form_10q.htm
LSB Industries, Inc.
Form 10-Q (3-31-2011)
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 March 31, 2011
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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 April 29, 2011 was 22,125,762 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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31
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Item 3.
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46
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Item 4.
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47
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48
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PART II – Other Information
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Item 1.
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49
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Item 1A.
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49
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Item 2.
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50
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Item 3.
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50
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Item 4.
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50
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Item 5.
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50
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Item 6.
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51
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 2011 is unaudited)
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March 31,
2011
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December 31,
2010
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Current assets:
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Cash and cash equivalents
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$ |
98,045 |
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$ |
66,946 |
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Restricted cash
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31 |
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31 |
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Short-term investments
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- |
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10,003 |
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Accounts receivable, net
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76,077 |
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74,259 |
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Inventories:
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Finished goods
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40,911 |
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32,072 |
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Work in process
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3,138 |
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2,981 |
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Raw materials
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26,771 |
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25,053 |
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Total inventories
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70,820 |
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60,106 |
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Supplies, prepaid items and other:
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Prepaid insurance
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3,219 |
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4,449 |
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Precious metals
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13,051 |
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12,048 |
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Supplies
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7,253 |
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6,802 |
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Fair value of derivatives and other
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218 |
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1,454 |
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Other
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3,677 |
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1,174 |
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Total supplies, prepaid items and other
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27,418 |
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25,927 |
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Deferred income taxes
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5,490 |
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5,396 |
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Total current assets
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277,881 |
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242,668 |
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Property, plant and equipment, net
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136,685 |
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135,755 |
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Other assets:
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Debt issuance costs, net
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1,153 |
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1,023 |
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Investment in affiliate
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3,901 |
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4,016 |
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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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2,871 |
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2,795 |
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Total other assets
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9,649 |
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9,558 |
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$ |
424,215 |
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$ |
387,981 |
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(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Information at March 31, 2011 is unaudited)
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March 31,
2011
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December 31,
2010
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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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48,088
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$
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51,025
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Short-term financing
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2,682
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3,821
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Accrued and other liabilities
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38,497
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31,507
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Current portion of long-term debt
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5,340
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2,328
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Total current liabilities
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94,607
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88,681
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Long-term debt
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76,338
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93,064
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Noncurrent accrued and other liabilities
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13,106
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12,605
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Deferred income taxes
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14,318
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14,261
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Commitments and contingencies (Note 10)
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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, $.10 par value; 75,000,000 shares authorized, 26,444,904 shares issued (25,476,534 at December 31, 2010)
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2,645
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2,548
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Capital in excess of par value
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157,626
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131,845
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Retained earnings
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90,949
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70,351
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254,220
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207,744
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Less treasury stock at cost:
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Common stock, 4,320,462 shares
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28,374
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28,374
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Total stockholders' equity
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225,846
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179,370
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$
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424,215
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$
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387,981
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See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, 2011 and 2010
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(In Thousands, Except Per Share Amounts)
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Net sales
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$
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177,493
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$
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130,410
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Cost of sales
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123,639
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102,144
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Gross profit
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53,854
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28,266
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Selling, general and administrative expense
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20,585
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24,589
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Provisions for losses on accounts receivable
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42
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9
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Other expense
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62
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58
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Other income
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(872
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)
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(806
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)
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Operating income
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34,037
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4,416
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Interest expense
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1,712
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2,080
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Non-operating other income, net
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(7
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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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32,332
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2,374
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Provisions for income taxes
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11,657
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912
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Equity in earnings of affiliate
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(285
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)
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(261
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)
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Income from continuing operations
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20,960
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1,723
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Net loss from discontinued operations
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57
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5
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Net income
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20,903
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1,718
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Dividends on preferred stocks
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305
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305
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Net income applicable to common stock
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$
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20,598
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$
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1,413
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Weighted-average common shares:
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Basic
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21,180
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21,226
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Diluted
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23,444
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21,364
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Income per common share:
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Basic
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$
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.97
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$
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.07
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Diluted
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$
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.90
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$
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.07
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See accompanying notes.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended March 31, 2011
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Common
Stock
Shares
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Non-
Redeemable Preferred
Stock
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Common
Stock Par
Value
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Capital in
Excess of
Par Value
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Retained
Earnings
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Treasury
Stock-
Common
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Total
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Balance at December 31, 2010
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25,477
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$
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3,000
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$
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2,548
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$
|
131,845
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$
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70,351
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$
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(28,374
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)
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$
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179,370
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Net income and comprehensive income
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20,903
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20,903
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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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254
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254
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Conversion of debentures to common stock
|
888
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89
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24,319
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|
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24,408
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Exercise of stock options
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80
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8
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|
505
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513
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Excess income tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
703
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|
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|
|
|
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|
|
703
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Balance at March 31, 2011
|
26,445
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$
|
3,000
|
$
|
2,645
|
$
|
157,626
|
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$
|
90,949
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|
$
|
(28,374
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)
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$
|
225,846
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|
See accompanying notes.
Note: For the three months ended March 31, 2010, total comprehensive income was $1,718,000.
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 2011 and 2010
Cash flows from continuing operating activities:
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Net income
|
$
|
20,903
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|
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$
|
1,718
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Adjustments to reconcile net income to net cash provided (used) by continuing operating activities:
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|
|
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Net loss from discontinued operations
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57
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|
|
5
|
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Deferred income taxes
|
|
(37
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)
|
|
|
189
|
|
Expense associated with modification of secured term loan
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|
387
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|
|
|
-
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Expense associated with induced conversion of 5.5% convertible debentures
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558
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|
|
-
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|
Loss (gain) on sales and disposals of property and equipment
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(19
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)
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3
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Gain on property insurance recoveries associated with property, plant and equipment
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-
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(495
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)
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Depreciation of property, plant and equipment
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4,592
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4,060
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Amortization
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153
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153
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Stock-based compensation
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254
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247
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Provisions for losses on accounts receivable
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42
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9
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Provision for (realization of) losses on inventory
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(15
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)
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118
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Realization of losses on firm sales commitments
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-
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(351
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)
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Equity in earnings of affiliate
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(285
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)
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(261
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)
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Distributions received from affiliate
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400
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|
140
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Changes in fair value of commodities contracts
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82
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|
310
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Changes in fair value of interest rate contracts
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|
(52
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)
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|
|
220
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|
Other
|
|
-
|
|
|
|
(10
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)
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Cash provided (used) by changes in assets and liabilities:
|
|
|
|
|
|
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Accounts receivable
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|
(1,871
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)
|
|
|
(11,323
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)
|
Inventories
|
|
(10,649
|
)
|
|
|
(10,218
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)
|
Prepaid and accrued income taxes
|
|
2,300
|
|
|
|
461
|
|
Other supplies and prepaid items
|
|
(2,747
|
)
|
|
|
351
|
|
Accounts payable
|
|
(4,488
|
)
|
|
|
3,291
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|
Accrued payroll and benefits
|
|
2,301
|
|
|
|
1,885
|
|
Commodities contracts
|
|
501
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|
|
|
124
|
|
Customer deposits
|
|
3,588
|
|
|
|
179
|
|
Other current and noncurrent liabilities
|
|
382
|
|
|
|
958
|
|
Net cash provided (used) by continuing operating activities
|
|
16,337
|
|
|
|
(8,237
|
)
|
|
|
|
|
|
|
|
|
Cash flows from continuing investing activities:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,579
|
)
|
|
|
(6,524
|
)
|
Proceeds from property insurance recoveries associated with property, plant and equipment
|
|
-
|
|
|
|
1,670
|
|
Proceeds from sales of property and equipment
|
|
19
|
|
|
|
2
|
|
Proceeds from short-term investments
|
|
10,012
|
|
|
|
10,051
|
|
Purchase of short-term investments
|
|
(9
|
)
|
|
|
(10,000
|
)
|
Deposits of restricted cash
|
|
-
|
|
|
|
(552
|
)
|
Proceeds from sales of carbon credits
|
|
673
|
|
|
|
-
|
|
Payments on contractual obligations – carbon credits
|
|
(673
|
)
|
|
|
-
|
|
Other assets
|
|
(86
|
)
|
|
|
(209
|
)
|
Net cash provided (used) by continuing investing activities
|
|
5,357
|
|
|
|
(5,562
|
)
|
(Continued on following page)
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended March 31, 2011 and 2010
Cash flows from continuing financing activities:
|
|
|
|
|
|
|
|
Proceeds from revolving debt facility
|
$
|
156,715
|
|
|
$
|
113,111
|
|
Payments on revolving debt facility
|
|
(156,715
|
)
|
|
|
(113,111
|
)
|
Proceeds from modification of secured term loan, net of fees
|
|
10,347
|
|
|
|
-
|
|
Proceeds from other long-term debt, net of fees
|
|
-
|
|
|
|
47
|
|
Payments on other long-term debt
|
|
(541
|
)
|
|
|
(1,588
|
)
|
Payments of debt issuance costs
|
|
(108
|
)
|
|
|
-
|
|
Payments on short-term financing
|
|
(1,139
|
)
|
|
|
(1,112
|
)
|
Proceeds from exercise of stock options
|
|
513
|
|
|
|
22
|
|
Excess income tax benefit associated with stock-based compensation
|
|
703
|
|
|
|
136
|
|
Dividends paid on preferred stocks
|
|
(305
|
)
|
|
|
(305
|
)
|
Net cash provided (used) by continuing financing activities
|
|
9,470
|
|
|
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
Cash flows of discontinued operations:
|
|
|
|
|
|
|
|
Operating cash flows
|
|
(65
|
)
|
|
|
(73
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
31,099
|
|
|
|
(16,672
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
66,946
|
|
|
|
61,739
|
|
Cash and cash equivalents at end of period
|
$
|
98,045
|
|
|
$
|
45,067
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net of refunds
|
$
|
8,654
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current other assets, accounts payable and long-term debt associated with property, plant and equipment
|
$
|
2,507
|
|
|
$
|
6,074
|
|
Debt issuance costs associated with the modification of the secured term loan
|
$
|
601
|
|
|
$
|
-
|
|
Debt issuance costs associated with 5.5% debentures converted to common stock
|
$
|
328
|
|
|
$
|
-
|
|
Accounts payable associated with 5.5% debentures converted to common stock
|
$
|
558
|
|
|
$
|
-
|
|
Accrued liabilities associated with 5.5% debentures converted to common stock
|
$
|
336
|
|
|
$
|
-
|
|
5.5% debentures converted to common stock
|
$
|
24,400
|
|
|
$
|
-
|
|
See accompanying notes.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
For a complete discussion of our significant accounting policies, refer to the notes to our audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 3, 2011.
Basis of Consolidation and Presentation - LSB Industries, Inc. (“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying condensed consolidated financial statements. We are involved in manufacturing, marketing and engineering operations. We 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”). LSB is a holding company with no significant operations or assets other than cash, cash equivalents, and investments in its 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 March 31, 2011 and for the three month periods ended March 31, 2011 and 2010 include all adjustments and accruals, consisting of normal, recurring accrual adjustments which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in connection with our audited consolidated financial statements and notes thereto included in our 2010 Form 10-K.
Reclassification - A reclassification has been made in our condensed consolidated statement of cash flows for the three months ended March 31, 2010 to conform to our condensed consolidated statement of cash flows presentation for the three months ended March 31, 2011, which reclassification expanded our continuing operating activity line items. This reclassification did not impact the total amount of net cash used by continuing operating activities for the three months ended March 31, 2010.
Use of Estimates - The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income per Common Share - Net income applicable to common stock is computed by adjusting net income by the amount of preferred stock dividends and dividend requirements, if applicable. 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 year. Diluted income per share is based on net income applicable to common stock plus preferred stock dividends and dividend requirements 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.
