | $ | 160,661 | ||||||||||||
Customer prepayments | — | — | 97,678 | 184,719 | — | 282,397 | ||||||||||||||||||
Accrued and other current liabilities | 21,942 | 3,380 | 29,376 | 13,781 | — | 68,479 | ||||||||||||||||||
Current liabilities held for sale – discontinued operations | — | — | 16,764 | — | — | 16,764 | ||||||||||||||||||
Total current liabilities | 23,934 | 3,380 | 253,432 | 247,555 | — | 528,301 | ||||||||||||||||||
Long-term debt | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Deferred taxes | 120,864 | — | — | 13,528 | 3,445 | 137,837 | ||||||||||||||||||
Pension and other liabilities | 76,626 | (170 | ) | 11,403 | 1,410 | 497 | 89,766 | |||||||||||||||||
Minority interest | — | 20,941 | 86,388 | — | — | 107,329 | ||||||||||||||||||
Noncurrent liabilities held for sale – discontinued operations | — | — | — | — | — | — | ||||||||||||||||||
Total liabilities and minority interest | 221,424 | 354,151 | 351,223 | 262,493 | 3,942 | 1,193,233 | ||||||||||||||||||
Preferred stock | 115,800 | — | — | — | — | 115,800 |
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Consolidating Balance Sheet (continued) |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Common Shareholders’ Equity | ||||||||||||||||||||||||
Common stock | 143,964 | — | 73 | 32,458 | (32,531 | ) | 143,964 | |||||||||||||||||
Paid-in capital | 619,384 | 150,218 | 2,031,300 | 1,255,515 | (3,437,033 | ) | 619,384 | |||||||||||||||||
Accumulated other comprehensive income (loss) | (18,240 | ) | — | — | 358,349 | (365,410 | ) | (25,301 | ) | |||||||||||||||
Retained earnings (accumulated deficit) | (314,996 | ) | (84,327 | ) | 454,619 | (191,845 | ) | 141,390 | 4,841 | |||||||||||||||
Total stockholders’ equity | 430,112 | 65,891 | 2,485,992 | 1,454,477 | (3,693,584 | ) | 742,888 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 767,336 | $ | 420,042 | $ | 2,837,215 | $ | 1,716,970 | $ | (3,689,642 | ) | $ | 2,051,921 | |||||||||||
23
Table of Contents
Consolidating Statement of Operations for the three months ended March 31, 2008: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 355,734 | $ | 217,468 | $ | — | $ | 573,202 | ||||||||||||
Other revenues | — | — | 945 | 557 | — | 1,502 | ||||||||||||||||||
Total revenues | — | — | 356,679 | 218,025 | — | 574,704 | ||||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | — | 83 | 286,344 | 120,562 | — | 406,989 | ||||||||||||||||||
Selling, general and administrative expenses | 509 | (2,035 | ) | 6,678 | 7,552 | — | 12,704 | |||||||||||||||||
Equity in the (earnings) loss of subsidiaries | — | — | (13,290 | ) | — | — | (13,290 | ) | ||||||||||||||||
Total cost & expenses | 509 | (1,952 | ) | 279,732 | 128,114 | — | 406,403 | |||||||||||||||||
Income (loss) from operations | (509 | ) | 1,952 | 76,947 | 89,911 | — | 168,301 | |||||||||||||||||
Interest income | — | 3,637 | — | 4,771 | — | 8,408 | ||||||||||||||||||
Interest expense | (465 | ) | (6,219 | ) | (2 | ) | (372 | ) | — | (7,058 | ) | |||||||||||||
Foreign currency gain (loss) | — | — | 6 | (6 | ) | — | — | |||||||||||||||||
Income (loss) before income taxes and minority interest | (974 | ) | (630 | ) | 76,951 | 94,304 | — | 169,651 | ||||||||||||||||
Income tax benefit (provision) | 376 | (23,481 | ) | (29,715 | ) | (6,684 | ) | — | (59,504 | ) | ||||||||||||||
Minority interest | — | (3,498 | ) | (14,628 | ) | — | — | (18,126 | ) | |||||||||||||||
Equity in subs (earnings) loss | 102,055 | 129,664 | — | 9,284 | (231,719 | ) | 9,284 | |||||||||||||||||
Income from continuing operations | 101,457 | 102,055 | 32,608 | 96,904 | (231,719 | ) | 101,305 | |||||||||||||||||
Income from discontinued Operations – net of tax | — | — | 152 | — | — | 152 | ||||||||||||||||||
Net income (loss) | $ | 101,457 | $ | 102,055 | $ | 32,760 | $ | 96,904 | $ | (231,719 | ) | $ | 101,457 | |||||||||||
24
Table of Contents
Consolidating Statement of Cash Flows for the three months ended March 31, 2008: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities | ||||||||||||||||||||||||
