form_10q.htm
LSB Industries, Inc.
Form 10-Q (6-30-2010)
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended             June 30, 2010       
   
 
OR
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from   _____________to______________
   
 
Commission file number                  1-7677      
   
             LSB Industries, Inc.           
Exact name of Registrant as specified in its charter
 
          Delaware            
    73-1015226     
State or other jurisdiction of
incorporation or organization
I.R.S. Employer Identification No.
 
       16 South Pennsylvania Avenue, Oklahoma City, Oklahoma                     73107      
                 Address of principal executive offices                  (Zip Code)
 
               (405) 235-4546                 
  Registrant's telephone number, including area code
 
          __             None            _        ___          
Former name, former address and former fiscal year, if  changed since last report.
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes [  ] No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  [  ] Yes [  ] No
 
1
 
(Facing Sheet Continued)

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ] Accelerated filer [X]

Non-accelerated filer [  ] Smaller reporting company [  ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

The number of shares outstanding of the Registrant's voting common stock, as of July 30, 2010 was 21,093,683 shares, excluding 4,320,462 shares held as treasury stock.
 
 
2 
 

FORM 10-Q OF LSB INDUSTRIES, INC.

TABLE OF CONTENTS
 
 
    
     
 
PART I – Financial Information
Page
     
Item 1.
4
     
Item 2.
37
     
Item 3.
63
     
Item 4.
64
     
65
     
 
PART II – Other Information
  
     
Item 1.
68
     
Item 1A.
68
     
Item 2.
68
     
Item 3.
70
     
Item 4.
70
     
Item 5.
70
     
Item 6.
71

 
3
 
PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 2010 is unaudited)

 
June 30,
2010
  
December 31,
2009
 
(In Thousands)
           
Current assets:
            
Cash and cash equivalents
$
65,285
  
$
61,739
  
Restricted cash
  
276
    
30
  
Short-term investments
  
-
    
10,051
  
Accounts receivable, net
  
73,759
    
57,762
  
Inventories:
            
Finished goods
  
23,084
    
25,753
  
Work in process
  
2,778
    
2,466
  
Raw materials
  
21,347
    
22,794
  
Total inventories
  
47,209
    
51,013
  
Supplies, prepaid items and other:
            
Prepaid income taxes
  
-
    
1,642
  
Prepaid insurance
  
2,086
    
4,136
  
Precious metals
  
11,422
    
13,083
  
Supplies
  
5,976
    
4,886
  
Other
  
2,299
    
1,626
  
Total supplies, prepaid items and other
  
21,783
    
25,373
  
Deferred income taxes
  
5,680
    
5,527
  
Total current assets
  
213,992
    
211,495
  
             
Property, plant and equipment, net
  
121,317
    
117,962
  
             
Other assets:
            
Debt issuance costs, net
  
1,342
    
1,652
  
Investment in affiliate
  
4,126
    
3,838
  
Goodwill
  
1,724
    
1,724
  
Other, net
  
2,274
    
1,962
  
Total other assets
  
9,466
    
9,176
  
 
$
344,775
  
$
338,633
  
 
(Continued on following page)

 
4
 
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Information at June 30, 2010 is unaudited)

 
June 30,
2010
  
December 31,
2009
 
(In Thousands)
Liabilities and Stockholders’ Equity
            
Current liabilities:
            
Accounts payable
$
38,297
  
$
37,553
  
Short-term financing
  
955
    
3,017
  
Accrued and other liabilities
  
23,390
    
23,054
  
Current portion of long-term debt
  
3,456
    
3,205
  
Total current liabilities
  
66,098
    
66,829
  
             
Long-term debt
  
98,459
    
98,596
  
             
Noncurrent accrued and other liabilities
  
11,252
    
10,626
  
             
Deferred income taxes
  
12,467
    
11,975
  
             
Commitments and contingencies (Note 11)
            
             
Stockholders' equity:
            
Series B 12% cumulative, convertible preferred stock, $100 par value; 20,000 shares issued and outstanding
  
2,000
    
2,000
  
Series D 6% cumulative, convertible Class C preferred stock, no par value; 1,000,000 shares issued
  
1,000
    
1,000
  
Common stock, $.10 par value; 75,000,000 shares authorized, 25,413,145 shares issued (25,369,095 at December 31, 2009)
  
2,541
    
2,537
  
Capital in excess of par value
  
130,828
    
129,941
  
Retained earnings
  
48,504
    
41,082
  
   
184,873
    
176,560
  
Less treasury stock at cost:
            
Common stock, 4,320,462 shares (4,143,362 at December 31, 2009)
  
28,374
    
25,953
  
Total stockholders' equity
  
156,499
    
150,607
  
 
$
344,775
  
$
338,633
  
 
See accompanying notes.

 
5
 
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six and Three Months Ended June 30, 2010 and 2009

 
Six Months
  
Three Months
 
2010
  
2009
  
2010
  
2009
 
(In Thousands, Except Per Share Amounts)
Net sales
$
298,802
    
$
288,760
    
$
168,392
    
$
138,563
  
Cost of sales
  
235,388
      
210,205
      
133,244
      
100,736
  
Gross profit
  
63,414
      
78,555
      
35,148
      
37,827
  
                               
Selling, general and administrative expense
  
46,827
      
44,421
      
22,238
      
23,046
  
Provision for (recoveries of) losses on accounts receivable
  
(35
)
    
28
      
(44
)
    
(24
)
Other expense
  
302
      
334
      
244
      
291
  
Other income
  
(906
)
    
(190
)
    
(100
)
    
(28
)
Operating income
  
17,226
      
33,962
      
12,810
      
14,542
  
                               
Interest expense
  
4,079
      
2,939
      
1,999
      
1,028
  
Losses (gains) on extinguishment of debt
  
52
      
(1,743
)
    
52
      
(421
)
Non-operating other income, net
  
(38
)
    
(34
)
    
-
      
(11
)
Income from continuing operations before provisions for income taxes and equity in earnings of affiliate
  
13,133
      
32,800
      
10,759
      
13,946
  
Provisions for income taxes
  
5,891
      
12,800
      
4,979
      
5,451
  
Equity in earnings of affiliate
  
(528
)
    
(488
)
    
(267
)
    
(248
)
Income from continuing operations
  
7,770
      
20,488
      
6,047
      
8,743
  
                               
Net loss from discontinued operations
  
43
      
15
      
38
      
13
  
Net income
  
7,727
      
20,473
      
6,009
      
8,730
  
                               
Dividends on preferred stocks
  
305
      
306
      
-
      
-
  
Net income applicable to common stock
$
7,422
    
$
20,167
    
$
6,009
    
$
8,730
  
                               
Weighted-average common shares:
                              
Basic
  
21,227
      
21,174
      
21,229
      
21,238
  
                               
Diluted
  
21,692
      
23,587
      
22,377
      
23,674
  
                               
Income per common share:
                              
Basic
$
.35
    
$
.95
    
$
.28
    
$
.41
  
                               
Diluted
$
.35
    
$
.89
    
$
.27
    
$
.38
  
 
See accompanying notes.
 
 
6 
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
Six Months Ended June 30, 2010


 
 
Common
Stock
Shares
  
Non-
Redeemable
Preferred
Stock
  
 
Common
Stock
Par Value
  
 
Capital in
Excess of
Par Value
  
 
 
Retained
Earnings
  
 
Treasury
Stock-
Common
  
 
 
 
Total
 
(In Thousands)
Balance at December 31, 2009
25,369
$
3,000
$
2,537
$
129,941
  
$
41,082
  
$
(25,953
)
$
150,607
  
Net income
                  
7,727
          
7,727
  
Dividends paid on preferred stocks
                  
(305
)
        
(305
)
Stock-based compensation
            
500
                
500
  
Exercise of stock options
43
      
4
  
292
                
296
  
Excess income tax benefit associated with stock-based compensation
            
94
                
94
  
Acquisition of 177,100 shares of common stock
                        
(2,421
)
  
(2,421
)
Conversion of 14 shares of redeemable preferred stock to common stock
1
          
1
                
1
  
Balance at June 30, 2010
25,413
$
3,000
$
2,541
$
130,828
  
$
48,504
  
$
(28,374
)
$
156,499
  
 
Note: For the six and three months ended June 30, 2010, total comprehensive income was $7,727,000 and $6,009,000, respectively. For the six and three months ended June 30, 2009, total comprehensive income was $20,593,000 and $8,778,000, respectively.
 
