Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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73-1015226 |
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(State of Incorporation)
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(I.R.S. Employer |
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Identification No.) |
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16 South Pennsylvania Avenue |
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Oklahoma City, Oklahoma
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73107 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: (405) 235-4546
Securities Registered Pursuant to Section 12(b) of the Act:
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Name of Each Exchange |
Title of Each Class
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On Which Registered |
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Common Stock, Par Value $.10
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New York Stock Exchange |
Preferred Share Purchase Rights
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New York Stock Exchange |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter
period that the Registrant has had to file the reports), and (2) has been subject to the filing
requirements for the past 90 days. þ Yes o 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).
þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes þ No
The aggregate market value of the Registrants voting common equity held by non-affiliates of the
Registrant, computed by reference to the price at which the voting common stock was last sold as of
June 30, 2011, was approximately $796 million. As a result, the Registrant is a large accelerated
filer as of December 31, 2011. For purposes of this computation, shares of the Registrants common
stock beneficially owned by each executive officer and director of the Registrant were deemed to be
owned by affiliates of the Registrant as of June 30, 2011. Such determination should not be deemed
an admission that such executive officers and directors of our common stock are, in fact,
affiliates of the Registrant or affiliates as of the date of this Form 10-K.
As of February 15, 2012, the Registrant had 22,318,223 shares of common stock outstanding
(excluding 4,320,462 shares of common stock held as treasury stock).
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS
General
LSB Industries, Inc. (LSB or Registrant) was formed in 1968 as an Oklahoma corporation and
became a Delaware corporation in 1977. LSB is a diversified holding company involved in
manufacturing and marketing operations through its subsidiaries. LSB and its wholly-owned
subsidiaries (the Company, We, Us, or Our) own the following core businesses:
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Climate Control Business manufactures and sells a broad range of heating, ventilation and
air conditioning (HVAC) products in the niche markets we serve consisting of geothermal and
water source heat pumps, hydronic fan coils, large custom air handlers, modular geothermal and
other chillers and other related products used to control the environment in various
structures. Our markets include commercial/institutional and residential new building
construction, renovation of existing buildings and replacement of existing systems. |
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Chemical Business manufactures and sells nitrogen-based chemical products produced from
four facilities located in El Dorado, Arkansas (the El Dorado Facility); Cherokee, Alabama
(the Cherokee Facility); Pryor, Oklahoma (the Pryor Facility); and Baytown, Texas (the
Baytown Facility) for the agricultural industrial, and mining markets. Our products include
high purity and commercial grade anhydrous ammonia for industrial and agricultural
applications, industrial and fertilizer grade ammonium nitrate (AN), urea ammonium nitrate
(UAN), sulfuric acids, nitric acids in various concentrations, nitrogen solutions, diesel
exhaust fluid (DEF) and various other products. |
We believe our Climate Control Business has developed leadership positions in certain niche markets
by offering extensive product lines, customized products and improved technologies. Under this
focused strategy, we have developed what we believe to be the most extensive line of geothermal and
water source heat pumps and hydronic fan coils in the United States (U.S.). Further, we believe
that we were a pioneer in the use of geothermal technology in the climate control industry and we
have used it to create what we believe to be the most energy efficient climate control systems
commercially available today. We employ highly flexible production capabilities that allow us to
custom design units for new construction as well as the retrofit and replacement markets. This
flexibility positions us well for an eventual recovery in commercial/institutional and residential
construction markets.
In recent years, we have put heavy emphasis on our geothermal heating and air conditioning
products, which are considered green technology and a form of renewable energy. We believe our
geothermal systems are among the most energy efficient systems available in the market for heating
and cooling applications in commercial/institutional and single family new construction as well as
replacement and renovation markets. Based upon industry information available to us, we believe we
have the leading market share. In addition, even though the general construction level has been
lower than some previous years in both the commercial/institutional and residential sectors, we
believe we have continued to increase our market share of the growing geothermal heating and
cooling market.
Our Chemical Business is a supplier to some of the worlds leading chemical and industrial
companies. By focusing on specific geographic areas, we have developed freight and distribution
advantages over many of our competitors, and we believe our Chemical Business has established
leading regional market positions.
We sell most of our industrial and mining products to customers pursuant to contracts containing
minimum volumes and/or cost plus a profit provision. These contractual sales stabilize the effect
of commodity cost changes and fluctuations in demand for these products due to the cyclicality of
the end markets. Periodically we enter into forward sales commitments for agricultural products but
we sell most of our agricultural products at the current spot market price in effect at time of
shipment.
Certain statements contained in this Part I may be deemed to be forward-looking statements. See
Special Note Regarding Forward-Looking Statements.
3
Current State of the Economy
Since our two core business segments serve several diverse markets, we consider market fundamentals
for each market individually as we evaluate economic conditions. From a macro standpoint, we
believe the U.S. economy is poised for modest growth if the European sovereign debt issues do not
negatively affect the global economy beyond current concerns.
Climate Control Business Sales for 2011 were 12% higher than the same period in 2010, including a
43% increase in hydronic fan coil sales, a 7% increase in geothermal and water source heat pump
sales, and a 6% increase in other HVAC sales. From a market sector perspective, the increase is due
to a 19% improvement in commercial/institutional product sales partially offset by a 7% decrease in
residential product sales. The improvement in commercial/institutional sales was in most major
product lines. For 2011, sales and order levels of our commercial/institutional products increased
in most major markets (education, multi-family, healthcare, office and hospitality) although sales
and order levels of our single-family residential products decreased from 2010 reflecting the
slowdown in new residential construction. The latest information available from the Construction
Market Forecasting Service provided by McGraw-Hill (CMFS) indicates that in 2012 both the
commercial/institutional and residential construction sectors we serve are expected to increase
modestly over 2011 levels.
Chemical Business Our Chemical Business primary markets are agricultural, industrial and mining.
During 2011, approximately 45% of our Chemical Business sales in 2011 were 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 prices 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 2012 outlook according to most market
indicators, including reports in Green Markets, Fertilizer Week and the USDAs 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. Our Cherokee and Pryor Facilities produce anhydrous ammonia from
natural gas and UAN from ammonia. During 2011, agricultural customer demand for and the selling
prices of ammonia and UAN continued to increase while natural gas prices were generally lower
compared to 2010. As a result, gross margins increased significantly for these two products. On the
other hand, our El Dorado Facility produces agricultural grade AN from purchased ammonia and is at
a cost disadvantage compared to competitive product produced from natural gas. During 2011, certain
of the mid-south market area for agricultural grade AN was in a drought condition, which could
negatively affect customer demand for that product if the drought continues into the spring of
2012. As a result, we are shipping agricultural grade AN to other freight logical markets and are
attempting to divert production capacity to other products to help mitigate the negative effects of
the drought.
The remaining 55% of our Chemical Business sales were into industrial and mining markets of which
approximately 57% of these sales are to customers that have contractual obligations to purchase a
minimum quantity and allow us to recover our cost plus a profit, irrespective of the volume of
product sold. During 2011, our sales volumes to industrial and mining customers increased 2% and
11%, respectively, as compared to 2010, while sales dollars increased 28% and 34%, respectively.
For 2012, we expect slight growth in these markets based on projections from the American Chemistry
Council and customer feedback.
See further discussion relating to the economy under various risk factors under Item 1A of this
Part 1 and Overview-Economic Conditions of the Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) contained in this report.
Website Access to Companys Reports
Our internet website address is www.lsb-okc.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge
through our website within a reasonable amount of time after they are electronically filed with, or
furnished to, the Securities and Exchange Commission (SEC).
4
Segment Information and Foreign and Domestic Operations and Export Sales
Schedules of the amounts of net sales, gross profit, operating income and identifiable assets
attributable to each of our lines of business and of the amount of our export sales in the
aggregate and by major geographic area for each of the last three years appear in Note 18 of the
Notes to Consolidated Financial Statements included elsewhere in this report.
Climate Control Business
General
Our Climate Control Business manufactures and sells a broad range of standard and custom designed
geothermal and water source heat pumps and hydronic fan coils as well as large custom air handlers
and modular chiller systems, including modular geothermal chillers. These products are for use in
commercial/institutional and residential HVAC systems. Our products are installed in some of the
most recognizable commercial/institutional developments in the U.S., including the Prudential
Tower, Rockefeller Plaza, Trump Tower, Time Warner Center and many others. In addition, we have a
significant presence in the lodging sector with installations in numerous Hyatt, Marriott, Four
Seasons, Starwood, Ritz Carlton and Hilton hotels, among others.
The following table summarizes net sales information relating to our products of the Climate
Control Business:
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2011 |
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2010 |
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2009 |
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Percentage of net sales of the Climate Control Business: |
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Geothermal and water source heat pumps |
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65 |
% |
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69 |
% |
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68 |
% |
Hydronic fan coils |
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19 |
% |
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15 |
% |
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17 |
% |
Other HVAC products |
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16 |
% |
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16 |
% |
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15 |
% |
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100 |
% |
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100 |
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100 |
% |
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Percentage of LSBs consolidated net sales: |
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Geothermal and water source heat pumps |
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23 |
% |
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28 |
% |
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34 |
% |
Hydronic fan coils |
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7 |
% |
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6 |
% |
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9 |
% |
Other HVAC products |
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5 |
% |
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7 |
% |
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7 |
% |
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35 |
% |
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41 |
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50 |
% |
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Market Conditions Climate Control Business
As discussed above, CMFS has projected the commercial/institutional and residential construction
sectors will rebound somewhat during 2012.
In addition, we believe that tax credits and incentives, and certain planned direct spending by the
federal government contained in the American Reinvestment and Recovery Act of 2009, have and could
continue to stimulate sales of our geothermal heat pump products, as well as other green
products.
Geothermal and Water Source Heat Pumps
We believe our Climate Control Business is a leading provider of geothermal and water source heat
pumps to the commercial/institutional construction and renovation markets in the U.S. Water source
heat pumps are highly efficient heating and cooling products, which enable individual room climate
control through the transfer of heat using a water pipe system connected to a centralized cooling
tower or heat injector. Water source heat pumps enjoy a broad range of commercial/institutional
applications, particularly in medium to large sized buildings with many small, individually
controlled spaces. We believe the market share for commercial/institutional water source heat pumps
relative to other types of heating and air-conditioning systems will continue to grow due to the
relative efficiency and longevity of such systems, as well as the replacement market for those
systems.
5
We also provide geothermal heat pumps in residential and commercial/institutional applications.
Geothermal systems, which circulate water or a combination of water and antifreeze through an
underground heat exchanger, are
considered to be the most energy efficient systems currently available in the market. We believe
the energy efficiency, longer life, and relatively short payback periods of geothermal systems, as
compared with other systems, as well as tax incentives that are available to homeowners and
businesses when installing geothermal systems, will increase demand for our geothermal products.
Our products are sold to the commercial/institutional markets, as well as single and multi-family
residential new construction, renovation and replacements.
Hydronic Fan Coils
We believe that our Climate Control Business is a leading provider of hydronic fan coils targeting
commercial and institutional markets. Hydronic fan coils use heated or chilled water provided by a
centralized chiller and/or boiler, through a water pipe system, to condition the air and allow
individual room control. Hydronic fan coil systems are quieter, have longer lives and lower
maintenance costs than other comparable systems used where individual room control is required.
Important components of our strategy for competing in the commercial/institutional renovation and
replacement markets include the breadth of our product line coupled with customization capability
provided by a flexible manufacturing process. Hydronic fan coils enjoy a broad range of
commercial/institutional applications, particularly in medium to large sized buildings with many
small, individually controlled spaces.
Production, Capital Investments and Backlog Climate Control Business
We manufacture our products in many sizes and configurations, as required by the purchaser, to fit
the space and capacity requirements of hotels, motels, schools, hospitals, apartment buildings,
office buildings and other commercial/institutional or residential structures. Most customers place
their product orders well in advance of required delivery dates.
During 2011, we invested approximately $5.7 million in additional property, plant and equipment
(PP&E) primarily relating to the purchase of production equipment and facility upgrades for
additional capacity relating to our Climate Control Business.
As of December 31, 2011, we have committed to spend an additional $0.3 million primarily for
production equipment and facility upgrades in 2012. In addition, planned spending in 2012 is
approximately $12 million although any commitment for any investment will be based on factors
including but not limited to: the maintenance, repair, and replacement of existing equipment and
facilities; efficiency/productivity improvements; and an increase in our capacity to produce and
distribute products as related to expectations for growth in the markets we serve. See discussions
under Liquidity and Capital Resources-Capital Expenditures of Item 7 of Part II of this report,
including Advanced Manufacturing Energy Credits awarded to two subsidiaries of the Climate Control
Business.
The backlog of confirmed customer product orders (purchase orders from customers that have been
accepted and received credit approval) for our Climate Control Business was approximately $44.5
million and $47.6 million as of December 31, 2011 and 2010, respectively. The backlog of product
orders generally does not include amounts relating to shipping and handling charges, service orders
or service contract orders. The backlog also excludes contracts for our construction business due
to the relative size of individual projects and, in some cases, extended timeframe for completion
beyond a twelve-month period.
Historically, we have not experienced significant cancellations relating to our backlog of
confirmed customer product orders. 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.
6
Distribution Climate Control Business
Our Climate Control Business sells its products primarily to mechanical contractors, original
equipment manufacturers (OEMs) and distributors. Our sales to mechanical contractors primarily
occur through independent manufacturers representatives, who also represent complementary product
lines not manufactured by us. OEMs generally consist of other air conditioning and heating
equipment manufacturers who resell under their own brand name the products purchased from our
Climate Control Business in competition with us. The following table summarizes net sales to OEMs
relating to our products of the Climate Control Business:
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2011 |
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2010 |
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2009 |
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Net sales to OEMs as a percentage of: |
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Net sales of the Climate Control Business |
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21 |
% |
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24 |
% |
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23 |
% |
LSBs consolidated net sales |
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7 |
% |
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10 |
% |
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11 |
% |
Market Climate Control Business
Our Climate Control Business market includes commercial/institutional and residential new building
construction, renovation of existing buildings and replacement of existing systems.
Raw Materials and Components Climate Control Business
Numerous domestic and foreign sources exist for the materials and components used by our Climate
Control Business, which include compressors, copper, steel, electric motors, valves and aluminum.
Periodically, our Climate Control Business enters into futures contracts for copper. We do not
anticipate any difficulties in obtaining necessary materials and components for our Climate Control
Business. Although we believe we will be able to pass to our customers the majority of any cost
increases in the form of higher prices, the timing of these price increases could lag the increases
in the cost of materials and components. While we believe we will have sufficient sources for
materials and components, a shortage could impact production of our Climate Control products.
Competition Climate Control Business
Our Climate Control Business competes with several companies, primarily Carrier, Trane, Nortek,
McQuay, and Bosch, some of whom are also our customers. Some of our competitors serve other markets
and have greater financial and other resources than we do. We believe our Climate Control Business
manufactures a broader line of geothermal and water source heat pump and fan coil products than any
other manufacturer in the United States and that we are competitive as to price, service, warranty
and product performance.
Continue to Introduce New Products Climate Control Business
Based on business plans and key objectives submitted by subsidiaries within our Climate Control
Business, we expect to continue to launch new products and product upgrades in an effort to
maintain and increase our current market position and to establish a presence in new markets served
by the Climate Control Business.
Chemical Business
General
Our Chemical Business manufactures products for three principal markets:
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anhydrous ammonia, fertilizer grade AN, UAN, and ammonium nitrate ammonia solution for
agricultural applications, |
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high purity and commercial grade anhydrous ammonia, high purity AN, sulfuric acids,
concentrated, blended and regular nitric acid, mixed nitrating acids, and DEF for
industrial applications, and |
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industrial grade AN and solutions for the mining industry. |
7
The following table summarizes net sales information relating to our products of the Chemical
Business:
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2011 |
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2010 |
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2009 |
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Percentage of net sales of the Chemical Business: |
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Agricultural products |
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45 |
% |
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39 |
% |
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41 |
% |
Industrial acids and other chemical products |
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32 |
% |
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36 |
% |
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37 |
% |
Mining products |
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23 |
% |
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25 |
% |
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22 |
% |
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100 |
% |
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100 |
% |
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100 |
% |
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Percentage of LSBs consolidated net sales: |
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Agricultural products |
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29 |
% |
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22 |
% |
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20 |
% |
Industrial acids and other chemical products |
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20 |
% |
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21 |
% |
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18 |
% |
Mining products |
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15 |
% |
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15 |
% |
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11 |
% |
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64 |
% |
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58 |
% |
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49 |
% |
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Market Conditions Chemical Business
As discussed above and in more detail below under Overview-Economic Conditions of the MD&A
contained in this report, we believe that customer demand for our industrial, mining and
agricultural products for 2012 will be sufficiently strong to allow us to run the four chemical
plants at optimal production rates, which is an important operating characteristic in chemical
process plants. The industrial and mining volumes are driven by general economic conditions as well
as contractual arrangements with certain large customers. Fertilizer demand depends upon acres
planted of crops requiring fertilizer to enhance yield. The fertilizer outlook could be affected
by significant changes in commodity prices, acres planted or weather conditions.
Agricultural Products
Our Chemical Business produces UAN, agricultural grade AN and anhydrous ammonia, all of which are
nitrogen-based fertilizers. Farmers and ranchers decide which type of nitrogen-based fertilizer to
apply based on the crop planted, soil and weather conditions, regional farming practices and
relative nitrogen fertilizer prices. Our agricultural markets include a high concentration of
pastureland and row crops, which favor our products. We sell these agricultural products to
farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain
production markets in the U.S. We develop our market position in these areas by emphasizing high
quality products, customer service and technical advice. During the past few years, we have been
successful in expanding outside our traditional markets by barging to distributors on the Tennessee
and Ohio rivers, and by railing into certain Western States. Our Chemical Business produces a high
performance AN fertilizer that, because of its uniform size, is easier to apply than many competing
nitrogen-based fertilizer products. Our historical sales of agricultural products are shown in the
following table. The sales shown do not reflect amounts used internally, such as ammonia, in the
manufacture of other products, or intercompany sales.
