form_10q.htm
LSB Industries, Inc.
Form 10-Q (9-30-2010)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
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OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____________to______________
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Commission file number 1-7677
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LSB Industries, Inc.
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Exact name of Registrant as specified in its charter
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Delaware
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73-1015226
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State or other jurisdiction of
incorporation or organization
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I.R.S. Employer Identification No.
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16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107
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Address of principal executive offices (Zip Code)
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(405) 235-4546
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Registrant's telephone number, including area code
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__ None _ ___
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Former name, former address and former fiscal year, if changed since last report.
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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
(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 October 29, 2010 was 21,100,983 shares, excluding 4,320,462 shares held as treasury stock.
FORM 10-Q OF LSB INDUSTRIES, INC.
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PART I – Financial Information
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Page
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Item 1.
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4
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Item 2.
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39
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Item 3.
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67
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Item 4.
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68
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69
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PART II – Other Information
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Item 1.
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72
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Item 1A.
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72
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Item 2.
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73
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Item 3.
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73
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Item 4.
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73
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Item 5.
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73
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Item 6.
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74
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 2010 is unaudited)
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September 30,
2010
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December 31,
2009
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Current assets:
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Cash and cash equivalents
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$
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51,437
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$
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61,739
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Restricted cash
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197
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30
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Short-term investments
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10,004
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10,051
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Accounts receivable, net
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71,439
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57,762
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Inventories:
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Finished goods
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29,211
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25,753
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Work in process
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3,289
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2,466
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Raw materials
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20,566
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22,794
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Total inventories
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53,066
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51,013
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Supplies, prepaid items and other:
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Prepaid income taxes
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1,396
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1,642
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Prepaid insurance
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997
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4,136
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Precious metals
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12,919
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13,083
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Supplies
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6,575
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4,886
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Other
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1,948
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1,626
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Total supplies, prepaid items and other
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23,835
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25,373
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Deferred income taxes
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5,605
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5,527
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Total current assets
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215,583
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211,495
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Property, plant and equipment, net
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133,717
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117,962
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Other assets:
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Debt issuance costs, net
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1,197
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1,652
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Investment in affiliate
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4,132
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3,838
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Goodwill
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1,724
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1,724
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Other, net
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2,745
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1,962
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Total other assets
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9,798
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9,176
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$
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359,098
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$
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338,633
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(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Information at September 30, 2010 is unaudited)
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September 30,
2010
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December 31,
2009
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$
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43,956
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$
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37,553
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Short-term financing
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-
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3,017
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Accrued and other liabilities
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27,020
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23,054
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Current portion of long-term debt
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3,475
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3,205
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Total current liabilities
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74,451
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66,829
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Long-term debt
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97,456
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98,596
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Noncurrent accrued and other liabilities
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12,095
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10,626
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Deferred income taxes
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14,474
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11,975
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Commitments and contingencies (Note 12)
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Stockholders' equity:
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Series B 12% cumulative, convertible preferred stock, $100 par value; 20,000 shares issued and outstanding
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2,000
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2,000
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Series D 6% cumulative, convertible Class C preferred stock, no par value; 1,000,000 shares issued
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1,000
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1,000
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Common stock, $.10 par value; 75,000,000 shares authorized, 25,419,795 shares issued (25,369,095 at December 31, 2009)
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2,542
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2,537
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Capital in excess of par value
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131,152
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129,941
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Retained earnings
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52,302
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41,082
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188,996
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176,560
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Less treasury stock at cost:
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Common stock, 4,320,462 shares (4,143,362 at December 31, 2009)
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28,374
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25,953
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Total stockholders' equity
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160,622
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150,607
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$
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359,098
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$
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338,633
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See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine and Three Months Ended September 30, 2010 and 2009
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(In Thousands, Except Per Share Amounts)
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Net sales
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$
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437,750
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$
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416,538
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$
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138,948
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$
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127,778
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Cost of sales
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344,897
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307,330
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109,509
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97,125
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Gross profit
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92,853
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109,208
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29,439
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30,653
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Selling, general and administrative expense
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70,775
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70,548
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23,948
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26,127
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Provision for (recoveries of) losses on accounts receivable
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(14
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)
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189
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21
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161
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Other expense
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575
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461
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273
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127
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Other income
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(4,179
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)
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(222
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)
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(3,273
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)
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(32
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)
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Operating income
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25,696
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38,232
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8,470
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4,270
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Interest expense
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5,943
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5,139
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1,864
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2,200
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Losses (gains) on extinguishment of debt
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52
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(1,796
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)
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-
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(53
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)
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Non-operating other income, net
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(48
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)
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(72
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)
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(10
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)
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(38
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)
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Income from continuing operations before provisions for income taxes and equity in earnings of affiliate
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19,749
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34,961
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6,616
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2,161
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Provisions for income taxes
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8,821
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14,110
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2,930
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1,310
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Equity in earnings of affiliate
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(719
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)
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(740
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)
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(191
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)
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(252
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)
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Income from continuing operations
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11,647
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21,591
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3,877
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1,103
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Net loss from discontinued operations
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122
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45
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79
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30
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Net income
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11,525
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21,546
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3,798
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1,073
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Dividends on preferred stocks
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305
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306
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-
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-
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Net income applicable to common stock
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$
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11,220
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$
|
21,240
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$
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3,798
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$
|
1,073
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Weighted-average common shares:
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Basic
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21,182
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21,279
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21,094
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21,487
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Diluted
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22,281
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23,623
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22,193
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22,633
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Income per common share:
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Basic
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$
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.53
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|
$
|
1.00
|
|
|
$
|
.18
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|
$
|
.05
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Diluted
|
$
|
.52
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$
|
.95
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$
|
.17
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|
$
|
.05
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|
See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
Nine Months Ended September 30, 2010
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Common
Stock
Shares
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Non-Redeemable Preferred Stock
|
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Common
Stock Par Value
|
|
Capital in Excess of Par Value
|
|
Retained Earnings
|
|
Treasury
Stock-
Common
|
|
Total
|
Balance at December 31, 2009
|
25,369
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$
|
3,000
|
$
|
2,537
|
$
|
129,941
|
|
$
|
41,082
|
|
$
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(25,953
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)
|
$
|
150,607
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Net income
|
|
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|
|
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|
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11,525
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11,525
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Dividends paid on preferred stocks
|
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|
|
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(305
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)
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(305
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)
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Stock-based compensation
|
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|
|
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|
752
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|
752
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Exercise of stock options
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50
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5
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|
342
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|
347
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|
Excess income tax benefit associated with stock-based compensation
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|
|
116
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|
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|
|
|
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|
116
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Acquisition of 177,100 shares of common stock
|
|
|
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|
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|
(2,421
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)
|
|
(2,421
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)
|
Conversion of 14 shares of redeemable preferred stock to common stock
|
1
|
|
|
|
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|
1
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|
|
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|
|
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|
|
1
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|
Balance at September 30, 2010
|
25,420
|
$
|
3,000
|
$
|
2,542
|
$
|
131,152
|
|
$
|
52,302
|
|
$
|
(28,374
|
)
|
$
|
160,622
|
|
Note: For the nine and three months ended September 30, 2010, total comprehensive income was $11,525,000 and $3,798,000, respectively. For the nine and three months ended September 30, 2009, total comprehensive income was $21,666,000 and $1,073,000, respectively.