Net income | 101,457 | 102,055 | 32,760 | 96,904 | (231,719 | ) | 101,457 | |||||||||||||||||
Income from discontinued operations | — | — | 152 | — | — | 152 | ||||||||||||||||||
Income from continuing operations | $ | 101,457 | $ | 102,055 | $ | 32,608 | $ | 96,904 | $ | (231,719 | ) | $ | 101,305 | |||||||||||
Adjustments to reconcile income from continuing operations to net cash flows from operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | — | — | 10,518 | 9,335 | — | 19,853 | ||||||||||||||||||
(Gain) loss on sale of property, plant and equipment | — | — | 765 | (288 | ) | — | 477 | |||||||||||||||||
Deferred income taxes | 37,901 | — | — | — | — | 37,901 | ||||||||||||||||||
Minority interest in earnings | — | (463 | ) | 18,589 | — | — | 18,126 | |||||||||||||||||
Distributions less than equity earnings | (117,710 | ) | (10,972 | ) | (332 | ) | (71,542 | ) | 200,224 | (332 | ) | |||||||||||||
Equity earnings - GrowHow UK Limited | — | — | — | (9,284 | ) | — | (9,284 | ) | ||||||||||||||||
Non-cash gain on derivatives | (661 | ) | — | — | — | — | (661 | ) | ||||||||||||||||
Share-based compensation | 1,264 | — | — | — | — | 1,264 | ||||||||||||||||||
Amortization of intangible and other assets | — | — | 1,119 | 819 | — | 1,938 | ||||||||||||||||||
Change in operating assets and liabilities | (11,586 | ) | (5,063 | ) | (57,740 | ) | 72,766 | (70,427 | ) | (72,050 | ) | |||||||||||||
Net cash flows from operating activities — continuing operations | 10,665 | 85,557 | 5,527 | 98,710 | (101,922 | ) | 98,537 | |||||||||||||||||
Net cash flows from operating activities — discontinued operations | — | — | 11,037 | — | — | 11,037 | ||||||||||||||||||
Net Cash Flows from Operating Activities | 10,665 | 85,557 | 16,564 | 98,710 | (101,922 | ) | 109,574 | |||||||||||||||||
Investing Activities | ||||||||||||||||||||||||
Purchase of property, plant and equipment | — | — | (5,395 | ) | (1,077 | ) | — | (6,472 | ) | |||||||||||||||
Plant turnaround expenditures | — | — | (535 | ) | (92 | ) | — | (627 | ) | |||||||||||||||
Distributions received from unconsolidated affiliate | — | — | 6,927 | — | — | 6,927 | ||||||||||||||||||
Contribution settlement received from GrowHow UK Limited | — | — | — | 27,890 | — | 27,890 | ||||||||||||||||||
Proceeds from the sale of property, plant and equipment | — | — | 1,224 | 390 | — | 1,614 | ||||||||||||||||||
Net cash flows from investing activities – continuing operations | — | — | 2,221 | 27,111 | — | 29,332 | ||||||||||||||||||
Net cash flows from investing activities – discontinued operations | — | — | — | — | — | — | ||||||||||||||||||
Net Cash Flows from Investing Activities | — | — | 2,221 | 27,111 | — | 29,332 | ||||||||||||||||||
25
Table of Contents
Consolidating Statement of Cash Flows (continued) |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Financing Activities | ||||||||||||||||||||||||
Common stock issuances and vestings | (5,873 | ) | — | — | — | — | (5,873 | ) | ||||||||||||||||
Excess tax benefits from compensation plans | 7,695 | — | — | — | — | 7,695 | ||||||||||||||||||
Preferred share dividends paid | (1,275 | ) | — | — | — | — | (1,275 | ) | ||||||||||||||||
Change in investments and advances from (to) affiliates | (11,212 | ) | (106,183 | ) | 44,998 | (53,730 | ) | 126,127 | — | |||||||||||||||
Distributions to minority interests | — | — | (20,526 | ) | — | — | (20,526 | ) | ||||||||||||||||
Net cash flows from financing Activities – continuing Operations | (10,665 | ) | (106,183 | ) | 24,472 | (53,730 | ) | 126,127 | (19,979 | ) | ||||||||||||||
Net cash flows from financing activities – discontinued operations | — | — | — | — | — | — | ||||||||||||||||||
Net Cash Flows from Financing Activities | (10,665 | ) | (106,183 | ) | 24,472 | (53,730 | ) | 126,127 | (19,979 | ) | ||||||||||||||
Effect of Exchange Rate Changes on Cash | — | — | — | 32 | — | 32 | ||||||||||||||||||
Increase (decrease) in Cash and Cash Equivalents - | — | (20,626 | ) | 43,257 | 72,123 | 24,205 | 118,959 | |||||||||||||||||
Cash and Cash Equivalents at Beginning of Year | — | 55,857 | 267,145 | 906,752 | (531,516 | ) | 698,238 | |||||||||||||||||