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2011 |
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2010 |
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2009 |
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Tons |
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Net Sales |
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Tons |
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Net Sales |
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Tons |
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Net Sales |
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(In Thousands) |
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Agricultural
Products |
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UAN |
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421 |
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$ |
129,507 |
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|
191 |
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$ |
36,794 |
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|
170 |
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$ |
28,109 |
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AN |
|
|
157 |
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57,703 |
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201 |
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56,758 |
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226 |
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57,182 |
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Ammonia |
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51 |
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26,392 |
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49 |
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22,430 |
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Other* |
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17,997 |
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19,616 |
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19,009 |
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Total |
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$ |
231,599 |
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$ |
135,598 |
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$ |
104,300 |
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* |
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Includes phosphate and potassium products purchased and sold through our retail and wholesale
distribution centers. |
8
Our Chemical Business establishes long-term relationships with wholesale agricultural distributors
and retailers and also sells directly to agricultural end-users through its network of wholesale
and retail distribution centers. In addition, our Chemical Business sells at market prices
substantially all of the UAN produced at the Pryor Facility pursuant to an agreement. The term of
the agreement is through June 2014, but may be terminated earlier by either party pursuant to the
terms of the agreement.
Industrial Acids and Other Chemical Products
Our Chemical Business manufactures and sells industrial acids and other chemical products primarily
to the polyurethane, paper, fibers, fuel additives, emission control, and electronics industries.
We are a major supplier of concentrated nitric acid and mixed nitrating acids, specialty products
used in the manufacture of fibers, gaskets, fuel additives, ordnance, and other chemical products.
In addition, our Chemical Business produces and sells blended and regular nitric acid. Our
Chemical Business is also a niche market supplier of industrial and high purity ammonia for many
specialty applications, including the reduction of air emissions from power plants.
We believe the Baytown Facility is one of the largest nitric acid manufacturing units in the U.S.,
with demonstrated capacity exceeding 1,350 short tons per day. The majority of the Baytown
Facilitys production is sold to a customer pursuant to a long-term contract (the Bayer
Agreement) that provides for a pass-through of certain costs, including the anhydrous ammonia
costs, plus a profit. The term of the Bayer Agreement is through June 2014, with certain renewal
options.
Our Chemical Business competes based upon service, price, location of production and distribution
sites, product quality and performance and provides inventory management as part of the value-added
services offered to certain customers.
Mining Products
Our Chemical Business manufactures industrial grade AN and 83% AN solution for the mining industry.
Pursuant to a long-term cost-plus supply agreement (the Orica Agreement), our Chemical Business
sells to Orica International Pte Ltd. a significant annual volume of industrial grade AN produced
at the El Dorado Facility. The term of the agreement is through December 2014.
Major Customer Chemical Business
The following summarizes net sales to our major customer relating to our products of the Chemical
Business:
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2011 |
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2010 |
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2009 |
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Net sales to Orica as a percentage of: |
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Net sales of the Chemical Business |
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17 |
% |
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18 |
% |
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14 |
% |
LSBs consolidated net sales |
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11 |
% |
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11 |
% |
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7 |
% |
Raw Materials Chemical Business
The products our Chemical Business manufactures are primarily derived from the following raw
material feedstocks: anhydrous ammonia and natural gas. These raw material feedstocks are
commodities, subject to price fluctuations.
The El Dorado Facility purchases approximately 200,000 tons of anhydrous ammonia annually and
produces and sells approximately 470,000 tons of nitrogen-based products per year. Although
anhydrous ammonia is produced from natural gas, the price does not necessarily follow the spot
price of natural gas in the U.S. Anhydrous ammonia is an internationally traded commodity and the
relative price is set in the world market while natural gas is primarily a nationally traded
commodity. The ammonia supply to the El Dorado Facility is transported from the Gulf of Mexico by
pipeline. Under an agreement with its principal supplier of anhydrous ammonia, our subsidiary, El
Dorado Chemical Company (EDC), purchases a majority of its anhydrous ammonia requirements through
December 2012 from this supplier. We believe that we can obtain anhydrous ammonia from other
sources in the event of an interruption of service under the above-referenced contract.
9
The Cherokee Facility normally consumes 5 to 6 million MMBtu of natural gas to produce and sell
approximately 300,000 to 370,000 tons of nitrogen-based products per year. Natural gas is a primary
raw material for producing anhydrous ammonia, UAN and other products. Periodically, the Cherokee
Facility purchases anhydrous ammonia to supplement its annual production capacity of approximately
175,000 tons. Anhydrous ammonia can be delivered to the Cherokee Facility by truck, rail or barge.
Based on 2011 production rates, the Pryor Facility consumes 5 to 6 million MMBtu of natural gas to
produce and sell approximately 300,000 tons of UAN and approximately 35,000 tons of anhydrous
ammonia.
The Cherokee and Pryor Facilities natural gas feedstock requirements are generally purchased at
spot market price. Periodically, we will enter into firm purchase commitments and/or
futures/forward contracts to economically hedge the cost of certain of the natural gas requirements
The Baytown Facility typically consumes more than 100,000 tons of purchased anhydrous ammonia per
year; however, the majority of the Baytown Facilitys production is sold to a customer pursuant to
the Bayer Agreement that provides for a pass-through of certain costs, including the anhydrous
ammonia costs, plus a profit.
Spot anhydrous ammonia and natural gas costs have fluctuated dramatically in recent years. The
following table shows, for the periods indicated, the high and low published prices for:
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ammonia based upon the low Tampa price per metric ton as published by Fertecon and FMB
Ammonia reports and |
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natural gas based upon the daily spot price at the Henry Hub pipeline pricing point. |
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Ammonia Price |
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Natural Gas |
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Per Metric Ton |
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Prices Per MMBtu |
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High |
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Low |
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High |
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Low |
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2011 |
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$ |
705 |
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$ |
475 |
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$ |
4.92 |
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$ |
2.80 |
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2010 |
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$ |
470 |
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$ |
300 |
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$ |
7.51 |
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$ |
3.18 |
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2009 |
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$ |
355 |
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$ |
125 |
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$ |
6.10 |
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$ |
1.85 |
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As of February 15, 2012, the published price, as described above, for ammonia was $400 per metric
ton and natural gas was $2.53 per MMBtu.
Sales Strategy Chemical Business
Our Chemical Business has pursued a strategy of developing industrial and mining customers that
purchase substantial quantities of products, including contractual obligations to purchase minimum
quantities and pricing arrangements that provide for the pass through of raw material and other
manufacturing costs. These arrangements help mitigate the volatility risk inherent in the raw
material feedstocks and/or the changes in demand for our products. For 2011, approximately 55% of
the Chemical Business sales were into industrial and mining
markets of which approximately 57% of
these sales were pursuant to these types of arrangements. The remaining 45% of our 2011 sales were
into agricultural markets primarily at the price in effect at time of shipment. Periodically, we
enter into firm purchase commitments and/or futures/forward contracts to economically hedge the
cost of natural gas for the purpose of securing the profit margin on a certain portion of our firm
sales price commitments in our Chemical Business.
The spot sales prices of our agricultural products may not have a correlation to the anhydrous
ammonia and natural gas feedstock costs but rather reflect market conditions for like and competing
nitrogen sources. This lack of correlation can compromise our ability to recover our full cost to
produce the product in this market. Additionally, the lack of sufficient non-seasonal sales volume
to operate our manufacturing facilities at optimum levels can preclude the Chemical Business from
reaching full performance potential. Looking forward, we are pursuing
profitable growth of our Chemical Business including the potential to increase the output of our
existing production facilities. Our strategy also calls for increased emphasis on the agricultural
sector, while remaining committed to further developing industrial customers who assume the
volatility risk associated with the cost of natural gas and ammonia.
10
Seasonality Chemical Business
We believe that the only significant seasonal products that we market 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
typically increases its inventory of AN and UAN prior to the beginning of each planting season. In
addition, the amount and timing of sales to the agricultural markets depend upon weather conditions
and other circumstances beyond our control.
Regulatory Matters Chemical Business
Our Chemical Business is subject to extensive federal, state and local environmental laws, rules
and regulations as discussed under Environmental Matters of this Item 1 and various risk factors
under Item 1A.
Competition Chemical Business
Our Chemical Business competes with several chemical companies in our markets, such as Agrium, CF
Industries, Dyno Nobel, Koch, Potash Corporation of Saskatchewan, and Yara International, many of
whom have greater financial and other resources than we do. We believe that competition within the
markets served by our Chemical Business is primarily based upon service, price, location of
production and distribution sites, and product quality and performance.
Employees
As of December 31, 2011, we employed 1,841 persons. As of that date, our Climate Control Business
employed 1,276 persons, none of whom were represented by a union, and our Chemical Business
employed 492 persons, with 149 represented by unions under agreements that expire in July through
November of 2013.
Environmental Matters
Our operations are subject to numerous environmental laws (Environmental Laws) and to other
federal, state and local laws regarding health and safety matters (Health Laws). In particular,
the manufacture and distribution of chemical products are activities which entail environmental
risks and impose obligations under the Environmental Laws and the Health Laws, many of which
provide for certain performance obligations, substantial fines and criminal sanctions for
violations. There can be no assurance that 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 are obligated to monitor certain discharge water outlets at our Chemical Business facilities.
We are also contractually obligated through at least December 2053 to pay a portion of the
operating costs of a municipally owned wastewater pipeline currently being constructed, which will
serve the El Dorado Facility. Additionally, we 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.
11
1. Discharge Water Matters
The El Dorado Facility owned by EDC generates process wastewater, which includes cooling tower and
boiler water quality control streams, 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 EDCs review. EDC submitted comments to the ADEQ on the draft permit in
December 2010.
The El Dorado Facility has generally demonstrated its ability to comply with applicable ammonia and
nitrate permit limits, but has, from time to time, had difficulty demonstrating consistent
compliance with the more restrictive dissolved minerals permit levels. As part of the El Dorado
Facilitys long-term compliance plan, EDC has pursued a rulemaking and permit modification with the
ADEQ. The ADEQ approved a rule change, but on August 31, 2011, the U.S. Environmental Protection
Agency (EPA) formally disapproved the rule change. On October 7, 2011, EDC filed a lawsuit
against the EPA in the U.S. District Court, El Dorado, Arkansas, appealing the EPAs decision
disapproving the rule change. At this time, we do not believe that the occasional noncompliance
will have a material adverse impact on EDC. We do not believe this matter regarding the dissolved
minerals will be an issue once the pipeline discussed below is operational.
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 provided a response which states that the El
Dorado Facility is now in compliance with the permit, except for an occasional difficulty
demonstrating consistent compliance with the more restrictive dissolved minerals permit limits;
that the El Dorado Facility expects to be able to maintain compliance and that a majority of the
alleged violations were resolved through a consent administrative order with the ADEQ. In June
2011, EDC received an Administrative Complaint from the EPA reciting past violations of the 2004
NPDES permit that had not been addressed by previous ADEQ Consent Administrative Orders and seeking
a penalty of $124,000. EDC has met with EPA to discuss the Administrative Complaint and EDCs
plans for addressing the occasional noncompliance with the NPDES Permit, as discussed above. EDC
has met, and continues to meet, with the EPA to explain its objections against the proposed
penalty. In December 2011, EDC was notified by the EPA that the matter has been taken over by the
United States Department of Justice (DOJ), the current Administrative Complaint will be
withdrawn, and the EPA and DOJ will handle this as a joint enforcement matter. On January 11,
2012, EPA filed a motion requesting authorization to withdraw the Administrative Complaint so that
it could proceed with a judicial enforcement proceeding against EDC and certain other companies in
the El Dorado, Arkansas, area that have also agreed to use the pipeline discussed below, all of
whom have alleged outstanding NPDES permit violations. It is anticipated that EPAs motions will
be granted. A liability of $124,000 has been established at December 31, 2011 relating to this
matter.
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. However, in
November 2011, opponents of the pipeline filed a lawsuit against the City and the pipeline
consultants for alleged violations of the Freedom of Information Act. We do not believe that this
lawsuit will affect the Citys approval, or the Citys construction, of the pipeline. 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. During April 2011,
certain companies, including EDC, and the City entered into a funding agreement and operating
agreement, pursuant to which each party to the agreements has agreed to contribute to the cost of
construction and the annual operating costs of the pipeline for the right to use the pipeline to
dispose its wastewater. EDC anticipates its capital cost in connection with the construction of the
pipeline will be approximately $4.0 million, of which $0.5 million has been capitalized as of
December 31, 2011. The City plans to complete the construction of the pipeline by mid-2014. Once
the pipeline is completed, EDCs 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.
12
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
December 31, 2011, in connection with this matter.
2. Air Matters
The EPA has sent information requests to most, if not all, of the operators of nitric acid plants
in the U.S., including our El Dorado and Cherokee Facilities and the Baytown Facility operated by
El Dorado Nitric Company and it subsidiaries (EDN) 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 EPAs 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 required 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 has 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.
Our Chemical Business has provided to the EPA a proposed settlement offer in connection with this
matter. While the total capital cost to achieve the emission rates being proposed by our Chemical
Business in the settlement offer has not been determined, the total capital cost could be
significant and involving up to nine of our affected nitric acid plants. Our Chemical Business
proposed settlement offer did not provide an amount of any proposed civil penalty, if any, but we
anticipate that the EPA will require a civil penalty. Therefore a liability of $100,000 has been
established at December 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.
13
Our subsidiary and Chevron are pursuing with the state of Kansas a course 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 KDHEs 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 would claim, if any. 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 December 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 $105,000.
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.
ITEM 1A. RISK FACTORS
Risks Related to Us and Our Business
Our Climate Control and Chemical Businesses and their customers are sensitive to adverse economic
cycles.
Our Climate Control Business can be affected by cyclical factors, such as interest rates, inflation
and economic downturns. Our Climate Control Business depends on sales to customers in the
construction and renovation industries, which are particularly sensitive to these factors. Due to
the recession, we have experienced and could continue to experience a decline in both
commercial/institutional and residential construction and, therefore, demand for our Climate
Control Business products. A decline in the economic activity in the United States has in the past,
and could in the future, have a material adverse effect on us and our customers in the construction
and renovation industries in which our Climate Control Business sells a substantial amount of its
products. Such a decline could result in a decrease in revenues and profits, and an increase in bad
debts, in our Climate Control Business and could have a material adverse effect on our operating
results, financial condition and liquidity.
Our Chemical Business also can be affected by cyclical factors such as inflation, global energy
policy and costs, global market conditions and economic downturns in specific industries. Certain
sales of our Chemical Business are sensitive to the level of activity in the agricultural, mining,
automotive and housing industries. A substantial decline in the activity of our Chemical Business
has in the past, and could in the future, have a material adverse effect on the results of our
Chemical Business and on our liquidity and capital resources.
Weather conditions adversely affect our Chemical Business.
The agricultural products produced and sold by our Chemical Business have been in the past, and
could be in the future, materially affected by adverse weather conditions (such as excessive rain
or drought) in the primary markets for our fertilizer and related agricultural products. If any of
these unusual weather events occur during the primary seasons for sales of our agricultural
products (March-June and September-November), this could have a material adverse effect on the
agricultural sales of our Chemical Business and our financial condition and results of operations.
14
Terrorist attacks and other acts of violence or war, and natural disasters (such as hurricanes,
pandemic health crisis, etc.), have and could negatively impact U.S. and foreign companies, the
financial markets, the industries where we operate, our operations and profitability.
Terrorist attacks and natural disasters (such as hurricanes) have in the past, and can in the
future, negatively affect our operations. We cannot predict further terrorist attacks and natural
disasters in the U.S. and elsewhere. These attacks or natural disasters have contributed to
economic instability in the U.S. and elsewhere, and further acts of
terrorism, violence, war or natural disasters could further affect the industries where we operate,
our ability to purchase raw materials, our business, results of operations and financial condition.
In addition, terrorist attacks and natural disasters may directly impact our physical facilities,
especially our chemical facilities, or those of our suppliers or customers and could impact our
sales, our production capability and our ability to deliver products to our customers. In the past,
hurricanes affecting the Gulf Coast of the U.S. have negatively impacted our operations and those
of our customers. The consequences of any terrorist attacks or hostilities or natural disasters are
unpredictable, and we may not be able to foresee events that could have an adverse effect on our
operations.
Environmental and regulatory matters entail significant risk for us.
Our businesses are subject to numerous environmental laws and regulations, primarily relating to
our Chemical Business. The manufacture and distribution of chemical products are activities, which
entail environmental risks and impose obligations under environmental laws and regulations, many of
which provide for substantial fines and potential criminal sanctions for violations. Although we
have established processes to monitor, review and manage our businesses to comply with the numerous
environmental laws and regulations, our Chemical Business has in the past, and may in the future,
be subject to fines, penalties and sanctions for violations and substantial expenditures for
cleanup costs and other liabilities relating to the handling, manufacture, use, emission, discharge
or disposal of effluents at or from the Chemical Business facilities. Further, a number of our
Chemical Business facilities are dependent on environmental permits to operate, the loss or
modification of which could have a material adverse effect on their operations and our financial
condition.
If changes to the production equipment at our chemical facilities are required in order to comply
with environmental regulations, the amount of capital expenditures necessary to bring the equipment
into compliance is unknown at this time and could be substantial.
We may be required to expand our security procedures and install additional security equipment for
our Chemical Business in order to comply with current and possible future government regulations,
including the Homeland Security Act of 2002.
The chemical industry in general, and producers and distributors of anhydrous ammonia and AN
specifically, are scrutinized by the government, industry and public on security issues. Under
current and proposed regulations, including the Homeland Security Act of 2002, we may be required
to incur substantial additional costs relating to security at our chemical facilities and
distribution centers, as well as in the transportation of our products. These costs could have a
material impact on our financial condition, results of operations, and liquidity. The cost of such
regulatory changes, if significant enough, could lead some of our customers to choose alternate
products to anhydrous ammonia and AN, which would have a significant impact on our Chemical
Business.
In order to comply with the Secure Handling of Ammonium Nitrate Act of 2007 as enacted by the
United States Congress, the U.S. Department of Homeland Security (DHS) has published in the
August 3, 2011 Federal Register a Notice of Proposed Rulemaking. This regulation proposes to
require sellers, buyers, their agents and transporters of solid AN and certain solid mixtures
containing AN to possess a valid registration issued by DHS, keep certain records, report the theft
or unexplained loss of regulated materials and certain other new requirements. We and other parties
affected by this proposal have submitted appropriate comments to DHS regarding the proposed
regulation. Depending on the provisions of the final regulation to be promulgated by DHS and on our
ability to pass these costs to our customers, these requirements may have a negative effect on the
profitability of our AN business and may result in fewer distributors who are willing to handle the
product.
Proposed governmental laws and regulations relating to greenhouse gas emissions may subject certain
of our Chemical Business facilities to significant new costs and restrictions on their operations.
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. Legislation is being considered that would regulate greenhouse
gas emissions at some point in the future. The EPA has instituted a mandatory greenhouse gas
reporting requirement that began in 2010, which impacts all of our chemical manufacturing sites.
15
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 certain 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.
There is intense competition in the Climate Control and Chemical industries.