See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 2010 and 2009
Cash flows from continuing operating activities:
|
|
|
|
|
|
|
|
Net income
|
$
|
11,525
|
|
|
$
|
21,546
|
|
Adjustments to reconcile net income to net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
122
|
|
|
|
45
|
|
Deferred income taxes
|
|
2,325
|
|
|
|
9,373
|
|
Loss (gain) on extinguishment of debt
|
|
52
|
|
|
|
(1,796
|
)
|
Losses on sales and disposals of property and equipment
|
|
508
|
|
|
|
340
|
|
Gain on property insurance recoveries associated with property, plant and equipment
|
|
(3,964
|
)
|
|
|
-
|
|
Depreciation of property, plant and equipment
|
|
12,880
|
|
|
|
11,573
|
|
Amortization
|
|
466
|
|
|
|
605
|
|
Stock-based compensation
|
|
752
|
|
|
|
768
|
|
Provision for (recovery of) losses on accounts receivable
|
|
(14
|
)
|
|
|
189
|
|
Realization of losses on inventory
|
|
(86
|
)
|
|
|
(3,186
|
)
|
Provision for (realization of) losses on firm sales commitments
|
|
(337
|
)
|
|
|
1,310
|
|
Equity in earnings of affiliate
|
|
(719
|
)
|
|
|
(740
|
)
|
Distributions received from affiliate
|
|
425
|
|
|
|
560
|
|
Changes in fair value of commodities contracts
|
|
(141
|
)
|
|
|
(236
|
)
|
Changes in fair value of interest rate contracts
|
|
344
|
|
|
|
(314
|
)
|
Other
|
|
(10
|
)
|
|
|
-
|
|
Cash provided (used) by changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(14,373
|
)
|
|
|
11,889
|
|
Inventories
|
|
(1,967
|
)
|
|
|
16,418
|
|
Prepaid and accrued income taxes
|
|
319
|
|
|
|
(2,415
|
)
|
Other supplies and prepaid items
|
|
1,449
|
|
|
|
(238
|
)
|
Accounts payable
|
|
6,635
|
|
|
|
(8,957
|
)
|
Customer deposits
|
|
2,306
|
|
|
|
(2,279
|
)
|
Accrued payroll and benefits
|
|
1,794
|
|
|
|
706
|
|
Commodities contracts
|
|
150
|
|
|
|
(5,072
|
)
|
Deferred rent expense
|
|
-
|
|
|
|
(1,424
|
)
|
Other current and noncurrent liabilities
|
|
2,244
|
|
|
|
(639
|
)
|
Net cash provided by continuing operating activities
|
|
22,685
|
|
|
|
48,026
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(26,129
|
)
|
|
|
(22,221
|
)
|
Proceeds from property insurance recoveries associated with property, plant and equipment
|
|
5,293
|
|
|
|
-
|
|
Proceeds from sales of property and equipment
|
|
44
|
|
|
|
14
|
|
Proceeds from short-term investments
|
|
20,053
|
|
|
|
-
|
|
Purchase of short-term investments
|
|
(20,006
|
)
|
|
|
(10,000
|
)
|
Proceeds from (deposits of) restricted cash
|
|
(167
|
)
|
|
|
862
|
|
Other assets
|
|
(427
|
)
|
|
|
(289
|
)
|
Net cash used by continuing investing activities
|
|
(21,339
|
)
|
|
|
(31,634
|
)
|
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Nine Months Ended September 30, 2010 and 2009
Cash flows from continuing financing activities:
|
|
|
|
|
|
|
|
Proceeds from revolving debt facilities
|
$
|
394,221
|
|
|
$
|
396,794
|
|
Payments on revolving debt facilities
|
|
(394,221
|
)
|
|
|
(396,794
|
)
|
Acquisition of 5.5% convertible debentures
|
|
(2,494
|
)
|
|
|
(7,953
|
)
|
Proceeds from other long-term debt, net of fees
|
|
47
|
|
|
|
8,566
|
|
Payments on other long-term debt
|
|
(3,370
|
)
|
|
|
(1,600
|
)
|
Payments of debt issuance costs
|
|
-
|
|
|
|
(26
|
)
|
Payments on loans secured by cash value of life insurance policies
|
|
(380
|
)
|
|
|
-
|
|
Payments on short-term financing
|
|
(3,017
|
)
|
|
|
(2,228
|
)
|
Proceeds from exercise of stock options
|
|
347
|
|
|
|
601
|
|
Purchase of treasury stock
|
|
(2,421
|
)
|
|
|
-
|
|
Excess income tax benefit associated with stock-based compensation
|
|
212
|
|
|
|
631
|
|
Dividends paid on preferred stocks
|
|
(305
|
)
|
|
|
(306
|
)
|
Net cash used by continuing financing activities
|
|
(11,381
|
)
|
|
|
(2,315
|
)
|
|
|
|
|
|
|
|
|
Cash flows of discontinued operations:
|
|
|
|
|
|
|
|
Operating cash flows
|
|
(267
|
)
|
|
|
(94
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
(10,302
|
)
|
|
|
13,983
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
61,739
|
|
|
|
46,204
|
|
Cash and cash equivalents at end of period
|
$
|
51,437
|
|
|
$
|
60,187
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net of refunds
|
$
|
5,993
|
|
|
$
|
6,521
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
Receivable associated with a property insurance claim
|
$
|
171
|
|
|
$
|
1,210
|
|
Current other assets, accounts payable, other current and noncurrent liabilities and long-term debt associated with property, plant and equipment
|
$
|
7,272
|
|
|
$
|
3,866
|
|
Debt issuance costs associated with the acquisition of the 5.5% convertible debentures
|
$
|
58
|
|
|
$
|
351
|
|
See accompanying notes.