Cash and Cash Equivalents at End of Year | $ | — | $ | 35,231 | $ | 310,402 | $ | 978,875 | $ | (507,311 | ) | $ | 817,197 | |||||||||||
26
Table of Contents
Condensed Consolidating Balance Sheet for the Year Ended December 31, 2007: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash, cash equivalents and restricted cash | $ | — | $ | 55,857 | $ | 267,145 | $ | 906,752 | $ | (531,516 | ) | $ | 698,238 | |||||||||||
Accounts receivable, net | 1 | 2 | 98,469 | 72,711 | — | 171,183 | ||||||||||||||||||
Inventories | — | — | 95,781 | 32,104 | 1,436 | 129,321 | ||||||||||||||||||
Other current assets | 10,614 | 638 | 11,127 | 6,454 | — | 28,833 | ||||||||||||||||||
Current assets held for sale – discontinued operations | — | — | 2,335 | — | — | 2,335 | ||||||||||||||||||
Total current assets | 10,615 | 56,497 | 474,857 | 1,018,021 | (530,080 | ) | 1,029,910 | |||||||||||||||||
Property, plant and equipment, net | — | — | 264,198 | 125,530 | — | 389,728 | ||||||||||||||||||
Equity investments | — | — | 10,488 | 341,498 | — | 351,986 | ||||||||||||||||||
Deferred plant turnaround costs, intangible and other assets | 6,732 | 8,333 | 18,984 | 45,174 | (5,549 | ) | 73,674 | |||||||||||||||||
Investments in and advances to (from) affiliates | 620,375 | 365,762 | 1,848,352 | 57,752 | (2,892,241 | ) | — | |||||||||||||||||
Noncurrent assets held for sale – discontinued operations | — | — | 43,029 | — | — | 43,029 | ||||||||||||||||||
Total Assets | $ | 637,722 | $ | 430,592 | $ | 2,659,908 | $ | 1,587,975 | $ | (3,427,870 | ) | $ | 1,888,327 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Customer prepayments | $ | — | $ | — | $ | 125,036 | $ | 174,315 | $ | — | $ | 299,351 | ||||||||||||
Accounts payable | 128 | — | 66,945 | 43,614 | — | 110,687 | ||||||||||||||||||
Accrued and other liabilities | 25,715 | 9,169 | 45,508 | 22,263 | — | 102,655 | ||||||||||||||||||
Current liabilities held for sale – discontinued operations | — | — | 4,993 | — | — | 4,993 | ||||||||||||||||||
Total current liabilities | 25,843 | 9,169 | 242,482 | 240,192 | — | 517,686 | ||||||||||||||||||
Long-term debt | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Deferred income taxes | 86,157 | — | — | 10,113 | 3,584 | 99,854 | ||||||||||||||||||
Pension and other liabilities | 79,650 | — | 11,628 | 2,866 | — | 94,144 | ||||||||||||||||||
Minority interest | — | 21,404 | 88,325 | — | — | 109,729 | ||||||||||||||||||
Noncurrent liabilities held for sale – discontinued operations | — | — | 739 | — | — | 739 | ||||||||||||||||||
Total liabilities and minority interest | 191,650 | 360,573 | 343,174 | 253,171 | 3,584 | 1,152,152 | ||||||||||||||||||
Preferred stock | 115,800 | — | — | — | — | 115,800 |
27
Table of Contents
Condensed Consolidating Balance Sheet (continued) |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Stockholders’ equity | ||||||||||||||||||||||||
Common stock | 142,170 | — | 73 | 32,458 | (32,531 | ) | 142,170 | |||||||||||||||||
Paid in capital | 618,873 | 150,218 | 1,910,748 | 1,133,745 | (3,194,710 | ) | 618,874 | |||||||||||||||||
Accumulated other comprehensive income (loss) | (22,002 | ) | — | — | 281,850 | (305,176 | ) | (45,328 | ) | |||||||||||||||
Retained earnings (accumulated deficit) | (408,769 | ) | (80,199 | ) | 405,913 | (113,249 | ) | 100,963 | (95,341 | ) | ||||||||||||||
Total stockholders’ equity | 330,272 | 70,019 | 2,316,734 | 1,334,804 | (3,431,454 | ) | 620,375 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 637,722 | $ | 430,592 | $ | 2,659,908 | $ | 1,587,975 | $ | (3,427,870 | ) | $ | 1,888,327 | |||||||||||
28
Table of Contents
Condensed Consolidating Balance Sheet as of March 31, 2007: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 1 | $ | 124,896 | $ | — | $ | 108,415 | $ | (2 | ) | $ | 233,310 | |||||||||||
Accounts receivable, net | — | — | 77,455 | 106,642 | (1 | ) | 184,096 | |||||||||||||||||
Inventories | — | — | 111,083 | 125,653 | (6,085 | ) | 230,651 | |||||||||||||||||