Substantially all of the markets in which we participate are highly competitive with respect to
product quality, price, design innovations, distribution, service, warranties, reliability and
efficiency. We compete with a number of companies, domestic and foreign, that have greater
financial, marketing and other resources. Competitive factors could require us to reduce prices or
increase spending on product development, marketing and sales that would have a material adverse
effect on our business, results of operation and financial condition.
A substantial portion of our sales is dependent upon a limited number of customers.
For 2011, six customers of our Chemical Business accounted for approximately 57% of its net sales
and 36% of our consolidated sales, and our Climate Control Business had one customer (including
affiliates and their distributors) that accounted for approximately 18% of its net sales and 6% of
our consolidated sales. The loss of, or a material reduction in purchase levels by, one or more of
these customers could have a material adverse effect on our business and our results of operations,
financial condition and liquidity if we are unable to replace a customer on substantially similar
terms.
Cost and the lack of availability of raw materials could materially affect our profitability and
liquidity.
Our sales and profits are heavily affected by the costs and availability of primary raw materials.
These primary raw materials are subject to considerable price volatility. Historically, when there
have been rapid increases in the cost of these primary raw materials, we have sometimes been unable
to timely increase our sales prices to cover all of the higher costs incurred. While we
periodically enter into futures/forward contracts to economically hedge against price increases in
certain of these raw materials, there can be no assurance that we will effectively manage against
price fluctuations in those raw materials.
Anhydrous ammonia and natural gas represent the primary raw material feedstocks in the production
of most of the products of the Chemical Business. Although our Chemical Business enters into
contracts with certain customers that provide for the pass-through of raw material costs, we have a
substantial amount of sales that do not provide for the pass-through of raw material costs. In
addition, the Climate Control Business depends on raw materials such as copper and steel, which
have shown considerable price volatility. As a result, in the future, we may not be able to pass
along to all of our customers the full amount of any increases in raw material costs. There can be
no assurance that future price fluctuations in our raw materials will not have an adverse effect on
our financial condition, liquidity and results of operations.
Since we source certain of our raw materials and components on a global basis, we may experience
long lead times in procuring those raw materials and components purchased overseas, as well as
being subject to tariff controls and other international trade barriers, which may increase the
uncertainty of raw material and component availability and pricing volatility.
Additionally, we depend on certain vendors to deliver the primary raw materials and other key
components that are required in the production of our products. Any disruption in the supply of the
primary raw materials and other key components could result in lost production or delayed
shipments. We have suspended in the past, and could suspend in the future, production at our
chemical facilities due to, among other things, the high cost or lack of availability of such
primary raw materials, which could adversely impact our competitiveness in the markets we serve.
Accordingly, our financial condition, liquidity and results of operations could be materially
affected in the future by the lack of availability of primary raw materials and other key
components.
16
Potential increase of imported ammonium nitrate from Russia.
Since May 2000, U.S. imports of fertilizer grade AN from Russia have been controlled by the terms
of an antidumping Suspension Agreement under which maximum volumes and minimum prices have been
set for Russian AN imports. In recent years, annual volumes of such imports were limited to 150,000
metric tons and minimum prices were tied to the prevailing U.S. market price.
In March 2011, the Russian Federation notified the U.S. Department of Commerce (Commerce
Department) that it had decided to withdraw from the Suspension Agreement. Accordingly, the
Agreement terminated effective May 2, 2011. As of that date, Russian AN imports have been subject
to an antidumping duty order. The antidumping order, unlike the suspension agreement, does not
place any volume restrictions on Russian AN imports and does not ensure that Russian prices are
tied to the prevailing U.S. market price. Instead, the order requires that Russian AN be priced
fairly, as defined by comparisons with Russian home market or third country AN prices or based on
Russian production costs. Because Russian producers continue to benefit from natural gas supplied
to them at state-set prices that are below market value, and because natural gas is by far the
largest material input into the production of AN, depending upon the analysis and methodologies
used by the Commerce Department, the price of Russian AN exported to the U.S. may be below
prevailing U.S. market prices and below our cost to produce fertilizer grade AN.
With the termination of the Suspension Agreement on May 2, 2011, every shipment of Russian
fertilizer grade AN imported into the U.S. is subject to an antidumping duty cash deposit of
approximately 254% of the value of the imports unless and until a review process is completed at
the Commerce Department through which a Russian producer or exporter may demonstrate that it is not
dumping to that extent and is entitled to a different rate.
In addition, the Commerce Department and the U.S. International Trade Commission have this year
completed a sunset review of the antidumping duty order against AN from Russia to determine
whether the order should remain in effect. These agencies have decided that the antidumping duty
order is still needed to address unfair trade in Russian AN, and, as a result, the order will
remain in place for at least an additional five years, until 2016.
There is also an outstanding antidumping duty order against AN from Ukraine, which is scheduled to
be reviewed by the same two agencies beginning in June of 2012. This review will decide whether the
antidumping measure against Ukrainian AN will remain in place for another five years beyond 2012.
If, as a result of the sunset review, the antidumping order were to be revoked, we would likely
face large volumes of unfairly priced Ukrainian AN in the U.S. market, with loss of revenue and
market share for our AN business.
For 2011, net sales of fertilizer grade AN accounted for 11% and 7% of our Chemical Business net
sales and consolidated net sales, respectively. If the suspension agreement is changed, as
discussed above, this change could result in Russia substantially increasing the amount of AN sold
in the U.S. at prices less than the U.S. producers are required to charge in order to cover their
cost plus a profit, and could have an adverse effect on our revenues and operating results.
Our previously idled Pryor Facility has a limited operating history.
During the fourth quarter of 2010, the Pryor Facility reached sustained production of anhydrous
ammonia. Subsequently, the Pryor Facility reached sustained production of UAN. However, the Pryor
Facility experienced substantial downtime in 2011 due to unplanned maintenance to correct
operational performance issues. Our ability to operate the Pryor Facility at consistent production
levels for extended periods is unknown due to our limited operating history at this facility and
equipment reliability issues from time to time.
17
We may have inadequate insurance.
While we maintain liability insurance, including certain coverage for environmental contamination,
it is subject to coverage limits and policies may exclude coverage for some types of damages (which
may include warranty claims). Although there may currently be sources from which such coverage may
be obtained, it may not continue to be
available to us on commercially reasonable terms or the possible types of liabilities that may be
incurred by us may not be covered by our insurance. In addition, our insurance carriers may not be
able to meet their obligations under the policies or the dollar amount of the liabilities may
exceed our policy limits. Even a partially uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of operations, financial
condition and liquidity.
LSB is a holding company and depends, in large part, on receiving funds from its subsidiaries to
fund our indebtedness.
Because LSB is a holding company and operations are conducted through its subsidiaries, including
Pryor Chemical Company (PCC) and ThermaClime, LLC (ThermaClime) and its subsidiaries, LSBs
ability to meet its obligations depends, in large part, on the operating performance and cash flows
of its subsidiaries and the ability of its subsidiaries to make distributions and pay dividends to
LSB. Under its loan agreements, ThermaClime and its subsidiaries may only make distributions and
pay dividends to LSB under limited circumstances and in limited amounts.
Loss of key personnel could negatively affect our business.
We believe that our performance has been and will continue to be dependent upon the efforts of our
principal executive officers. We cannot promise that our principal executive officers will continue
to be available. Jack E. Golsen has an employment agreement with us. No other principal executive
has an employment agreement with us. The loss of some of our principal executive officers could
have a material adverse effect on us. We believe that our future success will depend in large part
on our continued ability to attract and retain highly skilled and qualified personnel.
We are effectively controlled by the Golsen Group.
Jack E. Golsen, our Chairman of the Board and Chief Executive Officer (CEO), members of his
immediate family (spouse and children), including Barry H. Golsen, our Vice Chairman and President,
entities owned by them and trusts for which they possess voting or dispositive power as trustee
(collectively, the Golsen Group) owned as of February 15, 2012, an aggregate of 3,263,964 shares
of our common stock and 1,020,000 shares of our voting preferred stock (1,000,000 of which shares
have .875 votes per share, or 875,000 votes), which together votes as a class and represents
approximately 18% of the voting power of our issued and outstanding voting securities as of that
date. Thus, the Golsen Group may be considered to effectively control us. As a result, the ability
of other stockholders to influence our management and policies could be limited.
We have not paid dividends on our outstanding common stock in many years.
Although we have paid dividends on our outstanding series of preferred stock (two of the three
outstanding series of preferred stock are owned by the Golsen Group), 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 2012. In
addition, there are certain limitations contained in our loan agreements, which limit our
subsidiaries from up streaming funds to LSB that may limit our ability to pay dividends on our
outstanding common stock.
Future issuance or potential issuance of our common stock could adversely affect the price of our
common stock, our ability to raise funds in new stock offerings and could dilute the percentage
ownership of our common stockholders.
Future sales of substantial amounts of our common stock or equity-related securities in the public
market, or the perception that such sales could occur, could adversely affect prevailing trading
prices of our common stock and could impair our ability to raise capital through future offerings
of equity or equity-related securities. No prediction can be made as to the effect, if any, that
future sales of shares of common stock or the availability of shares of common stock for future
sale will have on the trading price of our common stock. Such future sales could also significantly
reduce the percentage ownership of our common stockholders.
18
We are subject to a variety of factors that could discourage other parties from attempting to
acquire us.
Our certificate of incorporation provides for a staggered board of directors and, except in limited
circumstances, a two-thirds vote of outstanding voting shares to approve a merger, consolidation or
sale of all, or substantially all, of our assets. In addition, we have entered into severance
agreements with our executive officers and some of the executive officers of certain subsidiaries
that provide, among other things, that if, within a specified period of time after the occurrence
of a change in control of LSB, these officers are terminated, other than for cause, or the officer
terminates his employment for good reason, we must pay such officer an amount equal to 2.9 times
the officers average annual gross salary for the last five years preceding the change in control.
We have authorized and unissued (including shares held in treasury) 52,682,177 shares of common
stock and 4,229,539 shares of preferred stock as of December 31, 2011. These unissued shares could
be used by our management to make it more difficult, and thereby discourage an attempt to acquire
control of us.
We have adopted a preferred share purchase plan, which is designed to protect us against certain
creeping acquisitions, open market purchases and certain mergers and other combinations with
acquiring companies.
The foregoing provisions and agreements are designed to discourage a third party tender offer,
proxy contest, or other attempts to acquire control of us and could have the effect of making it
more difficult to remove incumbent management.
Delaware has adopted an anti-takeover law which, among other things, will delay for three years
business combinations with acquirers of 15% or more of the outstanding voting stock of
publicly-held companies (such as us), unless;
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prior to such time the board of directors of the corporation approved the business
combination that results in the stockholder becoming an invested stockholder; |
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the acquirer owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction; |
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two-thirds of the stockholders, other than the acquirer, vote to approve the business
combination after approval thereof by the board of directors; or |
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the stockholders of the corporation amends its articles of incorporation or by-laws
electing not to be governed by this provision. |
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Climate Control Business
Our Climate Control Business conducts its operations in seven facilities, all located in the
greater Oklahoma City, Oklahoma area, totaling approximately 1 million square feet including the
following:
Our Climate Control Business manufactures most of its geothermal and water source heat pump
products in facilities totaling approximately 440,000 square feet. We own these facilities, with a
portion being subject to a mortgage. For 2011, we utilized approximately 64% of the production
capacity of this manufacturing facility, based primarily on two ten-hour shifts per day and a
four-day workweek. We also utilize approximately 126,000 square feet of an existing facility for a
distribution center, which facility we own.
Our Climate Control Business conducts its fan coil manufacturing operation in facilities totaling
approximately 230,000 square feet. We own a majority of these facilities, subject to a mortgage.
For 2011, our fan coil
manufacturing operation utilized approximately 52% of the production capacity, based primarily on
one ten-hour shift per day and a four-day workweek.
19
Our Climate Control Business conducts its large air handler manufacturing operation in a facility
consisting of approximately 120,000 square feet. We own this facility, subject to a mortgage. For
2011, we utilized approximately 71% of the production capacity of this manufacturing facility,
based primarily on one eight-hour shift on a five-day workweek and a partial second shift in
selected areas.
During the fourth quarter of 2011, the modular chiller manufacturing operation of the Climate
Control Business completed the process of establishing separate production facilities in order to
increase production capacity and accommodate anticipated sales volume increases due to an expected
increase in market share and to new products currently under development. This new production
facility consists of approximately 70,000 square feet in an existing facility owned by us.
All of the properties utilized by our Climate Control Business are suitable to meet the current
needs of that business.
Chemical Business
Our Chemical Business primarily conducts manufacturing operations in facilities located:
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on 150 acres of a 1,400 acre tract of land in El Dorado, Arkansas, |
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on 160 acres of a 1,300 acre tract of land in Cherokee, Alabama, |
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on 58 acres in an industrial park in Pryor, Oklahoma and |
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on property within Bayers manufacturing complex in Baytown, Texas. |
We own all of these manufacturing facilities except the Baytown Facility. Except for certain assets
that are owned by EDN for use in the production process within the Baytown Facility, the Baytown
Facility is owned by Bayer. EDN operates and maintains the Baytown Facility pursuant to the Bayer
Agreement. Certain real property and equipment located at the El Dorado and Cherokee Facilities are
being used to secure a $72 million term loan.
EDC also distributes its agricultural products through 16 wholesale and retail distribution
centers, with 14 of the centers located in Texas (11 of which we own and 3 of which we lease); 1
center located in Tennessee (owned); and 1 center located in Missouri (owned).
All of the properties utilized by our Chemical Business are suitable and adequate to meet the
current needs of that business.
For 2011, the following was our percentage of utilization based on continuous operation, which is
adjusted for downtime for planned major maintenance activities (Turnarounds).
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Percentage of |
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Capacity |
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El Dorado Facility (1) |
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77 |
% |
Cherokee Facility (2) |
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100 |
% |
Pryor Facility (3) |
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67 |
% |
Baytown Facility |
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84 |
% |
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(1) |
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The percentage of capacity for the El Dorado Facility relates to its nitric acid capacity. The
El Dorado Facility has capacity to produce other nitrogen products in excess of its nitric acid
capacity. The low percentage of utilization is a direct result of unplanned downtime during the
year. |
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(2) |
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The percentage of capacity for the Cherokee Facility relates to its ammonia production
capacity. The Cherokee Facility is able to purchase anhydrous ammonia by truck, rail or barge to
supplement its ammonia production capacity. |
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(3) |
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The percentage of capacity for the Pryor Facility relates to current operating ammonia
production capacity. The Pryor Facility has additional operational capacity for nitric acid and AN
solution in excess of its current ammonia capacity. The low percentage of utilization as compared
to our other facilities is a result of unplanned downtime
during the year, primarily during the third quarter, as we continued to work out various
operational performance issues. |
20
ITEM 3. LEGAL PROCEEDINGS
1. Environmental See Business-Environmental Matters for a discussion as to:
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certain environmental matters relating to water and air issues in our Chemical Business,
including, without limitation, the following: |
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1. |
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On October 7, 2011, EDC has filed a lawsuit in the U.S. District Court,
Western District of Arkansas, in connection with the EPAs disapproval of a rule
change previously approved by the ADEQ to reduce the more restrictive dissolved
mineral level requirements placed in EDCs NPDES permit. |
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2. |
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The penalty assessed against EDC in the sum of $124,000 for certain
alleged violations of the El Dorado Facilitys NPDES permit has been referred to
the DOJ by the EPA and the EPA has requested that the Administrative Complaint
relating to the alleged violation be withdrawn and be handled by the DOJ and the
EPA as a joint enforcement matter. |
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3. |
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The EPA has sent information requests to most, if not all, of the
operators of nitric acid plants in the United States, including our El Dorado and
Cherokee Facilities and the Baytown Facility to determine compliance with the
construction and maintenance of these plants over the years under the Clean Air
Act. If it is determined that the equipment in any of our nitric acid plants are
not meeting 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 not in
compliance and be required to retrofit each facility with the best available
control technology. Our Chemical Business has provided to the EPA a proposed
settlement offer in connection with this matter. While the total capital cost to
achieve the emission rates being proposed by our Chemical Business in the
settlement offer has not been determined, the total capital could be significant
and involving up to nine of our affected nitric acid plants. Our Chemical Business
proposed settlement offer did not provide an amount of any proposed civil penalty,
if any, but we anticipate that the EPA will require a civil penalty. Therefore a
liability of $100,000 has been established at December 31, 2011, in connection with
this matter. |
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certain environmental remediation matters at our former Hallowell Facility. |
2. Other
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.
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.
21
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:
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fraudulent inducement and fraud, |
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violation of 10(b) of the Exchange Act and Rule 10b-5, |
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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 Groups 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. During September 2011, this case was tried before the
court in the U.S. District Court for the District of Kansas. We are awaiting the courts decision
in this matter. Our insurer, Chartis, a subsidiary of AIG, has agreed to defend this lawsuit on
our behalf 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 costs 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 December 31, 2011 as a result of this matter.
Other Claims and Legal Actions
We are also involved in various other claims and legal actions including claims for damages
resulting from water leaks related to our Climate Control products and other product liability
occurrences. Most of the product liability claims are covered by our general liability insurance,
which generally includes a deductible of $250,000 per claim. For any claims or legal actions that
we have assessed the likelihood of our liability as probable, we have recognized our estimated
liability up to the applicable deductible. At December 31, 2011, our accrued general liability
insurance claims were $739,000 and are included in accrued and other liabilities. It is possible
that the actual development of claims could be different from 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
Our officers serve one-year terms, renewable on an annual basis by the board of directors.
Information regarding LSBs executive officers is as follows:
Jack E. Golsen (1) Chairman of the Board and Chief Executive Officer. Mr. Golsen, age 83, first
became a director in 1969. His term will expire in 2013. Mr. Golsen, founder of LSB, is our
Chairman of the Board of Directors and Chief Executive Officer and has served in those capacities
since our inception in 1969. Mr. Golsen served as our President from 1969 until 2004. During 1996,
he was inducted into the Oklahoma Commerce and Industry Hall of Honor as one of Oklahomas leading
industrialists. Mr. Golsen has a Bachelor of Science degree from the University of New Mexico. Mr.
Golsen is a Trustee of Oklahoma City University and has served on its Finance Committee for many
years. During his career, he acquired or started the companies which formed the Company. He has
served on the boards of insurance companies, several banks and was Board Chairman of Equity Bank
for Savings N.A. which was formerly owned by the Company. In 1972, he was recognized nationally as
the person who prevented a widespread collapse of the Wall Street investment banking industry.
Refer to The Second Crash by Charles Ellis, and six additional books about the Wall Street
crisis.