Table of Contents
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 September 30, 2010 and for the nine and three-month periods ended September 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 15 – 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 (“U.S.”) generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the 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 nine months ended September 30, 2009 to conform to our condensed consolidated statement of cash flows presentation for the nine months ended September 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 nine months ended September 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 13 - Derivatives, Hedges and Financial Instruments.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3: Changes in Accounting Estimates During the three months ended September 30, 2010, we had the following change in accounting estimates relating to our Climate Control Business:
·
|
a decrease in our inventory shrink reserves of $390,000.
|
The net effect of this change in accounting estimates increased income from continuing operations by $390,000 and net income by $234,000 for the nine and three months ended September 30, 2010. In addition, this change in accounting estimates increased basic and diluted net income per share by $.01 and $.01, respectively, for the nine months ended September 30, 2010 and $.01 and $.01, respectively, for the three months ended September 30, 2010.
During the three months ended September 30, 2009, we had the following changes in accounting estimates relating primarily to our Climate Control Business:
·
|
a decrease in our estimated costs to complete a construction contract of $575,000, which contract was substantially completed during the third quarter,
|
·
|
a decrease in our inventory shrink reserves of $238,000, and
|
·
|
an increase in our accrued vacation of $205,000.
|
The net effect of these changes in accounting estimates increased income from continuing operations by $608,000 and net income by $371,000 for the nine and three months ended September 30, 2009. In addition, these changes in accounting estimates increased basic and diluted net income per share by $.02 and $.02, respectively, for the nine months ended September 30, 2009 and $.02 and $.02, respectively, for the three months ended September 30, 2009.
Note 4: Short-Term Investments Investments, which consist 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.
Note 5: Accounts Receivable, net Our accounts receivable, net, consists of the following:
|
|
September 30,
2010
|
|
December 31,
2009
|
Trade receivables
|
$
|
70,890
|
|
|
$
|
55,318
|
|
Insurance claims
|
|
-
|
|
|
|
1,517
|
|
Other
|
|
1,096
|
|
|
|
1,603
|
|
|
|
71,986
|
|
|
|
58,438
|
|
Allowance for doubtful accounts
|
|
(547
|
)
|
|
|
(676
|
)
|
|
$
|
71,439
|
|
|
$
|
57,762
|
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6: 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 September 30, 2010 and December 31, 2009, inventory reserves for certain slow-moving inventory items (Climate Control products) were $1,447,000 and $1,198,000, respectively. In addition, inventory reserves for certain nitrogen-based inventories provided by our Chemical Business were $88,000 and $478,000, at September 30, 2010 and December 31, 2009, respectively, because cost exceeded the net realizable value.
Changes in our inventory reserves are as follows:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Balance at beginning of period
|
$
|
1,676
|
|
|
$
|
4,141
|
|
|
$
|
1,302
|
|
|
$
|
1,064
|
|
Provision for (realization of) losses
|
|
(87
|
)
|
|
|
(3,186
|
)
|
|
|
237
|
|
|
|
(162
|
)
|
Write-offs/disposals
|
|
(54
|
)
|
|
|
(57
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Balance at end of period
|
$
|
1,535
|
|
|
$
|
898
|
|
|
$
|
1,535
|
|
|
$
|
898
|
|
The provision for (realization of) losses is included in cost of sales in the accompanying condensed consolidated statements of income.
Note 7: 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.
Precious metals expense, net, consists of the following:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Precious metals expense
|
$
|
4,508
|
|
|
$
|
4,354
|
|
|
$
|
1,047
|
|
|
$
|
1,075
|
|
Recoveries of precious metals
|
|
(751
|
)
|
|
|
(2,456
|
)
|
|
|
(751
|
)
|
|
|
(234
|
)
|
Gains on sales of precious metals
|
|
(112
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Precious metals expense, net
|
$
|
3,645
|
|
|
$
|
1,898
|
|
|
$
|
296
|
|
|
$
|
841
|
|
Precious metals expense, net, is included in cost of sales in the accompanying condensed consolidated statements of income.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: 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”). During September 2010, the Partnership repaid its indebtedness to a term lender (“Term Lender”) of the Project. CHI had entered into a non-recourse guaranty of the partnership’s indebtedness to the Term Lender. In connection with the non-recourse guaranty, CHI had pledged its limited partnership interest in the Partnership to the Term Lender. CHI’s obligation under the non-recourse guaranty was limited to the asset pledged, which was CHI’s limited partnership interest. As a result of the Partnership repaying in full its indebtedness to the Term Lender, the asset pledged by CHI under the non-recourse guaranty has been released and the lien thereon terminated. In accordance with GAAP, no liability was required to be established for this guaranty since it was entered into prior to January 1, 2003.