See accompanying notes.

 
7 
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, 2010 and 2009


 
2010
  
2009
 
(In Thousands)
Cash flows from continuing operating activities:
              
Net income
$
7,727
    
$
20,473
  
Adjustments to reconcile net income to net cash provided by continuing operating activities:
              
Net loss from discontinued operations
  
43
      
15
  
Deferred income taxes
  
244
      
5,538
  
Loss (gain) on extinguishment of debt
  
52
      
(1,743
)
Losses on sales and disposals of property and equipment
  
259
      
220
  
Gain on property insurance recoveries associated with property, plant and equipment
  
(495
)
    
-
  
Depreciation of property, plant and equipment
  
8,626
      
7,684
  
Amortization
  
311
      
451
  
Stock-based compensation
  
500
      
514
  
Provision for (recovery of) losses on accounts receivable
  
(35
)
    
28
  
Realization of losses on inventory
  
(324
)
    
(3,024
)
Provision for (realization of) losses on firm sales commitments
  
(371
)
    
514
  
Equity in earnings of affiliate
  
(528
)
    
(488
)
Distributions received from affiliate
  
240
      
350
  
Changes in fair value of commodities contracts
  
246
      
969
  
Changes in fair value of interest rate contracts
  
348
      
(649
)
Other
  
(10
)
    
-
  
Cash provided (used) by changes in assets and liabilities:
              
Accounts receivable
  
(16,585
)
    
15,790
  
Inventories
  
4,128
      
12,153
  
Prepaid and accrued income taxes
  
2,392
      
146
  
Other supplies and prepaid items
  
1,798
      
1,315
  
Accounts payable
  
2,700
      
(11,703
)
Customer deposits
  
(77
)
    
(2,121
)
Accrued payroll and benefits
  
(1,054
)
    
(1,983
)
Commodities contracts
  
150
      
(4,112
)
Deferred rent expense
  
-
      
(1,424
)
Other current and noncurrent liabilities
  
2,243
      
(3,781
)
Net cash provided by continuing operating activities
  
12,528
      
35,132
  
               
Capital expenditures
  
(10,861
)
    
(12,406
)
Proceeds from property insurance recoveries associated with property, plant and equipment
  
1,670
      
-
  
Proceeds from sales of property and equipment
  
11
      
3
  
Proceeds from short-term investments
  
20,053
      
-
  
Purchase of short-term investments
  
(10,002
)
    
-
  
Proceeds from (deposits of) restricted cash
  
(246
)
    
518
  
Other assets
  
(326
)
    
(209
)
Net cash provided (used) by continuing investing activities
  
299
      
(12,094
)

 (Continued on following page)
 
 
8
 
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Six Months Ended June 30, 2010 and 2009
 
 
2010
  
2009
 
(In Thousands)
Cash flows from continuing financing activities:
              
Proceeds from revolving debt facilities
$
263,064
    
$
281,103
  
Payments on revolving debt facilities
  
(263,064
)
    
(281,103
)
Acquisition of 5.5% convertible debentures
  
(2,494
)
    
(7,134
)
Proceeds from other long-term debt, net of fees
  
47
      
2,565
  
Payments on other long-term debt
  
(2,386
)
    
(687
)
Payments on short-term financing
  
(2,062
)
    
(1,776
)
Proceeds from exercise of stock options
  
296
      
500
  
Purchase of treasury stock
  
(2,421
)
    
-
  
Excess income tax benefit associated with stock-based compensation
  
189
      
657
  
Dividends paid on preferred stocks
  
(305
)
    
(306
)
Net cash used by continuing financing activities
  
(9,136
)
    
(6,181
)
               
Cash flows of discontinued operations:
              
Operating cash flows
  
(145
)
    
(53
)
Net increase in cash and cash equivalents
  
3,546
      
16,804
  
               
Cash and cash equivalents at beginning of period
  
61,739
      
46,204
  
Cash and cash equivalents at end of period
$
65,285
    
$
63,008
  
               
Supplemental cash flow information:
              
               
Cash payments for income taxes, net of refunds
$
3,093
    
$
6,459
  
               
Noncash investing and financing activities:
              
               
Receivable associated with a property insurance claim
$
560
    
$
1,135
  
Current other assets, accounts payable and long-term debt associated with property, plant and equipment
$
5,548
    
$
4,164
  
Debt issuance costs associated with the acquisition of the 5.5% convertible debentures
$
58
    
$
323
  
               

See accompanying notes.
 
 
9
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1: Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of LSB Industries, Inc. (the “Company”, “We”, “Us”, or “Our”) and its subsidiaries. Through our subsidiaries, we are a manufacturing, marketing and engineering company. Our subsidiaries are primarily engaged in the manufacture and sale of geothermal and water source heat pumps and air handling products (the "Climate Control Business") and the manufacture and sale of chemical products (the “Chemical Business”). The Company is a holding company with no significant operations or assets other than cash, cash equivalents, and our investments in our subsidiaries. Entities that are 20% to 50% owned and for which we have significant influence are accounted for on the equity method. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the unaudited condensed consolidated financial statements of the Company as of June 30, 2010 and for the six and three-month periods ended June 30, 2010 and 2009 include all adjustments and accruals, consisting of normal, recurring accrual adjustments except for an additional income tax provision as discussed in Note 14 – Income Taxes, which are necessary for a fair presentation of the results for the interim periods.  These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”).

Certain reclassifications have been made in our condensed consolidated statement of cash flows for the six months ended June 30, 2009 to conform to our condensed consolidated statement of cash flows presentation for the six months ended June 30, 2010, which reclassifications expanded our continuing operating activity line items. These reclassifications did not impact the total amount of net cash provided by continuing operating activities for the six months ended June 30, 2009.

Note 2: Recently Issued Accounting Pronouncements In January 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update requiring additional disclosures about an entity’s derivative and hedging activities for the purpose of improving the transparency of financial reporting. A portion of the new disclosure requirements became effective for the Company on January 1, 2010 and were applied prospectively. The remaining new disclosure requirements will become effective for the Company on January 1, 2011. See Note 12 - Derivatives, Hedges and Financial Instruments.

Note 3: Short-Term Investments  Investments, which consisted of certificates of deposit with an original maturity of 13 weeks, are considered short-term investments. These investments are carried at cost, which approximates fair value. All of these investments were held by financial institutions within the United States and none of these investments were in excess of the federally insured limits.
 
 
10
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 4: Accounts Receivable, net  Our accounts receivable, net, consists of the following:

   
June 30,
2010
  
December 31,
2009
 
(In Thousands)
Trade receivables
$
72,467
    
$
55,318
  
Insurance claims
  
880
      
1,517
  
Other
  
948
      
1,603
  
   
74,295
      
58,438
  
Allowance for doubtful accounts
  
(536
)
    
(676
)
 
$
73,759
    
$
57,762
  

Note 5: Inventories Inventories are priced at the lower of cost or market, with cost being determined using the first-in, first-out (“FIFO”) basis. Finished goods and work-in-process inventories include material, labor, and manufacturing overhead costs. At June 30, 2010 and December 31, 2009, inventory reserves for certain slow-moving inventory items (Climate Control products) were $1,195,000 and $1,198,000, respectively. In addition, inventory reserves for certain nitrogen-based inventories provided by our Chemical Business were $107,000 and $478,000, at June 30, 2010 and December 31, 2009, respectively, because cost exceeded the net realizable value.

Changes in our inventory reserves are as follows:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Balance at beginning of period
$
1,676
    
$
4,141
    
$
1,744
    
$
1,109
  
Provision for (realization of) losses
  
(324
)
    
(3,024
)
    
(442
)
    
8
  
Write-offs/disposals
  
(50
)
    
(53
)
    
-
      
(53
)
Balance at end of period
$
1,302
    
$
1,064
    
$
1,302
    
$
1,064
  

The provision for (realization of) losses is included in cost of sales in the accompanying condensed consolidated statements of income.