Other current assets | 7,460 | 37 | 11,121 | 8,644 | (668 | ) | 26,594 | |||||||||||||||||
Current assets held for sale – discontinued operations | — | — | 14,489 | — | — | 14,489 | ||||||||||||||||||
Total current assets | 7,461 | 124,933 | 214,148 | 349,354 | (6,756 | ) | 689,140 | |||||||||||||||||
Property, plant and equipment, net | — | 34 | 281,782 | 337,736 | 2 | 619,554 | ||||||||||||||||||
Equity investments | — | — | 11,544 | 155,202 | — | 166,746 | ||||||||||||||||||
Intangible assets, other assets and deferred plant turnaround costs | (1,839 | ) | 8,851 | 18,797 | 50,464 | (11,359 | ) | 64,914 | ||||||||||||||||
Investments in and advanced to (from) affiliates | 505,261 | 276,800 | 1,675,902 | 394,957 | (2,852,920 | ) | — | |||||||||||||||||
Noncurrent assets held for sale – discontinued operations | — | — | 89,908 | — | — | 89,908 | ||||||||||||||||||
Total assets | $ | 510,883 | $ | 410,618 | $ | 2,292,081 | $ | 1,287,713 | $ | (2,871,033 | ) | $ | 1,630,262 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 21 | $ | — | $ | 60,451 | $ | 70,094 | $ | 1 | $ | 130,567 | ||||||||||||
Accrued expenses and other current liabilities | 14,319 | 5,894 | 204,453 | 86,913 | (129,179 | ) | 182,400 | |||||||||||||||||
Current liabilities held for sale – discontinued operations | — | — | 16,654 | — | — | 16,654 | ||||||||||||||||||
Total current liabilities | 14,340 | 5,894 | 281,558 | 157,007 | (129,178 | ) | 329,621 | |||||||||||||||||
Long-term debt | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Deferred taxes | (5,510 | ) | — | — | 43,268 | — | 37,758 | |||||||||||||||||
Pension and other liabilities | 134,048 | (171 | ) | (108,805 | ) | 128,073 | 55,758 | 208,903 | ||||||||||||||||
Minority interest | — | 19,304 | 79,545 | — | 1 | 98,850 | ||||||||||||||||||
Noncurrent liabilities held for sale – discontinued operations | — | — | 4,069 | — | — | 4,069 | ||||||||||||||||||
Total liabilities and minority interest | 142,878 | 355,027 | 256,367 | 328,348 | (73,419 | ) | 1,009,201 | |||||||||||||||||
Preferred stock | 115,800 | — | — | — | — | 115,800 | ||||||||||||||||||
Common Shareholders’ Equity | ||||||||||||||||||||||||
Common stock | 145,192 | — | 73 | 49,709 | (49,782 | ) | 145,192 | |||||||||||||||||
Paid-in capital | 694,621 | 150,218 | 2,035,412 | 1,274,009 | (3,459,639 | ) | 694,621 | |||||||||||||||||
Accumulated other comprehensive income (loss) | (77,432 | ) | — | — | 14,031 | 15,051 | (48,350 | ) | ||||||||||||||||
Retained earnings (accumulated deficit) | (510,176 | ) | (94,627 | ) | 229 | (378,384 | ) | 696,756 | (286,202 | ) | ||||||||||||||
Total stockholders’ equity | 252,205 | 55,591 | 2,035,714 | 959,365 | (2,797,614 | ) | 505,261 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 510,883 | $ | 410,618 | $ | 2,292,081 | $ | 1,287,713 | $ | (2,871,033 | ) | $ | 1,630,262 | |||||||||||
29
Table of Contents
Consolidating Statement of Operations for the three months ended March 31, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 241,927 | $ | 257,539 | $ | — | $ | 499,466 | ||||||||||||
Other revenues | — | — | 749 | 709 | — | 1,458 | ||||||||||||||||||
Total revenues | — | — | 242,676 | 258,248 | — | 500,924 | ||||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | — | — | 215,089 | 207,175 | — | 422,264 | ||||||||||||||||||
Selling, general and administrative expenses | 531 | (2,291 | ) | 4,763 | 14,054 | — | 17,057 | |||||||||||||||||
Equity in the (earnings) loss of subsidiaries | — | — | (5,617 | ) | — | — | (5,617 | ) | ||||||||||||||||
Total cost & expenses | 531 | (2,291 | ) | 214,235 | 221,229 | — | 433,704 | |||||||||||||||||
Income (loss) from operations | (531 | ) | 2,291 | 28,441 | 37,019 | — | 67,220 | |||||||||||||||||
Interest income | — | 572 | 1,769 | 546 | — | 2,887 | ||||||||||||||||||
Interest expense | (465 | ) | (8,330 | ) | (2 | ) | (112 | ) | — | (8,909 | ) | |||||||||||||
Loss on debt | — | (38,662 | ) | — | — | — | (38,662 | ) | ||||||||||||||||
Foreign currency gain (loss) | — | — | 2 | (2 | ) | — | — | |||||||||||||||||
