FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended March 31, 1997
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The transition period from to
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Commission file number 1-7677
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LSB INDUSTRIES, INC.
Exact name of Registrant as specified in its charter
DELAWARE 73-1015226
- ------------------------------ ---------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
16 South Pennsylvania, Oklahoma City, Oklahoma 73107
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Address of principal executive offices (Zip Code)
(405) 235-4546
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Registrant's telephone number, including area code
None
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES x NO
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The number of shares outstanding of the Registrant's voting Common
Stock, as of May 1, 1997 was 12,882,656 shares excluding 2,031,820
shares held as treasury stock.
PART I
FINANCIAL INFORMATION
Company or group of companies for which report is filed: LSB
Industries, Inc. and all of its wholly-owned subsidiaries.
The accompanying condensed consolidated balance sheet of LSB
Industries, Inc. at March 31, 1997, the condensed consolidated
statements of operations and cash flows for the three month
periods ended March 31, 1997 and 1996 have been subjected to a
review, in accordance with standards established by the American
Institute of Certified Public Accountants, by Ernst & Young LLP,
independent auditors, whose report with respect thereto appears
elsewhere in this Form 10-Q. The financial statements mentioned
above are unaudited and reflect all adjustments, consisting
primarily of adjustments of a normal recurring nature, which are,
in the opinion of management, necessary for a fair presentation
of the interim periods. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the full year. The condensed
consolidated balance sheet at December 31, 1996, was derived from
audited financial statements as of that date.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1997 is unaudited)
(Dollars in thousands)
March 31, December 31,
ASSETS 1997 1996
_________________________________________ ___________ __________
Current assets:
Cash and cash equivalents $ 4,597 $ 1,620
Trade accounts receivable, net of allowance 55,819 50,791
Inventories:
Finished goods 39,402 36,304
Work in process 8,709 12,084
Raw materials 19,193 19,594
___________ __________
Total inventory 67,304 67,982
Supplies and prepaid items 8,007 7,217
___________ __________
Total current assets 135,727 127,610
Property, plant and equipment, net 118,983 103,143
Investments and other assets:
Loans receivable, secured by real estate 764 15,010
Other assets, net of allowance 15,511 15,521
___________ __________
$ 270,985 $ 261,284
=========== ==========
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Information at March 31, 1997 is unaudited)
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
________________________________________ ___________ __________
Current liabilities:
Drafts payable $ 632 $ 536
Accounts payable 36,849 41,796
Accrued liabilities 12,947 12,780
Current portion of long-term debt 16,197 13,007
__________ __________
Total current liabilities 66,625 68,119
Long-term debt 136,959 119,277
Contingencies (Note 4)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,539 shares
issued and outstanding (1,539 in 1996) 146 146
Stockholders' equity (Note 3):
Series B 12% cumulative, convertible
preferred stock, $100 par value;
20,000 shares issued and outstanding 2,000 2,000
Series 2 $3.25 convertible, exchangeable
Class C preferred stock, $50 stated
value; 920,000 shares issued 46,000 46,000
Common stock, $.10 par value; 75,000,000
shares authorized, 14,914,476 shares
issued (14,888,476 in 1996) 1,491 1,489
Capital in excess of par value 37,922 37,843
Accumulated deficit (8,947) (2,706)
__________ __________
78,466 84,626
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 1,982,620 shares
(1,913,120 in 1996) 11,011 10,684
__________ __________
Total stockholders' equity 67,255 73,742
__________ __________
$ 270,985 $ 261,284
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
__________ __________
Revenues:
Net sales $ 73,234 $ 69,495
Other income 1,630 1,411
__________ __________
74,864 70,906
Costs and expenses:
Cost of sales 62,312 54,688
Selling, general and administrative 14,872 13,718
Interest 3,056 2,969
__________ __________
80,240 71,375
__________ __________
Loss before provision for
income taxes (5,376) (469)
Provision for income taxes 62 62
---------- ----------
Net loss $ (5,438) $ (531)
========== ==========
Net loss applicable to
common stock (Note 2) $ (6,241) $ (1,350)
Average common shares outstanding (Note 2): ========== ==========
Primary 12,974,824 12,911,387
Fully diluted 12,974,824 12,911,387
Loss per common share (Note 2):
Primary $ (.48) $ (.10)
========== ==========
Fully diluted $ (.48) $ (.10)
========== ==========
(See accompanying notes)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 1997 and 1996
(Dollars in thousands)
1997 1996
___________ __________
Cash flows from operations:
Net loss $ (5,438) $ (531)
Adjustments to reconcile net loss
to cash flows used by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 2,439 2,307
Other 283 307
Provision for possible losses
on receivables and other assets 152 539
Gain on sale of assets (65) (659)
Recapture of prior period provisions for
loss on loans receivable secured by real estate (1,383) -
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (4,841) (7,958)
Inventories 678 (616)
Supplies and prepaid items (791) (1,444)
Accounts payable (4,947) 5,625
Accrued liabilities 169 853
___________ __________
Net cash used by operations (13,744) (1,577)
Cash flows from investing activities:
Capital expenditures (2,819) (2,173)
Principal payments on notes receivable 183 44
Proceeds from sales of equipment and
real estate properties 160 15
Proceeds from sale of investment securities - 1,444
Increase in other assets (721) (96)
___________ __________
Net cash used in investing activities (3,197) (766)
Cash flows from financing activities:
Payments on long-term and other debt (21,172) (2,290)
Long-term and other borrowings 54,451 -
Net change in revolving debt (12,408) 4,787
Net change in drafts payable 96 (208)
Dividends paid on preferred stocks (Note 3) (803) (820)
Purchases of treasury stock (Note 3) (327) (7)
Net proceeds from issuance of common stock 81 -
___________ __________
Net cash provided by financing activities 19,918 1,462
___________ __________
Net increase (decrease) in cash 2,977 (881)
Cash and cash equivalents at beginning of period 1,620 1,420
----------- ----------
Cash and cash equivalents at end of period $ 4,597 $ 539
(See accompanying notes)
Note 1: At December 31, 1996, the Company had regular-tax net
operating loss ( NOL ) carryforwards for tax purposes of
approximately $45 million (approximately $10 million alternative
minimum tax NOLs). Such amounts of regular-tax NOL expire
beginning in 1999. The Company also has investment tax credit
carryforwards of approximately $356,000, which begin expiring in
1997.