CHI has filed a lawsuit in the U.S. District Court, Western District of Oklahoma, against the general partner of the Partnership, styled CHI v. Cepolk Corporation. CHI alleges, among other things, that:
·
|
the general partner failed to make its capital contribution of approximately $2.0 million to the Partnership as required under the partnership agreement, and
|
·
|
the general partner breached its fiduciary duty and the general partner has been unjustly enriched, in connection with the general partner’s management of the Partnership and the use of and payments to a company that provides maintenance services (“Maintenance Provider”) to the Partnership’s project, which Maintenance Provider is believed to be owned and controlled by the same people as the general partner.
|
After CHI filed its lawsuit in the Oklahoma U.S. District Court, the general partner, Partnership and the Maintenance Provider filed a lawsuit in Louisiana against CHI alleging that the Louisiana State Court has jurisdiction and should consider the issues in dispute.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Current and Noncurrent Accrued and Other Liabilities Our current and noncurrent accrued and other liabilities consist of the following:
|
September 30,
2010
|
|
December 31,
2009
|
Accrued payroll and benefits
|
|
$ |
7,694 |
|
|
$ |
5,900 |
|
Deferred revenue on extended warranty contracts
|
|
|
5,532 |
|
|
|
4,884 |
|
Accrued insurance
|
|
|
3,949 |
|
|
|
3,667 |
|
Accrued death benefits
|
|
|
3,879 |
|
|
|
3,356 |
|
Accrued warranty costs
|
|
|
3,134 |
|
|
|
3,138 |
|
Customer deposits
|
|
|
2,941 |
|
|
|
635 |
|
Fair value of derivatives
|
|
|
2,439 |
|
|
|
1,929 |
|
Accrued property and franchise taxes
|
|
|
1,267 |
|
|
|
791 |
|
Accrued executive benefits
|
|
|
1,207 |
|
|
|
1,102 |
|
Accrued interest
|
|
|
1,196 |
|
|
|
1,593 |
|
Accrued contractual manufacturing obligations
|
|
|
1,032 |
|
|
|
732 |
|
Accrued commissions
|
|
|
794 |
|
|
|
1,035 |
|
Other
|
|
|
4,051 |
|
|
|
4,918 |
|
|
|
|
39,115 |
|
|
|
33,680 |
|
Less noncurrent portion
|
|
|
12,095 |
|
|
|
10,626 |
|
Current portion of accrued and other liabilities
|
|
$ |
27,020 |
|
|
$ |
23,054 |
|
Note 10: 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 for commercial products, the base warranty coverage for most of the manufactured equipment in the Climate Control Business is limited to eighteen months from the date of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days for spare parts. For residential products, the base warranty coverage for manufactured equipment in the Climate Control Business is limited to ten years from the date of shipment for material and to five years from the date of shipment for labor associated with the repair. The warranty provides that most equipment is required to be returned to the factory or an authorized representative and the warranty is limited to the repair and replacement of the defective product, with a maximum warranty of the refund of the purchase price. Furthermore, companies within the Climate Control Business generally disclaim and exclude warranties related to merchantability or fitness for any particular purpose and disclaim and exclude any liability for consequential or incidental damages. In some cases, the customer may purchase or a specific product may be sold with an extended warranty. The above discussion is generally applicable to such extended warranties, but variations do occur depending upon specific contractual obligations, certain system components, and local laws.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Accrued Warranty Costs (continued)
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 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.
Changes in our product warranty obligation (accrued warranty costs) are as follows:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Balance at beginning of period
|
$
|
3,138
|
|
|
$
|
2,820
|
|
|
$
|
3,129
|
|
|
$
|
3,038
|
|
Charged to costs and expenses
|
|
2,669
|
|
|
|
5,050
|
|
|
|
1,026
|
|
|
|
1,904
|
|
Costs and expenses incurred
|
|
(2,673
|
)
|
|
|
(4,115
|
)
|
|
|
(1,021
|
)
|
|
|
(1,187
|
)
|
Balance at end of period
|
$
|
3,134
|
|
|
$
|
3,755
|
|
|
$
|
3,134
|
|
|
$
|
3,755
|
|
Note 11: Long-Term Debt Our long-term debt consists of the following:
|
September 30,
|
|
December 31,
|
|
2010
|
|
2009
|
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 6.43%, most of which is secured by machinery, equipment and real estate
|
|
|
24,880 |
|
|
|
22,401 |
|
|
|
|
100,931 |
|
|
|
101,801 |
|
Less current portion of long-term debt
|
|
|
3,475 |
|
|
|
3,205 |
|
Long-term debt due after one year
|
|
$ |
97,456 |
|
|
$ |
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 September 30, 2010 was 3.75%. Interest is paid monthly, if applicable.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Long-Term Debt (continued)
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 September 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.
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 $200 million at September 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 September 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,
|
·
|
make restricted payments or loans to affiliates who are not Borrowers,
|
·
|
engage in mergers, consolidations or other forms of recapitalization, or
|
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.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Long-Term Debt (continued)
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.
During the nine months ended September 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 nine and three months ended September 30, 2009, we acquired $10,100,000 and $900,000, respectively, aggregate principal amount of the 2007 Debentures for approximately $7,953,000 and $819,000, respectively, with each purchase being negotiated. As a result, we recognized a gain on extinguishment of debt of $1,796,000 and $53,000, 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 September 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 19 - 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Long-Term Debt (continued)
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.
(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 September 30, 2010 was approximately 3.47%. The Secured Term Loan requires only quarterly interest payments with the final payment of interest and principal at maturity. During the first nine 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 September 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 $63 million at September 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 September 30, 2010, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was approximately $72 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 September 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies
Purchase and Sales Commitments - We entered into the following significant purchase and sales commitments during the nine months ended September 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 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.
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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
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”), 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 ammonia and nitrate 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 approval from certain state legislative committees and the ADEQ. 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 has been 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 September 30, 2010 as a result of the Administrative Order.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
EDC is continuing to pursue the rulemaking and permit modification and has filed a petition with the ADEQ to reopen the dissolved minerals rulemaking incorporating revisions which EDC believes would be acceptable to the EPA. The ADEQ has reopened the rulemaking and has held a public hearing on the rulemaking issue. The issue must be approved by several legislative committees and the ADEQ, and, after such approvals, the rulemaking revisions must be approved by EPA.