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 (“U.S.”) and none of these investments were in excess of the federally insured limits.
Accounts Receivable - Our accounts receivable are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on accounts receivable balances. Our estimate is based on historical experience and periodic assessment of outstanding accounts receivable, particularly those accounts which are past due (based upon the terms of the sale). Our periodic assessment of our accounts receivable is based on our best estimate of amounts that are not recoverable.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
Inventories - Inventories are stated at the lower of cost (determined using the first-in, first-out (“FIFO”) basis) or market (net realizable value). Finished goods and work-in-process inventories include material, labor, and manufacturing overhead costs. Additionally, we review inventories and record inventory reserves for slow-moving inventory items.
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 or capital projects, we may be able to perform procedures to recover precious metals (previously expensed) which have accumulated over time within the manufacturing equipment. Recoveries of precious metals are recognized at historical FIFO costs. When we accumulate precious metals in excess of our production requirements, we may sell a portion of the excess metals.
Product Warranty - Our Climate Control Business sells equipment that has an expected life, under normal circumstances and use, which extends over several years. As such, we provide warranties after equipment shipment/start up covering defects in materials and workmanship.
Our accounting policy and methodology for warranty arrangements is to measure and recognize the expense and liability for such warranty obligations at the time of sale using a percentage of sales and cost per unit of equipment, based upon our historical and estimated future 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 reasonably possible that our estimated accrued warranty costs could change in the near term.
Contingencies - Certain conditions may exist which may result in a loss, but which will only be resolved when future events occur. We and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a loss has been incurred, we would accrue for such contingent losses when such losses can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable but reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Estimates of potential legal fees and other directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Loss contingency liabilities are included in current and noncurrent accrued and other liabilities and are based on current estimates that may be revised in the near term. In addition, we recognize contingent gains when such gains are realized or realizable and earned.
Derivatives, Hedges, Financial Instruments and Carbon Credits - 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.
Climate reserve tonnes (“carbon credits”) are recognized in the balance sheet and are measured at fair value. Changes in fair value of carbon credits are recorded in results of operations. Contractual obligations associated with carbon credits are recognized in the balance sheet and are measured at fair value unless we enter into a firm sales commitment to sell the associated carbon credits. When we enter into a firm sales commitment, the sales price, pursuant to the terms of the firm sales commitment, establishes the amount of the associated contractual obligation. Changes in fair value of contractual obligations associated with carbon credits are recorded in results of operations.
Income Taxes - We do not recognize a tax benefit unless we conclude that it is more-likely-than-not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized. We also record interest related to unrecognized tax positions in interest expense and penalties in operating other expense.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
Income tax benefits associated with amounts that are deductible for income tax purposes but that do not affect earnings are credited to equity. These benefits are principally generated from exercises of non-qualified stock options.
Recognition of Insurance Recoveries - If an insurance claim relates to a recovery of our losses, we recognize the recovery when it is probable and reasonably estimable. If our insurance claim relates to a contingent gain, we recognize the recovery when it is realized or realizable and earned. Amounts recoverable from our insurance carriers, if any, are included in accounts receivable.
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 us on January 1, 2010 and the remaining new disclosure requirements became effective for us on January 1, 2011. These disclosure requirements were applied prospectively. See Note 11 - Derivatives, Hedges, Financial Instruments and Carbon Credits.
Note 2: Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
(Dollars In Thousands, Except Per Share Amounts)
|
Three Months Ended
March 31,
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
20,903
|
|
|
$
|
1,718
|
|
Dividends on Series B Preferred
|
|
(240
|
)
|
|
|
(240
|
)
|
Dividends on Series D Preferred
|
|
(60
|
)
|
|
|
(60
|
)
|
Dividends on Noncumulative Preferred
|
|
(5
|
)
|
|
|
(5
|
)
|
Total dividends on preferred stock
|
|
(305
|
)
|
|
|
(305
|
)
|
Numerator for basic net income per common share - net income applicable to common stock
|
|
20,598
|
|
|
|
1,413
|
|
Dividends on preferred stock assumed to be converted, if dilutive
|
|
305
|
|
|
|
-
|
|
Interest expense including amortization of debt issuance costs, net of income taxes, on convertible debt assumed to be converted, if dilutive
|
|
265
|
|
|
|
-
|
|
Numerator for diluted net income per common share
|
$
|
21,168
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic net income per common share - weighted-average shares
|
|
21,179,800
|
|
|
|
21,226,411
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
973,292
|
|
|
|
4,000
|
|
Convertible preferred stock
|
|
935,626
|
|
|
|
-
|
|
Stock options
|
|
355,681
|
|
|
|
133,192
|
|
Dilutive potential common shares
|
|
2,264,599
|
|
|
|
137,192
|
|
Denominator for diluted net income per common share - adjusted weighted-average shares and assumed conversions
|
|
23,444,399
|
|
|
|
21,363,603
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
.97
|
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
$
|
.90
|
|
|
$
|
.07
|
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2: 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:
|
Three Months Ended
March 31,
|
Stock options
|
2,889
|
|
|
375,000
|
Convertible notes payable
|
-
|
|
|
1,070,160
|
Convertible preferred stock
|
-
|
|
|
936,846
|
|
2,889
|
|
|
2,382,006
|
Note 3: Accounts Receivable, net Our accounts receivables, net, consists of the following:
|
|
March 31,
2011
|
|
December 31,
2010
|
Trade receivables
|
$
|
75,775
|
|
|
$
|
73,367
|
|
Other
|
|
982
|
|
|
|
1,528
|
|
|
|
76,757
|
|
|
|
74,895
|
|
Allowance for doubtful accounts
|
|
(680
|
)
|
|
|
(636
|
)
|
|
$
|
76,077
|
|
|
$
|
74,259
|
|
Note 4: Inventories At March 31, 2011 and December 31, 2010, inventory reserves for certain slow-moving inventory items (Climate Control products) were $1,715,000 and $1,616,000, respectively. In addition, because cost exceeded the net realizable value, inventory reserves for certain nitrogen-based inventories provided by our Chemical Business were $60,000 and $177,000 at March 31, 2011 and December 31, 2010, respectively.
Changes in our inventory reserves are as follows:
|
Three Months Ended
March 31,
|
Balance at beginning of period
|
$
|
1,793
|
|
|
$
|
1,676
|
|
Provision for (realization of) losses
|
|
(15
|
)
|
|
|
118
|
|
Write-offs and disposals
|
|
(3
|
)
|
|
|
(50
|
)
|
Balance at end of period
|
$
|
1,775
|
|
|
$
|
1,744
|
|
The provision for (realization of) losses is included in cost of sales in the accompanying condensed consolidated statements of income.
Note 5: Precious Metals Precious metals are included in supplies, prepaid items and other in the accompanying condensed consolidated balance sheets. In addition, precious metals expense, net, is included in cost of sales in the accompanying condensed consolidated statements of income.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 5: Precious Metals (continued)
Precious metals expense, net, consists of the following:
|
Three Months Ended
March 31,
|
Precious metals expense
|
$
|
2,110
|
|
|
$
|
1,379
|
|
Recoveries of precious metals
|
|
(752
|
)
|
|
|
-
|
|
Gains on sales of precious metals
|
|
-
|
|
|
|
(112
|
)
|
Precious metals expense, net
|
$
|
1,358
|
|
|
$
|
1,267
|
|
Note 6: Investment in Affiliate Cepolk Holdings, Inc. (“CHI”), a subsidiary within the Climate Control Business, 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. The income recognized from the Partnership is reported as equity in earnings of affiliate.
CHI has filed a lawsuit against the general partner of the Partnership alleging, among other things, that:
·
|
the general partner failed to make its capital contribution of approximately $2.0 million to the Partnership, and
|
·
|
the general partner breached certain fiduciary duties and was unjustly enriched in its management of the Partnership.
|
Note 7: Current and Noncurrent Accrued and Other Liabilities Our current and noncurrent accrued and other liabilities consist of the following:
|
March 31,
2011
|
|
December 31,
2010
|
Accrued payroll and benefits
|
|
$ |
9,043 |
|
|
$ |
6,742 |
|
Accrued income taxes
|
|
|
7,135 |
|
|
|
4,835 |
|
Customer deposits
|
|
|
6,174 |
|
|
|
2,586 |
|
Deferred revenue on extended warranty contracts
|
|
|
5,841 |
|
|
|
5,675 |
|
Accrued warranty costs
|
|
|
4,284 |
|
|
|
3,996 |
|
Accrued death benefits
|
|
|
4,048 |
|
|
|
4,058 |
|
Accrued group health and workers’ compensation insurance claims
|
|
|
2,398 |
|
|
|
2,459 |
|
Fair value of derivatives and other
|
|
|
1,843 |
|
|
|
2,539 |
|
Accrued contractual manufacturing obligations
|
|
|
1,801 |
|
|
|
1,968 |
|
Accrued executive benefits
|
|
|
1,163 |
|
|
|
1,187 |
|
Accrued precious metals costs
|
|
|
1,128 |
|
|
|
846 |
|
Accrued general liability insurance claims
|
|
|
1,120 |
|
|
|
1,230 |
|
Accrued commissions
|
|
|
817 |
|
|
|
1,279 |
|
Accrued interest
|
|
|
610 |
|
|
|
1,343 |
|
Other
|
|
|
4,198 |
|
|
|
3,369 |
|
|
|
|
51,603 |
|
|
|
44,112 |
|
Less noncurrent portion
|
|
|
13,106 |
|
|
|
12,605 |
|
Current portion of accrued and other liabilities
|
|
$ |
38,497 |
|
|
$ |
31,507 |
|
Note 8: Accrued Warranty Costs Our Climate Control Business sells equipment that has an expected life, under normal circumstances and use, which extends over several years. As such, we provide warranties after equipment shipment/start up covering defects in materials and workmanship. Generally for commercial/institutional products, the base warranty coverage for most of the manufactured equipment in the Climate Control Business is limited to
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Accrued Warranty Costs (continued)
eighteen months from the date of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days for spare parts. For residential products, the base warranty coverage for manufactured equipment in the Climate Control Business is limited to ten years from the date of shipment for material and to five years from the date of shipment for labor associated with the repair. The warranty provides that most equipment is required to be returned to the factory or an authorized representative and the warranty is limited to the repair and replacement of the defective product, with a maximum warranty of the refund of the purchase price. Furthermore, companies within the Climate Control Business generally disclaim and exclude warranties related to merchantability or fitness for any particular purpose and disclaim and exclude any liability for consequential or incidental damages. In some cases, the customer may purchase or a specific product may be sold with an extended warranty. The above discussion is generally applicable to such extended warranties, but variations do occur depending upon specific contractual obligations, certain system components, and local laws.
Changes in our product warranty obligation (accrued warranty costs) are as follows:
|
Three Months Ended
March 31,
|
Balance at beginning of period
|
$
|
3,996
|
|
|
$
|
3,138
|
|
Amounts charged to costs and expenses
|
|
1,627
|
|
|
|
998
|
|
Costs incurred
|
|
(1,339
|
)
|
|
|
(1,145
|
)
|
Balance at end of period
|
$
|
4,284
|
|
|
$
|
2,991
|
|
Note 9: Long-Term Debt Our long-term debt consists of the following:
|
March 31,
|
|
December 31,
|
|
2011
|
|
2010
|
Working Capital Revolver Loan due 2012 (A)
|
$
|
-
|
|
$
|
-
|
|
5.5% Convertible Senior Subordinated Notes due 2012 (B)
|
|
2,500
|
|
|
26,900
|
|
Secured Term Loan (C)
|
|
60,000
|
|
|
48,773
|
|
Other, with a current weighted-average interest rate of 6.66%, most of which is secured by machinery, equipment and real estate
|
|
19,178
|
|
|
19,719
|
|
|
|
81,678
|
|
|
95,392
|
|
Less current portion of long-term debt
|
|
5,340
|
|
|
2,328
|
|
Long-term debt due after one year
|
$
|
76,338
|
|
$
|
93,064
|
|
(A) Our wholly-owned subsidiary, ThermaClime, LLC (“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 March 31, 2011 was 3.75%. Interest is paid monthly, if applicable.