The Company s provision for income taxes for the three months
ended March 31, 1997 of $62,000 is for current state income taxes
and federal alternative minimum tax.
Note 2: Primary earnings per common share are based upon the
weighted average number of common shares and dilutive common
equivalent shares outstanding during each period, after giving
appropriate effect to preferred stock dividends.
Fully diluted earnings per share are based on the weighted
average number of common shares and dilutive common equivalent
shares outstanding and the assumed conversion of dilutive
convertible securities outstanding, if any, after appropriate
adjustment for interest and related income tax effects on
convertible notes payable.
Net income applicable to common stock is computed by adjusting
net income by the amount of preferred stock dividends, including
past due undeclared or unpaid dividends, if cumulative.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be
adopted on December 31, 1997. At that time, the Company will he
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. Due to losses
incurred during the fiscal quarters ended March 31, 1997 and
March 31, 1996, the impact of Statement No. 128 on the
calculation of both primary and fully diluted earnings per share
for these quarters is not expected to be material.
Note 3: The table below provides detail of activity in the Stockholders'
equity accounts for the three months ended March 31, 1997:
Retained
Common Stock Non- Capital Earnings Treasury
_______________ redeemable in excess (Accumu- Treasury Stock
Par Preferred of par lated Stock- Prefer-
Shares Value Stock Value deficit) Common red Total
______ ______ _________ ________ ______ _______ _______ ______
(In thousands)
Balance at December 31, 1996 14,888 $ 1,489 $ 48,000 $ 37,843 $(2,706) $(10,684) $ (200) 73,742
Net loss (5,438) (5,438)
Exercise of stock options 26 2 79 81
Dividends declared:
Series B 12% preferred
stock ($3.00 per share) (60) (60)
Series 2 preferred
stock ($.81 per share) (743) (743)
Purchase of treasury stock (327) (327)
______ ______ ________ _______ _______ _______ ______ ______
(1)
Balance at March 31, 1997 14,914 $ 1,491 $ 48,000 $ 37,922 $(8,947) $(11,011) $ (200) $67,255
====== ====== ======== ======= ======= ======= ====== ======
(1)
Includes 1,982,620 shares of the Company's Common Stock held in treasury.
Excluding the 1,982,620 shares held in treasury, the outstanding
shares of the Company's Common Stock at March 31, 1997 were 12,931,856.
Note 4: Following is a summary of certain legal actions
involving the Company:
A. In 1987, the U.S. Government notified one of the Company's
subsidiaries along with numerous other companies, of
potential responsibility for clean-up of a waste disposal
site in Oklahoma. No legal action has yet been filed. The
amount of the Company's cost associated with the clean-up of
the site is unknown due to continuing changes in (i) the
estimated total cost of clean-up of the site and (ii) the
percentage of the total waste which was alleged to have been
contributed to the site by the Company, accordingly, no
provision for any liability which may result has been made
in the accompanying financial statements. The subsidiary's
insurance carriers have been notified of this matter;
however, the amount of possible coverage, if any, is not yet
determinable.
B. The State of Arkansas performed a preliminary assessment of
the Chemical Business' primary manufacturing facility (the
"Site") and advised the Company that the Site has had
certain releases of contaminants. On July 18, 1994, the
Company received a report from the State of Arkansas which
contained findings of violations of certain environmental
laws and requested the Company to conduct further
investigations to better determine the compliance status of
the Company and releases of contaminants at the Site. On
May 2, 1995, the Company signed a Consent Administrative
Agreement ("Agreement") with the State of Arkansas. The
Agreement provides for the Company to remediate and close a
certain landfill, monitor groundwater for certain
contaminants and depending on the results of the monitoring
program to submit a remediaton plan, upgrade certain
equipment to reduce wastewater effluent, and pay a civil
penalty of $25,000.
Subsequent to the signing of the Agreement on May 2, 1995,
the Company completed its remediation and closure activities
and had the "Closure Certification Report" approved by the
State of Arkansas. The Company also submitted a
"Groundwater Monitoring Work Plan" to the State of Arkansas
which has been approved and the initial phase of field work
has been completed. A work plan for the second phase of the
monitoring has also been submitted and approved by the state
of Arkansas.
On February 12, 1996, the Company entered into another
Consent Administrative Agreement ("Additional Agreement")
with the state of Arkansas to resolve certain compliance
issues associated with nitric acid concentrations. The
Company has installed additional pollution control equipment
to reduce opacity and constituent emissions which impact
opacity. The Company was assessed $50,000 in civil
penalties associated with the Original Agreement. In the
summer of 1996 and then on January 28, 1997, the Company
executed amendments to the Additional Agreement ("Amended
Agreements"). The Amended Agreements acknowledged
compliance with the requirements of the prior Agreement and
imposed a $150,000 civil penalty. As of March 31, 1997, the
Company has paid $144,000 of the above penalties. The
Company is planning to undertake one or more supplemental
environmental projects in lieu of paying the remaining
penalty due. Based on information presently available, the
Company does not believe that compliance with these
agreements should have a material adverse effect on the
Company or the Company's financial condition or results of
operation.