Further, the city of El Dorado, Arkansas has received approval to construct a pipeline for disposal of wastewater generated by the city and by certain companies in the El Dorado area. The companies intending to use the pipeline will contribute to the cost of construction and operation of the pipeline. Although EDC believes it can comply with the more restrictive permit limits, EDC intends to participate in the construction of the pipeline that will be owned by the city in order to ensure that it will be able to comply with the permit limits and anticipates the cost to EDC in connection with the construction of the pipeline for EDC’s right to use the pipeline to dispose of its wastewater will be approximately $4.0 million. Construction of the pipeline by the city is anticipated to be completed in 2013.
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 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 September 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
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 September 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 has agreed in writing, 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 are in the process of performing 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
At September 30, 2010, our estimated allocable portion of the total estimated liability (which is included in current accrued and other liabilities) related to this matter is $163,000. 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.
During 2010, EDC became aware that certain personnel at its Whitewright, Texas agricultural distribution site, which personnel had been previously terminated by EDC, disposed of chemicals and debris at the site without authorization. Upon learning of these acts by the former employees, EDC contracted with an environmental company to analyze the areas of such disposal and dispose of any chemicals and contaminated soils. Upon completion of testing, it was determined that the area contained contaminants above state action levels. As a result, EDC notified the appropriate authorities in the state of Texas of the contamination. EDC has installed numerous monitoring wells in coordination with the state, and EDC believes that the cost of this project could be approximately $200,000 of which $50,000 remains accrued at September 30, 2010.
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:
·
|
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.
|
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
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
|
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 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 September 30, 2010 as a result of this matter.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Commitments and Contingencies (continued)
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 13: 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 September 30, 2010, the valuations of contracts classified as Level 2 related to the foreign exchange contracts and interest rate swap contracts discussed below. For the foreign exchange contracts, these contracts are valued using the foreign currency exchange rates pursuant to the terms of the contracts and using market information for foreign currency exchange rates. The valuation inputs included the total contractual weighted-average exchange rate of 1.28 and the total estimated market weighted-average exchange rate of 1.36 (U.S. Dollar/Euro). For the foreign exchange contracts and 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 0.53%. 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 September 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: 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 September 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 September 30, 2010, our futures/forward natural gas contracts were for 680,000 MMBtu of natural gas through December 2010 at a weighted-average cost of $4.24 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 September 30, 2010, our foreign exchange contracts were for the receipt of approximately 783,000 Euros through June 2011 at a weighted-average contract exchange rate of 1.28 (U.S. Dollar/Euro). 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 nine months ended September 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.
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LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: Derivatives, Hedges and Financial Instruments (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009:
|
Fair Value Measurements at
September 30, 2010 Using
|
Description
|
|
Total Fair
Value at
September 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
|
Assets - Supplies, prepaid items and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities contracts
|
$
|
307
|
|
$
|
307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
150
|
|
Foreign exchange contracts
|
|
66
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
$
|
373
|
|
$
|
307
|
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Current and noncurrent accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities contracts
|
$
|
166
|
|
$
|
166
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest rate contracts
|
|
2,273
|
|
|
-
|
|
|
|
2,273
|
|
|
|
-
|
|
|
|
1,929
|
|
Total
|
$
|
2,439
|
|
$
|
166
|
|
|
$
|
2,273
|
|
|
$
|
-
|
|
|
$
|
1,929
|
|
During the nine months ended September 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 nine months ended September 30, 2009 (not applicable for the nine months ended September 30, 2010 and the three months ended September 30, 2010 and 2009):
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
|
|
$ |
- |
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: Derivatives, Hedges and Financial Instruments (continued)
Realized and unrealized net gains (losses) included in earnings and the income statement classifications are as follows:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Total net gains (losses) included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales – Commodities contracts
|
$
|
(764
|
)
|
|
$
|
(1,598
|
)
|
|
$
|
140
|
|
|
$
|
(450
|
)
|
Cost of sales – Foreign exchange contracts
|
|
42
|
|
|
|
(31
|
)
|
|
|
66
|
|
|
|
-
|
|
Interest expense – Interest rate contracts
|
|
(1,512
|
)
|
|
|
(530
|
)
|
|
|
(375
|
)
|
|
|
(688
|
)
|
|
$
|
(2,234
|
)
|
|
$
|
(2,159
|
)
|
|
$
|
(169
|
)
|
|
$
|
(1,138
|
)
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Change in unrealized gains and losses relating to contracts still held at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales – Commodities contracts
|
$
|
141
|
|
|
$
|
236
|
|
|
$
|
342
|
|
|
$
|
385
|
|
Cost of sales – Foreign exchange contracts
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
Interest expense – Interest rate contracts
|
|
(344
|
)
|
|
|
314
|
|
|
|
4
|
|
|
|
(335
|
)
|
|
$
|
(137
|
)
|
|
$
|
550
|
|
|
$
|
412
|
|
|
$
|
50
|
|
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 September 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 September 30, 2010 and December 31, 2009, the estimated fair value of the Secured Term Loan is based on defined LIBOR rates plus 6.025% and 7%, respectively, 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 September 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:
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: Derivatives, Hedges and Financial Instruments (continued)
|
September 30, 2010
|
|
December 31, 2009
|
|
Estimated
Fair Value
|
|
Carrying Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
Variable Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Term Loan
|
|
$ |
25,627 |
|
|
$ |
49,151 |
|
|
$ |
27,640 |
|
|
$ |
50,000 |
|
Working Capital Revolver Loan
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other debt
|
|
|
2,467 |
|
|
|
2,467 |
|
|
|
2,553 |
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5% Convertible Senior Subordinated Notes
|
|
|
26,900 |
|
|
|
26,900 |
|
|
|
29,106 |
|
|
|
29,400 |
|
Other bank debt and equipment financing
|
|
|
23,030 |
|
|
|
22,413 |
|
|
|
20,231 |
|
|
|
19,848 |
|
|
|
$ |
78,024 |
|
|
$ |
100,931 |
|
|
$ |
79,530 |
|
|
$ |
101,801 |
|
Note 14: 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 nine months ended September 30, 2010,
·
|
we purchased 177,100 shares of treasury stock;
|
·
|
we issued 50,140 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 nine months ended September 30, 2009,
·
|
we issued 408,500 shares of our common stock as the result of the exercise of stock options;
|
·
|
we acquired $10,100,000 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.