Note 6: Precious Metals Precious metals are used as a catalyst in the Chemical Business manufacturing process. Precious metals are carried at cost, with cost being determined using the FIFO basis. Because some of the catalyst consumed in the production process cannot be readily recovered and the amount and timing of recoveries are not predictable, we follow the practice of expensing precious metals as they are consumed.

Occasionally, during major maintenance and/or capital projects, we may be able to perform procedures to recover precious metals (previously expensed) which have accumulated over time within our manufacturing equipment. When we accumulate precious metals in excess of our production requirements, we may sell a portion of the excess metals.

 
11
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 6: Precious Metals (continued)

Precious metals expense, net, consists of the following:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Precious metals expense
$
3,461
    
$
3,279
    
$
2,082
    
$
1,552
  
Recoveries of precious metals
  
-
      
(2,222
)
    
-
      
(9
)
Gains on sales of precious metals
  
(112
)
    
-
      
-
      
-
  
Precious metals expense, net
$
3,349
    
$
1,057
    
$
2,082
    
$
1,543
  

Precious metals expense, net, is included in cost of sales in the accompanying condensed consolidated statements of income.

Note 7: Investment in Affiliate  Cepolk Holdings, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has a 50% equity interest in Cepolk Limited Partnership (“Partnership”), which is accounted for on the equity method. The Partnership owns an energy savings project located at the Ft. Polk Army base in Louisiana (“Project”). As of June 30, 2010, the Partnership and general partner to the Partnership are indebted to a term lender (“Term Lender”) of the Project for approximately $1,280,000 with a term extending to December 2010. CHI has pledged its limited partnership interest in the Partnership to the Term Lender as part of the Term Lender’s collateral securing all obligations under the loan. This guarantee and pledge is limited to CHI’s limited partnership interest and does not expose CHI or the Company to liability in excess of CHI’s limited partnership interest. In accordance with GAAP, no liability is required to be established for this pledge since it was entered into prior to January 1, 2003. CHI has no recourse provisions or available collateral that would enable CHI to recover its partnership interest should the Term Lender be required to perform under this pledge.

 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 8: Current and Noncurrent Accrued and Other Liabilities  Our current and noncurrent accrued and other liabilities consist of the following:

 
June 30,
2010
  
December 31,
2009
 
(In Thousands)
Deferred revenue on extended warranty contracts
   $ 5,284     $ 4,884  
Accrued payroll and benefits
     4,846       5,900  
Accrued insurance
     4,146       3,667  
Accrued death benefits
     3,703       3,356  
Accrued warranty costs
     3,129       3,138  
Fair value of derivatives
     2,523       1,929  
Accrued contractual manufacturing obligations
     1,687       732  
Accrued income taxes
     1,358       608  
Accrued executive benefits
     1,213       1,102  
Accrued interest
     809       1,593  
Accrued commissions
     723       1,035  
Other
     5,221       5,736  
      34,642       33,680  
Less noncurrent portion
     11,252       10,626  
Current portion of accrued and other liabilities
   $ 23,390     $ 23,054  

Note 9: Accrued Warranty Costs Our Climate Control Business sells equipment that has an expected life, under normal circumstances and use, that extends over several years. As such, we provide warranties after equipment shipment/start up covering defects in materials and workmanship.

Generally, the base warranty coverage for most of the manufactured equipment in the Climate Control Business is limited to eighteen months from the date of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days for spare parts. The warranty provides that most equipment is required to be returned to the factory or an authorized representative and the warranty is limited to the repair and replacement of the defective product, with a maximum warranty of the refund of the purchase price. Furthermore, companies within the Climate Control Business generally disclaim and exclude warranties related to merchantability or fitness for any particular purpose and disclaim and exclude any liability for consequential or incidental damages. In some cases, the customer may purchase or a specific product may be sold with an extended warranty. The above discussion is generally applicable to such extended warranties, but variations do occur depending upon specific contractual obligations, certain system components, and local laws.

Our accounting policy and methodology for warranty arrangements is to measure and recognize the expense and liability for such warranty obligations using a percentage of net sales, based upon our historical warranty costs. We also recognize the additional warranty expense and liability to cover atypical costs associated with a specific product, or component thereof, or project installation, when such costs are probable and reasonably estimable. It is possible that future warranty costs could exceed our estimates.

 
13
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 9: Accrued Warranty Costs (continued)

Changes in our product warranty obligation (accrued warranty costs) are as follows:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Balance at beginning of period
$
3,138
    
$
2,820
    
$
2,991
    
$
2,864
  
Charged to costs and expenses
  
1,643
      
3,146
      
645
      
1,288
  
Costs and expenses incurred
  
(1,652
)
    
(2,928
)
    
(507
)
    
(1,114
)
Balance at end of period
$
3,129
    
$
3,038
    
$
3,129
    
$
3,038
  

Note 10: Long-Term Debt  Our long-term debt consists of the following:

 
June 30,
  
December 31,
 
2010
  
2009
 
(In Thousands)
Working Capital Revolver Loan due 2012 (A)
$
-
  
$
-
  
5.5% Convertible Senior Subordinated Notes due 2012 (B)
  
26,900
    
29,400
  
Secured Term Loan due 2012 (C)
  
49,151
    
50,000
  
Other, with a current weighted-average interest rate of 6.42%, most of which is secured by machinery, equipment and real estate
  
25,864
    
22,401
  
   
101,915
    
101,801
  
Less current portion of long-term debt
  
3,456
    
3,205
  
Long-term debt due after one year
$
98,459
  
$
98,596
  

(A)         Our wholly-owned subsidiary, ThermaClime, LLC, formerly ThermaClime, Inc., (“ThermaClime”) and its subsidiaries (collectively, the “Borrowers”) are parties to a $50 million revolving credit facility (the “Working Capital Revolver Loan”) that provides for advances based on specified percentages of eligible accounts receivable and inventories for ThermaClime, and its subsidiaries. The Working Capital Revolver Loan, as amended, accrues interest at a base rate (generally equivalent to the prime rate) plus .50% or LIBOR plus 1.75% and matures on April 13, 2012. The interest rate at June 30, 2010 was 3.75%. Interest is paid monthly, if applicable.

The facility provides for up to $8.5 million of letters of credit. All letters of credit outstanding reduce availability under the facility. As of June 30, 2010, amounts available for borrowing under the Working Capital Revolver Loan were approximately $49.2 million. Under the Working Capital Revolver Loan, as amended, the lender also requires the Borrowers to pay a letter of credit fee equal to 1% per annum of the undrawn amount of all outstanding letters of credit, an unused line fee equal to .375% per annum for the excess amount available under the facility not drawn and various other audit, appraisal and valuation charges.
 
 
14
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 10: Long-Term Debt (continued)

The lender may, upon an event of default, as defined, terminate the Working Capital Revolver Loan and make the balance outstanding, if any, due and payable in full. The Working Capital Revolver Loan is secured by the assets of all the ThermaClime entities other than El Dorado Nitric Company and its subsidiaries (“EDN”) but excluding the assets securing the Secured Term Loan discussed in (C) below, certain production equipment and facilities utilized by the Climate Control Business, and certain distribution-related assets of El Dorado Chemical Company (“EDC”). In addition, EDN is neither a borrower under, nor guarantor of, the Working Capital Revolver Loan. The carrying value of the pledged assets is approximately $194 million at June 30, 2010.

The Working Capital Revolver Loan, as amended, requires ThermaClime to meet certain financial covenants, including an EBITDA requirement of greater than $25 million, a minimum fixed charge coverage ratio of not less than 1.10 to 1, and a maximum senior leverage coverage ratio of not greater than 4.50 to 1. These requirements are measured quarterly on a trailing twelve-month basis and as defined in the agreement. ThermaClime was in compliance with those covenants for the twelve-month period ended June 30, 2010. The Working Capital Revolver Loan also contains covenants that, among other things, limit the Borrowers’ (which does not include the Company) ability, without consent of the lender and with certain exceptions, to:

·  
incur additional indebtedness,
·  
incur liens,
·  
make restricted payments or loans to affiliates who are not Borrowers,
·  
engage in mergers, consolidations or other forms of recapitalization, or
·  
dispose assets.

The Working Capital Revolver Loan also requires all collections on accounts receivable be made through a bank account in the name of the lender or their agent.