C. In 1996, a lawsuit was filed against the Company's Chemical
Business by a group of residents of El Dorado, Arkansas,
asserting a citizens' suit against the Chemical Business as
a result of certain alleged violations of the Clean Air Act,
the Clean Water Act, the Chemical Business' air and water
permits and certain other environmental laws, rules and
regulations. The citizens' suit requests the court to order
the Chemical Business to cure such alleged violations, if
any, plus penalties as provided under the applicable
statutes. The Company's Chemical Business will assert all
defenses available to it and will vigorously defend itself.
In July 1996, several of the same individuals who are
plaintiffs in the citizens' suit referenced above filed a
toxic tort lawsuit against the Company's Chemical Business
alleging that they suffered certain injuries and damages as
a result of alleged releases of toxic substances from the
Chemical Business' El Dorado, Arkansas manufacturing
facility. In October 1996, another toxic tort lawsuit was
filed against the Company's Chemical Business. This
subsequent action asserts similar damage theories as the
previously discussed lawsuit, except this action attempts to
have a class certified to represent substantially all
allegedly affected persons. The plaintiffs are suing for an
unspecified amount of actual and punitive damages.
The Company's insurance carriers have been notified of these
matters. The Company and the Chemical Business maintain an
Environmental Impairment Insurance Policy ("EIL Insurance")
that provides coverage to the Company and the Chemical
Business for certain discharges, dispersals, releases, or
escapes of certain contaminants and pollutants into or upon
land, the atmosphere or any water course or body of water
from the Site, which has caused bodily injury, property
damage or contamination to others or to other property not
on the Site. The EIL Insurance provides limits of liability
for each loss up to $10.0 million and a similar $10.0
million limit for all losses due to bodily injury or
property damage, except $5.0 million for all remediation
expenses, with the maximum limit of liability for all claims
under the EIL Insurance not to exceed $10.0 million for each
loss or remediation expense and $10.0 million for all losses
and remediation expenses. The EIL Insurance also provides a
retention of the first $500,000 per loss or remediation
expense that is to be paid by the Company.
D. A civil cause of action has been filed against the Company's
Chemical Business and five (5) other unrelated commercial
explosives manufacturers alleging that the defendants
allegedly violated certain federal and state antitrust laws
in connection with alleged price fixing of certain explosive
products. The plaintiffs are suing for an unspecified
amount of damages, which, pursuant to statute, plaintiffs
are requesting be trebled, together with costs. Based on
the information presently available to the Company, the
Company does not believe that the Chemical Business
conspired with any party, including but not limited to, the
five (5) other defendants, to fix prices in connection with
the sale of commercial explosives. Discovery has only
recently commenced in this matter. The Chemical Business
intends to vigorously defend itself in this matter.
The Company's Chemical Business has been added as a
defendant in a separate lawsuit pending in Missouri. This
lawsuit alleges a national conspiracy, as well as a regional
conspiracy, directed against explosive customers in Missouri
and seeks unspecified damages. The Company's Chemical
Business has been included in this lawsuit because it sold
products to customers in Missouri during a time in which
other defendants have admitted to participating in an
antitrust conspiracy, and because it has been sued in the
preceding described lawsuit. Based on the information
presently available to the Company, the Company does not
believe that the Chemical Business conspired with any party,
to fix prices in connection with the sale of commercial
explosives. The Chemical Business intends to vigorously
defend itself in this matter.
For several years the explosive industry has been under an
investigation by the U.S. Department of Justice. Certain
explosive companies plead guilty to antitrust violations.
In connection with that investigation, the Chemical Business
received and has complied with certain document subpoenas,
and certain of the Chemical Business' employees have been
subpoenaed to testify in connection with such investigation.
As of the date of this report, the Chemical Business has not
been identified as a target of this investigation.
The Company including its subsidiaries, is a party to
various other claims, legal actions, and complaints arising
in the ordinary course of business. In the opinion of
management after consultation with counsel, all claims,
legal actions (including those described above) and
complaints are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve
such amounts that unfavorable disposition would not have a
material effect on the financial position of the Company,
but could have a material impact to the net income (loss) of
a particular quarter or year, if resolved unfavorably.
Debt Guarantee
The Company has guaranteed approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft
Company, in exchange for a 25.6% ownership interest, to which no
value has been assigned as of March 31, 1997. The Company has
advanced the aviation company $241,000 as of March 31, 1997 and
is accruing losses of the aviation company based on its ownership
percentage. As a result, the Company has recorded losses of
$1,403,000 ($187,000 in the first quarter of 1997, and $626,000
and $590,000 in the years ended December 31, 1996 and 1995,
respectively) related to the debt guarantee. The debt guarantee
relates to a $2 million term note and up to $600,000 of a $2
million revolving credit facility. The $2 million term note
requires interest only payments through September 1998;
thereafter, it requires monthly principal payments of $11,111
plus interest beginning in October 1998 until it matures on
August 8, 1999, at which time all outstanding principal and
unpaid interest are due. In the event of default of this note,
the Company is required to assume payments on the note with the
term extended until August 2004. The $2 million revolving credit
facility, on which a subsidiary of the Company has guaranteed up
to $600,000 of indebtedness, had a balance of approximately
$400,000 as of March 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be
read in conjunction with a review of the Company's March 31, 1997
Condensed Consolidated Financial Statements.