The Working Capital Revolver Loan provides for up to $8.5 million of letters of credit. All letters of credit outstanding reduce availability under the Working Capital Revolver Loan. As of March 31, 2011, 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 Working Capital Revolver Loan 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
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Long-Term Debt (continued)
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 $248 million at March 31, 2011.
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 March 31, 2011. The Working Capital Revolver Loan also contains covenants that, among other things, limit the Borrowers’ (which does not include LSB) 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 the debentures (the “2007 Debentures”) in a private placement to the QIBs pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Act”), afforded by Section 4(2) of the Act and Regulation D promulgated under the Act. We received net proceeds of approximately $57 million, after discounts and commissions. In connection with the closing, we entered into an indenture (the “Indenture”) with UMB Bank, as trustee, governing the 2007 Debentures. UMB Bank receives customary compensation from us for such services.
The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012. Interest is payable in arrears on January 1 and July 1 of each year.
The 2007 Debentures are unsecured obligations and are subordinated in right of payment to all of our existing and future senior indebtedness, including indebtedness under our revolving debt facilities. The 2007 Debentures are effectively subordinated to all of our present and future liabilities, including trade payables.
In previous periods, we acquired a certain portion of the 2007 Debentures, with each purchase being negotiated. On March 31, 2011, one of the holders converted $24.4 million principal amount of the 2007 Debentures into 888,160 shares of LSB common stock. For financial reporting purposes, this transaction is considered an induced conversion.
As the result of these acquisitions and conversion, only $2.5 million of the 2007 Debentures remain outstanding at March 31, 2011, of which $2.0 million is 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”) as discussed in Note 16 - 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.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Long-Term Debt (continued)
The 2007 Debentures may be redeemed at our option, in whole or in part, upon notice at a redemption price, payable at our option in cash or, subject to certain conditions, in shares of our common stock, equal to 100% of the principal amount of the debentures to be redeemed plus accrued and unpaid interest. As of March 31, 2011, we are able to exercise our redemption rights concerning the remaining 2007 Debentures since the closing sale price of our common stock has exceeded 115% of the conversion price, or $31.59, for at least 20 trading days in the 30 consecutive trading day period ending immediately prior to the redemption date.
If a designated event (as defined in the Indenture) occurs prior to maturity, holders of the 2007 Debentures may require us to repurchase all or a portion of their 2007 Debentures for cash at a repurchase price equal to 101% of the principal amount of the 2007 Debentures plus any accrued and unpaid interest, as set forth in the Indenture.
At maturity, we may elect, subject to certain conditions as set forth in the Indenture, to pay up to 50% of the principal amount of the outstanding 2007 Debentures, plus all accrued and unpaid interest thereon to, but excluding, the maturity date, in shares of our common stock (valued at 95% of the weighted average of the closing sale prices of the common stock for the 20 consecutive trading days ending on the fifth trading day prior to the maturity date), if the common stock is then listed on an eligible market, the shares used to pay the 2007 Debentures and any interest thereon are freely tradable, and certain required opinions of counsel are received.
(C) On March 29, 2011, ThermaClime and certain of its subsidiaries entered into an amended and restated term loan agreement (the “Amended Agreement”), which amended ThermaClime’s existing term loan agreement (the “Original Agreement”), dated November 2, 2007, as previously amended. Pursuant to the terms of the Amended Agreement, the maximum principal amount of ThermaClime’s term loan facility (the “Secured Term Loan”) is increased from $50 million to $60 million. The maximum principal amount may be further increased up to $75 million, subject to syndicating the additional amount and ThermaClime electing such increase. See discussion in Note 17 – Subsequent Events. The Amended Agreement also extends the maturity of the Secured Term Loan from November 2, 2012, to March 29, 2016. The Secured Term Loan continues to be guaranteed by LSB. For financial reporting purposes, this transaction is considered a non-substantial modification of the Original Agreement.
The Secured Term Loan requires 20 quarterly principal payments of $0.75 million, plus interest and a final balloon payment of $45 million due on March 29, 2016. The stated interest rate on the Secured Term Loan includes a variable interest rate of approximately 3.31% on the principal amount of $35 million, which the variable interest rate is based on three-month LIBOR plus 300 basis points, which rate is adjusted quarterly, and a fixed interest rate of 5.15% on the principal amount of $25 million. At March 31, 2011, the resulting weighted-average interest rate was approximately 4.08%.
The Secured Term Loan is secured by the real property and equipment located at our chemical production facilities located in El Dorado, Arkansas (the “El Dorado Facility”) and Cherokee, Alabama (the “Cherokee Facility”). The carrying value of the pledged assets is approximately $63 million at March 31, 2011.
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 LSB, all with certain exceptions. At March 31, 2011, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was approximately $70 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 March 31, 2011.
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.
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Long-Term Debt (continued)
A prepayment premium equal to 2.5% of the principal amount prepaid is due to the lenders should the borrowers elect to prepay on or prior to March 29, 2012. This premium is reduced to 1.0% during the following 24-month period and is eliminated thereafter.
Note 10: Commitments and Contingencies
Purchase Commitments - We entered into the following significant purchase commitments during the three months ended March 31, 2011:
During the first quarter of 2011, certain subsidiaries within the Chemical Business entered into contracts to purchase natural gas for anticipated production needs at the Cherokee Facility and the chemical product facility located in Pryor, Oklahoma (the “Pryor Facility”). Since these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business and are documented as such, these contracts are exempt from the accounting and reporting requirements relating to derivatives. At March 31, 2011, our purchase commitments under these contracts were for approximately 2.5 million MMBtu of natural gas through September 2011 at the weighted-average cost of $4.01 per MMBtu ($9.9 million).
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 we will not incur material costs or liabilities in complying with such laws or in paying fines or penalties for violation of such laws. The Environmental Laws and Health Laws and enforcement policies thereunder relating to our Chemical Business have in the past resulted, and could in the future result, in compliance expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of effluents at or from our facilities or the use or disposal of certain of its chemical products. Historically, significant expenditures have been incurred by subsidiaries within our Chemical Business in order to comply with the Environmental Laws and Health Laws and are reasonably expected to be incurred in the future.
We will recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. We are obligated to monitor certain discharge water outlets at our Chemical Business facilities should we discontinue the operations of a facility. We also have certain facilities in our Chemical Business that contain asbestos insulation around certain piping and heated surfaces, which we plan to maintain or replace, as needed, with non-asbestos insulation through our standard repair and maintenance activities to prevent deterioration. Since we currently have no plans to discontinue the use of these facilities and the remaining life of the facilities is indeterminable, an asset retirement liability has not been recognized. Currently, there is insufficient information to estimate the fair value of the asset retirement obligations. However, we will continue to review these obligations and record a liability when a reasonable estimate of the fair value can be made.
1. Discharge Water Matters
The El Dorado Facility owned by EDC generates process wastewater, which includes cooling tower and boiler blowdowns, contact storm water (rain water inside the facility area which picks up contaminants) and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by a state National Pollutant Discharge Elimination System (“NPDES”) discharge water permit issued by the Arkansas Department of Environmental Quality (“ADEQ”), which permit is generally required to be renewed every five years. The El Dorado Facility is currently operating under a NPDES discharge water permit, which became effective in 2004 (“2004 NPDES permit”). In November 2010, a preliminary draft of a discharge water permit renewal, which contains more restrictive ammonia limits, was issued by the ADEQ for EDC’s review. EDC submitted comments to the ADEQ on the draft permit in December 2010.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Commitments and Contingencies (continued)
The El Dorado Facility has generally demonstrated its ability to comply with applicable 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. However, as part of our long-term compliance plan, EDC is pursuing a rulemaking and permit modification with the ADEQ. The ADEQ approved a rule change, subject to approval by the United States Environmental Protection Agency (“EPA”). The ADEQ incorporated the revised dissolved minerals limits in the preliminary draft permit received in November 2010. The preliminary draft permit is subject to approval by the EPA of the rule change.
During January 2010, EDC received an Administrative Order from the EPA noting certain violations of the 2004 NPDES 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 a majority of the alleged violations were resolved through a consent administrative order 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 2004 NPDES 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 March 31, 2011 as a result of the Administrative Order.
In conjunction with our long-term compliance plan, the city of El Dorado, Arkansas 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 without the pipeline, EDC will participate in the construction of the pipeline that will be owned by the city in order to ensure that EDC will be able to comply with future permit limits. EDC anticipates its cost in connection with the construction of the pipeline including EDC’s right to use the pipeline to dispose of its wastewater will be approximately $4.0 million. See discussion in Note 17- Subsequent Events.
In addition, the El Dorado Facility is currently operating under a consent administrative order (“2006 CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater. The 2006 CAO required EDC to continue 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 relating to the El Dorado Facility. The final remedy for shallow groundwater contamination, should any remediation be required, will be selected pursuant to a new consent administrative order and based upon the risk assessment. The cost of any additional remediation that may be required will be determined based on the results of the investigation and risk assessment, which costs (or range of costs) cannot currently be reasonably estimated. Therefore, no liability has been established at March 31, 2011, 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 our El Dorado and Cherokee Facilities and the Baytown, Texas facility under Section 114 of the Clean Air Act as to construction and modification activities at each of these facilities over a period of years. These information requests will 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 type of emission control equipment that might be imposed is unknown and, as a result, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: 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 be required to retrofit each facility with the “best available control technology.” We are currently unable to determine the amount (or range of amounts) of any penalties that may be assessed by the EPA. Therefore no liability has been established at March 31, 2011, in connection with this matter.
3. Other Environmental Matters
In 2002, two subsidiaries within our Chemical Business, sold substantially all of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained ownership of the real property. 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. Based on the assessment discussed above, we account for transactions associated with the Hallowell Facility as discontinued operations.
The successor (“Chevron”) of a prior owner of the Hallowell Facility has agreed in writing, within certain limitations, to pay and has been paying one-half of the costs of the 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. Currently, our subsidiary and Chevron are in the process of performing additional surface and groundwater testing. We have accrued for our allocable portion of costs for the additional testing, monitoring and risk assessments that could be reasonably estimated.
In addition, the Kansas Department of Health and Environment (“KDHE”) notified our subsidiary and Chevron that the Hallowell Facility has been referred to the KDHE’s Natural Resources Trustee, 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. The ultimate required remediation, if any, is unknown. The nature and extent of a portion of the requirements are not currently defined and the associated costs (or range of costs) are not reasonably estimable.
At March 31, 2011, our estimated allocable portion of the total estimated liability (which is included in current accrued and other liabilities) related to the Hallowell Facility is $195,000. The estimated amount is not discounted to its present value. It is reasonably possible that a change in the estimate of our liability could occur in the near term.
B. Other Pending, Threatened or Settled Litigation
The Jayhawk Group
In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC, Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the manager and sole member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the Jayhawk Group agreed, among other things, that if we undertook, in our sole discretion, within one year from the date of agreement a tender offer for our Series 2 $3.25 convertible exchangeable Class C preferred stock (“Series 2 Preferred”) or to issue our common stock for a portion of our Series 2 Preferred pursuant to a private exchange, that they would tender or exchange an aggregate of no more than 180,450 shares of the 340,900 shares of the Series 2 Preferred beneficially owned by the Jayhawk Group, subject to, among other things, the entities owned and controlled by Jack E. Golsen, our Chairman and Chief Executive Officer (“Golsen”), and his immediate family, that beneficially own Series 2 Preferred only being able to exchange or tender approximately the same percentage of shares of Series 2 Preferred beneficially owned by them as the Jayhawk Group was able to tender or exchange under the terms of the agreement.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: 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.