Barry H. Golsen, J.D. (1) Vice Chairman of the Board, President, and President of the Climate
Control Business. Mr. Golsen, age 61, first became a director in 1981. His term will expire in
2012. Mr. Golsen was elected President of LSB in 2004. Mr. Golsen has served as our Vice Chairman
of the Board of Directors since August 1994. Mr. Golsen has served in several capacities with
various LSB subsidiary companies and has been the President of our Climate Control Business for
more than ten years. Mr. Golsen served as a director of the Oklahoma branch of the Federal Reserve
Bank. Mr. Golsen has both his undergraduate and law degrees from the University of Oklahoma.
22
David R. Goss Executive Vice President of Operations and Director. Mr. Goss, age 71, first became
a director in 1971. His term will expire in 2012. Mr. Goss, a certified public accountant, is our
Executive Vice President of Operations and has served in substantially the same capacity for more
than ten years. He has served as a member of the executive management team since our inception in
1969. Mr. Goss is a graduate of Rutgers University.
Tony M. Shelby Executive Vice President of Finance and Director. Mr. Shelby, age 70, first became
a director in 1971. His term will expire in 2014. Mr. Shelby, a certified public accountant, is our
Executive Vice President of Finance and Chief Financial Officer, a position he has held for more
than ten years. Mr. Shelby has served as a member of the LSB executive management team since our
inception in 1969. Prior to becoming our Executive Vice President of Finance and Chief Financial
Officer, he served as Chief Financial Officer of a subsidiary of LSB and was with the accounting
firm of Arthur Young & Co., a predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of
Oklahoma City University.
Steven J. Golsen (1) Chief Operating Officer of the Climate Control Business and Director. Mr.
Golsen, age 59, first became a director in 2011. His term will expire in 2014. Mr. Golsen is our
Chief Operating Officer of our Climate Control Business. Mr. Golsen has served as the Chief
Operating Officer of our Machine Tool Business and Climate Control Business for more than ten
years. Mr. Golsen has been employed by the Company since 1976. Mr. Golsen attended the University
of New Mexico and University of Oklahoma.
Jim D. Jones (2) Senior Vice President and Treasurer. Mr. Jones, age 69, has been Senior Vice
President and Treasurer since July 2003, and has served as an officer of LSB since April 1977. Mr.
Jones is a certified public accountant and was with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young LLP. Mr. Jones is a graduate of the University of Central Oklahoma.
David M. Shear (1) Senior Vice President and General Counsel. Mr. Shear, age 52, has been Senior
Vice President and General Counsel since July 2004 and General Counsel and Secretary since 1990.
Mr. Shear attended Brandeis University, graduating cum laude in 1981. At Brandeis University, Mr.
Shear was the founding Editor-In-Chief of Chronos, the first journal of undergraduate scholarly
articles. Mr. Shear attended the Boston University School of Law, where he was a contributing
Editor of the Annual Review of Banking Law. Mr. Shear acted as a staff attorney at the Bureau of
Competition with the Federal Trade Commission from 1985 to 1986. From 1986 through 1989, Mr. Shear
was an associate in the Boston law firm of Weiss, Angoff, Coltin, Koski and Wolf.
Michael D. Tepper Senior Vice President of International Operations. Mr. Tepper, age 73, has
served in substantially the same capacity for more than ten years. Mr. Tepper is a graduate of the
Wharton School of the University of Pennsylvania.
Michael G. Adams Vice President and Corporate Controller. Mr. Adams, age 62, has been Vice
President and Corporate Controller since 2008 and has served as an officer of LSB since March 1990.
Mr. Adams is a certified public accountant and was with the accounting firm of Arthur Young & Co.,
a predecessor to Ernst & Young LLP. Mr. Adams is a graduate of the University of Oklahoma.
Harold L. Rieker Jr. Vice President and Principal Accounting Officer. Mr. Rieker, age 51, has
been Vice President and Principal Accounting Officer since 2008 and has served as an officer of LSB
since March 2006. Mr. Rieker is a certified public accountant and was with the accounting firm of
Grant Thornton LLP. Mr. Rieker is a graduate of the University of Central Oklahoma.
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(1) |
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Barry H. Golsen and Steven J. Golsen are the sons of Jack E. Golsen and David M. Shear is
married to the niece of Jack E. Golsen. |
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(2) |
|
The Company and Mr. Jones entered into a settlement order with the SEC, which resulted in Mr.
Jones entering into an agreement with the Oklahoma Accounting Board placing him on probation
through July 2011. Under
the order with the SEC, the Company and Mr. Jones agreed, without admitting or denying any
wrongdoing, not to commit violations of certain provisions of the Securities Exchange Act of
1934, as amended. Mr. Jones also consented not to appear before the SEC as an accountant, but
can apply for reinstatement at any time after July 2011. Mr. Jones has filed a petition with the
SEC for reinstatement and is awaiting the SECs response. |
23
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Information
Our common stock is trading on the New York Stock Exchange under the symbol LXU. The following
table shows, for the periods indicated, the high and low sales prices.
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Year Ended |
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December 31, |
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2011 |
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2010 |
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Quarter |
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High |
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Low |
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High |
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Low |
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First |
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$ |
40.31 |
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$ |
23.65 |
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$ |
15.99 |
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$ |
12.61 |
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Second |
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$ |
49.21 |
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$ |
35.35 |
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$ |
19.96 |
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$ |
13.23 |
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Third |
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$ |
46.88 |
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$ |
28.41 |
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$ |
18.99 |
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$ |
12.71 |
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Fourth |
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$ |
40.61 |
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$ |
24.85 |
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$ |
24.58 |
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$ |
18.60 |
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Stockholders
As of February 15, 2012, we had 540 record holders of our common stock. This number does not
include investors whose ownership is recorded in the name of their brokerage company.
Dividends
We have not paid cash dividends in our outstanding shares of common stock during the two most
recent fiscal years but have paid cash dividends on our outstanding series of convertible preferred
stock during this period. See discussion concerning dividends and restrictions in payment of
dividends below under Liquidity and Capital Resources Dividends of the MD&A contained in this
report.
Equity Compensation Plans
See discussions relating to our equity compensation plans under Item 12 of Part III contained in
this report.
Sale of Unregistered Securities
There were no unregistered sales of equity securities in 2011 that have not been previously
reported in a Quarterly Report on Form
10-Q or Current Report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended December 2011, there were no purchases of equity securities by the
Company and affiliated purchasers.
24
Preferred Share Rights Plan
We have adopted a preferred share rights plan to protect us against certain creeping acquisitions,
open market purchases and certain mergers and other combinations with acquiring companies. The
rights plan will impact a potential acquirer unless the acquirer negotiates with our board of
directors and the board of directors approves the transaction. Pursuant to the rights plan, one
preferred share purchase right (a Right) is attached to each currently outstanding or
subsequently issued share of our common stock. Prior to becoming exercisable, the Rights trade
together with our common stock. In general, if a person or group acquires or announces a tender or
exchange offer for 15% or more of our common stock (except for the Golsen Group and certain other
limited excluded persons), then the Rights become exercisable. Each Right entitles the holder
(other than the person or group that triggers the Rights being exercisable) to purchase from us one
one-hundredth of a share of Series 4 Junior Participating
Preferred Stock, no par value (the Preferred Stock), at an exercise price of $47.75 per one
one-hundredth of a share, subject to adjustment. If a person or group acquires 15% or more of our
common stock, each Right will entitle the holder (other than the person or group that triggered the
Rights being exercisable) to purchase shares of our common stock (or, in certain circumstances,
cash or other securities) having a market value of twice the exercise price of a Right at such
time. Under certain circumstances, each Right will entitle the holder (other than the person or
group that triggered the Rights being exercisable) to purchase the common stock of the acquirer
having a market value of twice the exercise price of a Right at such time. In addition, under
certain circumstances, our board of directors may exchange each Right (other than those held by the
acquirer) for one share of our common stock, subject to adjustment. Our board of directors may
redeem the Rights at a price of $0.01 per Right generally at any time before 10 days after the
Rights become exercisable. Our board of directors may exchange all or part of the Rights (except to
the person or group that triggered the Rights being exercisable) for our common stock at an
exchange ratio of one common share per Right until the person triggering the Right becomes the
beneficial owner of 50% or more of our common stock.
25
ITEM 6. SELECTED FINANCIAL DATA (1)
|
|
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars In Thousands, Except Per Share Data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
805,256 |
|
|
$ |
609,905 |
|
|
$ |
531,838 |
|
|
$ |
748,967 |
|
|
$ |
586,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
6,658 |
|
|
$ |
7,427 |
|
|
$ |
6,746 |
|
|
$ |
11,381 |
|
|
$ |
12,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for income taxes (2) |
|
$ |
46,208 |
|
|
$ |
19,787 |
|
|
$ |
15,024 |
|
|
$ |
18,776 |
|
|
$ |
2,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
83,984 |
|
|
$ |
29,715 |
|
|
$ |
21,849 |
|
|
$ |
36,560 |
|
|
$ |
46,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
83,842 |
|
|
$ |
29,574 |
|
|
$ |
21,584 |
|
|
$ |
36,547 |
|
|
$ |
46,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
83,537 |
|
|
$ |
29,269 |
|
|
$ |
21,278 |
|
|
$ |
36,241 |
|
|
$ |
41,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share applicable to common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.81 |
|
|
$ |
1.39 |
|
|
$ |
1.01 |
|
|
$ |
1.71 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
|
|
|
$ |
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3.80 |
|
|
$ |
1.38 |
|
|
$ |
1.00 |
|
|
$ |
1.71 |
|
|
$ |
2.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.59 |
|
|
$ |
1.33 |
|
|
$ |
.97 |
|
|
$ |
1.58 |
|
|
$ |
1.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
|
|
|
$ |
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3.58 |
|
|
$ |
1.32 |
|
|
$ |
.96 |
|
|
$ |
1.58 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
502,009 |
|
|
$ |
387,981 |
|
|
$ |
338,633 |
|
|
$ |
335,767 |
|
|
$ |
307,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
$ |
44 |
|
|
$ |
45 |
|
|
$ |
48 |
|
|
$ |
52 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion |
|
$ |
79,460 |
|
|
$ |
95,392 |
|
|
$ |
101,801 |
|
|
$ |
105,160 |
|
|
$ |
122,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
$ |
293,270 |
|
|
$ |
179,370 |
|
|
$ |
150,607 |
|
|
$ |
130,044 |
|
|
$ |
94,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
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|
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|
Selected other data: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See discussions included in Item 7 of Part II of this report. |
|
(2) |
|
In the fourth quarter of 2007, we began recognizing a provision for regular federal income
taxes as the result of reversing the valuation allowance on federal NOL carryforwards and
other timing differences and the associated utilization of the federal NOL carryforwards. |
26
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) should be read in conjunction with a review of the other Items included in this Form 10-K
and our December 31, 2011 Consolidated Financial Statements included elsewhere in this report.
Certain statements contained in this MD&A may be deemed to be forward-looking statements. See
Special Note Regarding Forward-Looking Statements.
Overview
General
LSB is a manufacturing and marketing 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 HVAC products in the
niche markets we serve consisting of geothermal and water source heat pumps, hydronic
fan coils, large custom air handlers, modular geothermal and other 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 2011, approximately 35% of our consolidated net sales relates
to the Climate Control Business. |
|
|
|
Chemical Business manufactures and sells nitrogen-based chemical products produced
from four facilities located in El Dorado, Arkansas; Cherokee, Alabama; Pryor, Oklahoma;
and Baytown, Texas for the agricultural, industrial and mining markets. Our products
include high purity and commercial grade anhydrous ammonia for industrial and
agricultural applications, industrial and fertilizer grade AN, UAN, sulfuric acids,
nitric acids in various concentrations, nitrogen solutions, DEF and various other
products. For 2011, approximately 64% of our consolidated net sales relates to the
Chemical Business. |
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. From a macro standpoint, we
believe the U.S. economy is poised for modest growth if the European sovereign debt issues do not
negatively affect the global economy beyond current concerns.
Climate Control Business Sales for 2011 were 12% higher than the same period in 2010, including a
43% increase in hydronic fan coil sales, a 7% increase in geothermal and water source heat pump
sales, and a 6% increase in other HVAC sales. From a market sector perspective, the increase is due
to a 19% improvement in commercial/institutional product sales partially offset by a 7% decrease in
residential product sales. The improvement in commercial/institutional sales was in most major
product lines. For 2011, sales and order levels of our commercial/institutional products increased
in most major markets (education, multi-family, healthcare, office and hospitality) although sales
and order levels of our single-family residential products decreased from 2010 reflecting the
slowdown in new residential construction. The latest information available from CMFS indicates that
in 2012 both the commercial/institutional and residential construction sectors we serve are
expected to increase modestly over 2011 levels.
Chemical Business Our Chemical Business primary markets are agricultural, industrial and mining.
During 2011, approximately 45% of our Chemical Business sales in 2011 were 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 prices 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 2012 outlook according to most market
indicators, including reports in Green Markets, Fertilizer Week and the USDAs 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. Our Cherokee and Pryor Facilities produce anhydrous ammonia from
natural gas and UAN from ammonia. During 2011, agricultural
27
customer demand for and the selling prices of ammonia and UAN continued to increase while natural
gas prices were generally lower compared to 2010. As a result, gross margins increased
significantly for these two products. On the other hand, our El Dorado Facility produces
agricultural grade AN from purchased ammonia and is at a cost disadvantage compared to competitive
product produced from natural gas. During 2011, certain of the mid-south market area for
agricultural grade AN was in a drought condition, which could negatively affect customer demand for
that product if the drought continues into the spring of 2012. As a result, we are shipping
agricultural grade AN to other freight logical markets and are attempting to divert production
capacity to other products to help mitigate the negative effects of the drought.
The remaining 55% of our Chemical Business sales were into industrial and mining markets of which
approximately 57% of these sales are to customers that have contractual obligations to purchase a
minimum quantity and allow us to recover our cost plus a profit, irrespective of the volume of
product sold. During 2011, our sales volumes to industrial and mining customers increased 2% and
11%, respectively, as compared to 2010, while sales dollars increased 28% and 34%, respectively.
For 2012, we expect slight growth in these markets based on projections from the American Chemistry
Council and customer feedback.
2011 Results
Our consolidated net sales for 2011 were $805.3 million compared to $609.9 million for 2010. The
sales increase of approximately $195.4 million included an increase of $160.8 million in our
Chemical Business and an increase of approximately $31.1 million in our Climate Control Business.
Our consolidated operating income was $136.4 million for 2011 compared to $55.9 million for 2010.
The increase in operating income of $80.5 million included an increase of $84.6 million in our
Chemical Business partially offset by a decrease of $2.6 million in our Climate Control Business.
In addition, our general corporate expense and other business operations net expenses increased
$1.5 million.
Our resulting effective income tax rate for 2011 was approximately 36% compared to 40% for 2010.
Climate Control Business
Our Climate Control sales for 2011 were $281.6 million, or approximately $31.1 million above 2010,
and included a $16.5 million increase in hydronic fan coil sales, a $12.2 million increase in
geothermal and water source heat pump sales, and a $2.4 million increase in other HVAC sales. From
a commercial/institutional market sector perspective, the net increase included a $35.4 million
increase in commercial/institutional product sales partially offset by approximately $4.3 million
decrease in residential product sales. The increase in the commercial/institutional sector of our
business was generally attributable to the gain in market share of most Climate Control operations,
whereas the decline in the residential product sales is due to the slowdown in single-family
residential construction during 2011.
We continue to 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:
|
|
|
Single-Family Residential |
|
|
|
Multi-Family Residential |
During 2011, approximately 79% of our Climate Control Business sales were to the
commercial/institutional and multi-family construction markets, and the remaining 21% were sales of
geothermal heat pumps (GHPs) to the single-family residential market.
28
The following table shows information relating to our product order intake level, net sales and
backlog of confirmed customer product orders of our Climate Control Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Orders (1) |
|
|
Net Sales |
|
|
Ending Backlog (1) |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
71.6 |
|
|
$ |
54.2 |
|
|
$ |
63.6 |
|
|
$ |
53.7 |
|
|
$ |
58.3 |
|
|
$ |
36.0 |
|
Second Quarter |
|
|
64.3 |
|
|
|
71.7 |
|
|
|
77.2 |
|
|
|
59.8 |
|
|
$ |
49.9 |
|
|
$ |
48.2 |
|
Third Quarter |
|
|
65.7 |
|
|
|
67.5 |
|
|
|
71.8 |
|
|
|
64.5 |
|
|
$ |
48.4 |
|
|
$ |
54.8 |
|
Fourth Quarter |
|
|
60.8 |
|
|
|
61.3 |
|
|
|
69.0 |
|
|
|
72.5 |
|
|
$ |
44.5 |
|
|
$ |
47.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
$ |
262.4 |
|
|
$ |
254.7 |
|
|
$ |
281.6 |
|
|
$ |
250.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our product order level consists of confirmed purchase orders from customers that have been
accepted and received credit approval. Our 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 construction business due to the relative size of
individual projects and, in some cases, extended timeframe for completion beyond a twelve-month
period. |
For January 2012, our new orders received were approximately $21.7 million and our backlog was
approximately $47.3 million at January 31, 2012.
Our GHPs use a form of renewable energy and, under certain conditions, can reduce energy costs up
to 80% compared to some conventional HVAC systems. Tax legislation continues to provide incentives
for customers purchasing products using forms of renewable energy. Homeowners who install GHPs are
eligible for a 30% tax credit. Businesses that install GHPs are eligible for a 10% tax credit and
five year accelerated depreciation on the balance of the system cost. Under currently enacted
legislation, these tax credits for homeowners and tax credits and accelerated depreciation for
business owners are effective through December 31, 2016. During 2012, businesses also have the
option of electing 50% bonus depreciation on qualifying equipment, such as GHPs, that are placed in
service during the year.
We expect the Climate Control Business to experience low to moderate sales growth in the
short-term. Although a significant part of the Climate Control Business sales are products that
are used for renovation and replacement application, its sales in the medium-term and long-term
will be primarily driven by growth in new construction, as well as the introduction of new
products. We continue to increase our sales and marketing efforts for all of our Climate Control
products in an effort to increase our share of the existing market for our products as well as
expand the market for and application of our products, including GHPs.
Chemical Business
Our Chemical Business operates four chemical facilities. 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 other modes of delivery. The El Dorado and Baytown Facilities
produce nitrogen products from anhydrous ammonia delivered by pipeline.
Our Chemical Business sales for 2011 were $511.9 million, an increase of $160.8 million. Sales
increased across all product lines due to both increased pricing and volume. Agricultural sales for
2011 were $231.6 million compared to $135.6 million for 2010. The increase of $96.0 million or 71%
was primarily due to a substantial increase in sales volume of UAN as a result of additional volume
resulting from the Pryor Facilitys first full year of production supported by strong demand and
higher sales prices.