OVERVIEW
The Company is pursuing a strategy of focusing on its more
profitable businesses and concentrating on businesses and product
lines in niche markets where the Company has established or can
establish a position as a market leader. In addition, the
Company is seeking to improve its liquidity and profits through
liquidation of selected assets that are on its balance sheet and
on which it is not realizing an acceptable return nor does it
have the potential to do so.
In this connection, the Company has been concentrating on
reshaping the Automotive Products Business by the liquidation of
certain of their assets that don't have the potential to earn an
acceptable return and focusing on product lines that management
believes have strategic advantages within select niche markets.
The Company has also recruited new key management people in the
Automotive Products Business including marketing, materials
control, manufacturing, and financial. The Company continues to
explore its alternatives to accomplish these goals.
In addition, the Company has been liquidating certain slow
moving inventory in the Industrial Products Business in the
ordinary course of business. It is the present intention of the
Company to limit this Business to lines of machine tools which
should result in an acceptable return on capital employed.
Certain statements contained in this Overview are forward-
looking statements, and the results thereof could differ
materially from such statements if the Company is unable to
liquidate such assets in a reasonable period or on reasonable
terms, and if able to liquidate such assets, it may not be able
to improve profits in the Automotive Products Business or have an
acceptable return on capital employed in these Businesses if
general economic conditions deteriorate drastically from the
environment these Businesses currently operate in or these
Businesses are unable to meet competitive pressures in the market
place which restrict these Businesses from manufacturing or
purchasing and selling their products at acceptable prices.
Information about the Company's continuing operations in
different industry segments for the three months ended March 31,
1997 and 1996 is detailed below.
Three Months Ended March 31,
1997 1996
___________ __________
(In thousands)
(Unaudited)
Sales:
Chemical $ 40,599 $ 36,520
Environmental Control 21,623 18,995
Automotive Products 7,992 10,956
Industrial Products 3,020 3,024
___________ __________
$ 73,234 $ 69,495
=========== ==========
Gross profit:
Chemical $ 3,384 $ 6,800
Environmental Control 6,008 4,699
Automotive Products 1,109 2,450
Industrial Products 421 858
___________ __________
$ 10,922 $ 14,807
=========== ==========
Operating profit (loss):
Chemical $ (645) $ 3,545
Environmental Control 1,551 721
Automotive Products (1,226) 139
Industrial Products (665) (497)
___________ __________
(985) 3,908
General corporate expenses (1,335) (1,408)
Interest expense (3,056) (2,969)
___________ __________
Loss before provision
for income taxes $ (5,376) $ (469)
=========== ==========
Gross profit by industry segment represents net sales less
cost of sales. Operating profit by industry segment represents
revenues less operating expenses before deducting general
corporate expenses, interest expense and income taxes. As
indicated in the above table, the operating profit (as defined)
declined from $3.9 million in the first quarter of 1996 to an
operating loss of $985,000 in the first quarter of 1997, while
sales increased approximately $3.7 million or 5.4% in the first
quarter of 1997 over the first quarter of 1996. The decline in
operating profit, coupled with an increase in interest expense,
resulted in a loss before provision for income taxes for 1997 of
$5.4 million.
Chemical Business
The operating profit in the Chemical Business is down from
$3.5 million profit in the first quarter of 1996 to an operating
loss of $.6 million in the first quarter of 1997. During the
first quarter of 1997, the Chemical Business continued to incur
significant amounts of downtime at its El Dorado, Arkansas Plant
site due to mechanical problems being incurred at the plant. The
downtime resulted in increases in manufacturing overhead and
lower absorption of such costs. The unabsorbed overhead combined
with the continued high cost of the primary raw material,
ammonia, led to higher cost of sales as a percent of sales and
lower gross profit margins.
The Chemical Business purchases approximately 250,000 tons
per year of anhydrous ammonia. The cost of ammonia consumed by
the Chemical Business in 1996 averaged $167 per ton, while in
November and December 1996, ammonia prices took an unexpected
increase to an average of approximately $200 per ton. During the
first quarter of 1997, ammonia prices continued to increase
through February (a high of $217 per ton) and then began to
decline during March so that the price for March, 1997
approximated the average price incurred during the months of
November and December 1996. The continued increase in ammonia
prices had a disruptive effect on the first quarter results of
the Chemical Business' operations. The decline in prices in
March, 1997 did not significantly reduce the Chemical Business'
cost of sales in the first quarter of 1997. The price of ammonia
averaged $45 more per ton in the first quarter of 1997 than in
the first quarter of 1996.
The Chemical Business has substantially finalized
negotiations with Bayer for the Chemical Business to build and
operate on a long-term basis a nitric acid plant located on
property owned by Bayer in Baytown, Texas. If the transaction is
completed, the Chemical Business would provide nitric acid from
such plant to Bayer's Baytown, Texas plant. Execution of the
agreement between the Chemical Business and Bayer is subject to
the Company finalizing the financing to construct the nitric acid
plant and the final terms upon which the Chemical Business would
lease such nitric acid plant. The Company has an agreement in
principle with a lender to provide financing. Such nitric acid
plant would be owned by a party that is not an affiliate of the
Company and would be leased to the Chemical Business for a period
expected to equal ten years under an operating lease. It is
expected that the cost to construct the nitric acid plant would
be approximately $60.0 million. Under the terms of the proposed
agreement, such nitric acid plant is to be constructed and become
operational within 18 months from execution of the definitive
agreement.