The Jayhawk Group has filed suit against us and Golsen 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 up to $12 million 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 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. We intend to contest the lawsuit vigorously, and have asserted 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 March 31, 2011 as a result of this matter.
Pryor Chemical Company
A subsidiary within our Chemical Business, Pryor Chemical Company (“PCC”) has filed lawsuits against certain vendors of PCC related to work performed during the start-up of the Pryor Facility. The claims allege certain damages resulting from improperly performed work by the vendors and for lost profits and other costs due to delays in restarting the Pryor Facility. The total amount for damages and lost profits claimed is substantial but the amount and timing of the ultimate recovery is uncertain. As a result, any recovery from litigation or settlement of these claims is a gain contingency and will be recognized if, and when, realized or realizable and earned.
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. At March 31, 2011, our accrued general liability insurance claims were $1,120,000 and are included in accrued and other liabilities. It is reasonably possible that the actual development of claims could be different than our estimates but, after consultation with legal counsel, if those general liability insurance 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.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Derivatives, Hedges, Financial Instruments and Carbon Credits 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. In addition as discussed below, we were issued climate reserve tonnes (“carbon credits”), which carbon credits are primarily to be transferred to Bayer Material Science LLC (“Bayer”) or sold and the proceeds given to Bayer. The carbon credits are accounted for on a fair value basis as discussed below. Also the contractual obligations associated with these carbon credits (primarily to Bayer) are accounted for on a fair value basis (as discussed below) unless we enter into a firm sales commitment to sell the carbon credits as discussed in Note 1 - Summary of Significant Accounting Policies. The valuations of these assets and liabilities were determined based on quoted market prices or, in instances where market quotes are not available, other valuation techniques or models used to estimate fair values.
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 March 31, 2011, the valuations of contracts classified as Level 2 related to the foreign exchange contracts and interest rate swap contracts. 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 1.43 (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 3.31% and the total estimated market weighted-average receive rate of 2.67%. No valuation input adjustments were considered necessary relating to nonperformance risk for the contracts discussed above. The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. At March 31, 2011, the valuations ($3.25 per carbon credit) of the carbon credits and the contractual obligations associated with these carbon credits are classified as Level 3 and are based on the range of ask/bid prices ($3.00 to $4.50) per carbon credit obtained from a broker involved in this low volume market, pricing terms included in sales agreements entered into during the first quarter of 2011, and inquiries from market participants concerning our listed ask price through a broker. The valuations are using undiscounted cash flows based on management’s assumption that the carbon credits would be sold and the associated contractual obligations would be extinguished in the near term. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the carbon credits and associated contractual obligations. At December 31, 2010, the valuations ($3.25 per carbon credit) of contracts classified as Level 3 related to carbon credits and contractual obligations associated with these carbon credits. At December 31, 2009, there were no valuations of contracts classified at Level 3.
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, 2010, our futures/forward copper contracts were for 750,000 pounds of copper through May 2011 at a weighted-average cost of $3.75 per pound. At March 31, 2011, our futures/forward copper contracts were for 750,000 pounds of copper through December 2011 at a weighted-average cost of $4.09 per pound. At December 31, 2010, our futures/forward natural gas contracts were for 800,000 MMBtu of natural gas through February 2011 at a weighted-average cost of $4.10 per MMBtu. At March 31, 2011, we did not have any futures/forward natural gas contracts. 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, 2010, our foreign exchange contracts were for the receipt
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
of approximately 783,000 Euros through June 2011 and for the payment of approximately 110,000 Euros through March 2011, at the total contractual weighted-average exchange rate of 1.26 (U.S. Dollar/Euro). At March 31, 2011, our foreign exchange contracts were for the receipt of approximately 184,000 Euros through June 2011 at the total contractual weighted-average 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 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 $0.4 million, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012. In February 2011, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.23% on a declining balance (from $23.8 million to $18.8 million) for the period beginning in April 2012 through March 2016.
These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. During the three months ended March 31, 2011 and 2010, no cash flows occurred relating to the purchase or sale of interest rate contracts. The cash flows associated with the interest rate swap payments are included in cash flows from continuing operating activities.
Carbon Credits and Associated Contractual Obligation
During December 2010, we were issued carbon credits by the Climate Action Reserve (“CAR”) in relation to a greenhouse gas reduction project (“Project”) performed at the nitric acid plant (the “Baytown Facility”), which is operated by EDN. Pursuant to the terms of the agreement with Bayer (the “Bayer Agreement”), carbon credits issued to us are primarily to be transferred to Bayer or sold and the proceeds given to Bayer to recover Bayer’s costs associated with the Project. We have no obligation to reimburse Bayer for their costs associated with the Project, except through the transfer or sale of the carbon credits when such credits are issued to us. After the project costs are recovered, subsequent carbon credits issued to us will be allocated to us and Bayer pursuant to the terms of the Bayer Agreement. The carbon credits are accounted for on a fair value basis and the contractual obligations associated with these carbon credits are also accounted for on a fair value basis (unless we enter into a firm sales commitment to sell the carbon credits). At December 31, 2010, we had approximately 198,000 carbon credits, all of which are subject to contractual obligations. At March 31, 2011, we had approximately 3,000 carbon credits, all of which were subject to contractual obligations and firm sales commitments. The cash flows associated with the carbon credits and the associated contractual obligations are included in cash flows from continuing investing activities.
23
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010:
|
Fair Value Measurements at
March 31, 2011 Using
|
Description
|
|
Total Fair
Value at
March 31,
2011
|
|
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,
2010
|
Assets - Supplies, prepaid items and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities contracts
|
|
$ |
178 |
|
|
$ |
178 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
761 |
|
Carbon credits
|
|
|
11 |
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
|
|
644 |
|
Foreign exchange contracts
|
|
|
29 |
|
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
49 |
|
Total
|
|
$ |
218 |
|
|
$ |
178 |
|
|
$ |
29 |
|
|
$ |
11 |
|
|
$ |
1,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Current and noncurrent accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations – carbon credits
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
644 |
|
Interest rate contracts
|
|
|
1,843 |
|
|
|
- |
|
|
|
1,843 |
|
|
|
- |
|
|
|
1,895 |
|
Total
|
|
$ |
1,843 |
|
|
$ |
- |
|
|
$ |
1,843 |
|
|
$ |
- |
|
|
$ |
2,539 |
|
During the three months ended March 31, 2011 and 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 assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2011 (not applicable for the three months ended March 31, 2010):
Beginning balance
|
$
|
644
|
|
|
$
|
(644
|
)
|
Transfers into Level 3
|
|
-
|
|
|
|
-
|
|
Transfers out of Level 3
|
|
-
|
|
|
|
-
|
|
Total realized and unrealized gain (loss) included in earnings
|
|
40
|
|
|
|
(40
|
)
|
Purchases
|
|
-
|
|
|
|
-
|
|
Issuances
|
|
-
|
|
|
|
-
|
|
Sales
|
|
(673
|
)
|
|
|
-
|
|
Settlements
|
|
-
|
|
|
|
684
|
|
Ending balance
|
$
|
11
|
|
|
$
|
-
|
|
24
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Realized and unrealized net losses included in earnings and the income statement classifications are as follows:
|
Three Months Ended
March 31,
|
Total net losses included in earnings:
|
|
|
|
|
|
|
|
Cost of sales – Commodities contracts
|
$
|
(151
|
)
|
|
$
|
(688
|
)
|
Cost of sales – Foreign exchange contracts
|
|
40
|
|
|
|
(24
|
)
|
Other income – Carbon credits
|
|
40
|
|
|
|
-
|
|
Other expense – Contractual obligations relating to carbon credits
|
|
(40
|
)
|
|
|
-
|
|
Interest expense – Interest rate contracts
|
|
(338
|
)
|
|
|
(614
|
)
|
|
$
|
(449
|
)
|
|
$
|
(1,326
|
)
|
Change in unrealized gains and losses relating to contracts still held at period end:
|
|
|
|
|
|
|
|
Cost of sales – Commodities contracts
|
$
|
(82
|
)
|
|
$
|
(310
|
)
|
Cost of sales – Foreign exchange contracts
|
|
18
|
|
|
|
(5
|
)
|
Interest expense – Interest rate contracts
|
|
52
|
|
|
|
(220
|
)
|
|
$
|
(12
|
)
|
|
$
|
(535
|
)
|
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 March 31, 2011 and December 31, 2010, the fair value for variable debt (excluding the secured term loan at December 31, 2010) is believed to approximate their carrying value. At December 31, 2010, the estimated fair value of the secured term loan is based on defined LIBOR rates plus 6% 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 March 31, 2011, the estimated fair value of the 2007 Debentures is based on the conversion rate and market price of LSB common stock. At December 31, 2010, 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:
|
March 31, 2011
|
|
December 31, 2010
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
Variable Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Term Loan (1)
|
|
$ |
60,000 |
|
|
$ |
60,000 |
|
|
$ |
26,721 |
|
|
$ |
48,773 |
|
Working Capital Revolver Loan
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other debt (2)
|
|
|
2,270 |
|
|
|
2,408 |
|
|
|
2,437 |
|
|
|
2,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5% Convertible Senior Subordinated Notes
|
|
|
3,607 |
|
|
|
2,500 |
|
|
|
27,976 |
|
|
|
26,900 |
|
Other bank debt and equipment financing
|
|
|
16,737 |
|
|
|
16,770 |
|
|
|
17,251 |
|
|
|
17,282 |
|
|
|
$ |
82,614 |
|
|
$ |
81,678 |
|
|
$ |
74,385 |
|
|
$ |
95,392 |
|
(1)
|
Includes a fixed interest rate of 5.15% on the principal amount of $25 million at March 31, 2011.
|
(2)
|
Includes a variable rate debt agreement with a minimum interest rate of 6%, which interest rate was 6% at March 31, 2011 and December 31, 2010.
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Income Taxes Provisions for income taxes are as follows:
|
Three Months Ended
March 31,
|
Current:
|
|
|
|
|
|
|
|
Federal
|
$
|
9,148
|
|
|
$
|
516
|
|
State
|
|
2,546
|
|
|
|
207
|
|
Total current provisions
|
$
|
11,694
|
|
|
$
|
723
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
$
|
(36
|
)
|
|
$
|
177
|
|
State
|
|
(1
|
)
|
|
|
12
|
|
Total deferred provision (benefit)
|
|
(37
|
)
|
|
|
189
|
|
Provisions for income taxes
|
$
|
11,657
|
|
|
$
|
912
|
|
For the three months ended March 31, 2011 and 2010, 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 three months ended March 31, 2011 and 2010, 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, 2010, we have remaining state tax net operating loss (“NOL”) carryforwards of approximately $7,200,000 that begin expiring in 2011.
Our annual estimated effective tax rate for 2011 includes the impact of permanent tax differences, such as the domestic manufacturer’s deduction, the advanced energy credit and other permanent items.
The tax provision for the three months ended March 31, 2011 and 2010 was $11,657,000 (36% of pre-tax income) and $912,000 (35% of pre-tax income), respectively.
We had approximately $771,000 and $700,000 accrued for uncertain tax liabilities at March 31, 2011 and December 31, 2010, respectively, which are included in current and noncurrent accrued and other liabilities.