Income (loss) before income taxes and minority interest | (996 | ) | (44,129 | ) | 30,210 | 37,451 | — | 22,536 | ||||||||||||||||
Income tax benefit | 505 | 8,895 | (15,331 | ) | 774 | — | (5,157 | ) | ||||||||||||||||
Minority interest | — | (1,667 | ) | (6,969 | ) | — | — | (8,636 | ) | |||||||||||||||
Equity in subsidiary earnings | 7,701 | 44,602 | — | — | (52,203 | ) | — | |||||||||||||||||
Income from continuing operations | 7,210 | 7,701 | 7,910 | 38,225 | (52,303 | ) | 8,743 | |||||||||||||||||
Income (loss) from discontinued operations — net of tax | — | — | (1,533 | ) | — | — | (1,533 | ) | ||||||||||||||||
Net income | $ | 7,210 | $ | 7,701 | $ | 6,377 | $ | 38,225 | $ | (52,303 | ) | $ | 7,210 | |||||||||||
30
Table of Contents
Consolidating Statement of Cash Flows for the three months ended March 31, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities | ||||||||||||||||||||||||
Net income | 7,210 | 7,701 | 6,377 | 38,225 | (52,303 | ) | 7,210 | |||||||||||||||||
Loss from discontinued operations | — | — | (1,533 | ) | — | — | (1,533 | ) | ||||||||||||||||
Income from continuing operations | $ | 7,210 | $ | 7,701 | $ | 7,910 | $ | 38,225 | $ | (52,303 | ) | $ | 8,743 | |||||||||||
Adjustments to reconcile net income from continuing operations to net cash flows from operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | — | — | 17,948 | 5,678 | — | 23,626 | ||||||||||||||||||
Deferred income taxes | — | — | 1,017 | 7,273 | 8,290 | |||||||||||||||||||
Minority interest in earnings | — | 803 | 7,833 | — | — | 8,636 | ||||||||||||||||||
Distributions in excess of (less than) equity earnings | 253,116 | 70,678 | (5,617 | ) | 25,666 | (349,460 | ) | (5,617 | ) | |||||||||||||||
Non-cash (gain) loss on derivatives | — | — | 1,830 | (4,336 | ) | (326 | ) | (2,832 | ) | |||||||||||||||
Share-based compensation | 3,085 | — | — | — | (217 | ) | 2,868 | |||||||||||||||||
Amortization of intangible and other assets | — | — | 2,341 | — | — | 2,341 | ||||||||||||||||||
Non-cash loss on early retirement of debt | — | 4,662 | — | — | — | 4,662 | ||||||||||||||||||
Change in operating assets and liabilities — continuing operations | (65,338 | ) | 576 | (6,283 | ) | 117,646 | (16,603 | ) | 29,998 | |||||||||||||||
Net cash flows from operating activities — continuing operations | 198,073 | 84,420 | 26,979 | 190,152 | (418,909 | ) | 80,715 | |||||||||||||||||
Net cash flows from operating activities — discontinued operations | — | — | (1,127 | ) | — | — | (1,127 | ) | ||||||||||||||||
Net Cash Flows from Operating Activities | 198,073 | 84,420 | 25,852 | 190,152 | (418,909 | ) | 79,588 | |||||||||||||||||
Investing Activities | ||||||||||||||||||||||||
Purchase of property, plant and equipment | — | (34 | ) | (1,796 | ) | (4,940 | ) | 34 | (6,736 | ) | ||||||||||||||
Plant turnaround expenditures | — | — | (7,511 | ) | (1,157 | ) | (174 | ) | (8,842 | ) | ||||||||||||||
Net Cash Flows from Investing Activities — Continuing Operations | — | (34 | ) | (9,307 | ) | (6,097 | ) | (140 | ) | (15,578 | ) | |||||||||||||
Net Cash Flows from Investing Activities — Discontinued Operations | — | — | — | — | — | — | ||||||||||||||||||
Net Cash Flows from Investing Activities | — | (34 | ) | (9,307 | ) | (6,097 | ) | (140 | ) | (15,578 | ) | |||||||||||||
31
Table of Contents
Consolidating Statement of Cash Flows (continued)
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Financing Activities | ||||||||||||||||||||||||
Issuance of debt | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Principal payments under borrowing arrangements | — | (331,300 | ) | (1 | ) | — | 2,501 | (328,800 | ) | |||||||||||||||
Payments for debt issuance costs | — | (5,429 | ) | — | — | — | (5,429 | ) | ||||||||||||||||
Common stock issuances and vestings | 61 | — | — | — | 215 | 276 | ||||||||||||||||||
Preferred share dividends paid | (1,275 | ) | — | — | — | — | (1,275 | ) | ||||||||||||||||
Change in investments and advances from (to) affiliates | (196,859 | ) | (53,497 | ) | (12,070 | ) | (153,907 | ) | 416,333 | — | ||||||||||||||