(B)         In June 2007, we entered into a purchase agreement with each of twenty two qualified institutional buyers (“QIBs”), pursuant to which we sold $60 million aggregate principal amount of debentures (the “2007 Debentures”) in a private placement to the QIBs pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Act”), afforded by Section 4(2) of the Act and Regulation D promulgated under the Act. We received net proceeds of approximately $57 million, after discounts and commissions. In connection with the closing, we entered into an indenture (the “Indenture”) with UMB Bank, as trustee, governing the 2007 Debentures. UMB Bank receives customary compensation from us for such services.

The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012. Interest is payable in arrears on January 1 and July 1 of each year.

The 2007 Debentures are unsecured obligations and are subordinated in right of payment to all of our existing and future senior indebtedness, including indebtedness under our revolving debt facilities. The 2007 Debentures are effectively subordinated to all present and future liabilities, including trade payables, of our subsidiaries.
 
 
15
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 10: Long-Term Debt (continued)

During the six and three months ended June 30, 2010, we acquired $2,500,000 aggregate principal amount of the 2007 Debentures for $2,494,000, with each purchase being negotiated. As a result, we recognized a loss on extinguishment of debt of approximately $52,000, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

During the six and three months ended June 30, 2009, we acquired $9,200,000 and $3,500,000, respectively, aggregate principal amount of the 2007 Debentures for approximately $7,134,000 and $2,960,000, respectively, with each purchase being negotiated. As a result, we recognized a gain on extinguishment of debt of $1,743,000 and $421,000, respectively, after writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.

As the result of acquisitions, only $26.9 million of the 2007 Debentures remain outstanding at June 30, 2010. In addition, see discussion concerning $5.0 million of the 2007 Debentures being held by Jack E. Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members of his immediate family (spouse and children), entities owned by them and trusts for which they possess voting or dispositive power as trustee (collectively, the “Golsen Group”) in Note 18 - Related Party Transactions.

The 2007 Debentures are convertible by the holders in whole or in part into shares of our common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders electing to convert all or any portion of a debenture is 36.4 shares of our common stock per $1,000 principal amount of debentures (representing a conversion price of $27.47 per share of common stock), subject to adjustment under certain conditions as set forth in the Indenture.

Beginning July 2, 2010, we may redeem some or all of the 2007 Debentures at a price equal to 100% of the principal amount of the 2007 Debentures, plus accrued and unpaid interest, all as set forth in the Indenture. The redemption price will be payable at our option in cash or, subject to certain conditions, shares of our common stock (valued at 95% of the weighted average of the closing sale prices of the common stock for the 20 consecutive trading days ending on the fifth trading day prior to the redemption date), subject to certain conditions being met on the date we mail the notice of redemption.

If a designated event (as defined in the Indenture) occurs prior to maturity, holders of the 2007 Debentures may require us to repurchase all or a portion of their 2007 Debentures for cash at a repurchase price equal to 101% of the principal amount of the 2007 Debentures plus any accrued and unpaid interest, as set forth in the Indenture.

At maturity, we may elect, subject to certain conditions as set forth in the Indenture, to pay up to 50% of the principal amount of the outstanding 2007 Debentures, plus all accrued and unpaid interest thereon to, but excluding, the maturity date, in shares of our common stock (valued at 95% of the weighted average of the closing sale prices of the common stock for the 20 consecutive trading days ending on the fifth trading day prior to the maturity date), if the common stock is then listed on an eligible market, the shares used to pay the 2007 Debentures and any interest thereon are freely tradable, and certain required opinions of counsel are received.
 
 
16
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 10: Long-Term Debt (continued)

(C) ThermaClime and certain of its subsidiaries entered into a $50 million loan agreement (the “Secured Term Loan”) with a certain lender. The Secured Term Loan matures on November 2, 2012 and accrues interest at a defined LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at June 30, 2010 was approximately 3.34%. The Secured Term Loan requires only quarterly interest payments with the final payment of interest and principal at maturity. During the first six months of 2010, we received proceeds from our insurance carrier as a partial payment on an insurance claim, of which we used approximately $0.8 million to pay down the Secured Term Loan.  As a result, approximately $49.2 million remains outstanding at June 30, 2010.

The Secured Term Loan is secured by the real property and equipment located at our El Dorado, Arkansas chemical production facility (the “El Dorado Facility”) and at our Cherokee, Alabama chemical production facility (the “Cherokee Facility”). The carrying value of the pledged assets is approximately $61million at June 30, 2010.

The Secured Term Loan borrowers are subject to numerous covenants under the agreement including, but not limited to, limitation on the incurrence of certain additional indebtedness and liens, limitations on mergers, acquisitions, dissolution and sale of assets, and limitations on declaration of dividends and distributions to us, all with certain exceptions. At June 30, 2010, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was approximately $67 million. As defined in the agreement, the Secured Term Loan borrowers are also subject to a minimum fixed charge coverage ratio of not less than 1.10 to 1 and a maximum leverage ratio of not greater than 4.50 to 1. Both of these requirements are measured quarterly on a trailing twelve-month basis. The Secured Term Loan borrowers were in compliance with these financial covenants for the twelve-month period ended June 30, 2010.

The maturity date of the Secured Term Loan can be accelerated by the lender upon the occurrence of a continuing event of default, as defined.

The Working Capital Revolver Loan agreement (discussed in (A) above) and the Secured Term Loan contain cross-default provisions. If ThermaClime fails to meet the financial covenants of either of these agreements, the lenders may declare an event of default.
 
Note 11: Commitments and Contingencies

Purchase and Sales Commitments - We entered into the following significant purchase and sales commitments during the six months ended June 30, 2010:

During February 2010, EDC signed an extension of EDC’s anhydrous ammonia purchase agreement with Koch Nitrogen International Sarl (“Koch”). Under the extension, Koch agrees to supply certain of EDC’s requirements of anhydrous ammonia through December 31, 2012.

During February 2010, EDC entered into a cost-plus supply agreement with Orica International Pte Ltd. (“Orica International”) to supply Orica International with 250,000 tons per year of industrial grade ammonium nitrate through December 2014. This new agreement, which became
 
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 11: Commitments and Contingencies (continued)

effective January 1, 2010, replaced EDC’s previous agreement to supply 210,000 tons per year of industrial grade ammonium nitrate (“AN”) to Orica USA, Inc.

Contingencies - We accrue for contingent losses when such losses are probable and reasonably estimable. In addition, we recognize contingent gains when such gains are realizable or realizable and earned.

Legal Matters - Following is a summary of certain legal matters involving the Company.

A.
Environmental Matters

Our operations are subject to numerous environmental laws (“Environmental Laws”) and to other federal, state and local laws regarding health and safety matters (“Health Laws”). In particular, the manufacture and distribution of chemical products are activities which entail environmental risks and impose obligations under the Environmental Laws and the Health Laws, many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. There can be no assurance that material costs or liabilities will not be incurred by us in complying with such laws or in paying fines or penalties for violation of such laws. The Environmental Laws and Health Laws and enforcement policies thereunder relating to our Chemical Business have in the past resulted, and could in the future result, in compliance expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of effluents at or from our facilities or the use or disposal of certain of its chemical products. Historically, significant expenditures have been incurred by subsidiaries within our Chemical Business in order to comply with the Environmental Laws and Health Laws and are reasonably expected to be incurred in the future.

We will recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. We are obligated to monitor certain discharge water outlets at our Chemical Business facilities should we discontinue the operations of a facility. We also have certain facilities in our Chemical Business that contain asbestos insulation around certain piping and heated surfaces, which we plan to maintain or replace, as needed, with non-asbestos insulation through our standard repair and maintenance activities to prevent deterioration. Since we currently have no plans to discontinue the use of these facilities and the remaining life of the facilities is indeterminable, an asset retirement liability has not been recognized. Currently, there is insufficient information to estimate the fair value of the asset retirement obligations. However, we will continue to review these obligations and record a liability when a reasonable estimate of the fair value can be made.