LSB and certain of its 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. Currently we are under examination by the IRS and certain state tax authorities for the tax years 2007-2009.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13: Other Expense, Other Income and Non-Operating Other Income, net
|
Three Months Ended
March 31,
|
Other expense:
|
|
|
|
|
|
|
|
Total other expense (1)
|
$
|
62
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
Settlements of litigation and potential litigation (2)
|
$
|
747
|
|
|
$
|
-
|
|
Property insurance recoveries in excess of
losses incurred (3)
|
|
-
|
|
|
|
739
|
|
Miscellaneous income (1)
|
|
125
|
|
|
|
67
|
|
Total other income
|
$
|
872
|
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
Non-operating other income, net:
|
|
|
|
|
|
|
|
Interest income
|
$
|
24
|
|
|
$
|
56
|
|
Miscellaneous expense (1)
|
|
(17
|
)
|
|
|
(18
|
)
|
Total non-operating other income, net
|
$
|
7
|
|
|
$
|
38
|
|
(1)
|
Amounts represent numerous unrelated transactions, none of which are individually significant requiring separate disclosure.
|
(2)
|
Amount relates primarily to the Chemical Business relating to a lawsuit filed in 2009 by Cherokee Nitrogen Company (“CNC”) against a vendor, which alleged that CNC suffered property damages and lost income as a result of the vendor’s negligence in installing certain equipment at the Cherokee Facility. In January 2011, a settlement at mediation was finalized, which included a payment to CNC of $735,000.
|
(3)
|
Amount relates to recoveries from a property insurance claim associated with one of our agricultural distribution centers operated by our Chemical Business.
|
Note 14: Business Interruption Insurance Claim In June 2010, a pipe failure in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged the ammonia plant. The fire was immediately extinguished and there were no injuries. As a result of this damage, the Pryor Facility was unable to produce anhydrous ammonia or urea ammonium nitrate (“UAN”) during substantially all of third quarter of 2010. Our insurance policy provides for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period plus a $250,000 deductible. Our insurance claim for business interruption has been filed, which claim amount substantially exceeds our deductible. A recovery, if any, from our business interruption coverage has not been recognized since it is considered a gain contingency, which will be recognized if, and when, realized or realizable and earned.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 15: Segment Information
|
Three Months Ended
March 31,
|
Net sales:
|
|
|
|
|
|
|
|
Climate Control
|
$
|
63,649
|
|
|
$
|
53,671
|
|
Chemical (1)
|
|
111,431
|
|
|
|
74,872
|
|
Other
|
|
2,413
|
|
|
|
1,867
|
|
|
$
|
177,493
|
|
|
$
|
130,410
|
|
|
|
|
|
|
|
|
|
Gross profit: (2)
|
|
|
|
|
|
|
|
Climate Control
|
$
|
21,486
|
|
|
$
|
18,399
|
|
Chemical (1) (3)
|
|
31,468
|
|
|
|
9,158
|
|
Other
|
|
900
|
|
|
|
709
|
|
|
$
|
53,854
|
|
|
$
|
28,266
|
|
|
|
|
|
|
|
|
|
Operating income: (4)
|
|
|
|
|
|
|
|
Climate Control
|
$
|
8,441
|
|
|
$
|
5,527
|
|
Chemical (1) (3)
|
|
29,098
|
|
|
|
1,885
|
|
General corporate expenses and other business operations, net (5)
|
|
(3,502
|
)
|
|
|
(2,996
|
)
|
|
|
34,037
|
|
|
|
4,416
|
|
Interest expense
|
|
(1,712
|
)
|
|
|
(2,080
|
)
|
Non-operating other income, net:
|
|
|
|
|
|
|
|
Climate Control
|
|
1
|
|
|
|
1
|
|
Chemical
|
|
-
|
|
|
|
2
|
|
Corporate and other business operations
|
|
6
|
|
|
|
35
|
|
Provisions for income taxes
|
|
(11,657
|
)
|
|
|
(912
|
)
|
Equity in earnings of affiliate-Climate Control
|
|
285
|
|
|
|
261
|
|
Income from continuing operations
|
$
|
20,960
|
|
|
$
|
1,723
|
|
(1)
|
During the first quarter of 2011, the Pryor Facility had sustained production of anhydrous ammonia and UAN compared to limited production during the first quarter of 2010. For the first quarter of 2011, the Pryor Facility had net sales to unrelated third parties of $19.3 million and operating income of $8.6 million resulting from those sales. In addition, the Chemical Business realized a net benefit of $2.7 million from the utilization by our other facilities of lower cost ammonia produced at the Pryor Facility. By comparison for the first quarter of 2010, the Pryor Facility had $0.3 million of sales and an operating loss of $6.0 million. During the first quarter of 2011, production-related costs are classified as cost of sales while normal recurring selling, general and administrative expenses (“SG&A”) are classified as SG&A. Due to limited production at the Pryor Facility during the first quarter of 2010, most of the expenses incurred were classified as SG&A excluding the net loss on firm sales commitments.
|
(2)
|
Gross profit by business segment represents net sales less cost of sales. Gross profit classified as “Other” relates to the sales of industrial machinery and related components.
|
(3)
|
During the first quarter of 2011 and 2010, we incurred expenses of $166,000 and $1,432,000, respectively, relating to planned major maintenance activities (“Turnarounds”). During the first quarter of 2011 and 2010, we recognized losses totaling $56,000 and $838,000, respectively, on our futures/forward contracts for natural gas. During the first quarter of 2010, we recognized sales with a gross profit of $761,000 higher than our comparable product sales made at lower market prices available during the first quarter of 2010. These sales related to sales commitments with higher firm sales prices entered into during 2008.
|
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 15: Segment Information (continued)
(4)
|
Our chief operating decision makers use operating income by business segment for purposes of making decisions, which include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less SG&A incurred by each business segment plus other income and other expense earned/incurred by each business segment before general corporate expenses 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)
|
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:
|
|
Three Months Ended
March 31,
|
Gross profit-Other
|
$
|
900
|
|
|
$
|
709
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
Personnel costs
|
|
(1,610
|
)
|
|
|
(1,747
|
)
|
Professional fees
|
|
(1,142
|
)
|
|
|
(1,170
|
)
|
All other
|
|
(1,694
|
)
|
|
|
(818
|
)
|
Total selling, general and administrative
|
|
(4,446
|
)
|
|
|
(3,735
|
)
|
|
|
|
|
|
|
|
|
Other income
|
|
47
|
|
|
|
40
|
|
Other expense
|
|
(3
|
)
|
|
|
(10
|
)
|
Total general corporate expenses and other business operations, net
|
$
|
(3,502
|
)
|
|
$
|
(2,996
|
)
|
Information about our total assets by industry segment is as follows:
|
March 31,
2011
|
|
December 31,
2010
|
Climate Control
|
$
|
119,991
|
|
$
|
112,894
|
|
Chemical
|
|
189,025
|
|
|
179,033
|
|
Corporate assets and other
|
|
115,199
|
|
|
96,054
|
|
Total assets
|
$
|
424,215
|
|
$
|
387,981
|
|
Note 16: Related Party Transactions
Golsen Group
In January 2010, we paid interest of $137,500 relating to $5,000,000 of the 2007 Debentures held by the Golsen Group that was accrued at December 31, 2009. In March 2010, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group. During the three months ended March 31, 2010, we incurred interest expense of $68,750 relating to the debentures held by the Golsen Group.
In January 2011, we paid interest of $137,500 relating to the debentures held by the Golsen Group that was accrued at December 31, 2010. In March 2011, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group. In March 2011, the Golsen Group sold $3,000,000 of the 2007 Debentures it held to a third party. During the three months ended March 31, 2011, we incurred interest expense of $27,500 relating to $2,000,000 of the 2007 Debentures held by the Golsen Group, which amount remained accrued at March 31, 2011.
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 17: Subsequent Events As discussed in Note 10 - Commitments and Contingencies, the city of El Dorado, Arkansas (the “City”) received approval to construct a pipeline for disposal of wastewater generated by the City and by certain companies in the El Dorado area. During April 2011, certain companies, including EDC, and the City entered into a funding agreement and operating agreement; however, the agreements do not become effective until the City obtains financing, among other things. Each party to the agreements will contribute to the cost of construction and the annual operating costs of the pipeline. EDC anticipates its capital cost in connection with the construction of the pipeline including EDC’s right to use the pipeline to dispose of its wastewater will be approximately $4.0 million. The City plans to complete the construction of the pipeline in 2013. Once the pipeline is completed, EDC’s estimated share of the annual operating costs is to be $100,000 to $150,000. The initial term of the operating agreement is through December 2053.
During April 2011, ThermaClime notified the administrative agent (also a lender) of the Amended Agreement associated with the Secured Term Loan to syndicate an additional $15 million pursuant to the terms of the Amended Agreement as discussed in Note 9 - Long-Term Debt.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our March 31, 2011 condensed consolidated financial statements. Certain statements contained in this MD&A may be deemed forward-looking statements. See "Special Note Regarding Forward-Looking Statements".
Overview
General
LSB is a manufacturing, marketing and engineering company operating through our subsidiaries. LSB and its wholly-owned subsidiaries own the following core businesses:
·
|
Climate Control Business manufactures and sells a broad range of air conditioning and heating products in the niche markets we serve consisting of geothermal and water source heat pumps, hydronic fan coils, large custom air handlers, modular geothermal chillers and other related products used to control the environment in commercial/institutional and residential new building construction, renovation of existing buildings and replacement of existing systems. For the first quarter of 2011, approximately 36% of our consolidated net sales relates to the Climate Control Business.
|
·
|
Chemical Business manufactures and sells nitrogen based chemical products produced from four plants located in Arkansas, Alabama, Oklahoma, and Texas for the industrial, mining and agricultural markets. Our products include high purity and commercial grade anhydrous ammonia, industrial and fertilizer grade AN, UAN, sulfuric acids, nitric acids in various concentrations, nitrogen solutions, DEF and various other products. For the first quarter of 2011, approximately 63% of our consolidated net sales relates to the Chemical Business.
|
As discussed below under “Chemical Business”, the Pryor Facility began limited production of anhydrous ammonia and UAN in the first quarter of 2010. The Pryor Facility reached sustained production of anhydrous ammonia during the fourth quarter of 2010 and UAN during the first quarter of 2011.
Economic Conditions
Since our two core business segments serve several diverse markets, we consider market fundamentals for each market individually as we evaluate economic conditions.
Climate Control Business - Sales for the first quarter of 2011 were 19% higher than the same period in 2010, including a 52% increase in hydronic fan coil sales and a 15% increase in geothermal and water source heat pump sales. From a construction sector perspective, the increase is due to a 21% improvement in commercial/institutional product sales and a 10% increase in residential product sales. The improvement in commercial/institutional sales was in all major product lines and was primarily related to the increased backlog of customer orders for our products entering into 2011 resulting from increases in the level of customer orders in prior quarters. Sales and order levels of our residential products increased over the comparable quarter in 2010 despite the slowdown in new residential construction due to the continued interest in energy efficient solutions. Based upon published reports of leading indicators, including the latest information available from the Construction Market Forecasting Service provided by McGraw-Hill (“CMFS”) as well as the National Architectural Billings Index published by American Institute of Architects (“AIA”), both the overall commercial/institutional construction and residential construction sectors are expected to increase modestly during the remainder of 2011. Another factor that may affect product order rates going forward is the potential for growth in our highly energy-efficient geothermal water-source heat pumps, which could benefit significantly from government stimulus programs, including various tax incentives, although we cannot predict the impact these programs will have on our business.
The Chemical Business - Our Chemical Business’ primary markets are industrial, mining and agricultural. During the first quarter of 2011, approximately 54% of our Chemical Business’ sales were into industrial and mining markets of which approximately 64% of these sales are to customers that have contractual obligations to purchase a minimum quantity or allow us to recover our cost plus a profit, irrespective of the volume of product sold. During the first quarter of 2011, customer demand for our industrial and mining products increased over the same period in 2010. We believe that such demand will continue to increase during the remainder of 2011 as the industrial markets
in the United States continue to recover based on industry-related publications, including the American Chemistry Council’s Chemistry and Economic Report.