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 14: Income Per Common Share (continued)
At September 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)
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
11,525
|
|
|
$
|
21,546
|
|
|
$
|
3,798
|
|
|
$
|
1,073
|
|
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
|
|
11,220
|
|
|
|
21,240
|
|
|
|
3,798
|
|
|
|
1,073
|
|
Dividends on preferred stock assumed to be converted, if dilutive
|
|
305
|
|
|
|
306
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense including amortization of debt issuance costs, net of income taxes, on convertible debt assumed to be converted, if dilutive
|
|
-
|
|
|
|
914
|
|
|
|
-
|
|
|
|
-
|
|
Numerator for diluted net income per common share
|
$
|
11,525
|
|
|
$
|
22,460
|
|
|
$
|
3,798
|
|
|
$
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share - weighted-average shares
|
|
21,182,180
|
|
|
|
21,279,030
|
|
|
|
21,093,732
|
|
|
|
21,486,688
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
937,080
|
|
|
|
938,006
|
|
|
|
936,536
|
|
|
|
937,106
|
|
Stock options
|
|
157,682
|
|
|
|
295,539
|
|
|
|
158,886
|
|
|
|
205,149
|
|
Convertible notes payable
|
|
4,000
|
|
|
|
1,110,560
|
|
|
|
4,000
|
|
|
|
4,000
|
|
Dilutive potential common shares
|
|
1,098,762
|
|
|
|
2,344,105
|
|
|
|
1,099,422
|
|
|
|
1,146,255
|
|
Denominator for diluted net income per common share - adjusted weighted-average shares and assumed conversions
|
|
22,280,942
|
|
|
|
23,623,135
|
|
|
|
22,193,154
|
|
|
|
22,632,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
.53
|
|
|
$
|
1.00
|
|
|
$
|
.18
|
|
|
$
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
$
|
.52
|
|
|
$
|
.95
|
|
|
$
|
.17
|
|
|
$
|
.05
|
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 14: 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:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
979,160 |
|
|
- |
|
|
979,160 |
|
|
1,106,560 |
|
Stock options
|
|
365,659 |
|
|
406,685 |
|
|
350,000 |
|
|
383,152 |
|
|
|
1,344,819 |
|
|
406,685 |
|
|
1,329,160 |
|
|
1,489,712 |
|
Note 15: Income Taxes Provisions for income taxes are as follows:
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
5,059
|
|
$
|
4,245
|
|
|
$
|
586
|
|
|
$
|
(2,245
|
)
|
State
|
|
1,437
|
|
|
492
|
|
|
|
263
|
|
|
|
(280
|
)
|
Total current provisions (benefit)
|
$
|
6,496
|
|
$
|
4,737
|
|
|
$
|
849
|
|
|
$
|
(2,525
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
2,026
|
|
$
|
8,680
|
|
|
$
|
1,800
|
|
|
$
|
3,710
|
|
State
|
|
299
|
|
|
693
|
|
|
|
281
|
|
|
|
125
|
|
Total deferred provisions
|
|
2,325
|
|
|
9,373
|
|
|
|
2,081
|
|
|
|
3,835
|
|
Provisions for income taxes
|
$
|
8,821
|
|
$
|
14,110
|
|
|
$
|
2,930
|
|
|
$
|
1,310
|
|
For the nine and three months ended September 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 nine and three months ended September 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 includes the impact of permanent tax differences, such as the domestic manufacturer’s deduction and other permanent items.
The tax provision for the nine months ended September 30, 2010 was $8,821,000 or 43.4% 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.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 15: 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 nine months ended September 30, 2010. For the nine months ended September 30, 2010, the effect of this adjustment decreased basic and diluted net income per share by $.04.
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 nine months ended September 30, 2009, the tax provision was $14,110,000 or 39.6% 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 $681,000 and $608,000 accrued for uncertain tax liabilities at September 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 1999 through 2006 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. With few exceptions, the 2007-2009 years remain open for all purposes of examination by the U.S. Internal Revenue Service (“IRS”) and other major tax jurisdictions.
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 16: Other Expense, Other Income and Non-Operating Other Income, net
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on sales and disposals of property and equipment
|
$
|
508
|
|
|
$
|
340
|
|
|
$
|
249
|
|
|
$
|
120
|
|
Other miscellaneous expense (1)
|
|
67
|
|
|
|
121
|
|
|
|
24
|
|
|
|
7
|
|
Total other expense
|
$
|
575
|
|
|
$
|
461
|
|
|
$
|
273
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property insurance recoveries in excess of losses incurred
|
$
|
3,982
|
|
|
$
|
-
|
|
|
$
|
3,243
|
|
|
$
|
-
|
|
Miscellaneous income (1)
|
|
197
|
|
|
|
222
|
|
|
|
30
|
|
|
|
32
|
|
Total other income
|
$
|
4,179
|
|
|
$
|
222
|
|
|
$
|
3,273
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
107
|
|
|
$
|
138
|
|
|
$
|
30
|
|
|
$
|
60
|
|
Miscellaneous income (1)
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Miscellaneous expense (1)
|
|
(60
|
)
|
|
|
(67
|
)
|
|
|
(21
|
)
|
|
|
(23
|
)
|
Total non-operating other income, net
|
$
|
48
|
|
|
$
|
72
|
|
|
$
|
10
|
|
|
$
|
38
|
|
(1)
|
Amounts represent numerous unrelated transactions, none of which are individually significant requiring separate disclosure.