1.      Discharge Water Matters

The El Dorado Facility owned by EDC generates process wastewater, which includes cooling tower and boiler blowdowns, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by a state National Pollutant Discharge Elimination System (“NPDES”) water discharge permit issued by the Arkansas Department of Environmental Quality (“ADEQ”),
 
 
18
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 11: Commitments and Contingencies (continued)

which permit is to be renewed every five years. The ADEQ issued to EDC a NPDES water discharge permit in 2004, and the El Dorado Facility had until June 1, 2007 to meet the compliance deadline for the more restrictive limits under the 2004 NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits, the El Dorado Facility has significantly reduced the contaminant levels of its wastewater.

The El Dorado Facility has generally demonstrated its ability to comply with the more restrictive permit limits, and believes that if it is required to meet the more restrictive dissolved minerals permit levels, it should be able to do so. The El Dorado Facility has been having discussions with the ADEQ to modify and reduce the permit levels as to dissolved minerals, but, although the rule is a state rule, any revisions must also be approved by the United States Environmental Protection Agency (“EPA”) before it can become effective. Additional information has been provided to the EPA regarding the dissolved mineral issue. Once the rule change is complete, the permit limits can be modified to incorporate reasonably achievable dissolved minerals permit levels. The ADEQ has agreed to reopen the rule making to modify the permit limit as to dissolved minerals, which is subject to public notice and public hearings. The ADEQ and the El Dorado Facility also entered into a Consent Administrative Order (“CAO”) which authorized the El Dorado Facility to continue operating through December 31, 2009, without incurring permit violations pending the modification of the permit to implement the revised rule. The ADEQ did not extend the CAO due to the above mentioned dissolved minerals issue; however, in the interim, the El Dorado Facility is currently in compliance with the more restrictive permit limits under the 2004 NPDES permit.

In March 2009, the EPA notified the ADEQ that it disapproved the dissolved mineral rulemaking due to insufficient documentation. Representatives of EDC, ADEQ and the EPA have met to determine what additional information was required by the EPA. During January 2010, EDC received an Administrative Order from the EPA noting certain violations of the permit and requesting EDC to demonstrate compliance with the permit or provide a plan and schedule for returning to compliance. EDC has provided the EPA a response which states that the El Dorado Facility is now in compliance with the permit, that the El Dorado Facility expects to maintain compliance and that all but fifteen of the alleged violations were resolved through the CAO with the ADEQ. During the meeting with the EPA prior to the issuance of the Administrative Order, the EPA advised EDC that its primary objective was to bring the El Dorado Facility into compliance with the permit requirements, but reserved the right to assess penalties for past and continuing violations of the permit. As a result, it is unknown whether the EPA might elect to pursue civil penalties against EDC. Therefore, no liability has been established at June 30, 2010 as a result of the Administrative Order.

In addition, EDC has entered into a CAO that recognizes the presence of nitrate contamination in the shallow groundwater at the El Dorado Facility. EDC is addressing the shallow groundwater contamination. The CAO requires the El Dorado Facility to continue semi-annual groundwater monitoring, to continue operation of a groundwater recovery system and to submit a human health and ecological risk assessment to the ADEQ. The required risk assessment was submitted in August 2007. The final remedy for shallow groundwater contamination, should any remediation be required, will be selected pursuant to the new CAO and based upon the risk
 
 
19
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 11: Commitments and Contingencies (continued)

assessment. The cost of any additional remediation that may be required will be determined based on the results of the investigation and risk assessment and cannot currently be reasonably estimated. Therefore, no liability has been established at June 30, 2010, in connection with this matter.

2.      Air Matters
 
The EPA has sent information requests to most, if not all, of the nitric acid plants in the United States, including to us relating to our El Dorado and Cherokee Facilities and the Baytown, Texas facility (the “Baytown Facility”), requesting information under Section 114 of the Clean Air Act as to construction and modification activities at each of these facilities over a period of years to enable the EPA to determine whether these facilities are in compliance with certain provisions of the Clean Air Act. In connection with a review by our Chemical Business of these facilities in obtaining information for the EPA pursuant to the EPA’s request, our Chemical Business management believes, subject to further review, investigation and discussion with the EPA, that certain facilities within our Chemical Business may be required to make certain capital improvements to certain emission equipment in order to comply with the requirements of the Clean Air Act. If changes to the production equipment at these facilities are required in order to bring this equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial.

Further, if it is determined that the equipment at any of our chemical facilities have not met the requirements of the Clean Air Act, our Chemical Business could be subject to penalties in an amount not to exceed $27,500 per day as to each facility not in compliance and require such facility to be retrofitted with the “best available control technology.” We believe this technology is already employed at the Baytown Facility. Currently, we believe that certain facilities within our Chemical Business may be required to pay certain penalties as a result of the above described matter; however, we are currently unable to determine the amount of any penalties that may be assessed by the EPA. Therefore no liability has been established at June 30, 2010, in connection with this matter.
 
3.      Other Environmental Matters

In December 2002, two of our subsidiaries within our Chemical Business, sold substantially all of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained ownership of the real property. At December 31, 2002, even though we continued to own the real property, we did not assess our continuing involvement with our former Hallowell Facility to be significant and therefore accounted for the sale as discontinued operations. In connection with this sale, our subsidiary leased the real property to the buyer under a triple net long-term lease agreement. However, our subsidiary retained the obligation to be responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property and a corrective action strategy based on the investigation. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters. The successor (“Chevron”) of a prior owner of the Hallowell Facility
 
 
20
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 11: Commitments and Contingencies (continued)

has agreed, within certain limitations, to pay and has been paying one-half of the costs of the interim measures relating to this matter as approved by the Kansas Department of Environmental Quality, subject to reallocation.

Our subsidiary and Chevron are pursuing a course with the state of Kansas of long-term surface and groundwater monitoring to track the natural decline in contamination. Our subsidiary and Chevron submitted their final report on the groundwater monitoring and an addendum to the Mitigation Work Plan to the state of Kansas. The data from the monitoring program is being evaluated by the state of Kansas. On June 29, 2010, representatives of our subsidiary and Chevron met with the Kansas Department of Health and Environment (“KDHE”).  As a result of this meeting, our subsidiary and Chevron have agreed to perform additional surface and groundwater testing.  In addition, the KDHE notified our subsidiary and Chevron that this site has been referred to the KDHE’s Natural Resources Trustee, who is to consider and recommend restoration, replacement and/or whether to seek compensation. KDHE will consider the recommendations in their evaluation. Currently, it is unknown what damages, if any, the KDHE will claim. We have accrued for our allocable portion of costs for the additional testing, monitoring and risk assessments that could be reasonably estimated; however, the nature and extent of a portion of the requirements are not currently defined and the associated costs are not reasonably estimable. The ultimate required remediation, if any, is unknown.

At June 30, 2010, our estimated allocable portion of the total estimated liability (which is included in current and noncurrent accrued and other liabilities) related to this matter is $195,000. This amount is not discounted to its present value. It is reasonably possible that a change in the estimate of our liability will occur in the near term.

B. Other Pending, Threatened or Settled Litigation

The Jayhawk Group

In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC, Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the manager and sole member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the Jayhawk Group agreed, among other things, that if we undertook, in our sole discretion, within one year from the date of agreement a tender offer for our Series 2 $3.25 convertible exchangeable Class C preferred stock (“Series 2 Preferred”) or to issue our common stock for a portion of our Series 2 Preferred pursuant to a private exchange, that they would tender or exchange an aggregate of no more than 180,450 shares of the 340,900 shares of the Series 2 Preferred beneficially owned by the Jayhawk Group, subject to, among other things, the entities owned and controlled by Jack E. Golsen, our Chairman and Chief Executive Officer (“Golsen”), and his immediate family, that beneficially own Series 2 Preferred only being able to exchange or tender approximately the same percentage of shares of Series 2 Preferred beneficially owned by them as the Jayhawk Group was able to tender or exchange under the terms of the agreement. In addition, under the agreement, the Jayhawk Group agreed to vote its shares of our common stock and Series 2 Preferred “for” an amendment to the Certificate of Designation covering the Series 2 Preferred to allow us:
 
 
21
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Commitments and Contingencies (continued)

·  
for a period of five years from the completion of an exchange or tender to repurchase, redeem or otherwise acquire shares of our common stock, without approval of the outstanding Series 2 Preferred irrespective that dividends are accrued and unpaid with respect to the Series 2 Preferred; or
·  
to provide that holders of Series 2 Preferred may not elect two directors to our board of directors when dividends are unpaid on the Series 2 Preferred if less than 140,000 shares of Series 2 Preferred remain outstanding.