The remaining 46% of our Chemical Business’ sales in the first quarter of 2011 were made into the agricultural fertilizer markets to customers that primarily purchase at spot market prices and not pursuant to contractual pricing arrangements. Our agricultural sales volumes and margins depend upon the supply of and the demand for fertilizer, which in turn depends on the market fundamentals for crops including corn, wheat, cotton and forage. The current outlook according to most market indicators, including reports in Green Markets, Fertilizer Week and the USDA’s World Agricultural Supply and Demand Estimates, point to positive supply and demand fundamentals for the types of nitrogen fertilizer products we produce and sell. However, it is possible that the fertilizer outlook could change if there are unanticipated changes in commodity prices, acres planted or unfavorable weather conditions. During 2010, the anhydrous ammonia market price increased while natural gas costs generally declined. As a result, gross profit margins at our Cherokee and Pryor Facilities benefited since these facilities produce anhydrous ammonia and UAN from natural gas. On the other hand, our El Dorado Facility is at a current cost disadvantage for their agricultural grade AN, which is produced from purchased ammonia, compared to competitive product produced from natural gas.
Historically, our Chemical Business experiences lower seasonal demand in the agricultural sector in the third quarter each year. As a result, most of our planned major maintenance activities are scheduled during that period as discussed below under, “Estimated Plant Turnaround Costs - Remainder of 2011” resulting in lower sales and profitability during that quarter.
Results for the First Quarter of 2011
Our consolidated net sales for the first quarter of 2011 were $177.5 million compared to $130.4 million for the same period in 2010. The sales increase of approximately $47.1 million includes an increase of $36.6 million in our Chemical Business and an increase of $10.0 million in our Climate Control Business.
Our consolidated operating income was $34.0 million for the first quarter of 2011 compared to $4.4 million for the same period in 2010. The increase in operating income of $29.6 million included an increase of $27.2 million in our Chemical Business and an increase of $2.9 million in our Climate Control Business. In addition, our general corporate expense and other business operations net expenses increased $0.5 million.
Our resulting effective income tax rate for the first quarter of 2011 was approximately 36% compared to 35% for the first quarter of 2010.
Climate Control Business
Our Climate Control sales for the first quarter of 2011 were $63.6 million, or $10.0 million higher than the same period of 2010, comprised of approximately $5.6 million increase in geothermal and water source heat pump sales, $3.8 million increase in hydronic fan coil sales, and $0.6 million increase in other HVAC sales. From a commercial/institutional market sector perspective, the increase includes an $8.7 million improvement in commercial/institutional product sales and an approximately $1.3 million increase in residential product sales. The improvement in both the commercial/institutional and residential sectors of our business is attributable to a higher beginning backlog and an improved rate of incoming product orders.
We continue to closely follow economic indicators and have attempted to assess the impact on the commercial/institutional and residential construction sectors that we serve, including, but not limited to, new construction and/or renovation of facilities in the following sectors:
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Single-Family Residential
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·
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Multi-Family Residential
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During the first quarter of 2011, approximately 78% of our Climate Control Business’ sales were to the commercial/institutional and multi-family construction markets, and the remaining 22% were sales of geothermal heat pumps (“GHPs”) to the single-family residential market.
For the first quarter of 2011, the product order intake level was $71.6 million as compared to $54.2 million for the first quarter of 2010 and compared to $61.3 million for the fourth quarter of 2010. For the first quarter of 2011, product orders for commercial/institutional products increased 43% while the increase for residential products was minimal as compared to the same period of 2010. Our product order level consists of confirmed purchase orders from customers that have been accepted and received credit approval.
Our order backlog was $58.3 million at March 31, 2011 as compared to $47.6 million at December 31, 2010; $54.8 million at September 30, 2010; $48.2 million at June 30, 2010; and $36.0 million at March 31, 2010. The backlog consists of confirmed customer orders for product to be shipped at a future date. Historically, we have not experienced significant cancellations relating to our backlog of confirmed customer product orders, and we expect to ship substantially all of these orders within the next twelve months; however, it is possible that some of our customers could cancel a portion of our backlog or extend the shipment terms.
Product orders and backlog, as reported, generally do not include amounts relating to shipping and handling charges, service orders or service contract orders. In addition, product orders and backlog, as reported, exclude contracts related to our engineering and construction business due to the relative size of individual projects and, in some cases, extended timeframe for completion beyond a twelve-month period.
Our GHPs use a form of renewable energy and, under certain conditions, can reduce energy costs up to 80% compared to conventional HVAC systems. Tax legislation continues to provide incentives for customers purchasing products using forms of renewable energy. Homeowners who install GHP’s are eligible for a 30% tax credit. Businesses that install GHP’s are eligible for a 10% tax credit and five year accelerated depreciation on the balance of the system cost. During 2011, businesses also have the option of electing 100% bonus depreciation on qualifying equipment, such as GHP’s, that are placed in service during the year.
Although our Climate Control Business has shown steady improvement in new order levels during each of the last four quarters compared to each of the comparable quarters of the previous year, we expect to see a continuing slow recovery in the short-term as compared to pre-recession levels. We have significantly increased our sales and marketing efforts for all of our Climate Control products, primarily to expand the market for our products, including GHPs. We believe that the recently enacted federal tax credits for GHPs have had a positive impact on sales of those highly energy efficient and green products.
Chemical Business
Our Chemical Business operates the El Dorado Facility, the Cherokee Facility, the Baytown Facility and the Pryor Facility. The El Dorado and Baytown Facilities produce nitrogen products from anhydrous ammonia delivered by pipeline. The El Dorado Facility also produces sulfuric acid from recovered elemental sulfur delivered by truck and rail. The Cherokee and Pryor Facilities produce anhydrous ammonia and nitrogen products from natural gas delivered by pipeline but can also receive supplemental anhydrous ammonia by truck, rail or barge.
Our Chemical Business sales for the first quarter of 2011 were $111.4 million, an increase of $36.6 million. Sales increased across all product lines due to both increased pricing and volume. Sales from our Pryor Facility to unrelated parties were $19.3 million during the first quarter of 2011 compared to $0.3 million for the same period in 2010, with the majority of these sales going into the agricultural market. Agricultural sales for the first quarter of 2011 were $51.1 million compared to $24.5 million for the same period in 2010 primarily due to the increased sales from our Pryor Facility, but also due to increased pricing of UAN and agricultural grade ammonium nitrate (“AN”) sold from our Cherokee and El Dorado Facilities, respectively. In addition, increases in raw material costs resulted in higher selling prices to certain industrial and mining customers that have contractual obligations allowing us to recover our costs.
The percentage change in sales (volume and dollars) for the first quarter of 2011 compared to the first quarter of 2010 is as follows:
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Increase
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Chemical products:
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Agricultural
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48
|
%
|
|
|
108
|
%
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Industrial acids and other
|
1
|
%
|
|
|
19
|
%
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Mining
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13
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%
|
|
|
22
|
%
|
Total weighted-average change
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19
|
%
|
|
|
49
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%
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The increases in agricultural tons and dollars are primarily due to the increased sales from our Pryor Facility, as discussed. In addition, selling prices increased for UAN and agricultural grade AN sold from our Cherokee and El Dorado Facilities, respectively.
The increase in industrial acids and mining sales both in tons and dollars is partially due to improved economic conditions resulting in increased customer demand, as well as higher ammonia feedstock cost in first quarter of 2011 that was passed through in the selling price pursuant to pricing arrangements with certain customers.
Since the Pryor Facility did not reach sustained production during the first quarter of 2010, most of its operating expenses for the first quarter of 2010 were not attributable to the production of product and were therefore expensed as incurred rather than charged to inventory. Approximately $5.2 million of Pryor Facility operating expenses were classified as selling, general and administrative expense (“SG&A”) in first quarter of 2010.
As indicated above under “Overview”, the Pryor Facility did sustain production of ammonia and UAN in the first quarter of 2011. During the 2011 quarter, the production rate for ammonia was approximately 540 tons per day (“TPD”) compared to our original targeted rate of 525 TPD and current planned rate of 700 TPD. The production rate for UAN was approximately 550 TPD compared to our current planned rate of 1000 TPD. Although the production rates were below our current planned rates, we expect to achieve the planned rates. In addition, we have a scheduled planned major maintenance activity in the third quarter of 2011 that should improve production rates.
Our primary raw material feedstocks (anhydrous ammonia, natural gas and sulfur) are commodities subject to significant price fluctuations, which we generally purchase at prices in effect at the time of delivery. During the first quarter of 2011, the average prices for those commodities compared to the same period in 2010 were as follows:
Natural gas average price per MMBtu based upon Tennessee 500 pipeline pricing point
|
$
|
4.55
|
|
|
$
|
5.64
|
|
Ammonia average price based upon low Tampa price per metric ton
|
$
|
512
|
|
|
$
|
381
|
|
Sulfur price based upon Tampa average quarterly price per long ton
|
$
|
185
|
|
|
$
|
90
|
|
Most of our Chemical Business sales in the industrial and mining markets were pursuant to sales contracts and/or pricing arrangements on terms that include the cost of raw material feedstock as a pass through component in the sales price. Our Chemical Business sales in the agricultural markets primarily were at the market price in effect at the time of sale or at a negotiated future price.
Liquidity and Capital Resources
The following is our cash and cash equivalents, short-term investments, total interest bearing debt and stockholders’ equity:
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March 31,
2011
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|
December 31,
2010
|
|
(Dollars In Millions)
|
Cash and cash equivalents
|
|
$ |
98.0 |
|
|
$ |
66.9 |
|
Short-term investments (1)
|
|
|
- |
|
|
|
10.0 |
|
|
|
$ |
98.0 |
|
|
$ |
76.9 |
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
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2007 Debentures
|
|
$ |
2.5 |
|
|
$ |
26.9 |
|
Secured Term Loan
|
|
|
60.0 |
|
|
|
48.8 |
|
Other
|
|
|
19.2 |
|
|
|
19.7 |
|
Total long-term debt, including current portion
|
|
$ |
81.7 |
|
|
$ |
95.4 |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$ |
225.8 |
|
|
$ |
179.4 |
|
|
|
|
|
|
|
|
|
|
Long-term debt to stockholders’ equity ratio (2)
|
|
|
0.4 |
|
|
|
0.5 |
|
(1)
|
These investments consist of certificates of deposit with an original maturity of 13 weeks. 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.
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(2)
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This ratio is based on total long-term debt divided by total stockholders’ equity and excludes the use of cash, cash equivalents and short-term investments to pay down debt.
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At March 31, 2011, our cash and cash equivalents totaled $98 million and our $50 million revolving credit facility (the “Working Capital Revolver Loan”) was undrawn and available to fund operations, if needed, subject to the amount of our eligible collateral and outstanding letters of credit.
For the remainder of 2011, we expect our primary cash needs will be for working capital to fund our operations, capital expenditures, and general obligations. We expect to fund these cash needs from internally generated cash flows, cash on hand, and the additional $15 million in financing as discussed below. Our internally generated cash flows and liquidity could be affected by possible declines in sales volumes resulting from the uncertainty relative to the current economic conditions.
On March 31, 2011, one of the holders of the 2007 Debentures converted $24.4 million principal amount of the 2007 Debentures into 888,160 shares of LSB common stock in accordance with the conversion terms of the debentures. As of March 31, 2011, only $2.5 million of the 2007 Debentures remain outstanding.