Distributions to minority interests | — | — | (4,474 | ) | — | — | (4,474 | ) | ||||||||||||||||
Net Cash Flows from Financing Activities — Continuing Operations | (198,073 | ) | (60,226 | ) | (16,545 | ) | (153,907 | ) | 419,049 | (9,702 | ) | |||||||||||||
Net Cash Flows from Financing Activities — Discontinued Operations | — | — | — | — | — | — | ||||||||||||||||||
Net Cash Flows from Financing Activities | (198,073 | ) | (60,226 | ) | (16,545 | ) | (153,907 | ) | 419,049 | (9,702 | ) | |||||||||||||
Effect of Exchange Rate Changes on Cash | — | — | — | (15 | ) | — | (15 | ) | ||||||||||||||||
Increase (decrease) in Cash and Cash Equivalents | — | 24,160 | — | 30,133 | — | 54,293 | ||||||||||||||||||
Cash and Cash Equivalents at Beginning of Year | 1 | 100,736 | — | 78,282 | (2 | ) | 179,017 | |||||||||||||||||
Cash and Cash Equivalents at End of Year | $ | 1 | $ | 124,896 | $ | — | $ | 108,415 | $ | (2 | ) | $ | 233,310 | |||||||||||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
As you read this management’s discussion and analysis of financial condition and results of operations, you should refer to our Consolidated Financial Statements and related Notes included in Item 1,Financial Statements.
Introduction
We are a leading North American producer and marketer of wholesale nitrogen products, serving agricultural and industrial markets. Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. The nitrogen products industry has periods of oversupply during industry downturns that lead to capacity shutdowns at the least cost-effective plants. These shutdowns are followed by supply shortages, which result in higher selling prices and higher industry-wide production rates during industry upturns. The higher selling prices encourage capacity additions until we again start to see an oversupply, and the cycle repeats itself.
Natural gas is the most significant raw material in the production of nitrogen products. In the 2008 first quarter, natural gas prices have experienced additional volatility and increased significantly from the December 31, 2007 forecasted prices.
The key drivers of our profitability are nitrogen products selling prices, as determined primarily by the global nitrogen demand/supply balance; and natural gas costs, in North American markets. Recent demand has been affected by the growing global population and its preference for a higher-protein diet, by low global stock-to-use ratios of grains and by the rise of corn-consuming biofuels in North America.
Imports account for over half of the total North American nitrogen supply, with levels varying among the various products. Most producers exporting nitrogen products into North America can afford to do so because they are manufacturing product with lower cost gas than that which is available to North American producers.
Our sales volumes depend primarily on our plant’s operating rates. We also purchase product from other manufacturers and importers for resale; however, historic gross margins on these volumes have not been significant. Profitability and cash flows from our nitrogen products are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting our nitrogen products results include the level of planted corn and wheat acres, transportation costs, weather conditions (particularly during planting season), grain prices and other variables described in Item 1 “Business” and Item 2 “Properties” sections of our 2007 Form 10-K filing with the Securities Exchange Commission.
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RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2008 COMPARED WITH
QUARTER ENDED MARCH 31, 2007
QUARTER ENDED MARCH 31, 2007
Consolidated Results
We reported net income of $101.5 million for the 2008 first quarter compared with 2007 first quarter net income of $7.2 million. The 2007 net income includes a $38.7 million ($24.3 million, net of taxes) charge for the early retirement of debt. The net income increase is primarily due to higher sales prices as a result of increased demand for nitrogen products, specifically in the agricultural markets.