During 2007, we made a tender offer for our outstanding Series 2 Preferred at the rate of 7.4 shares of our common stock for each share of Series 2 Preferred so tendered. In July 2007, we redeemed the balance of our outstanding shares of Series 2 Preferred. Pursuant to its terms, the Series 2 Preferred was convertible into 4.329 shares of our common stock for each share of Series 2 Preferred. As a result of the redemption, the Jayhawk Group converted the balance of its Series 2 Preferred pursuant to the terms of the Series 2 Preferred in lieu of having its shares redeemed.

During November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit styled Jayhawk Capital Management, LLC, et al. v. LSB Industries, Inc., et al., in the United States District Court for the District of Kansas at Kansas City. During March 2009, the Jayhawk Group amended its complaint alleging that the Jayhawk Group should have been able to tender all of its Series 2 Preferred pursuant to the tender offer, notwithstanding the above-described agreement, based on the following claims against us and Golsen:

·  
fraudulent inducement and fraud,
·  
violation of 10(b) of the Exchange Act and Rule 10b-5,
·  
violation of 17-12A501 of the Kansas Uniform Securities Act, and
·  
breach of contract.
 
The Jayhawk Group seeks damages in an unspecified amount based on the additional number of common shares it allegedly would have received on conversion of all of its Series 2 Preferred through the February 2007 tender offer, plus punitive damages. In addition, the amended complaint seeks damages of approximately $4,000,000 for accrued and unpaid dividends it purports are owed as a result of Jayhawk’s July 2007 conversion of its remaining shares of Series 2 Preferred. In May 2008, the General Counsel for the Jayhawk Group offered to settle its claims against us and Golsen in return for a payment of $100,000, representing the approximate legal fees it had incurred investigating the claims at that time. Through counsel, we verbally agreed to the settlement offer and confirmed the agreement by e-mail. Afterward, the Jayhawk Group’s General Counsel purported to withdraw the settlement offer, and asserted that Jayhawk is not bound by any settlement agreement. We contend that the settlement agreement is binding on the Jayhawk Group. Both Golsen and we have filed motions to dismiss the plaintiff’s complaint in the federal court, and such motions to dismiss are pending. We intend to contest the lawsuit vigorously, and will assert that Jayhawk is bound by an agreement to settle the claims for $100,000. Our insurer, Chartis, a subsidiary of AIG, has agreed to defend this lawsuit on our behalf and on behalf of Golsen and to indemnify under a reservation of rights to deny liability under certain conditions. We have incurred expenses associated with this matter up to our
 
 
22
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 11: Commitments and Contingencies (continued)

insurance deductible of $250,000, and our insurer is paying defense cost in excess of our deductible in this matter. Although our insurer is defending this matter under a reservation of rights, we are not currently aware of any material issue in this case that would result in our insurer denying coverage. Therefore, no liability has been established at June 30, 2010 as a result of this matter.

Other Claims and Legal Actions

We are also involved in various other claims and legal actions including claims for damages resulting from water leaks related to our Climate Control products and other product liability occurrences. Most of the product liability claims are covered by our general liability insurance, which generally includes a deductible of $250,000 per claim. For any claims or legal actions that we have assessed the likelihood of our liability as probable, we have recognized our estimated liability up to the applicable deductible.

In the opinion of management, after consultation with legal counsel, if those claims for which we have not recognized a liability were determined adversely to us, it would not have a material effect on our business, financial condition or results of operations.

Note 12: Derivatives, Hedges and Financial Instruments Derivatives are recognized in the balance sheet and are measured at fair value. Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply or hedge accounting is elected.

We have three classes of contracts that are accounted for on a fair value basis, which are commodities futures/forward contracts (“commodities contracts”), foreign exchange contracts and interest rate contracts as discussed below. All of these contracts are used as economic hedges for risk management purposes but are not designated as hedging instruments. The valuation of these contracts was determined based on quoted market prices or, in instances where market quotes are not available, other valuation techniques or models used to estimate fair values.

The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At June 30, 2010, the valuations of contracts classified as Level 2 related to the interest rate swap contracts discussed below. For the interest rate swap contracts, we utilize valuation software and market data from a third-party provider. These interest rate contracts are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the contracts and using market information for forward interest-rate yield curves. The valuation inputs included the total contractual weighted-average pay rate of 3.42% and the total estimated market weighted-average receive rate of 0.94%. No valuation input adjustments were considered necessary relating to nonperformance risk for the contracts discussed above. There were no valuations of contracts classified as Level 3 at June 30, 2010. At December 31, 2008, the valuations of contracts classified as Level 3 were based on the average ask/bid prices obtained from a broker relating to a low volume market.
 
 
23
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 12: Derivatives, Hedges and Financial Instruments (continued)

Commodities Contracts

Raw materials for use in our manufacturing processes include copper used by our Climate Control Business and anhydrous ammonia and natural gas used by our Chemical Business. As part of our raw material price risk management, we periodically enter into futures/forward contracts for these materials, which contracts are generally accounted for on a mark-to-market basis. At December 31, 2009, our futures/forward copper contracts were for 750,000 pounds of copper through May 2010 at a weighted-average cost of $3.19 per pound. At June 30, 2010, our futures/forward copper contracts were for 750,000 pounds of copper through December 2010 at a weighted-average cost of $3.24 per pound. At December 31, 2009, we also had contractual rights under natural gas call contracts for approximately 150,000 MMBtu of natural gas through February 2010 at a weighted-average price of $6.00 per MMBtu. At June 30, 2010, our futures/forward natural gas contracts were for 140,000 MMBtu of natural gas through September 2010 at a weighted-average cost of $4.95 per MMBtu. The cash flows relating to these contracts are included in cash flows from continuing operating activities.

Foreign Exchange Contracts

One of our business operations purchases industrial machinery and related components from vendors outside of the United States. As part of our foreign currency risk management, we periodically enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange rates. These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. At December 31, 2009, our foreign exchange contracts were for the receipt of approximately 336,000 Euros through April 2010 at a weighted-average contract exchange rate of 1.44 (U.S. Dollar/Euro). At June 30, 2010, we had no outstanding foreign exchange contracts. The cash flows relating to these contracts are included in cash flows from continuing operating activities.

Interest Rate Contracts

As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. In March 2005, we purchased two interest rate cap contracts for a cost of $590,000, which matured in March 2009. In April 2008, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. In September 2008, we acquired an interest rate swap at a cost basis of $354,000, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012.

These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. Although no purchases occurred during the six months ended June 30, 2010 and 2009, the cash flows relating to the purchase of interest rate contracts are included in cash flows from continuing investing activities. In addition, the cash flows associated with the interest rate swap payments are included in cash flows from continuing operating activities.

 
24 
 
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 12: Derivatives, Hedges and Financial Instruments (continued)

The following details our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009:

 
Fair Value Measurements at
June 30, 2010 Using

 
 
 
 
Description
  
 
Total Fair
Value at
June 30,
2010
  
Quoted Prices
 in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
 
Significant
Unobservable
Inputs
(Level 3)
  
 
Total Fair
Value at
December 31,
2009

 
(In Thousands)

Assets - Supplies, prepaid items and other:
                                    
Commodities contracts
$
-
  
$
-
    
$
-
    
$
-
    
$
150
  
Total
$
-
  
$
-
    
$
-
    
$
-
    
$
150
  
                                     
Liabilities - Current and noncurrent accrued and other liabilities:
                                    
Commodities contracts
$
246
  
$
246
    
$
-
    
$
-
    
$
-
  
Interest rate contracts
  
2,277
    
-
      
2,277
      
-
      
1,929
  
Total
$
2,523
  
$
246
    
$
2,277
    
$
-
    
$
1,929
  

During the six months ended June 30, 2010, none of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and Level 2 classifications. In addition, the following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2009 (not applicable for the six months ended June 30, 2010 and the three months ended June 30, 2010 and 2009):