As discussed below under “Loan Agreements-Terms and Conditions,” on March 29, 2011, ThermaClime and certain of its subsidiaries entered into an amended and restated term loan agreement (the “Amended Agreement”), which amended ThermaClime’s existing term loan agreement. Pursuant to the terms of the Amended Agreement, the maximum principal amount of ThermaClime’s term loan facility (the “Secured Term Loan”) is increased from $50 million to $60 million. The principal amount may be further increased an additional $15 million, subject to syndicating the additional amount, which ThermaClime has notified the administrative agent (also a lender) of the Amended Agreement to pursue. The Amended Agreement also extends the maturity of the Secured Term Loan from November 2, 2012, to March 29, 2016. The Secured Term Loan requires 20 quarterly principal payments of $0.75 million, plus interest and a final balloon payment of $45 million due on March 29, 2016. At March 31, 2011, the interest rate was approximately 4.08%. The Secured Term Loan is secured by the real property and equipment located at our El Dorado and Cherokee Facilities.
Certain subsidiaries are subject to numerous covenants under the Secured Term Loan 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. Pursuant to the terms of an amendment to the Amended Agreement entered into in April 2011, ThermaClime is able to transfer up to $15 million to LSB.
The Working Capital Revolver Loan, which certain subsidiaries (the “Borrowers”) are parties to, is available to fund these subsidiaries working capital requirements, if necessary, through April 13, 2012. Under the Working Capital Revolver Loan, the Borrowers may borrow on a revolving basis up to $50.0 million based on specific percentages of eligible accounts receivable and inventories. At March 31, 2011, we had approximately $49.2 million of borrowing availability under the Working Capital Revolver Loan based on eligible collateral and outstanding letters of credit. We consider the Working Capital Revolver Loan to be important to our overall capital structure and our current intention is to negotiate a renewal on or before maturity of April 2012.
The financial covenants of the Working Capital Revolver Loan and the Secured Term Loan are discussed below under “Subordinated Debentures and Loan Agreements - Terms and Conditions”. The Borrowers’ ability to maintain borrowing availability under the Working Capital Revolver Loan depends on their ability to comply with the terms and conditions of the loan agreements and their ability to generate cash flow from operations. The Borrowers are restricted under their credit agreements as to the funds they may transfer to LSB and its subsidiaries that are not parties to the loan agreement. This limitation does not prohibit payment to LSB of amounts due under a Services Agreement, Management Agreement and a Tax Sharing Agreement with ThermaClime. Based upon our current projections, we believe that cash and borrowing availability under our Working Capital Revolver Loan is adequate to fund operations during the remainder of 2011.
In 2009, we filed a universal shelf registration statement on Form S-3, with the SEC. The shelf registration statement provides that we could offer and sell up to $200 million of our securities consisting of equity (common and preferred), debt (senior and subordinated), warrants and units, or a combination thereof. This disclosure shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
Income Taxes
We recognize and pay federal income taxes at regular corporate tax rates. The federal tax returns for 1999 through 2006 remain subject to examination for the purpose of determining the amount of tax NOL and other carryforwards. With few exceptions, the 2007-2009 years remain open for all purposes of examination by the IRS and other major tax jurisdictions. Currently, we are under examination by the IRS and certain state tax authorities for the tax years 2007-2009.
We believe that we do not have any material uncertain tax positions other than the failure to file original or amended state income tax returns in some jurisdictions where LSB or some of its subsidiaries may have a filing responsibility. We had approximately $771,000 and $700,000 accrued for uncertain tax liabilities at March 31, 2011 and December 31, 2010, respectively.
Capital Expenditures
Capital Expenditures-First Quarter of 2011
Cash used for capital expenditures during the first quarter of 2011 was $4.6 million, including $1.3 million primarily for production equipment and other upgrades for additional capacity in our Climate Control Business and $3.2 million for our Chemical Business, primarily for process and reliability improvements of our operating facilities. During the first quarter of 2011, we had nominal capital expenditures associated with maintaining compliance with environmental laws, regulations and guidelines. The capital expenditures were primarily funded from working capital.
Committed and Planned Capital Expenditures-Remainder of 2011
At March 31, 2011, we had committed capital expenditures of approximately $26.5 million for the remainder of 2011. The committed expenditures included $23.9 million in the Chemical Business. The Chemical Business committed capital expenditures included $13.7 million for process and reliability improvements; $9.4 million for plant expansion at our Pryor Facility; and $0.8 million to maintain compliance with environmental laws, regulations and guidelines. In addition, our commitments included $2.6 million in our Climate Control Business primarily for facility upgrades and production equipment. We plan to fund these expenditures from available cash and working capital.
In addition to committed capital expenditures at March 31, 2011, we had additional planned capital expenditures for 2011 in our Chemical Business of approximately $11.0 million and in our Climate Control Business of approximately $7.6 million.
The planned capital expenditures are subject to economic conditions and approval by senior management. If these capital expenditures are approved, most of these expenditures will likely be funded from working capital and internal cash flows. In addition, see discussion below under “Wastewater Pipeline” relating to expenditures associated with the participation of the construction of a wastewater pipeline. Also see discussion below under “Information Request from EPA” that may require additional capital improvement to certain emission equipment not currently included in our committed or planned capital expenditures for the remainder of 2011.
Wastewater Pipeline
The El Dorado Facility generates process wastewater, which is subject to a wastewater discharge permit issued by the ADEQ, which permit is generally renewed every five years. In conjunction with our long-term compliance plan, during April 2011, certain companies, including EDC, and the city of El Dorado, Arkansas (the “City”) entered into a funding agreement and operating agreement related to a wastewater pipeline to be constructed by the City. The agreements do not become effective until the City obtains financing, among other things. Each party to the agreements will contribute to the cost of construction and the annual operating costs of the pipeline. EDC anticipates its capital cost in connection with the construction of the pipeline including EDC’s right to use the pipeline to dispose of its wastewater will be approximately $4.0 million. The City plans to complete the construction of the pipeline in 2013. Once the pipeline is completed, EDC’s estimated share of the annual operating costs is to be $100,000 to $150,000. The initial term of the operating agreement is through December 2053.
Advanced Manufacturing Energy Credits
On January 8, 2010, two subsidiaries within the Climate Control Business were awarded Internal Revenue Code § 48C tax credits (also referred to as “Advanced Manufacturing Energy Credits”) of approximately $9.6 million. The award is based on anticipated capital expenditures made from February 2009 through February 2013 for machinery that will be used to produce geothermal heat pumps and green modular chillers. As these subsidiaries invest in the qualifying machinery, we will be entitled to an income tax credit equal to 30% of the machinery cost, up to the total credit amount awarded. We anticipate utilizing approximately $2.2 million of these tax credits to partially offset our federal income tax liability for 2010 and 2011.
Information Request from EPA
The EPA has sent information requests to most, if not all, of the nitric acid plants in the United States, including our El Dorado and Cherokee Facilities and the Baytown Facility under Section 114 of the Clean Air Act as to construction and modification activities at each of these facilities over a period of years. These information requests will 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 type of emission control equipment that might be imposed is unknown and, as a result, the amount of capital expenditures necessary in order to bring the equipment into compliance is unknown at this time but could be substantial.
Further, if it is determined that the equipment at any of our chemical facilities have not met the requirements of the Clean Air Act, our Chemical Business could be subject to penalties in an amount not to exceed $27,500 per day as to each facility not in compliance and be required to retrofit each facility with the “best available control technology.” We believe this technology is already employed at the Baytown Facility. We are currently unable to determine the amount (or range of amounts) of any penalties that may be assessed by the EPA. Therefore no liability has been established at March 31, 2011, in connection with this matter.
Proposed Transaction with Landmark
We have been considering a proposed acquisition of certain real estate located in Oklahoma City and Laguna Vista, Texas (“Real Estate”) from Landmark Land Company, Inc. (“Landmark”) (the “Acquisition”). If we were to complete the transaction as to both sites, the aggregate proposed purchase price for both sites of Real Estate is approximately $5.0 million. We would undertake the Acquisition, if completed, as a five to seven year investment. If completed, the proposal contemplates that Landmark would be engaged to develop the Real Estate as a residential development and market the Real Estate on our behalf, at our election. Landmark has agreed to use the geothermal heat pumps manufactured by our Climate Control Business wherever feasible in the development of the Real Estate. Jack E. Golsen, our chairman of the board of directors and CEO, and another individual formed a limited liability company (“LLC”), and each contributed $1.0 million to the LLC. The LLC subsequently loaned Landmark the $2.0 million. In March 2011, Mr. Golsen sold his membership interest in the LLC to Gerald Barton, the CEO and a substantial stockholder of Landmark. Mr. Barton issued a promissory note to Mr. Golsen in the principal amount of approximately $1.1 million, representing the amount that Mr. Golsen had invested in the LLC, plus interest (the “Barton Note”). The Barton Note is due and payable in June 2011. In addition, Bernard Ille, one of our directors, served as a director of Landmark for many years until he resigned in March 2011. In light of the Barton Note and Mr. Ille’s past relationship with Landmark, our board of directors appointed a special committee for the purpose of reviewing, on our behalf, the Acquisition, to evaluate the risks and benefits to us of the Acquisition and to approve the Acquisition on behalf of our board. During the first week of May 2011, the special committee approved the purchase from Landmark of the Real Estate located in Oklahoma City for a purchase price of $2.25 million and is still considering the possibility of purchasing the Real Estate located in Laguna Vista, Texas. Completion of the purchase of the Oklahoma City Real Estate is subject to finalization and execution of definitive agreements. The definitive agreements in connection with the purchase of any of the Real Estate from Landmark will provide a condition that Landmark not use any of the proceeds to repay Landmark’s obligation to the LLC or Gerald Barton’s obligation to Mr. Golsen under the Barton Note.
Business Interruption Insurance Claim
In June 2010, a pipe failure in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged the ammonia plant. The fire was immediately extinguished and there were no injuries. As a result of this damage, the Pryor Facility was unable to produce anhydrous ammonia or UAN during substantially all of third quarter of 2010. Our insurance policy provides for business interruption coverage for certain lost profits and extra expense with a 30-day waiting period plus a $250,000 deductible. Our insurance claim for business interruption has been filed, which claim amount substantially exceeds our deductible. A recovery, if any, from our business interruption coverage has not been recognized since it is considered a gain contingency, which will be recognized if, and when, realized or realizable and earned.
Estimated Plant Turnaround Costs - Remainder of 2011
Our Chemical Business expenses the costs of Turnarounds as they are incurred. Based on our current plan for Turnarounds during the remainder of 2011, we currently estimate that we will incur approximately $7.0 million to $8.0 million of Turnaround costs, of which approximately $4.0 million to $5.0 million is expected to be incurred during the third quarter of 2011. These costs do not include the costs relating to lost absorption or reduced margins due to the associated plants being shut down. Turnarounds are generally performed during the summer months since demand is lower for our agricultural products during these months. However, it is possible that the timing and actual costs of our Turnarounds could be significantly different from our estimates.
Expenses Associated with Environmental Regulatory Compliance
Our Chemical Business is subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, our Chemical Business incurred expenses of $1.0 million in the first quarter of 2011 in connection with environmental regulatory issues. For the remainder of 2011, we expect to incur expenses ranging from $2.0 million to $3.0 million in connection with environmental regulatory issues. However, it is possible that the actual costs could be significantly different than our estimates.