Environmental Control Business
As indicated in the above table, the Environmental Control
Business reported improved sales (an increase of 13.8%) and
improved operating profit for the first quarter of 1997, over
that of the first quarter of 1996, primarily as a result of
improved market conditions for the heat pump product lines.
Automotive and Industrial Products Businesses
As indicated in the above table, during the first quarter of
1997 these Businesses recorded combined sales of $11.0 million
and reported an operating loss (as defined above) of $1.9
million, as compared to combined sales of $14.0 million and an
operating loss of $.4 million for the first quarter of 1996, as a
result of lower sales and decreased absorption of manufacturing
costs due to lower production volume. The net investment in
assets of these Businesses decreased from $56.8 million at year
end 1996 to $56.3 million at March 31, 1997. As a result of the
stringent inventory reduction program put into place in 1995,
inventories of these Businesses decreased approximately $.9
million during the three months ended March 31, 1997.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 vs. Three months ended March
31, 1996.
Revenues
Total revenues for the three months ended March 31, 1997 and
1996 were $74.9 million and $70.9 million, respectively (an
increase of $4.0 million). Sales increased $3.7 million. Other
income increased $.2 million.
Net Sales
Consolidated net sales included in total revenues for the
three months ended March 31, 1997 were $73.2 million, compared to
$69.5 million for the first three months of 1996, an increase of
$3.7 million. This increase in sales resulted principally from:
(i) increased sales in the Chemical Business of $4.1 million,
primarily due to higher sales in the U.S. of agricultural
products and increased business volume of the Company's
subsidiary located in Australia , Total Energy Systems ("TES"),
(ii) increased sales in the Environmental Control Business of
$2.6 million primarily due to firming of market conditions for
this Business' Heat Pump product lines,offset by (iii) decreased
sales in the Automotive Products Business of $3.0 due primarily
to a reduced customer base.
Gross Profit
Gross profit was 14.9% for the first three months of 1997,
compared to 21.3% for the first three months of 1996. The
decrease in the gross profit percentage was due primarily to (i)
decreased absorption of costs due to lower production volumes in
the Automotive Products Business, and (ii) higher production
costs in the Chemical Business due to the effect of higher prices
of ammonia and unabsorbed overhead costs caused by excessive
downtime related to modifications made to resolve problems
associated with mechanical failures at the Chemical Business'
primary manufacturing plant.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a
percent of net sales were 20.3% in the three month period ended
March 31, 1997 compared to 19.7% for the first three months of
1996. This increase is primarily the result of increased
professional fees related to environmental matters in the
Chemical Business and decreased sales volume in the Automotive
Products Business without a corresponding decrease in SG&A.
Interest Expense
Interest expense for the Company, excluding capitalized
interest, was $3.1 million during the first quarter of 1997,
compared to $3.0 million during the first quarter of 1996.
During the first quarter of 1997, $.7 million of interest expense
was capitalized in connection with construction of the DSN Plant.
The increase of $.8 million before the effect of capitalization
primarily resulted from increased borrowings and higher interest
rates.
Loss Before Taxes
The Company had a loss before income taxes of $5.4 million
in the first quarter of 1997 compared a loss before income taxes
of $.5 million in the three months ended March 31, 1996. The
decreased profitability of $4.9 million was primarily due to the
decline in gross profit and the increase in SG&A as previously
discussed.
Provision for Income Taxes
As a result of the Company's current operating loss and net
operating loss carryforward for income tax purposes as discussed
elsewhere herein and in Note 1 of Notes to Condensed Consolidated
Financial Statements, the Company's provisions for income taxes
for the three months ended March 31, 1997 and the three months
ended March 31, 1996 are for current state income taxes and
federal alternative minimum taxes.
Liquidity and Capital Resources
Cash Flow From Operations
Net cash used by operations for the quarter ended March 31,
1997 was $13.7 million, after adjustments for noncash
depreciation and amortization of $2.7 million and recapture of
previous years provisions for possible losses of $1.4 million.
This net cash usage includes the following changes in assets and
liabilities: (i) accounts receivable increases of $4.8 million,
(ii) inventory decreases of $0.7 million, (iii) increases in
supplies and prepaid items of $0.8 million, and (iv) decreases in
accounts payable and accrued liabilities of $4.8 million. The
increase in accounts receivable is due mainly to seasonal sales
increases in the Chemical Business. The decrease in inventories
is primarily due to the inventory reduction plan being executed
in the Automotive Products Business, partially offset by
increased inventories at the Chemical Business' Australian
subsidiary due to anticipated sales increases. The increase in
supplies and prepaid items is due primarily to increases in
prepaid insurance costs. The decrease in accounts payable and
accrued liabilities is due primarily to a decrease in capital
construction projects.
Cash Flow From Investing And Financing Activities
Cash used by investing activities included $2.8 million in
capital expenditures (primarily in the Chemical Business) and
increased other assets of $0.7 million due primarily to advances
made to a potential acquisition candidate. Net cash provided by
financing activities included (i) term borrowings of $54.5
million, including proceeds from the new $50 million financing
discussed under "Sources of Funds", (ii) payments on term debt of
$21.2 million, including $19.1 million in unscheduled payoff of
debt with proceeds from the new $50 million financing, (iii)
decreases in revolving debt of $12.4 million, (iv) dividends of
$0.8 million, and (v) treasury stock purchases of $0.3 million.