|
Note 17: 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. The following summarizes our significant insurance claims:
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. We have no immediate plans to rebuild the damaged plant. The nitric acid plant that suffered the fire, with a 182 ton per day capacity, was the smaller of the two nitric acid plants at the Cherokee Facility. The Cherokee Facility continued production with the larger of the nitric acid plants. Our property insurance policy provided for replacement cost coverage relating to property damage with a $1,000,000 property loss deductible. Because our replacement cost claim for property damages exceeded our property loss deductible and the net book value of the damaged property, we did not recognize a loss relating to property damage at the time of the fire but we recorded a property insurance claim receivable relating to this event. During the first nine months of 2010, our insurance claim receivable decreased by a net $1,175,000. The activity during the nine months of 2010 included the receipt of approximately $1,561,000 ($1,387,000 relates to property, plant and equipment (“PP&E”)) from our insurance carrier as a partial payment on our insurance claim, of which $1,347,000 was applied against our insurance claim receivable and the remaining balance of $214,000 (all of which relates to PP&E) was classified as other income. In addition, the activity included $172,000 relating to payables (approved by our insurance carrier) to unrelated third parties. As a result, there was no insurance claim receivable balance relating
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 17: Business Interruption and Property Insurance Claims (continued)
to this event at September 30, 2010. Our property insurance carrier is considering our remaining property damage claims. Any additional insurance proceeds represent a gain contingency and will be recognized if, and when, realized or realizable and earned. There is no business interruption claim associated with this event.
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 nine months of 2010, the project to rebuild the Bryan Center was completed. Our general liability insurance policy provided for coverage against third party damages with a $250,000 loss deductible. Our property insurance policy provided 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 September 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 managing, processing and paying directly the third party general liability claims associated with this event. Because our replacement cost claim for property damages exceeded 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. 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 nine months of 2010, our insurance claim receivable decreased by a net $35,000. The activity during the nine months of 2010 included the receipt of additional payments totaling $1,315,000 ($564,000 related to PP&E) from our insurance carrier, of which $444,000 was applied against our insurance claim receivable and the remaining balance of $871,000 ($853,000 related to PP&E) was classified as other income. In addition, the activity included $409,000 relating to payables (approved by our insurance carrier) to unrelated third parties and to our insurance carrier associated with the general liability deductible. As a result, there was no insurance claim receivable balance relating to this event at September 30, 2010. Based on our current analysis, we do not have any remaining insurance claims associated with our property damage coverage or any insurance claims associated with our business interruption coverage relating to this event.
Pryor Facility – In June 2010, a pipe failure in the primary reformer of the ammonia plant at the chemical facility located in Pryor, Oklahoma (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 was unable to produce anhydrous ammonia or urea ammonium nitrate (“UAN”) during substantially all of the three months ended September 30, 2010. The costs associated with the rebuild the ammonia reformer were approximately $8 million and the work was completed by the end of September 2010. Our property insurance policy provides for replacement cost coverage relating to property damage with a $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. Because our replacement cost claim for property damages exceeded our property loss deductible and the net book value of the
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 17: Business Interruption and Property Insurance Claims (continued)
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. During the first nine months of 2010, the activity associated with our insurance claim receivable included the receipt of partial payments totaling $3,634,000 ($3,157,000 relates to PP&E), of which $865,000 was applied against our insurance claim receivable and the remaining balance of $2,769,000 (all of which relates to PP&E) was classified as other income. In addition, the activity included a total of $865,000 relating to payables (approved by our insurance carrier) to unrelated third parties and the disposal of the net book value of the damaged property. As a result, there was no insurance claim receivable balance relating to this event at September 30, 2010. The property insurance carrier is considering our remaining property damage claims. Any additional insurance proceeds represent a gain contingency and will be recognized if, and when, realized or realizable and earned. The insurance claim for business interruption has not been filed and a recovery, if any, from our business interruption coverage has not been recognized.
Note 18: Segment Information
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control
|
$
|
178,045
|
|
|
$
|
206,443
|
|
|
$
|
64,546
|
|
|
$
|
67,413
|
|
Chemical
|
|
253,828
|
|
|
|
204,089
|
|
|
|
72,578
|
|
|
|
59,718
|
|
Other
|
|
5,877
|
|
|
|
6,006
|
|
|
|
1,824
|
|
|
|
647
|
|
|
$
|
437,750
|
|
|
$
|
416,538
|
|
|
$
|
138,948
|
|
|
$
|
127,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control (2)
|
$
|
60,195
|
|
|
$
|
72,172
|
|
|
$
|
22,964
|
|
|
$
|
24,746
|
|
Chemical (3)
|
|
30,631
|
|
|
|
35,091
|
|
|
|
5,871
|
|
|
|
5,662
|
|
Other
|
|
2,027
|
|
|
|
1,945
|
|
|
|
604
|
|
|
|
245
|
|
|
$
|
92,853
|
|
|
$
|
109,208
|
|
|
$
|
29,439
|
|
|
$
|
30,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control (2)
|
$
|
22,632
|
|
|
$
|
32,146
|
|
|
$
|
10,112
|
|
|
$
|
10,942
|
|
Chemical (3) (5)
|
|
12,310
|
|
|
|
15,491
|
|
|
|
1,247
|
|
|
|
(3,344
|
)
|
General corporate expenses and other business operations, net (6)
|
|
(9,246
|
)
|
|
|
(9,405
|
)
|
|
|
(2,889
|
)
|
|
|
(3,328
|
)
|
|
|
25,696
|
|
|
|
38,232
|
|
|
|
8,470
|
|
|
|
4,270
|
|
Interest expense
|
|
(5,943
|
)
|
|
|
(5,139
|
)
|
|
|
(1,864
|
)
|
|
|
(2,200
|
)
|
Gains (losses) on extinguishment of debt
|
|
(52
|
)
|
|
|
1,796
|
|
|
|
-
|
|
|
|
53
|
|
Non-operating other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chemical
|
|
6
|
|
|
|
26
|
|
|
|
1
|
|
|
|
20
|
|
Corporate and other business operations
|
|
41
|
|
|
|
46
|
|
|
|
9
|
|
|
|
18
|
|
Provisions for income taxes
|
|
(8,821
|
)
|
|
|
(14,110
|
)
|
|
|
(2,930
|
)
|
|
|
(1,310
|
)
|
Equity in earnings of affiliate-Climate Control
|
|
719
|
|
|
|
740
|
|
|
|
191
|
|
|
|
252
|
|
Income from continuing operations
|
$
|
11,647
|
|
|
$
|
21,591
|
|
|
$
|
3,877
|
|
|
$
|
1,103
|
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 18: Segment Information (continued)
(1)
|
Gross profit by industry segment represents net sales less cost of sales. Gross profit classified as “Other” relates to the sales of industrial machinery and related components.