 
Commodities
Contracts
  
 
(In Thousands)
Beginning balance
   $ (1,388 )
Total realized and unrealized gain included in earnings
     493  
Purchases, issuances, and settlements
     895  
Transfers in and/or out of Level 3
     -  
Ending balance
   $ -  


 
25 
 
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 12: Derivatives, Hedges and Financial Instruments (continued)

Realized and unrealized net gains (losses) included in earnings and the income statement classifications are as follows:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Total net gains (losses) included in earnings:
                              
Cost of sales – Commodities contracts
$
(904
)
  
$
(1,148
)
  
$
(216
)
  
$
8
  
Cost of sales – Foreign exchange contracts
  
(24
)
    
(31
)
    
-
      
(1
)
Interest expense – Interest rate contracts
  
(1,137
)
    
158
      
(523
)
    
427
  
 
$
(2,065
)
  
$
(1,021
)
  
$
(739
)
  
$
434
  

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Change in unrealized gains and losses relating to contracts still held at period end:
                              
Cost of sales – Commodities contracts
$
(246
)
  
$
(969
)
  
$
(313
)
  
$
30
  
Interest expense – Interest rate contracts
  
(348
)
    
649
      
(128
)
    
719
  
 
$
(594
)
  
$
(320
)
  
$
(441
)
  
$
749
  

The following discussion of fair values is not indicative of the overall fair value of our assets and liabilities since it does not include all assets, including intangibles.

Our long-term debt agreements are the only financial instruments with fair values significantly different from their carrying amounts. At June 30, 2010 and December 31, 2009, the fair value for variable debt, excluding the Secured Term Loan, was believed to approximate their carrying value. At June 30, 2010 and December 31, 2009, the estimated fair value of the Secured Term Loan is based on defined LIBOR rates plus 7% utilizing information obtained from the lender. The fair values of fixed rate borrowings, other than the 2007 Debentures, are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding while also taking into consideration our current credit worthiness. At June 30, 2010 and December 31, 2009, the estimated fair value of the 2007 Debentures is based on quoted prices obtained from a broker for these debentures. The estimated fair value and carrying value of our long-term debt are as follows:

 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 12: Derivatives, Hedges and Financial Instruments (continued)

 
June 30, 2010
  
December 31, 2009
 
Estimated
Fair Value
  
Carrying
Value
  
Estimated
Fair Value
  
Carrying
 Value
 
(In Thousands)
Variable Rate:
                        
Secured Term Loan
   $ 24,518     $ 49,151     $ 27,640     $ 50,000  
Working Capital Revolver Loan
     -       -       -       -  
Other debt
     2,495       2,495       2,553       2,553  
                                 
Fixed Rate:
                                
5.5% Convertible Senior Subordinated Notes
     26,833       26,900       29,106       29,400  
Other bank debt and equipment financing
     24,015       23,369       20,231       19,848  
    $ 77,861     $ 101,915     $ 79,530     $ 101,801  

Note 13: Income Per Common Share  Net income applicable to common stock is computed by adjusting net income by the amount of preferred stock dividends. Basic income per common share is based upon net income applicable to common stock and the weighted-average number of common shares outstanding during each period.

Diluted income per share is based on net income applicable to common stock plus preferred stock dividends on preferred stock assumed to be converted, if dilutive, and interest expense including amortization of debt issuance cost, net of income taxes, on convertible debt assumed to be converted, if dilutive, and the weighted-average number of common shares and dilutive common equivalent shares outstanding, and the assumed conversion of dilutive convertible securities outstanding.

The following is a summary of certain transactions which affected basic income per share or diluted income per share, if dilutive:

During the six months ended June 30, 2010,
·  
we purchased 177,100 shares of treasury stock;
·  
we issued 43,510 shares of our common stock as the result of the exercise of stock options;
·  
we acquired $2,500,000 aggregate principle amount of the 2007 Debentures; and
·  
we paid cash dividends on our Series B 12% cumulative, convertible preferred stock (“Series B Preferred”), Series D 6% cumulative, convertible Class C preferred stock (“Series D Preferred”) and noncumulative redeemable preferred stock (“Noncumulative Preferred”) totaling approximately $240,000, $60,000 and $5,000, respectively.

During the six months ended June 30, 2009,
·  
we issued 389,000 shares of our common stock as the result of the exercise of stock options;
·  
we acquired $9,200,000 aggregate principle amount of the 2007 Debentures; and
·  
we paid cash dividends on our Series B Preferred, Series D Preferred and Noncumulative Preferred totaling approximately $240,000, $60,000 and $6,000, respectively.
 
 
 
27
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 13: Income Per Common Share (continued)

At June 30, 2010, there were no dividends in arrears.

The following table sets forth the computation of basic and diluted net income per common share:

(Dollars In Thousands, Except Per Share Amounts)

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
Numerator:
                              
Net income
$
7,727
    
$
20,473
    
$
6,009
    
$
8,730
  
Dividends on Series B Preferred
  
(240
)
    
(240
)
    
-
      
-
  
Dividends on Series D Preferred
  
(60
)
    
(60
)
    
-
      
-
  
Dividends on Noncumulative Preferred
  
(5
)
    
(6
)
    
-
      
-
  
Total dividends on preferred stock
  
(305
)
    
(306
)
    
-
      
-
  
Numerator for basic net income per common share - net income applicable to common stock
  
7,422
      
20,167
      
6,009
      
8,730
  
Dividends on preferred stock assumed to be converted, if dilutive
  
65
      
306
      
-
      
-
  
Interest expense including amortization of debt issuance costs, net of income taxes, on convertible debt assumed to be converted, if dilutive
  
-
      
 
627
      
 
-
      
 
314
  
Numerator for diluted net income per common share
$
7,487
    
$
21,100
    
$
6,009
    
$
9,044
  
                               
Denominator:
                              
Denominator for basic net income per common share - weighted-average shares
  
21,227,411
      
21,174,210
      
21,228,918
      
21,237,904
  
Effect of dilutive securities:
                              
Convertible preferred stock
  
270,425
      
938,006
      
936,566
      
937,825
  
Stock options
  
190,332
      
331,607
      
207,849
      
354,899
  
Convertible notes payable
  
4,000
      
1,143,320
      
4,000
      
1,143,320
  
Dilutive potential common shares
  
464,757
      
2,412,933
      
1,148,415
      
2,436,044
  
Denominator for diluted net income per common share - adjusted weighted-average shares and assumed conversions
  
21,692,168
      
 
23,587,143
      
 
22,377,333
      
 
23,673,948
  
                               
Basic net income per common share
$
.35
    
$
.95
    
$
.28
    
$
.41
  
                               
Diluted net income per common share
$
.35
    
$
.89
    
$
.27
    
$
.38
  

 
28 
 
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 13: Income Per Common Share (continued)

The following weighted-average shares of securities were not included in the computation of diluted net income per common share as their effect would have been antidilutive:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
                         
Convertible notes payable
     979,160       -       979,160       -  
Convertible preferred stock
     666,666       -       -       -  
Stock options
     373,619       766,646       372,253       412,363  
      2,019,445       766,646       1,351,413       412,363  

Note 14:  Income Taxes Provisions for income taxes are as follows:

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Current:
                            
Federal
$
4,473
  
$
6,490
    
$
3,957
    
$
1,682
  
State
  
1,174
    
772
      
967
      
182
  
Total current provisions
$
5,647
  
$
7,262
    
$
4,924
    
$
1,864
  

Deferred:
                            
Federal
$
226
  
$
4,970
    
$
49
    
$
3,219
  
State
  
18
    
568
      
6
      
368
  
Total deferred provisions
  
244
    
5,538
      
55
      
3,587
  
Provisions for income taxes
$
5,891
  
$
12,800
    
$
4,979
    
$
5,451
  

For the six and three months ended June 30, 2010 and 2009, the current provision for federal income taxes shown above includes regular federal income tax after the consideration of permanent and temporary differences between income for GAAP and tax purposes. For the six and three months ended June 30, 2010 and 2009, the current provision for state income taxes shown above includes regular state income tax and provisions for uncertain state income tax positions. At December 31, 2009, we had state net operating loss (“NOL”) carryforwards totaling approximately $12,900,000, which begin expiring in 2010.