During the first quarter of 1997, the Company paid the
following aggregate dividends: (1) $3.00 per share on each of the
outstanding shares of its Series B 12% Cumulative Convertible
Preferred Stock; (2) $.81 per share on each outstanding share of
its $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2; and (3) $.03 per share on each outstanding share of its
Common Stock. During the second quarter of 1997, the Company has
paid a dividend of $10.00 per share on each outstanding share of
its Redeemable Preferred Stock and has declared but not paid
dividends of $.81 per share on each outstanding share of its
$3.25 Convertible Exchangeable Class C Preferred Stock, Series 2,
$3.00 per share on each of the outstanding shares of its Series B
12% Cumulative Convertible Preferred Stock and $.03 per share on
each share of its outstanding Common Stock.
Source of Funds
The Company is a diversified holding Company and its
liquidity is dependent, in large part, on the operations of its
subsidiaries and credit agreements with lenders.
On February 13, 1997 the Company's wholly-owned
subsidiaries, El Dorado Chemical Company, Slurry Explosive
Corporation, and Northwest Financial Corporation. (collectively
"Borrowers") completed a $50.0 million long-term financing
agreement ("Financing") with an institutional lender.
Approximately $19.3 million in proceeds from the Financing were
used to repay other outstanding term debt and accrued interest,
and the remaining $30.7 million in proceeds were used to pay down
the Company's revolving credit facilities and thereby create
additional borrowing availability for future working capital and
other corporate needs. The Financing is secured by a first
mortgage lien on the Chemical Business' property, plant, and
equipment located in El Dorado, Arkansas and owned by the
Borrowers, except rolling stock and excluding the DSN Plant which
is security under a separate loan agreement. The $50.0 million
Financing consists of $25.0 million of fixed rate notes bearing
interest at 10.57% per annum and $25.0 million of floating rate
notes bearing interest at LIBOR plus 4.2% (initially 9.76%).
Repayment of the notes is due in quarterly installments of
$833,332 plus interest commencing on July 1,1997 through April
2004 at which time the balance is due. The Financing requires
the Borrowers to maintain certain financial ratios and contains
other financial covenants, including the ratio of funded debt to
total capitalization, current ratio, and fixed charge coverage
ratio, in addition to net worth and working capital requirements.
As of the date of this report, the Borrowers are in compliance
with all financial covenants required by the loan agreement
related to the financing. The Financing also contains certain
restrictions on transactions with affiliates. The Financing
limits the amount of dividends or distributions by the Borrowers
to an amount equal to payments for federal income taxes
determined as if the Borrowers filed returns on a separate
company basis and dividends up to 50% of the Borrowers' prior
year net income. The annual interest on the $50 million in
outstanding debt under the Financing at March 31, 1997, at the
rate then in effect, would approximate $5.1 million.
The Company and certain of its subsidiaries are parties to a
working capital line of credit evidenced by six separate loan
agreements ("Agreements") with an unrelated lender ("Lender")
collateralized by receivables, inventory, and proprietary rights
of the Company and the subsidiaries that are parties to the
Agreements and the stock of certain of the subsidiaries that are
borrowers under the Agreements. The Agreements, as amended,
provide for revolving credit facilities ("Revolver") for total
direct borrowings up to $63.0 million, including the issuance of
letters of credit. The Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Agreements, as amended, provide for interest at the reference
rate as defined (which approximates the national prime rate) plus
1.5%, or the Eurodollar rate plus 3.875%. At March 31, 1997 the
effective interest rate was 10%. The initial term of the
Agreements is through December 12, 1997, and is renewable
thereafter for successive thirteen month terms. The Lender has
agreed to amend the initial term maturity date to April 1, 1998.
At March 31, 1997, additional amounts that the Company could have
borrowed under the Agreements, based on eligible collateral, were
approximately $18.2 million. Borrowings under the Revolver
outstanding at March 31, 1997, were $43.9 million. The
Agreements, as amended, require the Company to maintain certain
financial ratios and contain other financial covenants, including
tangible net worth requirements and capital expenditure
limitations. As of the date of this report, the Company is in
compliance with all financial covenants, or if not in compliance,
has obtained appropriate waivers from the Lender. The annual
interest on the outstanding debt under the Revolver at March 31,
1997 at the rates then in effect would approximate $4.5 million.
In addition to the Agreements discussed above, the Company
had the following term loans in place as of March 31, 1997:
(1) The Company s wholly-owned subsidiary, DSN Corporation
("DSN"), is a party to several loan agreements with a
financing company (the Financing Company ) for three (3)
projects. These loan agreements are for a $16.5 million
term loan (the DSN Permanent Loan"), which was used to
construct, equip, re-erect, and refurbish the DSN Plant
being placed into service by the Chemical Business at its El
Dorado, Arkansas facility; a loan for approximately $1.2
million to purchase additional railcars to support the DSN
Plant (the Railcar Loan ); and a loan for approximately
$1.1 million to finance the construction of a mixed acid
plant (the Mixed Acid Plant ) in North Carolina (the Mixed
Acid Loan ). At March 31, 1997, DSN had outstanding
borrowings of $13.4 million under the DSN Permanent Loan,
$.9 million under the Mixed Acid Loan, and $1.0 million
under the Railcar Loan. The loans have repayment schedules
of eighty-four (84) consecutive monthly installments of
principle and interest. The interest rate on each of the
loans is fixed and range from 8.24% to 8.86%. Annual
interest, for the three notes as a whole, at March 31, 1997
at the agreed to interest rates would approximate $1.3
million. The loans are secured by the various DSN and Mixed
Acid Plants property and equipment, and all railcars
purchased under the Railcar Loan. The loan agreements
require the Company to maintain certain financial ratios,
including tangible net worth requirements. As of the date
of this report, the Company is in compliance with all
financial covenants or if not in compliance, has obtained
appropriate waivers from the Financing Company.