Proposed Legislation and Regulations Concerning Greenhouse Gas Emissions
The manufacturing facilities within our Chemical Business use significant amounts of electricity, natural gas and other raw materials necessary for the production of their chemical products that result, or could result, in certain greenhouse gas emissions into the environment. Federal and state courts and administrative agencies, including the EPA, are considering the scope and scale of greenhouse gas emission regulation. There are bills pending or that have been proposed in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to either install abatement systems where feasible or buy allowances for offsets of emissions of greenhouse gas. The EPA has instituted a mandatory greenhouse gas reporting requirement that began in 2010, which impacts all of our chemical manufacturing sites. Greenhouse gas regulation could increase the price of the electricity and other energy sources purchased by our chemical facilities; increase costs for natural gas and other raw materials (such as anhydrous ammonia); potentially restrict access to or the use of natural gas and other raw materials necessary to produce our chemical products; and require us to incur substantial expenditures to retrofit our chemical facilities to comply with the proposed new laws and regulations regulating greenhouse gas emissions, if adopted. Federal, state and local governments may also pass laws mandating the use of alternative energy sources, such as wind power and solar energy, which may increase the cost of energy use in certain of our chemical and other manufacturing operations. While future emission regulations or new laws appear possible, it is too early to predict how these regulations, if and when adopted, will affect our businesses, operations, liquidity or financial results.
Dividends
LSB is a holding company and, accordingly, its ability to pay cash dividends on its preferred stock and common stock depends in large part on its ability to obtain funds from its subsidiaries. The ability of ThermaClime (which owns a substantial portion of the companies comprising the Climate Control Business and Chemical Business) and its wholly-owned subsidiaries to pay dividends and to make distributions to LSB is restricted by certain covenants contained in the Working Capital Revolver Loan and the Secured Term Loan agreements. Under the terms of these agreements, so long as no default or event of default has occurred, is continuing or would result therefrom, ThermaClime cannot transfer funds to LSB in the form of cash dividends or other distributions or advances, except for the following, under the terms of the loans:
·
|
unrestricted payments up to $15 million LSB;
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·
|
loans to LSB entered into subsequent to March 29, 2011, provided the aggregate amount of such loans do not exceed $2.0 million at any time outstanding;
|
·
|
amounts not to exceed $5.0 million annually under a certain management agreement between LSB and ThermaClime, provided certain conditions are met;
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·
|
the repayment of costs and expenses incurred by LSB that are directly allocable to ThermaClime or its subsidiaries for LSB’s provision of services under certain services agreement;
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·
|
the amount of income taxes that ThermaClime would be required to pay if they were not consolidated with LSB, and
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·
|
an amount not to exceed fifty percent (50%) of ThermaClime's consolidated net income during each fiscal year determined in accordance with generally accepted accounting principles plus income taxes paid to LSB within the previous bullet above, provided that certain other conditions are met.
|
Holders of our common stock are entitled to receive dividends only when and if declared by our board of directors. We have not paid cash dividends on our outstanding common stock in many years, and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future. However, our board of directors has not made a decision whether or not to pay such dividends on our common stock in 2011.
During the first quarter of 2011, dividends totaling $304,700 were declared and paid on our outstanding preferred stock using funds from our working capital. Each share of preferred stock is entitled to receive an annual dividend, only when declared by our board of directors, payable as follows:
·
|
$0.06 per share on our outstanding Series D Preferred for an aggregate dividend of $60,000;
|
·
|
$12.00 per share on our outstanding Series B Preferred for an aggregate dividend of $240,000; and
|
·
|
$10.00 per share on our outstanding Noncumulative Preferred for an aggregate dividend of approximately $4,700.
|
All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Group. See “Related Party Transactions” of this MD&A for a discussion as to the amount of dividends paid to the Golsen Group during the first quarter of 2011. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred.
Compliance with Long - Term Debt Covenants
As discussed below under “Subordinated Debentures and Loan Agreements - Terms and Conditions”, the Secured Term Loan and Working Capital Revolver Loan, as amended, of ThermaClime and its subsidiaries require, among other things, that ThermaClime meet certain financial covenants. Currently, ThermaClime's forecast is that ThermaClime will be able to meet all financial covenant requirements for the remainder of 2011.
Loan Agreements - Terms and Conditions
Working Capital Revolver Loan - ThermaClime’s Working Capital Revolver Loan is available to fund its working capital requirements, if necessary, through April 13, 2012. Under the Working Capital Revolver Loan, ThermaClime and its subsidiaries may borrow on a revolving basis up to $50.0 million based on specific percentages of eligible accounts receivable and inventories. At March 31, 2011, there were no outstanding borrowings. In addition, the net credit available for borrowings under our Working Capital Revolver Loan was approximately $49.2 million at March 31, 2011, based on our eligible collateral and outstanding letters of credit as of that date. The Working Capital Revolver Loan requires that ThermaClime 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. As of March 31, 2011 and as defined in the agreement, ThermaClime’s EBITDA was approximately $80 million; the fixed charge coverage ratio was 14.5 to 1; and the senior leverage coverage ratio was 0.8 to 1.
Secured Term Loan - On March 29, 2011, ThermaClime and certain of its subsidiaries entered into the Amended Agreement, which amended ThermaClime’s existing term loan agreement, dated November 2, 2007, as previously amended. Pursuant to the terms of the Amended Agreement, the maximum principal amount of ThermaClime’s Secured Term Loan is increased from $50 million to $60 million. The principal amount is expected to increase an additional $15 million, subject to the completion of syndication. The Amended Agreement also extends the maturity of the Secured Term Loan from November 2, 2012, to March 29, 2016. The Secured Term Loan continues to be guaranteed by LSB.
The Secured Term Loan requires 20 quarterly principal payments of $0.75 million, plus interest and a final balloon payment of $45 million due on March 29, 2016. The stated interest rate on the Secured Term Loan includes a variable interest rate of approximately 3.31% on the principal amount of $35 million, which the variable interest rate is based on three-month LIBOR plus 300 basis points, which rate is adjusted quarterly, and a fixed interest rate of 5.15% on the principal amount of $25 million. At March 31, 2011, the resulting weighted-average interest rate was approximately 4.08%.
The Secured Term Loan is secured by the real property and equipment located at our El Dorado and Cherokee Facilities. The carrying value of the pledged assets is approximately $63 million at March 31, 2011.
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 LSB, all with certain exceptions. At March 31, 2011, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was approximately $70 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. As of March 31, 2011 and as defined in the agreement, Secured Term Loan borrowers’ fixed charge coverage ratio was 5.3 to 1 and the leverage coverage ratio was 0.9 to 1.
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.
A prepayment premium equal to 2.5% of the principal amount prepaid is due to the lenders should the borrowers elect to prepay on or prior to March 29, 2012. This premium is reduced to 1.0% during the following 24-month period and is eliminated thereafter.
Cross-Default Provisions - The Working Capital Revolver Loan agreement 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.
Seasonality
We believe that our only significant seasonal products are fertilizer and related chemical products sold by our Chemical Business to the agricultural industry. The selling seasons for those products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets in which the majority of our agricultural products are distributed. As a result, our Chemical Business increases its inventory of agricultural products prior to the beginning of each planting season. The amount and timing of sales to the agricultural markets is further dependent upon weather conditions and other circumstances beyond our control.
Related Party Transactions
Golsen Group
In January 2011, we paid interest of $137,500 relating to $5,000,000 of the 2007 Debentures held by the Golsen Group that was accrued at December 31, 2010. In March 2011, we paid dividends totaling $300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the Golsen Group. In March 2011, the Golsen Group sold $3,000,000 of the 2007 Debentures it held to a third party. During the three months ended March 31, 2011, we incurred interest expense of $27,500 relating to $2,000,000 of the debentures held by the Golsen Group, which amount remains accrued at March 31, 2011.
Results of Operations
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating income in our Climate Control segment for the three months ended March 31,
|
2011
|
|
2010
|
|
Change
|
|
Percentage
Change
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal and water source heat pumps
|
|
$ |
42,571 |
|
|
|
$ |
36,958 |
|
|
|
$ |
5,613 |
|
|
|
15.2 |
% |
Hydronic fan coils
|
|
|
11,089 |
|
|
|
|
7,274 |
|
|
|
|
3,815 |
|
|
|
52.4 |
% |
Other HVAC products
|
|
|
9,989 |
|
|
|
|
9,439 |
|
|
|
|
550 |
|
|
|
5.8 |
% |
Total Climate Control
|
|
$ |
63,649 |
|
|
|
$ |
53,671 |
|
|
|
$ |
9,978 |
|
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – Climate Control
|
|
$ |
21,486 |
|
|
|
$ |
18,399 |
|
|
|
$ |
3,087 |
|
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage – Climate Control (1)
|
|
|
33.8 |
|
% |
|
|
34.3 |
|
% |
|
|
(0.5 |
) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income – Climate Control
|
|
$ |
8,441 |
|
|
|
$ |
5,527 |
|
|
|
$ |
2,914 |
|
|
|
52.7 |
% |
(1) As a percentage of net sales
Net Sales - Climate Control
·
|
Net sales of our geothermal and water source heat pump products increased primarily as a result of an 18% improvement in sales of our commercial products and a 10% improvement in sales of our residential products due to the higher backlog at the beginning of 2011 and stronger product order levels during the first quarter of 2011. During the first quarter of 2011, we continued to maintain a market share leadership position of approximately 42%, based on preliminary market data supplied by the Air-Conditioning, Heating and Refrigeration Institute (“AHRI”);
|
·
|
Net sales of our hydronic fan coils increased primarily due to a 29% increase in the number of units sold due to increased construction and renovation activities in the markets we serve and a 10% increase in the average unit sales price due to change in product mix. During the first quarter of 2011, we continued to have a market share leadership position of approximately 26% based on preliminary market data supplied by the AHRI;
|
·
|
Net sales of our other HVAC products increased primarily as the result of an increase in the sales of our large custom air handlers and modular chillers partially offset by a decrease in engineering and construction services.
|
Gross Profit - Climate Control
The increase in gross profit in our Climate Control Business was primarily the result of higher sales volume as discussed above.
Operating Income - Climate Control
Operating income increased primarily as a result of the increase in gross profit as discussed above.
Chemical Business
The following table contains certain information about our net sales, gross profit and operating income in our Chemical segment for the three months ended March 31,
|
2011
|
|
2010
|
|
Change
|
|
Percentage
Change
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products
|
$
|
51,101
|
|
|
$
|
24,536
|
|
|
$
|
26,565
|
|
|
108.3
|
%
|
Industrial acids and other chemical products
|
|
36,843
|
|
|
|
31,061
|
|
|
|
5,782
|
|
|
18.6
|
%
|
Mining products
|
|
23,487
|
|
|
|
19,275
|
|
|
|
4,212
|
|
|
21.9
|
%
|
Total Chemical
|
$
|
111,431
|
|
|
$
|
74,872
|
|
|
$
|
36,559
|
|
|
48.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit – Chemical
|
$
|
31,468
|
|
|
$
|
9,158
|
|
|
$
|
22,310
|
|
|
243.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage – Chemical (1)
|
|
28.2
|
|
%
|
|
12.2
|
|
%
|
|
16.0
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income – Chemical
|
$
|
29,098
|
|
|
$
|
1,885
|
|
|
$
|
27,213
|
|
|
1443.7
|
%
|
(1) As a percentage of net sales
Net Sales - Chemical
The El Dorado and Cherokee Facilities produce all the chemical products described in the table above and the Baytown Facility produces only industrial acids products. The Pryor Facility produces agricultural and industrial chemical products with a current emphasis on agricultural. For the first quarter of 2011, overall sales prices for the Chemical Business increased 30% and the volume of tons sold increased 19%, compared with the same period of 2010, generally as a result of the following:
·
|
Agricultural products sales - Agricultural products sales increased $26.6 million, or 108%, primarily due to increased sales from our Pryor Facility and increased selling prices driven by an increase in market demand for crop nutrients and strong grain commodity prices. Tons of agricultural products sold increased 48% including an increase of 44,000 tons of UAN and 7,000 tons of ammonia sold into agricultural markets from the Pryor Facility.
|