Our annual estimated effective tax rate for 2010 is reduced by permanent tax differences, including the domestic manufacturer’s deduction and other permanent items.

The tax provision for the six months ended June 30, 2010 was $5,891,000 or 43.3% of pre-tax income and included the impact of the increased domestic manufacturer’s deduction available in 2010, the advanced energy credits and the additional income tax provision related to nondeductible expenses in prior years.
 
 
29
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 14:  Income Taxes (continued)

During June 2010, we determined that certain nondeductible expenses had not been properly identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional income tax provision of approximately $800,000 for the six and three months ended June 30, 2010. For the six and three months ended June 30, 2010, the effect of this adjustment decreased basic net income per share by $.04 and decreased diluted net income per share by $.03.

Management of the Company evaluated the impact of this accounting error and concluded the effect of this adjustment was immaterial to the Company’s 2007-2009 consolidated financial statements as well as the projected consolidated financial statements for the year ending December 31, 2010.

For the six months ended June 30, 2009, the tax provision was $12,800,000 or 38.5% of pre-tax income and included the impact of the domestic manufacturer’s deduction and other permanent items.

Our accounting for income taxes includes utilizing the accounting principle that the realization of an uncertain income tax position must be “more likely than not” (i.e., greater than 50% likelihood) that the position will be sustained upon examination by taxing authorities before it can be recognized in the financial statements.

We believe that we do not have any material uncertain tax positions other than the failure to file state income tax returns in some jurisdictions where we or some of our subsidiaries may have a filing responsibility (i.e, nexus). We had approximately $665,000 and $608,000 accrued for uncertain tax liabilities at June 30, 2010 and December 31, 2009, respectively, which are included in current and noncurrent accrued and other liabilities.

We and certain of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The federal tax returns for 1997 through 2005 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. With few exceptions, the 2006-2008 years remain open for all purposes of examination by the IRS and other major tax jurisdictions.
 
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 15: Other Expense, Other Income and Non-Operating Other Income, net

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Other expense:
                              
Losses on sales and disposals of property and equipment
$
259
    
$
220
    
$
256
    
$
207
  
Other miscellaneous expense (1)
  
43
      
114
      
(12
)
    
84
  
Total other expense (1)
$
302
    
$
334
    
$
244
    
$
291
  
                               
Other income:
                              
Property insurance recoveries in excess of
losses incurred
 
$
 
739
    
 
$
 
-
    
 
$
 
-
    
 
$
 
-
  
Miscellaneous income (1)
  
167
      
190
      
100
      
28
  
Total other income
$
906
    
$
190
    
$
100
    
$
28
  
                               
Non-operating other income, net:
                              
Interest income
$
77
    
$
78
    
$
21
    
$
33
  
Miscellaneous expense (1)
  
(39
)
    
(44
)
    
(21
)
    
(22
)
Total non-operating other income, net
$
38
    
$
34
    
$
-
    
$
11
  

(1)  
Amounts represent numerous unrelated transactions, none of which are individually significant requiring separate disclosure.

Note 16: Business Interruption and Property Insurance Claims  If an insurance claim relates to a recovery of our losses, we recognize the recovery when it is probable and reasonably estimable. If our insurance claim relates to a contingent gain, we recognize the recovery when it is realized or realizable and earned.

Cherokee Facility - In February 2009, a small nitric acid plant located at the Cherokee Facility suffered damage due to a fire. The fire was immediately extinguished and there were no injuries. The extent of the damage to the nitric acid plant has been determined. We have no immediate plans to rebuild the damaged plant. The nitric acid plant that suffered the fire, with a current 182 ton per day capacity, is the smaller of the two nitric acid plants at the Cherokee Facility. The Cherokee Facility continues production with the larger of the nitric acid plants. Our property insurance policy provides for replacement cost coverage relating to property damage with a $1,000,000 property loss deductible. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but we recorded a property insurance claim receivable relating to this event. During the first six months of 2010, our insurance claim receivable decreased by a net $849,000. The activity during the six months of 2010 included the receipt of approximately $1,021,000 from our insurance carrier as a partial payment on our insurance claim, all of which relates to property, plant and equipment (“PP&E”). In addition, the activity included payments of $172,000 relating to payables (approved by our insurance carrier) to unrelated third parties. As a result, the balance of the insurance claim receivable relating to this event was $326,000 at June 30, 2010.
 
 
31
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
 
Note 16: Business Interruption and Property Insurance Claims (continued)
 
Bryan Distribution Center - In July 2009, one of our fifteen agricultural distribution centers operated by our Chemical Business was destroyed by fire, resulting in the cessation of operations at this center, which is located in Bryan, Texas (“Bryan Center”). The Bryan Center stored and sold agricultural chemical products, including fertilizer grade ammonium nitrate, potash and certain other fertilizer products. During the first six months of 2010, the project to rebuild the Bryan Center was substantially completed. Our general liability insurance policy provides for coverage against third party damages with a $250,000 loss deductible. Our property insurance policy provides for replacement cost coverage relating to property damage and for business interruption coverage for certain lost profits and extra expense with a total $100,000 loss deductible for both coverages. As of June 30, 2010, the third party general liability claims have exceeded our $250,000 deductible. We have recognized the $250,000 general liability deductible and the insurance company has been paying directly most of the third party general liability claims. Because our replacement cost claim for property damages exceeds our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. A recovery, if any, from our business interruption coverage has not been recognized. During the fourth quarter of 2009, we received $545,000 from our insurance carrier as a partial payment on our insurance claim, which amount was applied against our insurance claim receivable. During the first six months of 2010, our insurance claim receivable decreased by a net $31,000. The activity during the six months of 2010 included the receipt of additional partial payments totaling $1,039,000 ($649,000 relates to PP&E) from our insurance carrier, of which $300,000 was applied against our insurance claim receivable and the remaining balance of $739,000 ($495,000 relates to PP&E) was classified as other income.  In addition, the activity included payments of $148,000 relating to payables (approved by our insurance carrier) to unrelated third parties and payments of $121,000 to our insurance carrier associated with the general liability deductible. As a result, the balance of the insurance claim receivable relating to this event was $4,000 at June 30, 2010.
 
 
Pryor Facility – In June 2010, a pipe failure in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged the ammonia plant.  The fire was immediately extinguished and there were no injuries. As a result of this damage, the Pryor Facility is unable to produce anhydrous ammonia or UAN. Based on our current assessment, the estimated costs to rebuild the ammonia reformer are approximately $8.0 million and should be completed toward the end of September 2010. Our property insurance policy provides for replacement cost coverage relating to property damage with a total $1,000,000 loss deductible and for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period and a minimum $250,000 deductible. As of June 30, 2010, because our replacement cost claim for property damages is estimated to exceed our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage from this fire but rather we recorded an insurance claim receivable relating to this event. A recovery, if any, from our business interruption coverage has not been recognized. At June 30, 2010, the balance of the insurance claim receivable relating to this event was $447,000.
 
 
32
 
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 17: Segment Information

 
Six Months Ended
June 30,
  
Three Months Ended
June 30,
 
2010
  
2009
  
2010
  
2009
 
(In Thousands)
Net sales:
                              
Climate Control
$
113,499
    
$
139,030
    
$
59,828
    
$
66,982
  
Chemical
  
181,250
      
144,371
      
106,378
      
69,893
  
Other
  
4,053
      
5,359
      
2,186
      
1,688
  
 
$
298,802
    
$
288,760
    
$
168,392
    
$
138,563
  
                               
Gross profit: (1)
                              
Climate Control (2)
$
37,231
    
$
47,426
    
$
18,832
    
$
24,998
  
Chemical (3)
  
24,760
      
29,429
      
15,602
      
12,281
  
Other
  
1,423
      
1,700
      
714
      
548
  
 
$
63,414
    
$
78,555
    
$
35,148
    
$
37,827
  
                               
Operating income: (4)
                              
Climate Control (2)
$
12,520
    
$
21,204
    
$
6,993
    
$
12,226
  
Chemical (3) (5)
  
11,063
      
18,835
      
9,178
      
6,197
  
General corporate expenses and other business operations, net (6)
  
(6,357
)
    
(6,077
)
    
(3,361
)
    
(3,881
)
   
17,226