29
Sales of industrial acids and other products for 2011 were $161.8 million compared to approximately
$126.9 million for 2010. Also sales of mining products for 2011 were $118.5 million compared to
$88.6 million for 2010. The combined increase in sales of $64.8 million or 30% includes the impact
from the increase in ammonia feedstock costs resulting in higher selling prices to certain
industrial and mining customers that have contractual obligations allowing us to recover our costs
plus a profit.
The Chemical Business operating income for 2011 was $116.5 million or $84.6 million higher than
2010 primarily as a result of increased sales volume and higher margins on UAN.
The percentage change in sales (volume and dollars) for 2011 compared to 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage Change of |
|
|
|
Tons |
|
|
Dollars |
|
|
|
Increase |
|
Chemical products: |
|
|
|
|
|
|
|
|
Agricultural |
|
|
37 |
% |
|
|
71 |
% |
Industrial acids and other |
|
|
2 |
% |
|
|
28 |
% |
Mining |
|
|
11 |
% |
|
|
34 |
% |
Total weighted-average change |
|
|
14 |
% |
|
|
46 |
% |
The increase in agricultural tons and dollars is due to increased tons of ammonia and UAN sales
partially offset by lower tons of agricultural grade AN. The lower production of agricultural grade
AN was primarily due to intermittent production issues, drought conditions in our primary Texas
market area, and increased industrial acid and industrial grade AN sales volumes, which reduced the
amount of acid available for conversion into agricultural grade AN. Our Chemical Business
experienced higher selling prices for all of our agricultural nitrogen fertilizers, which resulted
in the higher increases in sales dollars than tons produced.
The increase in industrial acids and mining sales was partially due to improved economic conditions
resulting in increased customer demand, but primarily resulted from higher ammonia prices in 2011
that were passed through in the selling price pursuant to pricing arrangements with certain
customers.
Our primary raw material feedstocks (anhydrous ammonia and natural gas) are commodities subject to
significant price fluctuations, which we generally purchase at prices in effect at the time of
delivery. During 2011, the average prices for those commodities compared to 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Natural gas average price per MMBtu based upon
Henry Hub pipeline pricing point |
|
$ |
3.99 |
|
|
$ |
4.38 |
|
|
|
|
|
|
|
|
Ammonia average price based upon low Tampa
price per metric ton |
|
$ |
574 |
|
|
$ |
405 |
|
|
|
|
|
|
|
|
At December 31, 2011, our Chemical Business had firm purchase commitments to purchase approximately
3.0 million MMBtu of natural gas through August 2012 at a weighted-average cost of $3.62 per MMBtu
and a weighted-average market value of $3.06 per MMBtu (approximately 1.8 million MMBtu relate to
the first quarter of 2012 at a weighted-average cost of $3.75 per MMBtu and a weighted-average
market value of $2.99 per MMBtu).
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.
30
Since the Pryor Facility did not reach sustained production until the fourth quarter of 2010, most
of its operating expenses for 2010 were not attributable to the production of product and were
therefore expensed as incurred rather than charged to inventory. For 2010, approximately $13.3
million of Pryor Facility operating expenses were
classified as selling, general and administrative expense (SG&A). During 2011, most of the Pryor
Facilitys operating expenses were attributable to the production of product were classified as
cost of sales.
Property and Business Interruption Insurance Recoveries
Chemical Business During 2011, we recognized an insurance recovery relating to a business
interruption claim, of which $8.6 million was recorded as a reduction to cost of sales. We used the
proceeds for recovery of working capital expended during the business interruption for which the
claim was filed. In addition, the cash flows relating to this insurance recovery are included in
cash flows from continuing operating activities. During 2010, we recognized insurance recoveries
relating to property insurance claims, of which $7.3 million was recorded as other income.
Completion of Planned Improvement Project at Pryor Facility 2012
The permitted production level of ammonia at the Pryor Facility is 700 tons per day (TPD), but
due to production limitations caused by restrictions in the flow of process gas through heat
exchangers and other mechanical restrictions, the ammonia plant was unable to sustain production
above 500 TPD during 2011. Beginning on January 3, 2012, a planned improvement project was
performed at the Pryor Facility to increase anhydrous ammonia production levels, during which time
the facility was not in production. The plant was gradually brought back into production on
February 3, 2012. The current production rate is approximately 600 TPD. During the period the
plant was down, approximately $1.6 million of maintenance costs for the project and approximately
$2.1 million of operating costs were expensed as incurred.
Liquidity and Capital Resources
The following is our cash and cash equivalents, short-term investments, total interest bearing debt
and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars In Millions) |
|
Cash and cash equivalents |
|
$ |
124.9 |
|
|
$ |
66.9 |
|
Short-term investments (1) |
|
|
10.0 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
$ |
134.9 |
|
|
$ |
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
2007 Debentures |
|
$ |
|
|
|
$ |
26.9 |
|
Secured Term Loan |
|
|
72.2 |
|
|
|
48.8 |
|
Other |
|
|
7.3 |
|
|
|
19.7 |
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
79.5 |
|
|
$ |
95.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
293.3 |
|
|
$ |
179.4 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These investments consisted 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. |
At December 31, 2011, our cash, cash equivalents and short-term investments totaled $134.9 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 2012, 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 and cash on hand. 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.
31
During 2011, the holders of the remaining 5.5% convertible debentures (2007 Debentures) converted
$26.9 million principal amount of the 2007 Debentures into 979,160 shares of LSB common stock in
accordance with the conversion terms of the debentures, including the $2.0 million converted as
discussed below under Related Party Transactions.
As discussed below under Loan Agreements-Terms and Conditions, on March 29, 2011, our subsidiary
ThermaClime, L.L.C. (ThermaClime) and certain of its subsidiaries entered into an amended and
restated term loan agreement (the Amended Agreement), which amended ThermaClimes existing term
loan agreement. Pursuant to the terms of the Amended Agreement, the maximum principal amount of
ThermaClimes term loan facility (the Secured Term Loan) was increased from $50 million to $60
million. The Amended Agreement also extended the maturity of the Secured Term Loan from November 2,
2012, to March 29, 2016.
On May 26, 2011, the principal amount of the Secured Term Loan was increased an additional $15
million to $75 million pursuant to the terms of the Amended Agreement. The use of proceeds from
the Secured Term Loan was for general corporate working capital purposes.
The Secured Term Loan requires quarterly principal payments of approximately $0.9 million, plus
interest and a final balloon payment of $56.3 million due on March 29, 2016. At December 31, 2011,
the weighted-average interest rate was approximately 4.10%. 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.
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
December 31, 2011, we had approximately $48.6 million of borrowing availability under the Working
Capital Revolver Loan based on eligible collateral and outstanding letters of credit. The Borrowers
are negotiating an amendment to extend the maturity of the Working Capital Revolver Loan. We expect
the amendment will provide for certain improvements to the terms and conditions to reflect the
Borrowers current level of business activity and financial condition. The amendment is expected
to be completed before the maturity date.
The financial covenants of the Working Capital Revolver Loan and the Secured Term Loan are
discussed below under 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 our
working capital is adequate to fund operations for the near term.
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. The shelf registration statement expires in November 2012 unless we decide
to file a post effective amendment, which is subject to a review by the SEC. 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.
32
Income Taxes
We recognize and pay federal income taxes at regular corporate tax rates. With few exceptions, the
2008-2010 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 2007-2010.
Subject to examination by taxing authorities, 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 $709,000 accrued for uncertain tax liabilities at December 31, 2011.
Capital Expenditures
Capital Expenditures-2011
Cash used for capital expenditures during 2011 was $44.2 million, including $6.0 million for the
benefit of our Climate Control Business and $35.8 million for the benefit of our Chemical Business.
The Chemical Business capital expenditures also included approximately $0.6 million associated with
maintaining compliance with environmental laws, regulations and guidelines. The capital
expenditures were funded from working capital.
Committed and Planned Capital Expenditures-2012
At December 31, 2011, we had committed capital expenditures of approximately $11.7 million for
2012. The committed expenditures included $10.2 million for the benefit of our Chemical Business,
including approximately $1.8 million relating to the wastewater pipeline discussed below associated
with environmental laws, regulations and guidelines. In addition, our committed expenditures
included $0.3 million for the benefit of our Climate Control Business and approximately $1.2
million for general corporate facility upgrades. We plan to fund these expenditures from working
capital.
In addition to committed capital expenditures at December 31, 2011, we had additional planned
capital expenditures for 2012 of $43.7 million, of which $31.2 is for the benefit of our Chemical
Business and $12.3 million is for the benefit of our Climate Control Business.
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 2012.
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. 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. Each party to the agreements has agreed to contribute to the cost of construction and the
annual operating costs of the pipeline for the right to use the pipeline to dispose of its
wastewater. EDC anticipates its capital cost in connection with the construction of the pipeline
will be approximately $4.0 million, of which $0.5 million has been capitalized as of December 31,
2011. The City plans to complete the construction of the pipeline by mid-2014. Once the pipeline is
completed, EDCs 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.
33
Information Request from EPA
The EPA has sent information requests to most, if not all, of the operators of 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 EPAs 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 has 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.
Our Chemical Business has provided to the EPA a proposed settlement offer in connection with this
matter. While the total capital cost to achieve the emission rates being proposed by our Chemical
Business in the settlement offer has not been determined, the total capital cost could be
significant and involving up to nine of our affected nitric acid plants. Our Chemical Business
proposed settlement offer did not provide an amount of any proposed civil penalty, if any, but we
anticipate that the EPA will require a civil penalty. Therefore a liability of $100,000 has been
established at December 31, 2011, in connection with this matter.
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 was based on anticipated capital expenditures made from
February 2009 through June 2014 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. As of December 31, 2011, we utilized $0.8 million of §48C tax credits and we anticipate
utilizing approximately $0.4 million of these tax credits to partially offset our federal income
tax liability for 2011.
Estimated Plant Turnaround Costs 2012
Our Chemical Business expenses the maintenance, repairs and minor renewal costs relating to
Turnarounds as they are incurred. Based on our current plan for Turnarounds during 2012, we
estimate that we will incur approximately $9.5 million to $10.5 million of these Turnaround costs.
These costs do not include the costs relating to lost absorption or reduced margins due to the
associated plants being shut down. We plan to fund these expenditures from our available working
capital. However, it is possible that the actual costs 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 $4.8 million in
2011 in connection with environmental regulatory issues. For 2012, we expect to incur expenses
ranging from $3.5 million to $4.5 million in connection with environmental regulatory issues.
However, it is possible that the actual costs could be significantly different than our estimates.
34
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. Legislation is being considered that would regulate greenhouse
gas emissions at some point in the future. 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 certain 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.
Authorization to Repurchase Stock
As previously reported, our board of directors enacted a stock repurchase authorization for an
unstipulated number of shares for an indefinite period. The stock repurchase authorization will
remain in effect until such time as our board of directors decides to end it. If we should
repurchase stock, we currently intend to fund any repurchases from our available working capital;
however, our plan could change in the near term.
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:
|
|
|
unrestricted payments up to $15.0 million to LSB, which amount was paid during the
second quarter of 2011; |
|
|
|
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; |
|
|
|
the repayment of costs and expenses incurred by LSB that are directly allocable to
ThermaClime or its subsidiaries for LSBs provision of services under certain services
agreement; |
|
|
|
the amount of income taxes that ThermaClime would be required to pay if they were not
consolidated with LSB; and |
|
|
|
an amount not to exceed fifty percent (50%) of ThermaClimes 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 and preferred stocks 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 2012.
35
During 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 non-redeemable Series D Preferred for an aggregate
dividend of $60,000; |
|
|
|
$12.00 per share on our outstanding non-redeemable 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. |
On January 26, 2012, our board of directors declared the following dividends:
|
|
|
$0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate
dividend of $60,000, payable on March 31, 2012; and |
|
|
|
$12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate
dividend of $240,000, payable on March 31, 2012. |
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 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 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, ThermaClimes forecast is
that ThermaClime will be able to meet all financial covenant requirements for 2012.
Loan Agreements Terms and Conditions
Working Capital Revolver Loan At December 31, 2011, there were no outstanding borrowings
under the Working Capital Revolver Loan. In addition, the net credit available for borrowings under
our Working Capital Revolver Loan was approximately $48.6 million at December 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 December 31, 2011 and as defined in the agreement, ThermaClimes EBITDA was
approximately $95 million; the fixed charge coverage ratio was 6.8 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 ThermaClimes existing term loan agreement, dated
November 2, 2007, as previously amended. Pursuant to the terms of the Amended Agreement, the
maximum principal amount of ThermaClimes Secured Term Loan was increased from $50.0 million to
$60.0 million. On May 26, 2011, the principal amount of the Secured Term Loan was increased an
additional $15.0 million to $75.0 million pursuant to the terms of the Amended Agreement. 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 quarterly principal payments of approximately $0.9 million, plus
interest and a final balloon payment of $56.3 million due on March 29, 2016. At December 31, 2011,
the stated interest rate on the Secured Term Loan includes a variable interest rate of
approximately 3.57% on the principal amount of $48.1 million (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 $24.1 million. At December 31, 2011, the resulting
weighted-average interest rate was approximately 4.10%.
36
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 $72 million at
December 31, 2011.
The Secured Term Loan borrowers are subject to numerous covenants under the Amended 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 December 31,
2011, the carrying value of the restricted net assets (including pledged assets) of ThermaClime and
its subsidiaries was approximately $97 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 December 31, 2011 and as defined in the
agreement, Secured Term Loan borrowers fixed charge coverage ratio was 5.1 to 1 and the leverage
ratio was 0.8 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. In addition, the
amount and timing of sales to the agricultural markets depend 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 the portion 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. In July 2011, the Golsen Group converted $2,000,000
principal amount of the 2007 Debentures into 72,800 shares of LSB common stock in accordance with
the term of the 2007 Debentures. During 2011, we incurred interest expense of $60,500 relating to
the $2,000,000 of the 2007 Debentures that was held by the Golsen Group, of which $55,000 was paid
in June 2011 and the remaining amount was forfeited and credited to capital in excess of par value
as the result of the conversion. In addition in July 2011, the Golsen Group converted an $8,000
convertible promissory note into 4,000 shares of LSB common stock in accordance with the terms of
such note.
Also see discussion under Related Party Transactions Transactions with Landmark of Item 13 of
Part III of this report.
37
Results of Operations
The following Results of Operations should be read in conjunction with our consolidated financial
statements for the years ended December 31, 2011, 2010, and 2009 and accompanying notes and the
discussions above under Overview and Liquidity and Capital Resources.
We present the following information about our results of operations for our two core business
segments, Climate Control Business and Chemical Business. Gross profit by business segment
represents net sales less cost of sales. In addition, our chief operating decision makers use
operating income by business segment for purposes of making decisions that include resource
allocations and performance evaluations. Operating income by business segment represents gross
profit by business segment less selling, 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. The business operation classified as Other primarily sells
industrial machinery and related components to machine tool dealers and end users. General
corporate expenses and other business operations, net consist of unallocated portions of gross
profit, SG&A, other income and other expense.
The following table contains certain information about our continuing operations in different
business segments for each of the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control |
|
$ |
281,565 |
|
|
$ |
250,521 |
|
|
$ |
266,169 |
|
Chemical |
|
|
511,854 |
|
|
|
351,086 |
|
|
|
257,832 |
|
Other |
|
|
11,837 |
|
|
|
8,298 |
|
|
|
7,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
805,256 |
|
|
$ |
609,905 |
|
|
$ |
531,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control |
|
$ |
88,178 |
|
|
$ |
86,364 |
|
|
$ |
92,409 |
|
Chemical |
|
|
130,687 |
|
|
|
49,295 |
|
|
|
42,422 |
|
Other |
|
|
4,153 |
|
|
|
2,966 |
|
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
223,018 |
|
|
$ |
138,625 |
|
|
$ |
137,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control |
|
$ |
32,759 |
|
|
$ |
35,338 |
|
|
$ |
37,706 |
|
Chemical |
|
|
116,503 |
|
|
|
31,948 |
|
|
|
15,122 |
|
General corporate expense and other business
operations, net |
|
|
(12,819 |
) |
|
|
(11,361 |
) |
|
|
(12,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
136,443 |
|
|
|
55,925 |
|
|
|
40,710 |
|
Interest expense |
|
|
(6,658 |
) |
|
|
(7,427 |
) |
|
|
(6,746 |
) |
Gain (losses) on extinguishment of debt |
|
|
(136 |
) |
|
|
(52 |
) |
|
|
1,783 |
|
Non-operating income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Climate Control |
|
|
2 |
|
|
|
3 |
|
|
|
8 |
|
Chemical |
|
|
1 |
|
|
|
7 |
|
|
|
31 |
|
Corporate and other business operations |
|
|
(3 |
) |
|
|
43 |
|
|
|
91 |
|
Provisions for income taxes |
|
|
(46,208 |
) |
|
|
(19,787 |
) |
|
|
(15,024 |
) |
Equity in earnings of affiliate Climate Control |
|
|
543 |
|
|
|
1,003 |
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
83,984 |
|
|
$ |
29,715 |
|
|
$ |
21,849 |
|
|
|
|
|
|
|
|
|
|
|
38
Year Ended December 31, 2011 Compared to Year Ended December 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 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal and water source heat pumps |
|
$ |
183,789 |
|
|
$ |
171,561 |
|
|
$ |
12,228 |
|
|
|
7.1 |
% |
Hydronic fan coils |
|
|
54,379 |
|
|
|
37,923 |
|
|
|
16,456 |
|
|
|
43.4 |
% |
Other HVAC products |
|
|
43,397 |
|
|
|
41,037 |
|
|
|
2,360 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Climate Control |
|
$ |
281,565 |
|
|
$ |
250,521 |
|
|
$ |
31,044 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Climate Control |
|
$ |
88,178 |
|
|
$ |
86,364 |
|
|
$ |
1,814 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Climate Control (1) |
|
|
31.3 |
% |
|
|
34.5 |
% |
|
|
(3.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income Climate Control |
|
$ |
32,759 |
|
|
$ |
35,338 |
|
|
$ |
(2,579 |
) |
|
|
(7.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 a 15% improvement in sales of our commercial products generally related to increases
in the education, hospitality, multi-family, and healthcare market sectors. Offsetting this
increase was a 7% decline in sales of our residential products, primarily due to the softness
in the single-family residential construction market. During 2011, we continued to maintain a
market share leadership position of approximately 41%, 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 an 18% increase in the
number of units sold due to increased construction and renovation activities in the markets we
serve and a 21% increase in the average unit sales price due to change in product mix. During
2011, we continued to have a market share leadership position of approximately 30% 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 modular chillers 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. The gross profit percentage decline of 3.2% was primarily due to
higher raw material and component costs and product mix, including a higher content of commercial
products with lower gross margins than our residential products.