|
(2)
|
During the nine and three months ended September 30, 2010, we recognized gains totaling $193,000 and $508,000, respectively, on our futures contracts for copper compared to gains totaling $1,193,000 and $404,000 during the nine and three months ended September 30, 2009, respectively. During the three months ended September 30, 2009, our engineering and construction business recognized additional gross profit of $552,000 relating to customer change orders.
|
(3)
|
As the result of entering into sales commitments with higher firm sales prices during 2008, we recognized sales with a gross profit of $761,000 higher than our comparable product sales made at lower market prices available during the nine months ended September 30, 2010, (not applicable for the third quarter of 2010) compared to sales with a gross profit of $5,143,000 and $1,585,000 higher than our comparable product sales made at lower market prices available during the nine and three months ended September 30, 2009, respectively. In addition, during the nine and three months ended September 30, 2010, we recognized gains on sales and recoveries of precious metals totaling $863,000 and $751,000, respectively, compared to gains totaling $2,456,000 and $234,000 during the nine and three months ended September 30, 2009, respectively. During the nine and three months ended September 30, 2010, we incurred expenses of $6,646,000 and $3,950,000, respectively, (of which $1,301,000 relates to the Pryor Facility) relating to planned major maintenance activities compared to expenses totaling $2,682,000 and $2,079,000 during the nine and three months ended September 30, 2009, respectively. During the nine and three months ended September 30, 2010, we recognized losses totaling $957,000 and $368,000, respectively, on our futures/forward contracts for natural gas and ammonia compared to losses totaling $2,791,000 and $854,000 during the nine and three months ended September 30, 2009, respectively. During the nine and three months ended September 30, 2009, we recognized losses on outstanding firm sales commitments of $1,310,000 and $1,229,000, respectively, which amounts include $992,000 relating to the Pryor Facility discussed below in footnote 5.
|
(4)
|
Our chief operating decision makers use operating income by industry segment for purposes of making decisions, which include resource allocations and performance evaluations. Operating income by industry segment represents gross profit by industry segment less selling, general and administration expense (“SG&A”) incurred by each industry segment plus other income and other expense earned/incurred by each industry segment before general corporate expenses and other business operations, net. General corporate expenses and other business operations, net, consist of unallocated portions of gross profit, SG&A, other income and other expense.
|
(5)
|
During the first nine months of 2010, we began limited production and sales of anhydrous ammonia and UAN at our Pryor Facility. However the production during this period was at rates lower than our targeted production rates. As the result of a pipe failure and fire that occurred in June 2010 within the Pryor Facility as discussed in Note 17 – Business Interruption and Property Insurance Claims, we had minimal production and sales
|
Table of Contents
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 18: Segment Information (continued)
|
of anhydrous ammonia and UAN during the third quarter of 2010. Consequently, we incurred net operating losses of $11,158,000 and $3,128,000 for the nine and three months ended September 30, 2010, respectively. These operating losses include other income of $2,769,000 associated with a property insurance recovery as discussed in Note 17 and Turnaround costs of $1,301,000 as discussed above in footnote 3. During the nine and three months ended September 30, 2009, we incurred expenses of $12,271,000 and $7,058,000, respectively, (including the $992,000 loss on firm sales commitments discussed above in footnote 3) relating to the Pryor Facility. Excluding the impact of gross profit and other income recognized during each 2010 respective period and the loss on firm sales commitments incurred during each 2009 respective period, these expenses are primarily included in SG&A for each respective period. In addition, our Chemical Business recognized other income totaling $1,085,000 and $346,000 during the nine and three months ended September 30, 2010, respectively, associated with other property insurance recoveries as discussed in Note 17.
|
(6)
|
The amounts included are not allocated to our Climate Control and Chemical Businesses since these items are not included in the operating results reviewed by our chief operating decision makers for purposes of making decisions as discussed above. A detail of these amounts are as follows:
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
Gross profit-Other
|
$
|
2,027
|
|
|
$
|
1,945
|
|
|
$
|
604
|
|
|
$
|
245
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
(6,054
|
)
|
|
|
(6,202
|
)
|
|
|
(1,787
|
)
|
|
|
(1,876
|
)
|
Professional fees
|
|
(3,105
|
)
|
|
|
(2,775
|
)
|
|
|
(1,180
|
)
|
|
|
(957
|
)
|
Office overhead
|
|
(458
|
)
|
|
|
(490
|
)
|
|
|
(135
|
)
|
|
|
(145
|
)
|
Property, franchise and other taxes
|
|
(248
|
)
|
|
|
(245
|
)
|
|
|
(78
|
)
|
|
|
(85
|
)
|
Advertising
|
|
(203
|
)
|
|
|
(199
|
)
|
|
|
(82
|
)
|
|
|
(67
|
)
|
Maintenance and repairs
|
|
(53
|
)
|
|
|
(182
|
)
|
|
|
(15
|
)
|
|
|
(8
|
)
|
All other
|
|
(1,371
|
)
|
|
|
(1,186
|
)
|
|
|
(372
|
)
|
|
|
(453
|
)
|
Total selling, general and administrative
|
|
(11,492
|
)
|
|
|
(11,279
|
)
|
|
|
(3,649
|
)
|
|
|
(3,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
230
|
|
|
|
156
|
|
|
|
160
|
|
|
|
23
|
|
Other expense
|
|
(11
|
)
|
|
|
(227
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Total general corporate expenses and other business operations, net
|
$
|
(9,246
|
)
|
|
$
|
|