(2) As of March 31, 1997, a subsidiary of the Company ("Prime")
was a party to an agreement ("Agreement") with Boatmen's
Bank, N.A. ("Bank"). The Agreement, as modified, requires
interest per annum at a rate equal to three quarters of one
percent (.75%) above the prime rate in effect from day to
day as published in the Wall Street Journal. The
outstanding principal balance of the note is payable in
sixty (60) monthly payments of principal and interest
commencing on June 30, 1996. Payment of the note is secured
by a first and priority lien and security interest in and to
Prime's right, title, and interest in the loan receivable
relating to the real property and office building located
in Oklahoma City, Oklahoma (the "Tower"), the Management
Agreement relating to the Tower. In February 1997, the
Company exercised its option to purchase the Tower by
paying approximately $140,000 for the exercise price under
the purchase option and related costs.
Future cash requirements include working capital
requirements for anticipated sales increases in all Businesses,
and funding for future capital expenditures, primarily in the
Chemical Business and the Environmental Control Business.
Funding for the higher accounts receivable resulting from
anticipated sales increases will be provided by cash flow
generated by the Company and the revolving credit facilities
discussed elsewhere in this report. Inventory requirements for
the higher anticipated sales activity should be met by scheduled
reductions in the inventories of the Industrial Products Business
and in the inventories of the Automotive Products Business, which
increased its inventories in 1995 beyond required levels. In
1997, the Company has planned capital expenditures of
approximately $6.0 million, primarily in the Chemical and
Environmental Control Businesses.
Management believes that cash flows from operations, the
Company's revolving credit facilities, and other sources, will
be adequate to meet its presently anticipated capital
expenditure, working capital, debt service, and dividend
requirements. The above sentence and certain statements
contained in the preceding paragraph are forward-looking
statements that involve a number of risks and uncertainties that
could cause actual results to differ materially, such as, a
material reduction in revenues, continuing to incur losses,
inability to collect a material amount of receivables, required
capital expenditures in excess of those presently anticipated, or
other future events, not presently predictable, which
individually or in the aggregate could impair the Company's
ability to obtain funds to meet its requirements. The Company
currently has no material commitment for capital expenditures,
except as discussed under "Overview", "Chemical Business" of this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the negotiations to build a new
nitric acid plant.
Foreign Subsidiary Financing
The Company has guaranteed a revolving credit working
capital facility (the "Facility") between TES and Bank of New
Zealand. The Facility allows for borrowings based on specific
percentages of qualified eligible assets. The Facility was
amended on December 19, 1996 to allow for borrowings up to an
aggregate of A$8.5 million Australian. This amendment also
required a reduction of A$.5 million to the amount of A$8.0
million on or before February 28, 1997, then a further reduction
of A$1.0 million to the amount of A$7.0 million (approximately US
$5.6 million) on or before March 31, 1997. Based on the
effective exchange rate at March 31, 1997,approximately US $4.6
million was borrowed at March 31, 1997. Such debt is secured by
substantially all the assets of TES, plus an unlimited guarantee
and indemnity from the Company. The interest rate on this debt
is the Bank of New Zealand Corporate Lending Rate plus 0.5%
(approximately 10.0% at March 31, 1997). The next annual review
is due on September 30, 1997. TES is in technical non-compliance
with a certain financial covenant contained in the loan agreement
involving the Facility. However, this covenant was not met at
the time of closing and the Bank of New Zealand agreed and
continues to agree as of the date of this report that the
covenant is something to work towards in the
future and has continued to allow TES to borrow under the
Facility. The outstanding borrowing under the facility at March
31, 1997 has been classified as due within one year in the
accompanying Consolidated Financial Statements.
Joint Ventures and Options to Purchase
Prior to 1997, the Company, through a subsidiary, loaned
$2.9 million to a French manufacturer of HVAC equipment whose
product line is compatible with that of the Company's
Environmental Control Business in the USA. Under the loan
agreement, the Company has the option to exchange its rights
under the loan for 100% of the borrower's outstanding common
stock. The Company obtained a security interest in the stock of
the French manufacturer to secure its loan. During the first
quarter of 1997 the Company advanced an additional $1 million to
the French manufacturer bringing the total of the loan at March
31, 1997 to $3.9 million. As of the date of this report, the
decision has not been made to exercise such option and the $3.9
million loan, net of a $1.5 million valuation reserve, is carried
on the books as a note receivable in other assets.
During 1995, the Company executed a stock option agreement
to acquire eighty percent (80%) of the stock of a specialty sales
organization ("Optioned Company") to enhance the marketing of the
Company's air conditioning products. The stock option has a four
(4) year term, and a total option granting price of $1.0 million
payable in installments including an option fee of $500,000 paid
upon signing of the option agreement and annual $100,000
payments for yearly extensions of the stock option thereafter for
up to three (3) years. Upon exercise of the stock option by the
Company, or upon the occurrence of certain performance criteria
which would give the grantors of the stock option the right to
accelerate the date on which the Company must elect whether to
exercise, the Company shall pay certain cash and issue promissory
notes for the balance of the exercise price of the subject
shares. The total exercise price of the subject shares is $4.0
million, less the amounts paid for the granting and any
extensions of the stock option.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The
Project had been awarded a contract to retrofit residential
housing units at a US Army base. The completed contract was for
installation of energy-efficient equipment (including air
conditioning and heating equipment), which would reduce utility
consumption. For the installation and management, the Project
will receive an average of seventy-seven percent (77%) of all
energy and maintenance savings during the twenty (20) year
contract term. The Project spent approximately $17.5 million to
retrofit the residential housing units at the US Army base. The
Project has received a loan from a lender to finance
approximately $14.0 million of the cost of the Project. The
Company is not guaranteeing any of the lending obligations of the
Project.