Operating Income Climate Control
Although our gross profit increased, operating income decreased primarily as the result of an
increase in expenses discussed below due, in part, to the increase in sales volume as well as
changes in our customer/product mix. Specifically, warranty expenses increased by $2.1 million
(which were also impacted by extending our warranty coverage period for certain products effective
during 2010), employee health insurance costs increased by $0.9 million primarily due to higher
actual spending and an increase in the number of employees, freight expenses increased by $0.9
million, and commissions of $0.8 million.
39
Chemical Business
The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products |
|
$ |
231,599 |
|
|
$ |
135,598 |
|
|
$ |
96,001 |
|
|
|
70.8 |
% |
Industrial acids and other chemical products |
|
|
161,776 |
|
|
|
126,846 |
|
|
|
34,930 |
|
|
|
27.5 |
% |
Mining products |
|
|
118,479 |
|
|
|
88,642 |
|
|
|
29,837 |
|
|
|
33.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Chemical |
|
$ |
511,854 |
|
|
$ |
351,086 |
|
|
$ |
160,768 |
|
|
|
45.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Chemical |
|
$ |
130,687 |
|
|
$ |
49,295 |
|
|
$ |
81,392 |
|
|
|
165.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Chemical (1) |
|
|
25.5 |
% |
|
|
14.0 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income Chemical |
|
$ |
116,503 |
|
|
$ |
31,948 |
|
|
$ |
84,555 |
|
|
|
264.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of net sales |
Net Sales Chemical
For 2011, overall sales prices for the Chemical Business increased 30% and the volume of tons sold
increased 14%, compared with 2010, generally as a result of the following:
|
|
|
Agricultural products sales Agricultural products sales increased $96.0 million, or
71%, primarily due to increased sales volumes and selling prices for UAN and ammonia,
partially offset by lower sales of agricultural grade AN. As the result of the Pryor
Facility beginning sustained production in the fourth quarter of 2010, tons of agricultural
products sold from this facility increased, including 189,000 tons of UAN. In addition, the
increase in UAN sales was driven by an increase in market demand for crop nutrients and
strong grain commodity prices. |
|
|
|
Industrial acids and other chemical products sales Industrial acids and other products
sales increased $34.9 million, or 28%, primarily due to improved economic conditions, new
customers and increased selling prices resulting from the pass through of higher raw
material costs pursuant to the terms of sales agreements with certain customers. |
|
|
|
Mining products sales Mining products sales increased $29.8 million, or 34% and
volumes increased 11%. Sales prices were driven higher by a general increase in raw
material and other costs, which we are able to pass through to certain customers pursuant
to the terms of supply agreements. Our industrial grade AN is primarily sold to one
customer pursuant to a multi-year supply contract in which the customer agrees to purchase,
and we agree to reserve certain minimum volumes. The customer took less than the minimum
quantity of product as defined in the contract. Pursuant to the terms of the contract, the
customer was invoiced for both product taken and for the reserved plant production capacity
that was not utilized. |
Gross Profit Chemical
The increase in gross profit of $81.4 million is a result of the increased sales volume in all
three product lines, accompanied by higher margins on UAN and ammonia due to higher average selling
prices relative to production costs. In addition, we recognized an $8.6 million business
interruption recovery in 2011, which was recorded as a reduction to cost of sales.
40
Operating Income Chemical
In addition to the increase in gross profit of $81.4 million discussed above, our Chemical
Business operating income includes operating and other expenses associated with the Pryor Facility
of approximately $2.8 million for 2011 compared to $13.6 million for 2010. Due to limited and
intermittent production at the Pryor Facility during 2010, costs identifiable with production were
classified as cost of sales and the remaining operational expenses were primarily classified as
SG&A. This increase in operating income was partially offset by gains totaling $7.3 million from
property insurance recoveries received in 2010.
Other
The business operation classified as Other primarily sells industrial machinery and related
components to machine tool dealers and end users. General corporate expenses and other business
operations, net consist of unallocated portions of gross profit, SG&A, other income and other
expense. The following table contains certain information about our net sales and gross profit
classified as Other and general corporate expenses and other business operations, net, for 2011
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales Other |
|
$ |
11,837 |
|
|
$ |
8,298 |
|
|
$ |
3,539 |
|
|
|
42.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Other |
|
$ |
4,153 |
|
|
$ |
2,966 |
|
|
$ |
1,187 |
|
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Other (1) |
|
|
35.1 |
% |
|
|
35.7 |
% |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expense and other
business operations, net |
|
$ |
(12,819 |
) |
|
$ |
(11,361 |
) |
|
$ |
(1,458 |
) |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of net sales |
Provision For Income Taxes
The provision for income taxes for 2011 was $46.2 million compared to $19.8 million for 2010. The
resulting effective tax rate for 2011 was 36% compared to 40% for 2010. As previously reported,
during 2010, we determined that certain nondeductible expenses had not been properly identified
relating to the 2007-2009 provisions for income taxes. As a result, we recorded an additional
income tax provision of approximately $800,000 for 2010.
41
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating
income in our Climate Control segment for 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal and water source heat pumps |
|
$ |
171,561 |
|
|
$ |
179,865 |
|
|
$ |
(8,304 |
) |
|
|
(4.6 |
)% |
Hydronic fan coils |
|
|
37,923 |
|
|
|
46,381 |
|
|
|
(8,458 |
) |
|
|
(18.2 |
)% |
Other HVAC products |
|
|
41,037 |
|
|
|
39,923 |
|
|
|
1,114 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Climate Control |
|
$ |
250,521 |
|
|
$ |
266,169 |
|
|
$ |
(15,648 |
) |
|
|
(5.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Climate Control |
|
$ |
86,364 |
|
|
$ |
92,409 |
|
|
$ |
(6,045 |
) |
|
|
(6.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Climate Control (1) |
|
|
34.5 |
% |
|
|
34.7 |
% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income Climate Control |
|
$ |
35,338 |
|
|
$ |
37,706 |
|
|
$ |
(2,368 |
) |
|
|
(6.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of net sales |
Net Sales Climate Control
|
|
Net sales of our geothermal and water source heat pump products decreased primarily
as a result of a 9.3% decline in sales of our commercial/institutional products due to the
slowdown in the construction and renovation activities in the markets we serve partially
offset by a 5.9% increase in sales of our residential products, principally during the second
half of 2010. During 2010, we continued to maintain a market share leadership position of
approximately 38%, based on market data supplied by the AHRI; |
|
|
Net sales of our hydronic fan coils decreased primarily due to a 7.4% decline in the number
of units sold due to the slowdown in the construction and renovation activities in the markets
we serve and a 13.3% decrease in the average unit sales price due to a change in product mix.
During 2010, we continue to have a market share leadership position of approximately 29% based
on market data supplied by the AHRI; |
|
|
Net sales of our other HVAC products increased as the result of higher sales of custom air
handlers and modular chillers partially offset by lower sales in our engineering and
construction services. |
Gross Profit Climate Control
The decline in gross profit in our Climate Control Business was the result of lower sales volume as
discussed above and to a lesser extent higher raw material costs offset by an improvement in
product mix, primarily the increase in residential product sales. The gross profit as a percentage
of sales was approximately the same for both periods.
Operating Income Climate Control
Operating income decreased primarily as a result of the decrease in gross profit as discussed above
partially offset by a decrease in operating expenses. Significant changes in operating expenses
include a decrease in commission expenses of $1.0 million due primarily to lower sales volume, a
net decrease in warranty expenses of $0.8 million primarily as a result of lower sales volume
partially offset by the impact of increasing our warranty coverage period for certain products, and
decreases in expenses relating to employee health insurance costs primarily due to a reduction in
actual spending and product liability costs due primarily to a decline in the value of claims ($1.0
million and $0.8 million, respectively).
42
Chemical Business
The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products |
|
$ |
135,598 |
|
|
$ |
104,300 |
|
|
$ |
31,298 |
|
|
|
30.0 |
% |
Industrial acids and other chemical products |
|
|
126,846 |
|
|
|
95,997 |
|
|
|
30,849 |
|
|
|
32.1 |
% |
Mining products |
|
|
88,642 |
|
|
|
57,535 |
|
|
|
31,107 |
|
|
|
54.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Chemical |
|
$ |
351,086 |
|
|
$ |
257,832 |
|
|
$ |
93,254 |
|
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Chemical |
|
$ |
49,295 |
|
|
$ |
42,422 |
|
|
$ |
6,873 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Chemical (1) |
|
|
14.0 |
% |
|
|
16.5 |
% |
|
|
(2.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income Chemical |
|
$ |
31,948 |
|
|
$ |
15,122 |
|
|
$ |
16,826 |
|
|
|
111.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of net sales |
Net Sales Chemical
For 2010, overall sales prices for the Chemical Business increased 13% and the volume of tons sold
increased 24%, compared with 2009, generally as a result of the following:
|
|
|
Agricultural products sales-Agricultural products sales increase of $31.3 million, or
30%, was primarily a result of price increases driven by a general increase in market
demand reflecting an improving economy and the impact of higher raw material costs. In
addition, tons of agricultural products sold increased 10% including an increase of 19,000
tons of UAN and 49,000 tons of ammonia sold into agricultural markets from the Pryor
Facility partially offset by 25,000 fewer tons of fertilizer grade AN due to unfavorable
weather conditions in the first quarter 2010. |
|
|
|
Industrial acids and other chemical products sales-Industrial acids and other products
sales increase of $30.8 million, or 32%, primarily related to a 27% increase in tons sold
including an increase of 134,000 tons, 18,000 tons and 11,000 tons from the Baytown, El
Dorado and Cherokee Facilities, respectively. The increase in volume is primarily due to
improved economic conditions, spot sales opportunities and new customers. |
|
|
|
Mining products sales-Mining products sales increase of $31.1 million, or 54%, includes
an increase of tons sold of 31%, including volume increases of 66,000 tons of industrial
grade AN and 13,000 tons of ammonia nitrate solutions. In addition, sales prices were
higher driven by a general increase in raw material and other costs, which we are able to
pass through to certain customers pursuant to the terms of supply agreements. Our
industrial grade AN is primarily sold to one customer pursuant to a multi-year take or pay
supply contract in which the customer agreed to purchase, and our El Dorado Facility agreed
to reserve certain minimum volumes of industrial grade AN during 2010. The cost-plus supply
contract, effective January 1, 2010, increased the annual minimum volume from 210,000 tons
to 240,000 tons. Pursuant to the terms of the contract, the customer has been invoiced for
the fixed costs and profit associated with the reserved capacity despite not taking the
minimum volume requirement. |
43
Gross Profit Chemical
Gross profit increased $6.9 million on an increase in sales of $93.3 million. The increase was due,
in part, to reduced costs per ton as the result of improved production efficiencies and higher
volumes. Gross profit for agricultural products was $6.4 million higher, which included $7.4
million from agricultural ammonia sales at the recently started Pryor Facility, an increase of $6.9
million from UAN and other agricultural products sales primarily due to rising prices, partially
offset by a decrease of $7.9 million from fertilizer grade AN sales. The average price of one of
our primary raw material feedstocks (anhydrous ammonia) increased in 2010, which contributed to the
lower gross profit on fertilizer grade AN sales. In addition, gross profit on industrial and mining
products was $6.8 million higher. Also impacting gross profit were:
|
|
|
$5.8 million reduction in gross profit from firm sales commitments made in prior
periods, |
|
|
|
$1.2 million reduction in gains from precious metals recoveries, |
|
|
|
$1.3 million reduction in gross profit due to other plant variances, and |
|
|
|
$2.0 million reduction in losses on natural gas and ammonia hedging contracts. |
Primarily as a result of these items and due to increased volumes to customers with contractual
arrangements allowing us to recover our raw material costs, our overall gross profit as a
percentage of sales decreased 2.5%.
Operating Income Chemical
In addition to the increase in gross profit of $6.9 million discussed above, our Chemical Business
operating income includes operating and other expenses associated with the Pryor Facility of
approximately $13.6 million for 2010 compared to $16.0 million for 2009. In 2010, we also recorded
a gain of $5.7 million from insurance recoveries at our Pryor Facility, and other insurance gains
of $1.6 million.
Other
The business operation classified as Other primarily sells industrial machinery and related
components to machine tool dealers and end users. General corporate expenses and other business
operations, net consist of unallocated portions of gross profit, SG&A, other income and other
expense. The following table contains certain information about our net sales and gross profit
classified as Other and general corporate expenses and other business operations, net, for 2010
and 2009:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
(Dollars In Thousands) |
|
Net sales Other |
|
$ |
8,298 |
|
|
$ |
7,837 |
|
|
$ |
461 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit Other |
|
$ |
2,966 |
|
|
$ |
2,583 |
|
|
$ |
383 |
|
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage Other (1) |
|
|
35.7 |
% |
|
|
33.0 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expense and other
business operations, net |
|
$ |
(11,361 |
) |
|
$ |
(12,118 |
) |
|
$ |
757 |
|
|
|
(6.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of net sales |
Net Sales Other
The increase in net sales classified as Other relates primarily to the improvement in demand for
industrial machinery.
44
Gross Profit Other
The increase in gross profit classified as Other is due primarily to the increase in sales as
discussed above.
General Corporate Expense and Other Business Operations, Net
Our general corporate expense and other business operations, net, decreased by $0.8 million
primarily as the result of the increase in gross profit classified as Other as discussed above.
Interest Expense
Interest expense was $7.4 million for 2010 compared to $6.7 million for 2009, an increase of
approximately $0.7 million. This increase primarily relates to losses (realized and unrealized) of
$1.5 million recognized in 2010 associated with our interest rate contracts compared to $0.7
million in 2009.
Loss and Gain on Extinguishment of Debt
During 2010, we acquired $2,500,000 aggregate principal amount of the 2007 Debentures for
$2,494,000 and recognized a loss on extinguishment of debt of $52,000, after writing off the
unamortized debt issuance costs associated with the 2007 Debentures acquired. During 2009, we
acquired $11,100,000 aggregate principal amount of the 2007 Debentures for approximately $8,938,000
and recognized a gain on extinguishment of debt of $1,783,000, after writing off the unamortized
debt issuance costs associated with the 2007 Debentures acquired.
Provision For Income Taxes
The provision for income taxes for 2010 was $19.8 million compared to $15.0 million for 2009. The
resulting effective tax rate for 2010 was 40% compared to 41% for 2009. During 2010, we determined
that certain nondeductible expenses had not been properly identified relating to the 2007-2009
provisions for income taxes. As a result, we recorded an additional income tax provision of
approximately $800,000 for 2010.
Cash Flow From Continuing Operating Activities
Historically, our primary cash needs have been for operating expenses, working capital and capital
expenditures. We have financed our cash requirements primarily through internally generated cash
flow, secured asset financing and the sale of assets. See additional discussions concerning cash
flow relating to our Climate Control and Chemical Businesses under Overview and Liquidity and
Capital Resources of this MD&A.
For 2011, net cash provided by continuing operating activities was $90.0 million primarily as the
result of net income of $83.8 million plus an adjustment of $19.2 for depreciation and amortization
partially offset by net cash used by the increase in accounts receivable of $13.5 million primarily
relating to the Chemical Business as the result of increased sales of our agricultural and mining
products and increased sales from our Pryor Facility and by the net change in prepaid and accrued
income taxes of $12.8 million due, in part, to payments made to taxing authorities partially offset
by the recognition of income taxes for 2011.
Cash Flow from Continuing Investing Activities
Net cash used by continuing investing activities for 2011 was $44.6 million that consisted
primarily of $44.2 million for capital expenditures of which $6.0 million and $35.8 million are for
the benefit of our Climate Control and Chemical Businesses, respectively.
Cash Flow from Continuing Financing Activities
Net cash provided by continuing financing activities was $12.9 million that primarily consisted of
proceeds from the Secured Term Loan and short-term financing totaling $31.8 million (net of debt
issuance costs/fees) partially offset by payments on long-term debt and short-term financing
totaling $20.3 million.
45
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of
contingencies. For each of the last three years ended December 31, 2011, 2010, and 2009, we did not
experience a material change in accounting estimates. However, it is reasonably possible that the
estimates and assumptions utilized as of December 31, 2011 could change in the near term. In
addition, the more critical areas of financial reporting impacted by managements judgment,
estimates and assumptions include the following:
Accounts Receivable and Credit Risk 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 that 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. In addition, our sales to
contractors and independent sales representatives are generally subject to a mechanics lien or
bond protection in the Climate Control Business. Sales to other customers are generally unsecured.
Credit is extended to customers based on an evaluation of the customers financial condition and
other factors. Concentrations of credit risk with respect to trade receivables are monitored and
this risk is reduced due to the large number of customers comprising our customer bases and their
dispersion across many different industries and geographic areas (primarily as it relates to the
Climate Control Business) and payment terms of 15 days or less relating to most of our significant
customers in the Chemical Business, however, thirteen customers (including their affiliates),
primarily relating to the Chemical Business, account for approximately 41% of our total net
receivables at December 31, 2011. We do not believe this concentration in these thirteen customers
represents a significant credit risk due to the financial stability of these customers. At December
31, 2011 and 2010, our allowance for doubtful accounts of $955,000 and $636,000, respectively, were
netted against our accounts receivable. For 2011, 2010, and 2009, our provision for losses on
accounts receivable was $347,000, $145,000, and $90,000, respectively.
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. At December 31, 2011 and
2010, the carrying value of certain nitrogen-based inventories produced by our Chemical Business
was reduced to market because cost exceeded the net realizable value by $16,000 and $177,000,
respectively. In addition, the carrying value of certain slow-moving inventory items (Climate
Control products) was reduced to market because cost exceeded the net realizable value by
$1,767,000 and $1,616,000 at December 31, 2011 and 2010, respectively. For 2011, 2010, and 2009,
our provision for (realization of) losses on inventory was $590,000, $184,000, and $(2,404,000),
respectively.
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. As of December 31, 2011 and 2010, precious metals were $17.8 million and $12.0 million,
respectively, and are included in supplies, prepaid items and other in the consolidated balance
sheets. 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. For 2011, 2010, and 2009, the
amounts expensed for precious metals, net of recoveries and gains, were approximately $1.9 million,
$5.2 million and $3.3 million, respectively. These precious metals expenses, net, are included in
cost of sales.