Three-months ended March 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Sales | Average | Sales | Average | |||||||||||||
(quantities in thousands of tons) | Volumes | Unit Price1 | Volumes | Unit Price1 | ||||||||||||
Ammonia2 | 364 | $ | 462 | 352 | $ | 331 | ||||||||||
UAN (32% basis)3 | 917 | $ | 285 | 940 | $ | 184 | ||||||||||
Urea | 24 | $ | 419 | 32 | $ | 298 | ||||||||||
Ammonium nitrate2 | 172 | $ | 304 | 187 | $ | 222 |
1. | After deducting outbound freight costs. | |
2. | 2007 ammonia and ammonium nitrate sales volumes and prices have been adjusted to exclude Terra’s UK operations for comparability to 2008 volumes and pricing. | |
3. | The nitrogen content of UAN is 32% by weight. |
Revenues for the quarter ended March 31, 2008 increased $73.8 million, or 15%, compared with the same 2007 quarter primarily due to higher sales prices for all nitrogen products, specifically UAN, partially offset by lower sales volumes. The price increase is due to improved demand for nitrogen products. The 2007 first quarter revenues included $89.9 million from the UK. The UK operations were contributed into the GrowHow UK Limited joint venture during the 2007 third quarter.
Operating income for the 2008 first quarter was $168.3 million which was $101.1 million more than the $67.2 million income in the 2007 first quarter. Higher first quarter sales prices contributed $173.5 million to the 2008 first quarter operating income. This increase was partially offset by increased costs of $82.5 million, primarily as a result of higher gas costs and increased costs relating to purchased product for resale. Increased equity earnings contributed $7.7 million to operating income. Decreased selling, general and administrative (SGA) costs contributed $4.4 million to operating income in the 2008 first quarter as compared to the 2007 first quarter. The SGA cost decreases are due to reduced share-based compensation costs of $3.2 million and reduced costs relating to the UK operations of $2.2 million; offset by higher professional services fees of $1.0 million.
Discontinued Operations
We have reported our Beaumont, Texas operations as discontinued operations for the periods ending March 31, 2008 and 2007. The Beaumont operations were included in our methanol segment in prior periods. In connection with reporting discontinued operations, we have determined that our methanol segment no longer meets the requirements of a reporting segment.
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Minority Interest
Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2008 and 2007 amounts are directly related to TNCLP earnings and losses. During the first quarter of 2008, the cumulative shortfall of the Minimum Quarterly Distribution was satisfied which entitled us to increased income allocations as provided for in the TNCLP Partnership Agreement. The current quarter minority interest balance reflects the impact of these adjusted income allocations.
Income Taxes
Income taxes for the first quarter 2008 were recorded based on the estimated effective tax rate for the individual jurisdictions in which we operate. The estimated annual effective tax rates were 37.0% and 36.5% in the quarters ended March 31, 2008 and 2007, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, which included $282.4 million related to customer prepayments, totaled $817.2 million at March 31, 2008. Our primary uses of cash are to fund our working capital requirements, make payments on our debt and other obligations and fund plant turnarounds and capital expenditures. The principal sources of these cash outlays are cash flow from operations, cash on hand and, to the extent necessary, borrowings under available bank facilities.
Net cash provided by continuing operations in the first three months of 2008 was $98.5 million and net cash provided by discontinuing operations was $11.0 million. Cash from continuing operations was composed of $170.6 million of cash provided from operating activities, offset by $72.1 million to fund seasonal working capital requirements. The primary working capital needs were to fund $85.1 million of inventories offset by $17.0 million of customer prepayments. The increase in inventories was due to a wet spring which delayed planting, and thus delayed delivery of product.
During the first three months, we funded plant and equipment purchases of $6.5 million primarily for replacement or sustaining capital needs. Plant turnaround costs represent cash used for the periodic scheduled major maintenance of our continuous process production facilities that is performed at each plant, generally every two years. We funded $0.6 million of plant turnaround costs in the first three months of 2008. We received $27.9 million from GrowHow UK Limited for our contribution settlement from the joint venture.
In April 2006, the Board of Directors authorized us to repurchase a maximum of 10%, or 9,516,817 shares, of our then outstanding common stock on the open market, in private transactions or otherwise. We did not repurchase any shares in the first quarter of 2008. As of March 31, 2008, we have repurchased a total of 6,675,100 shares, which results in 2,841,717 shares that we are authorized to repurchase by June 30, 2008.
We paid dividends on the outstanding preferred stock of $1.3 million for the three-month periods ending March 31, 2008 and 2007.
Distributions paid to the minority TNCLP common unit holders in the first three months of 2008 and 2007 were $20.5 million and $4.5 million, respectively. TNCLP distributions are based on “Available Cash” as defined in the Partnership Agreement.
In February 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. These notes and guarantees are unsecured and will rank equal in right of payment with any future senior obligations of such guarantors.