Debt Guarantee
As disclosed in Note 4 of the Notes to Condensed
Consolidated Financial Statements a subsidiary of the Company and
one of its subsidiaries have guaranteed approximately $2.6
million of indebtedness of a start up aviation company in
exchange for an ownership interest. The debt guarantee relates
to two note instruments. One note for which the subsidiary had
guaranteed up to $600,000 had a balance of approximately $400,000
as of March 31, 1997. The other note in the amount of $2.0
million requires monthly principal payments of $11,111 plus
interest beginning in October 1998 through August 8, 1999, at
which time all outstanding principal and accrued interest are
due. In the event of default of the $2.0 million note, the
Company is required to assume payments on the note with the term
extended until August 2004. Both notes are current as to
principal and interest.
In 1996, the aviation company received a cash infusion of
$4.0 million from an unrelated third party investor for a 41.6%
ownership interest in the aviation company. The investor also
retained an option to purchase additional stock of the aviation
company in exchange for $4.0 million.
Availability of Company's Loss Carryovers
The Company anticipates that its cash flow in future years
will benefit from its ability to use net operating loss ("NOL")
carryovers from prior periods to reduce the federal income tax
payments which it would otherwise be required to make with
respect to income generated in such future years; however, such
benefit will be limited by the Company's reduced NOL for
alternative minimum tax purposes which is approximately $10.0
million at December 31, 1996. As of December 31, 1996, the
Company had available NOL carryovers of approximately $45.0
million, based on its federal income tax returns as filed with
the Internal Revenue Service for taxable years through 1995, and
on the Company's estimates for 1996. These NOL carryovers will
expire beginning in the year 1999.
The above paragraph contains certain forward-looking
statements. The amount of these carryovers has not been audited
or approved by the Internal Revenue Service and, accordingly, no
assurance can be given that such carryovers will not be reduced
as a result of audits in the future. In addition, the ability of
the Company to utilize these carryovers in the future will be
subject to a variety of limitations applicable to corporate
taxpayers generally under both the Internal Revenue Code of 1986,
as amended, and the Treasury Regulations. These include, in
particular, limitations imposed by Code Section 382 and the
consolidated return regulations.
Contingencies
As discussed in Note 4 of Notes to Condensed Consolidated
Financial Statements, the Company has several contingencies that
could impact its liquidity in the event that the Company is
unsuccessful in defending against the claimants. Although
management does not anticipate that these claims will result in
substantial adverse impacts on its liquidity, it is not possible
to determine the outcome. The preceding sentence is a forward
looking statement that involves a number of risks and
uncertainties that could cause actual results to differ
materially, such as, among other factors, the following: the EIL
Insurance does not provide coverage to the Company and the
Chemical Business for any material claims made by the claimants,
the claimants alleged damages are not covered by the EIL Policy
which a court may find the Company and/or the Chemical Business
liable for, such as punitive damages or penalties, a court finds
the Company and/or the Chemical Business liable for damages to
such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company.
Independent Accountants' Review Report
Board of Directors
LSB Industries, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of LSB Industries, Inc. and subsidiaries as of March 31,
1997, and the related condensed consolidated statements of
operations and cash flows for the three month periods ended March
31, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the
objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated March 7, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996, is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Oklahoma City, Oklahoma
May 20, 1997 ERNST & YOUNG LLP
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no additional material legal proceedings pending
against the Company and/or its subsidiaries not previously
reported by the Company in Item 3 of its Form 10-K for the fiscal
period ended December 31, 1996, which Item 3 is incorporated by
reference herein.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits. The Company has included the following
exhibits in this report:
3.0(ii) The Bylaws of the Company, as amended.
4.1 Seventh Amendment dated April 11, 1997 to the Loan
and Security Agreement dated December 12, 1994, between
the Company and BankAmerica Business Credit, Inc.
Substantially identical First Amendments dated April
11, 1997 to the Loan and Security Agreements dated
December 12, 1994, were entered into by each of L&S
Bearing, International Environmental Corporation,
Climate Master, Inc., Summit Machine Tool
Manufacturing, Corp., and El Dorado Chemical Company
and Slurry Explosive Corporation with BankAmerica
Business Credit, Inc. and are hereby omitted and such
will be provided upon the Commission's request.
10.1 Letter Amendment dated May 14, 1997 to Loan and
Security Agreement between DSN Corporation and The CIT
Group/Equipment Financing, Inc.
11.1 Statement Re: Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial
Information.
27.1 Financial Data Schedule
(B) Reports of Form 8-K. The Company did not file any
reports on Form 8-K during the quarter ended March 31,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Company has caused the undersigned, duly-
authorized, to sign this report on its behalf on this 20th day of
May, 1997.
LSB INDUSTRIES, INC.
By: /s/ Tony M. Shelby
--------------------------------
Tony M. Shelby,
Senior Vice President of Finance
(Principal Financial Officer)
By: /s/ Jim D. Jones
----------------------------------
Jim D. Jones
Vice President, Controller and
Treasurer(Principal Accounting
Officer)