Accrued Insurance Liabilities We are self-insured up to certain limits for group health,
workers compensation and general liability claims. Above these limits, we have commercial
stop-loss insurance coverage for our contractual exposure on group health claims and statutory
limits under workers compensation obligations. We also carry umbrella insurance of $100 million
for most general liability and auto liability risks. We have a separate $30 million insurance
policy covering pollution liability at our Chemical Business facilities. Additional pollution
liability coverage for our other facilities is provided in our general liability and umbrella
46
policies. Our accrued insurance liabilities are based on estimates of claims, which include the reported incurred
claims amounts plus the reserves established by our insurance adjustors and/or estimates provided
by attorneys handling the claims, if any. In addition, our accrued insurance liabilities include
estimates of incurred, but not reported, claims based on historical claims experience. The
determination of such claims and the appropriateness of the related liability is periodically
reviewed and revised, if needed. Changes in these estimated liabilities are charged to operations.
Potential legal fees and other directly related costs associated with insurance claims are not
accrued but rather are expensed as incurred. At December 31, 2011 and 2010, our accrued group
health and workers compensation insurance claims were $2,535,000 and $2,459,000, respectively, and
our accrued general liability insurance claims were $739,000 and $1,230,000 respectively. These
accrued insurance claims are included in accrued and other liabilities. It is reasonably possible
that the actual development of claims could be different than our estimates.
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.
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.
Generally for commercial/institutional products, the base warranty coverage for most of the
manufactured equipment in the Climate Control Business is limited to eighteen months from the date
of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days
for spare parts. For residential products, the base warranty coverage for manufactured equipment in
the Climate Control Business is limited to ten years from the date of shipment for material and to
five years from the date of shipment for labor associated with the repair. The warranty provides
that most equipment is required to be returned to the factory or an authorized representative and
the warranty is limited to the repair and replacement of the defective product, with a maximum
warranty of the refund of the purchase price. Furthermore, companies within the Climate Control
Business generally disclaim and exclude warranties related to merchantability or fitness for any
particular purpose and disclaim and exclude any liability for consequential or incidental damages.
In some cases, the customer may purchase or a specific product may be sold with an extended
warranty. The above discussion is generally applicable to such extended warranties, but variations
do occur depending upon specific contractual obligations, certain system components, and local
laws.
At December 31, 2011 and 2010, our accrued product warranty obligations were $5.4 million and $4.0
million, respectively and are included in current and noncurrent accrued and other liabilities in
the consolidated balance sheets. For 2011, 2010, and 2009, our warranty expense was $6.5 million,
$4.5 million, and $5.3 million, respectively.
Executive Benefit Agreements We have entered into benefit agreements with certain key
executives. Costs associated with these individual benefit agreements are accrued based on the
estimated remaining service period when such benefits become probable they will be paid. Total
costs accrued equal the present value of specified payments to be made after benefits become
payable. In 1992, we entered into individual benefit agreements with certain key executives (1992
Agreements) that provide for annual benefit payments for life (in addition to salary). The
liability for these benefits under the 1992 Agreements is $1.3 million and $1.2 million as of
December 31, 2011 and 2010, respectively, and is included in current and noncurrent accrued and
other liabilities in the consolidated balance sheets.
In 1981, we entered into individual death benefit agreements with certain key executives. In
addition, as part of the 1992 Agreements, should the executive die prior to attaining the age of
65, we will pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. In 2005, we entered into a death benefit
agreement with our CEO. As of December 31, 2011 and 2010, the liability for death benefits is $4.0
million and $4.1 million, respectively, which is included in current and noncurrent accrued and
noncurrent liabilities in the consolidated balance sheets.
47
Income Taxes We recognize deferred tax assets and liabilities for the expected future tax
consequences attributable to net operating loss carryforwards, tax credit carryforwards, and
differences between the financial statement carrying amounts and the tax basis of our assets and
liabilities. We establish valuation allowances if we believe it is more-likely-than-not that some
or all of deferred tax assets will not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
In addition, 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 record interest related to unrecognized tax positions in interest
expense and penalties in operating other expense.
We reduce income tax expense for investment tax credits in the year the credit arises and is
earned.
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. We
are a party to various litigation and other contingencies, the ultimate outcome of which is not
presently known. Should the ultimate outcome of these contingencies be adverse, such outcome could
create an event of default under ThermaClimes Working Capital Revolver Loan and the Secured Term
Loan and could adversely impact our liquidity, capital resources and results of operations.
Regulatory Compliance - Our Chemical Business is subject to specific federal and state
regulatory compliance laws and guidelines. We have developed policies and procedures related to
regulatory compliance. We must continually monitor whether we have maintained compliance with such
laws and regulations and the operating implications, if any, and amount of penalties, fines and
assessments that may result from noncompliance. At December 31, 2011, liabilities totaling $329,000
have been accrued relating to a penalty assessed for past violations of a discharge water permit at
the El Dorado Facility, estimated civil penalty associated with the Clean Air Act involving certain
nitric acid plants within our chemical facilities, and to remediation and surface and groundwater
monitoring costs associated with our former Kansas facility. This liability is included in current
accrued and other liabilities and is based on current estimates that may be revised in the near
term.
Asset Retirement Obligations - We are obligated to monitor certain discharge water outlets at
our Chemical Business facilities should we discontinue the operations of a facility. We are also
contractually obligated through at least December 2053 to pay a portion of the operating costs of a
municipally owned wastewater pipeline currently being constructed, which will serve the El Dorado
Facility. Additionally, we 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. Currently, there is insufficient information to estimate the fair value for
most of our asset retirement obligations. In addition, we currently have no plans to discontinue
the use of these facilities and the remaining life of the facilities is indeterminable. As a
result, no asset retirement obligations have been recognized except for $75,000 to retire an
injection well at the Pryor Facility. However, we will continue to review these obligations and
record a liability when a reasonable estimate of the fair value can be made.
Stock Options Equity award transactions with employees are measured based on the estimated
fair value of the equity awards issued. For equity awards with only service conditions that have a
graded vesting period, we recognize compensation cost on a straight-line basis over the requisite
service period for the entire award. In
addition, we issue new shares of common stock upon the exercise of stock options.
48
During 2011, the compensation and stock option committee of our board of directors approved the
grants under the 2008 Incentive Stock Plan of 249,000 shares of qualified stock options (the 2011
Qualified Options) to certain employees and our board of directors (with the recipient abstaining)
approved the grant of 5,000 shares of non-qualified stock options (2011 Non-Qualified Options) to
one of our outside directors. The exercise price of the 2011 Qualified and Non-Qualified Options
was equal to the market value of our common stock at the date of grant, which date was also the
service inception date. The weighted-average fair value per 2011 Qualified Option was $16.00 and
$16.25 per 2011 Non-Qualified Option and the total estimated fair value was $4.1 million. The fair
value for the 2011 Qualified and Non-Qualified Options was estimated using a Black-Scholes-Merton
option pricing model with the following assumptions:
|
|
|
a weighted-average risk-free interest rate of 1.21% based on an U.S. Treasury
zero-coupon issue with a term approximating the estimated expected life as of the grant
date; |
|
|
|
no dividend yield based on historical data; |
|
|
|
a weighted-average expected volatility of 48.59% of the expected market price of our
common stock based on historical volatility of our common stock primarily over
approximately six years from the date of grant; and |
|
|
|
a weighted-average expected life of the options of 5.90 years based on the historical
exercise behavior of these employees and outside director, if applicable. |
In addition, we estimated a total weighted-average expected forfeiture rate of 2.97% for these
options.
Revenue Recognition We recognize revenue for substantially all of our operations at the time
title to the goods transfers to the buyer and there remain no significant future performance
obligations by us. Revenue relating to construction contracts is recognized using the
percentage-of-completion method based primarily on contract costs incurred to date compared with
total estimated contract costs. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Sales of warranty contracts are recognized
as revenue ratably over the life of the contract. See discussion above under Accrued Warranty
Costs for our accounting policy for recognizing warranty expense.
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. At December 31, 2011, there were no insurance claim receivable balances relating to
insurance claims.
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.
At December 31, 2011, we had two classes of contracts that were accounted for on a fair value
basis, which were commodities futures/forward contracts (commodities contracts) and interest rate
contracts. All of these contracts were used as economic hedges for risk management purposes but
were not designated as hedging instruments. The valuations of these assets and liabilities were
determined based on quoted market prices or, in instances where market quotes were 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 December 31, 2011, the valuations of contracts classified as Level 2 related to
interest rate swap contracts. For 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 3.27% and the total
estimated market weighted-average receive rate of 0.99%. No valuation input adjustments were
considered necessary relating to nonperformance risk for the contracts.
Our assets and liabilities classified as Level 3 were minimal at December 31, 2011.
49
Managements judgment and estimates in these areas are based on information available from internal
and external resources at that time. Actual results could differ materially from these estimates
and judgments, as additional information becomes known.
Performance and Payment Bonds
We are contingently liable to sureties in respect of insurance bonds issued by the sureties in
connection with certain contracts entered into by subsidiaries in the normal course of business.
These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As
of December 31, 2011, we have agreed to indemnify the sureties for payments, up to $12.2 million,
made by them in respect of such bonds. All of these insurances bonds are expected to expire or be
renewed in 2012.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K under the Securities Exchange Act of 1934.
50
Aggregate Contractual Obligations
Our aggregate contractual obligations as of December 31, 2011 are summarized in the following table
(1) (2).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in the Year Ending December 31, |
|
Contractual Obligations |
|
Total |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
Thereafter |
|
|
|
(In Thousands) |
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Term Loan |
|
$ |
72,188 |
|
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
57,188 |
|
|
$ |
|
|
Capital leases |
|
|
749 |
|
|
|
378 |
|
|
|
336 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
6,523 |
|
|
|
807 |
|
|
|
851 |
|
|
|
900 |
|
|
|
952 |
|
|
|
1,007 |
|
|
|
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
79,460 |
|
|
|
4,935 |
|
|
|
4,937 |
|
|
|
4,685 |
|
|
|
4,702 |
|
|
|
58,195 |
|
|
|
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments on long-term debt (3) |
|
|
13,262 |
|
|
|
3,414 |
|
|
|
3,164 |
|
|
|
2,936 |
|
|
|
2,717 |
|
|
|
769 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (4) |
|
|
2,241 |
|
|
|
839 |
|
|
|
553 |
|
|
|
467 |
|
|
|
322 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (5) |
|
|
9,900 |
|
|
|
9,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastewater pipeline project (6) |
|
|
8,114 |
|
|
|
2,208 |
|
|
|
733 |
|
|
|
298 |
|
|
|
125 |
|
|
|
125 |
|
|
|
4,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
20,267 |
|
|
|
5,635 |
|
|
|
4,585 |
|
|
|
3,453 |
|
|
|
1,554 |
|
|
|
1,127 |
|
|
|
3,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm purchase commitments and
futures/forward contracts |
|
|
12,172 |
|
|
|
12,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations carbon credits |
|
|
223 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued contractual manufacturing and
profit sharing obligations |
|
|
3,091 |
|
|
|
3,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual obligations included
in noncurrent accrued and other
liabilities (7) |
|
|
5,156 |
|
|
|
|
|
|
|
112 |
|
|
|
113 |
|
|
|
70 |
|
|
|
66 |
|
|
|
4,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
153,886 |
|
|
$ |
42,417 |
|
|
$ |
14,084 |
|
|
$ |
11,952 |
|
|
$ |
9,490 |
|
|
$ |
60,342 |
|
|
$ |
15,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The table does not include amounts relating to future purchases of anhydrous ammonia by EDC pursuant to a supply agreement through December 2012. The
terms of this supply agreement does not include minimum volumes or take-or-pay provisions. |
|
(2) |
|
The table does not include our estimated accrued warranty costs of $5.4 million at December 31, 2011 as discussed above under Critical Accounting
Policies and Estimates. |
|
(3) |
|
The estimated interest payments relating to variable interest rate debt are based on interest rates at December 31, 2011. |
|
(4) |
|
The estimated future cash flows are based on the estimated fair value of these contracts at December 31, 2011. |
|
(5) |
|
Capital expenditures include only committed amounts in our 2012 capital expenditure budget but exclude amounts relating to the wastewater pipeline project. |
|
(6) |
|
The future cash flows include capital expenditures and operating costs based on estimates at December 31, 2011 |
|
(7) |
|
The future cash flows relating to executive and death benefits are based on estimates at December 31, 2011. |
51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Our results of operations and operating cash flows are impacted by changes in market prices of
copper, steel, anhydrous ammonia and natural gas, changes in market currency exchange rates, and
changes in market interest rates.
Forward Sales Commitments Risk
Periodically, our Climate Control and Chemical Businesses enter into forward firm sales commitments
for products to be delivered in future periods. As a result, we could be exposed to embedded losses
should our product costs exceed the firm sales prices. At December 31, 2011, we had no embedded
losses associated with sales commitments with firm sales prices.
Commodity Price Risk
Our Climate Control Business buys substantial quantities of copper and steel for use in
manufacturing processes and our Chemical Business buys substantial quantities of anhydrous ammonia
and natural gas as feedstocks generally at market prices. As part of our raw material price risk
management, periodically, our Climate Control Business enters into futures contracts for copper and
our Chemical Business enters into firm purchase commitments and/or futures/forward contracts for
anhydrous ammonia and natural gas.
At December 31, 2011, our futures/forward copper contracts were for 375,000 pounds of copper
through May 2012 at a weighted-average cost of $3.42 per pound ($1.28 million) and a
weighted-average market value of $3.45 per pound ($1.29 million), which contracts are generally
accounted for on a mark-to-market basis.
During 2011, certain subsidiaries within the Chemical Business entered into contracts to purchase
natural gas for anticipated production needs. 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 December 31, 2011, our purchase commitments under these contracts were
for approximately 3.0 million MMBtu of natural gas through August 2012 at the weighted-average cost
of $3.62 per MMBtu ($10.9 million) and a weighted-average market value of $3.06 per MMBtu ($9.2
million).
Interest Rate Risk
Our interest rate risk exposure results from our debt portfolio which is impacted by short-term
rates, primarily variable-rate borrowings from commercial banks, and long-term rates, primarily
fixed-rate notes, some of which prohibit prepayment or require a substantial premium payment with
the prepayment.
As part of our interest rate risk management, we periodically purchase and/or enter into various
interest rate contracts. At December 31, 2011, we have an interest rate swap, which sets a fixed
three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. Also, we have an interest
rate swap, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April
2012. In addition, we have an interest rate swap, which sets a fixed three-month LIBOR of 3.23% on
a declining balance (from $23.8 million to $18.8 million) for the period beginning April 2012
through March 2016. These contracts are free-standing derivatives and are accounted for on a
mark-to-market basis. At December 31, 2011, the fair value of these contracts (unrealized loss) was
$2.2 million.
52
The following table presents principal amounts and related weighted-average interest rates by
maturity date for our interest rate sensitive debt agreements and the estimated future cash flows
and related estimated weighted-average receive rate for our interest rate sensitive interest rate
swaps as of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending December 31, |
|
|
|
(Dollars In Thousands) |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
Thereafter |
|
|
Total |
|
|
Expected maturities of
long-term debt (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate debt (2) |
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
57,188 |
|
|
$ |
|
|
|
$ |
72,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
interest rate |
|
|
4.10 |
% |
|
|
4.10 |
% |
|
|
4.10 |
% |
|
|
4.10 |
% |
|
|
4.10 |
% |
|
|
|
|
|
|
4.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate debt |
|
$ |
1,185 |
|
|
$ |
1,187 |
|
|
$ |
935 |
|
|
$ |
952 |
|
|
$ |
1,007 |
|
|
$ |
2,006 |
|
|
$ |
7,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
interest rate |
|
|
6.71 |
% |
|
|
6.72 |
% |
|
|
6.73 |
% |
|
|
6.71 |
% |
|
|
6.66 |
% |
|
|
6.62 |
% |
|
|
6.68 |
% |
|
Estimated future cash flows of
interest rate swaps (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed |
|
$ |
839 |
|
|
$ |
553 |
|
|
$ |
467 |
|
|
$ |
322 |
|
|
$ |
60 |
|
|
$ |
|
|
|
$ |
2,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
pay rate |
|
|
3.35 |
% |
|
|
3.23 |
% |
|
|
3.23 |
% |
|
|
3.23 |
% |
|
|
3.23 |
% |
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
receive rate |
|
|
0.60 |
% |
|
|
0.76 |
% |
|
|
1.00 |
% |
|
|
1.57 |
% |
|
|
1.92 |
% |
|
|
|
|
|
|
0.99 |
% |
|
|
|
(1) |
|
The variable and fixed interest rate debt balances and weighted-average interest rate are
based on the aggregate amount of debt outstanding as of December 31, 2011. |
|
(2) |
|
Includes the Secured Term Loan that includes a fixed interest rate of 5.15% on the principal
amount of $24.1 million at December 31, 2011. |
|
(3) |
|
The estimated future cash flows and related weighted-average receive rate are based on the
estimated fair value of these contracts as of December 31, 2011. |
53
The following table presents our purchase commitments under firm purchase commitments and
futures/forward contracts and related weighted-average contract costs by contract terms as of
December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending December 31, |
|
|
|
(Dollars In Thousands, Except For Per Pound and MMBtu) |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
Thereafter |
|
|
Total |
|
|
Firm purchase commitments and Futures/Forward
contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of contracts |
|
$ |
1,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average cost per pound
|
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of contracts |
|
$ |
10,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average cost per MMBtu
|
|
$ |
3.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.62 |
|
54
Our long-term debt agreements are the only financial instruments with fair values significantly
different from their carrying amounts. At December 31, 2011 and 2010, the fair value for variable
interest rate debt (excluding the secured term loan at December 31, 2010) approximates 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 interest 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 December 31, 2010, the estimated fair value of the 2007 Debentures is based
on quoted prices obtained from a broker for these debentures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
(In Thousands) |
Variable Interest Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Term Loan |
|
$ |
72,188 |
|
|
$ |
72,188 |
|
|
$ |
26,721 |
|
|
$ |
48,773 |
|
Working Capital Revolver Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt |
|
|
|
|
|
|
|
|
|
|
2,437 |
|
|
|
2,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5% Convertible Senior Subordinated Notes |
|
|
|
|
|
|
|
|
|
|
27,976 |
|
|
|
26,900 |
|
Other bank debt and equipment financing |
|
|
7,211 |
|
|
|
7,272 |
|
|
|
17,251 |
|
|
|
17,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,399 |
|
|
$ |
79,460 |
|
|
$ |
74,385 |
|
|
$ |
95,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have included the financial statements and supplementary financial information required by this
item immediately following Part IV of this report and hereby incorporate by reference the relevant
portions of those statements and information into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, with the
participation of our Principal Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15 under the Securities Exchange Act of 1934). Based upon that evaluation, our Principal
Executive Officer and our Principal Financial Officer have concluded that our disclosure controls
and procedures were effective. There were no changes to our internal control over financial
reporting during the quarter ended December 31, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance to
our management and board of directors regarding the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2011, our internal control over
financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report on our internal
control over financial reporting. This report appears on the following page.