In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. Borrowing availability under the credit facility is generally based on 100% eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. These facilities include $50 million only available for the use of TNCLP, one of our consolidated subsidiaries. At March 31, 2008, there were no outstanding revolving credit borrowings and there were $10.3 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $189.7 million under the facilities. We are required to maintain a combined minimum unused borrowing availability of $30 million. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, if our borrowing availability falls below a combined $60 million, we are required to have generated $60 million of operating cash flows, or earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters.
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Our ability to meet credit facility covenants will depend on future market conditions, operating cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Failure to meet these covenants could result in additional costs and fees to amend the credit facility or could result in termination of the facility. Based on current market conditions for our finished products and natural gas, we anticipate that we will be able to meet our covenants through 2008. If there were to be any adverse changes in the factors discussed above, we may need a waiver of our credit facility covenants, of which, there is no assurance that we would receive such waivers.
There were no material changes outside of the ordinary course of business to our contractual obligations or off-balance sheet arrangements presented in Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsof the Annual Report on Form 10-K for the period ended December 31, 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from interest rates, foreign exchange rates, natural gas prices and nitrogen prices. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We intend to use derivative financial instruments as risk management tools and not for speculative investment purposes. Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of Terra’s Annual Report on Form 10-K for the year ended December 31, 2007 provides more information as to the types of practices and instruments used to manage risk. There were no material changes in our use of financial instruments during the quarter ended March 31, 2008.
The volume of natural gas hedged varies from time to time based on management’s judgment of market conditions, particularly natural gas prices and prices for nitrogen products. Management also considers our position related to forward fixed price sales contracts in determining the level of derivatives necessary. Contracts were in place at March 31, 2008 to cover approximately 18% of our natural gas requirements for the succeeding twelve months. Our ability to manage exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by oue bank agreement covenants.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no significant changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements are based upon the assumptions as to future events that may not prove to be accurate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These include, among others, statements relating to:
• | changes in financial markets, | ||
• | general economic conditions within the agricultural industry, | ||
• | competitive factors and price changes (principally, sales prices of nitrogen products and natural gas costs), | ||
• | changes in product mix, | ||
• | changes in the seasonality of demand patterns, | ||
• | changes in weather conditions, | ||
• | changes in environmental and other government regulations, | ||
• | changes in agricultural regulations, and | ||
• | other risks detailed in “Risk Factors” in our 2007 Annual Report. |
Additional information as to these factors can be found in our 2007 Annual Report in the sections entitled “Business,” “Legal Proceedings,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the “Notes” to our consolidated financial statements included as part of this report.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
There were no significant changes in our risk factors during the first quarter of 2008 as compared to the risk factors identified in our 2007 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Company Purchases of Equity Securities
On April 25, 2006, the Board of Directors authorized us to repurchase a maximum of 10 percent, or 9,516,817 shares, of our then outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by us. During the 2008 first quarter, we did not repurchase any shares under the stock buyback program. The remaining number of shares that we are authorized to repurchase is 2,841,717 at March 31, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.1 | Terra Industries Inc. Excess Benefit Plan, as amended and restated effective as of January 1, 2008 | |
Exhibit 10.2 | Consulting and Non-Competition Agreement between Terra Industries Inc. and Francis G. Meyer dated April 1, 2008, filed as Exhibit 10.1 to Terra Industries Inc.’s Form 8-K dated April 1, 2008, is incorporated herein by reference | |
Exhibit 10.3 | Supplemental Indenture, dated January 9, 2008, by and among Terra Capital, Inc., Terra Industries Inc., Terra Environmental Technologies, Inc., the existing guarantors named therein and U.S. Bank National Association, as trustee filed as Exhibit 4.1 to Terra Industries Inc.’s Form 8-K dated January 9, 2008, is incorporated herein by reference. | |
Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TERRA INDUSTRIES INC. | ||||
Date: April 25, 2008 | /s/ Daniel D. Greenwell | |||
Daniel D. Greenwell | ||||
Senior Vice President and Chief Financial Officer and a duly authorized signatory |
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EXHIBIT INDEX
Exhibit 10.1 | Terra Industries Inc. Excess Benefit Plan, as amended and restated effective as of January 1, 2008 | |
Exhibit 10.2 | Consulting and Non-Competition Agreement between Terra Industries Inc. and Francis G. Meyer dated April 1, 2008, filed as Exhibit 10.1 to Terra Industries Inc.’s Form 8-K dated April 1, 2008, is incorporated herein by reference | |
Exhibit 10.3 | Supplemental Indenture, dated January 9, 2008, by and among Terra Capital, Inc., Terra Industries Inc., Terra Environmental Technologies, Inc., the existing guarantors named therein and U.S. Bank National Association, as trustee filed as Exhibit 4.1 to Terra Industries Inc.’s Form 8-K dated January 9, 2008, is incorporated herein by reference. | |
Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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