55
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LSB Industries, Inc.
We have audited LSB Industries, Inc.s internal control over financial reporting as of December 31,
2011 based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LSB Industries, Inc.s
management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, LSB Industries, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of LSB Industries, Inc. as of December 31,
2011 and 2010, and the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2011 of LSB Industries, Inc. and
our report dated February 28, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Oklahoma City, Oklahoma
February 28, 2012
56
ITEM 9B. OTHER INFORMATION
None.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed Forward-Looking Statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in this report other than statements of
historical fact are Forward-Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results and performance of the Company to
differ materially from such statements. The words believe, expect, anticipate, intend, and
similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained
herein include, but not limited to, the following:
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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; |
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the outlook for the types of nitrogen fertilizer products we produce and sell; |
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modest increase in the commercial/institutional and residential construction sectors we serve; |
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demand for our geothermal products; |
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investments will continue to increase our capacity to produce and distribute our Climate Control products; |
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shipment of backlog; |
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ability to pass to our customers the majority of any cost increases in the form of higher prices; |
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sufficient sources for materials and components; |
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customer demand for our industrial, mining and agricultural products for 2012 will be sufficiently strong
to allow us to run the four chemical plants at optimal production rates; |
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capital spending for 2012; |
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ability to obtain anhydrous ammonia from other sources; |
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compliance by the El Dorado Facility of the terms of its NPDES permit; |
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dissolved mineral issue should not be an issue once the pipeline is operational; |
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sales growth of the Climate Control Business; |
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sales in the medium-term and long-term will be primarily driven by growth in new construction, as well as
the introduction of new products; |
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geothermal systems are considered to be the most energy efficient systems currently available; |
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our GHPs use a form of renewable energy and, under certain conditions, can reduce energy costs up to 80%
compared to conventional HVAC systems; |
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homeowners who install GHPs are eligible for a 30% tax credit, businesses that install GHPs are eligible
for a 10% tax credit and five year accelerated depreciation on the balance of the system cost, and during
2012, businesses also have the option of electing 50% bonus depreciation on qualifying equipment, such as
GHPs, that are placed in service during the year; |
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cash needs for 2012 will be for working capital and capital expenditures; |
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we plan to rely upon internally generated cash flows and cash on hand to fund operations and pay
obligations; |
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fund committed capital expenditures from working capital; |
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in conjunction with our long-term compliance plan, EDC intends to participate in a wastewater pipeline
project for disposal of wastewater that the city of El Dorado, Arkansas will construct and own; |
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the ability for the El Dorado Facility to use the wastewater pipeline will ensure EDCs ability to comply
with future permit limits; |
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cost relating to settlement with the EPA relating to issues involving the Clean Air Act; |
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EDC anticipates that its share of the cost to construct the pipeline will be approximately $4.0 million
and its share of future operating costs will not be significant and the city plans to complete the
construction by mid-2014; |
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production levels at our Pryor Facility; |
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costs of Turnarounds during 2012 for our chemical facilities; |
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ability to fund our cash needs from internally-generated cash flows and cash on hand; |
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the expenses in connection with environmental regulatory issues for 2012; |
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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; |
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if we should repurchase stock, we currently intend to fund any repurchases from our available working
capital or the proposed financing; |
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meeting all required covenant tests for all quarters and the year ending in 2012; |
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costs relating to environmental and health laws and enforcement policies thereunder; |
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growth of U.S. economy if European sovereign debt issues do not negatively affect the global economy; |
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amending our Working Capital Revolver; and |
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material uncertain tax positions. |
While we believe the expectations reflected in such Forward-Looking Statements are reasonable, we
can give no assurance such expectations will prove to have been correct. There are a variety of
factors which could cause future outcomes to differ materially from those described in this report,
including, but not limited to,
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changes in general economic conditions, both domestic and foreign, |
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material reduction in revenues, |
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material changes in interest rates, |
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ability to collect in a timely manner a material amount of receivables, |
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increased competitive pressures, |
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changes in federal, state and local laws and regulations, especially environmental regulations or the
American Reinvestment and Recovery act, or in interpretation of such, |
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releases of pollutants into the environment exceeding our permitted limits, |
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material increases in equipment, maintenance, operating or labor costs not presently anticipated by us, |
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the requirement to use internally generated funds for purposes not presently anticipated, |
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the inability to secure additional financing for planned capital expenditures or financing obligations
coming due in the near future, |
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material changes in the cost of certain precious metals, anhydrous ammonia, natural gas, copper, steel
and purchased components, |
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changes in competition, |
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the loss of any significant customer, |
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changes in operating strategy or development plans, |
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inability to fund the working capital and expansion of our businesses, |
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problems with product equipment, |
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changes in the production efficiency of our facilities, |
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adverse results in our contingencies including pending litigation, |
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changes in production rates at the Pryor Facility, |
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inability to obtain necessary raw materials and purchased components, |
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material changes in our accounting estimates, |
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significant problems within our production equipment, |
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fire or natural disasters, |
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inability to obtain or retain our insurance coverage, |
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inability to negotiate a satisfactory settlement with the EPA, |
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other factors described in the MD&A contained in this report, and |
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other factors described in Risk Factors. |
Given these uncertainties, all parties are cautioned not to place undue reliance on such
Forward-Looking Statements. We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of the Forward-Looking Statements contained herein to
reflect future events or developments.
58
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
General
Our Certificate of Incorporation and By-laws provide for the division of the Board of Directors
into three classes, each class consisting as nearly as possible of one-third of the whole. The term
of office of one class of directors expires each year; with each class of directors elected for a
term of three years and until the shareholders elect their qualified successors.
Our By-laws provide that the Board of Directors, by resolution from time to time, may fix the
number of directors that shall constitute the whole Board of Directors. The By-laws presently
provide that the number of directors may consist of not less than 3 nor more than 14. The Board of
Directors currently has set the number of directors at 14.
Only persons who are nominated in accordance with the procedures set forth in our Bylaws are
eligible for election as directors. Pursuant to our Bylaws, nominations of persons for election to
the Board of Directors may be made at a meeting of stockholders at which directors are to be
elected only (i) by or at the direction of the Board of Directors; or (ii) by any stockholder of
LSB entitled to vote for the election of directors at the meeting who complies with the notice
procedures set forth in our Bylaws. A director nomination made by a stockholder must be delivered
or mailed to and received at our principal executive offices not less than 120 nor more than 150
days prior to the date of the annual meeting; provided, however, that in the event the date of the
annual meeting is more than 30 days before or more than 60 days after such date, notice by the
stockholder to be timely must be so delivered, or mailed and received not later than the
90th day prior to such annual meeting, or if later, the 10th day following
the date on which the public disclosure of the date of such annual meeting was so made.
Our Nominating and Corporate Governance Committee reviews the composition of the Board to assess
the Board performance, composition, and effectiveness. The Nominating Committee values certain
characteristics in all Board members, including personal and professional integrity, reputation,
outstanding professional achievement, and sound business judgment. The Nominating Committee
evaluates each individual director in the context of the Board as a whole with the goal of
recommending an effective group with a diversity of experience and skills who will exercise sound
business judgment in the interest of our business and our shareholders.
Directors
Robert C. Brown, M.D., age 80. Dr. Brown first became a director in 1969. His term will expire in
2012. Dr. Brown has practiced medicine for many years and was Vice President and Treasurer of Plaza
Medical Group, P.C. until its acquisition by Integris Health on October 31, 2011. Dr. Brown
received both his undergraduate and medical degrees from Tufts University after which he spent two
years as a doctor in the United States Navy and over three years at the Mayo Clinic. Dr. Brown is
also a Clinical Professor at Oklahoma University Health Science Center. Dr. Brown has experience
with and insight into all aspects of developing and growing a company and as President and Chief
Executive Officer oversaw the launch and sale of a medical claims clearinghouse which was sold,
ultimately, to WebMD. Dr. Brown is currently President and Chief Executive Officer of ClaimLogic
L.L.C., a medical claims clearinghouse specializing in the provision of medical clearinghouse
services to university affiliated hospitals and other medical providers throughout the United
States. Dr. Brown served as President of the Medical Staff of Baptist Medical Center of Oklahoma.
He is a Board member of Integris Physicians Services, Inc. Dr. Browns leadership experience,
entrepreneurial business experience and broad range of knowledge of our history and business
through his service as a director, among other factors, led the Board to conclude that he should
serve as a director.
Charles A. Burtch, age 76. Mr. Burtch first became a director in 1999. His term will expire in
2013. Mr. Burtch was formerly Executive Vice-President and West Division Manager of BankAmerica,
where he managed BankAmericas asset-based lending division for the western third of the United
States. He retired in 1998 and has since been engaged as a private investor. Mr. Burtch is a
graduate of Arizona State University. Mr. Burtchs financial experience and his experience as
executive vice president of a large commercial bank, among other factors, led the Board to conclude
that he should serve as a director.
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Robert A. Butkin, age 59. Mr. Butkin first became a director in August 2007. His term will expire
in 2013. Mr. Butkin is currently a Professor of Law at the University of Tulsa College of Law. He
was Dean of the Tulsa College of Law from 2005 to 2007. Mr. Butkin also serves as President and as
a member of the board of BRJN Capital Corporation, a private investment company. Mr. Butkin served
as Assistant Attorney General for the State of Oklahoma from 1987 to 1993, and served from 1995 to
2005 as the State Treasurer of Oklahoma. He has served in various community and professional
organizations, including holding the presidency of the Southern State Treasurers Association. He
chaired the Banking, Collateral and Cash Management Committee for the National Association of State
Treasurers (NAST). In addition, from 1981 to 1995, he served on the Board of Citizens Bank of
Velma, Oklahoma, and he served as Chairman of the Board of that bank from 1991 to 1994. Mr. Butkin
serves on the board of several non-profits, including the Jasmine Moran Childrens Museum
(1995-present); Leadership Oklahoma (Advisory Board, 1998-present); and the Oklahoma Academy
(2003-present). He attended and received a Bachelor of Arts degree from Yale College. He received
his Juris Doctorate from the University of Pennsylvania Law School in 1978. Mr. Butkins
leadership skills and financial experience obtained through serving as State Treasurer of Oklahoma,
chairman of the banking committee of NAST, leading his private investment company, and service as
the dean of a major law school in the State of Oklahoma, among other factors, led the Board to
conclude that he should serve as a director.
Barry H. Golsen, J.D., age 61. Mr. Golsen first became a director in 1981. His term will expire in
2012. Mr. Golsen was elected President of LSB in 2004. Mr. Golsen has served as our Vice Chairman
of the Board of Directors since August 1994 Mr. Golsen has served in several capacities with
various LSB subsidiary companies and has been the President of our Climate Control Business for
more than 10 years. Mr. Golsen served as a director of the Oklahoma branch of the Federal Reserve
Bank. Mr. Golsen has both his undergraduate and law degrees from the University of Oklahoma. Mr.
Golsens extensive experience in the climate control industry, his depth of knowledge and
understanding of the business in which we operate, and his demonstrated leadership skills within
the Company, among other factors, led the Board to conclude that he should serve as a director.
Jack E. Golsen, age 83. Mr. Golsen first became a director in 1969. His term will expire in 2013.
Mr. Golsen, founder of LSB, is our Chairman of the Board of Directors and Chief Executive Officer
and has served in those capacities since our inception in 1969. Mr. Golsen served as our President
from 1969 until 2004. During 1996, he was inducted into the Oklahoma Commerce and Industry Hall of
Honor as one of Oklahomas leading industrialists. Mr. Golsen is a Trustee of Oklahoma City
University and has served on its Finance Committee for many years. During his career, he acquired
or started the companies which formed the Company. He has served on the boards of insurance
companies, several banks and was Board Chairman of Equity Bank for Savings N.A., which was formerly
owned by the Company. In 1972, he was recognized nationally as the person who prevented a
widespread collapse of the Wall Street investment banking industry. Refer to The Second Crash by
Charles Ellis, and six additional books about the Wall Street crisis. Mr. Golsen has a Bachelor of
Science degree from the University of New Mexico. Mr. Golsens demonstrated leadership skills and
extensive experience and understanding in all industries in which we operate, his financial
experience and broad business knowledge, among other factors, led the Board to conclude that he
should serve as a director.
Steven J. Golsen, age 59. Mr. Golsen first became a director in 2011. His term will expire in
2014. Mr. Golsen also serves as the Chief Operating Officer of our Climate Control Business. Mr.
Golsen has been employed by the Company since 1976. Mr. Golsen has served as the Chief Operating
Officer of our Machine Tool Business and our Climate Control Business for more than 10 years. Mr.
Golsen attended the University of New Mexico and University of Oklahoma. Mr. Golsens extensive
experience, his intimate knowledge and understanding of multiple aspects of our business
(particularly our Climate Control Business) and his demonstrated management and leadership skills
within the Company, among other factors, led the Board to conclude that he should serve as a
director.
David R. Goss, age 71. Mr. Goss first became a director in 1971. His term will expire in 2012. Mr.
Goss, a certified public accountant, is our Executive Vice President of Operations and has served
in substantially the same capacity for more than 10 years. He has served as a member of the
executive management team since our inception in 1969. Mr. Goss is a graduate of Rutgers
University. Mr. Gosss accounting and financial experience and extensive knowledge of the
industries in which we operate, among other factors, led the Board to conclude that he should serve
as a director.
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Bernard G. Ille, age 85. Mr. Ille first became a director in 1971. His term will expire in 2014.
Mr. Ille served as President and Chief Executive Officer of United Founders Life from 1966 to 1988.
He served as President and Chief Executive Officer of First Life Assurance Company from 1988, until
it was acquired by another company in 1994. During his tenure as President of these two companies,
he served as Chairman of the Oklahoma Guaranty Association for 10 years and was President of the
Oklahoma Association of Life Insurance Companies for two terms. He was a director of Landmark Land
Company, Inc., which was the parent company of First Life for many years until his retirement in
March 2011. He is also a director for Quail Creek Bank, N.A. Mr. Ille is currently President of BML
Consultants, a consulting firm, and a private investor. He is a graduate of the University of
Oklahoma. Mr. Illes leadership of a major insurance company in Oklahoma, his financial and
insurance background, and his investment experience, among other factors, led the Board to conclude
that he should serve as a director.
Gail P. Lapidus, age 60. Ms. Lapidus first became a director in February 2010. Her term will expire
in 2012. Ms. Lapidus is the Executive Director and Chief Executive Officer of Family & Childrens
Services (FCS), a premiere human services provider in the Tulsa, Oklahoma metro area. Ms. Lapidus
has been with the 85-year-old agency for 35 years and has served as its Executive Director since
1986. During her tenure, FCS has become the largest outpatient community mental health center in
the state of Oklahoma for children, families and individuals without sufficient economic resources
or health insurance. FCS, which has an annual budget of more than $35 million and a staff of over
500, has attracted national recognition and research grants for the services it provides. Ms.
Lapidus received her undergraduate degree and a Masters Degree in Social Work from the University
of Oklahoma where she was later named an inaugural inductee into the Hall of Honor for outstanding
leadership in professional practice. Ms. Lapiduss management and leadership experience as the
executive director of FCS, among other factors, led the Board to conclude that she should serve as
a director.
Donald W. Munson, age 79. Mr. Munson first became a director in 1997. His term will expire in 2014.
From 1988, until his retirement in 1992, Mr. Munson served as President and Chief Operating Officer
of Lennox Industries. Prior to 1998, he served as Executive Vice President of Lennox Industries
Division Operations, President of Lennox Canada and Managing Director of Lennox Industries
European Operations. Prior to joining Lennox Industries, Mr. Munson served in various capacities
with the Howden Group, a company located in Scotland, and The Trane Company, including serving as
the managing director of various companies within the Howden Group and Vice President Europe for
The Trane Company. He is currently a consultant. Mr. Munson is a resident of England. He has
degrees in mechanical engineering and business administration from the University of Minnesota. Mr.
Munsons extensive experience in the climate control industry, and his leadership skills obtained
through his service as senior executive and a managing director of Lennox Industries, among other
factors, led the Board to conclude that he should serve as a director.
Ronald V. Perry, age 62. Mr. Perry first became a director in August 2007. His term will expire in
2014. In 2011, after 32 years, Mr. Perry stepped down as President of Prime Time Travel, which he
founded . He continues with Prime Time Travel as a member of the Executive Committee, Director and
Treasurer. He is an elected member of the Board of Directors of Metro Technology Centers. Mr.
Perry has served in various charitable and civic organizations. He has had leadership positions
with Leadership OKC, Rotary Club of OKC and the American Heart Association. He is also past
President of the Board of Directors for the Regional Food Bank of Oklahoma. In 2007, the mayor of
Oklahoma City appointed Mr. Perry to serve as a commissioner on the Oklahoma City Convention and
Visitors Bureau. Mr. Perry graduated from Oklahoma State University, with a Bachelors degree in
Business Administration and then served as a captain in the United States Army. His leadership
skills, business experience and promotions experience, among other factors, led the Board to
conclude that he should serve as a director.
Horace G. Rhodes, age 84. Mr. Rhodes first became a director in 1996. His term will expire in 2013.
Mr. Rhodes is the Chairman of the law firm of Kerr, Irvine, Rhodes & Ables and has served in such
capacity and has practiced law for many years. From 1972 until 2001, he served as Executive Vice
President and General Counsel for the Association of Oklahoma Life Insurance Companies and since
1982 served as Executive Vice President and General Counsel for the Oklahoma Life and Health
Insurance Guaranty Association (OLHIGA). Mr. Rhodes received his undergraduate and law degrees
from the University of Oklahoma. Mr. Rhodes experience as a leader of an Oklahoma law firm, his
depth of understanding of corporations and business transactions obtained through 40 years of
practice as a corporate lawyer with expertise in mergers and acquisitions, his financial and
investment experience gained through one year as treasurer and seven years as president of a life
insurance company, together with his
unique financial experience as an insurance industry regulator for three years, among other
factors, led the Board to conclude that he should serve as a director.
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Tony M. Shelby, age 70. Mr. Shelby first became a director in 1971. His term will expire in 2014.
Mr. Shelby, a certified public accountant, is our Executive Vice President of Finance and Chief
Financial Officer, a position he has held for more than 10 years. Mr. Shelby has served as a member
of the LSB executive management team since our inception in 1969. Prior to becoming our Executive
Vice President of Finance and Chief Financial Officer, he served as Chief Financial Officer of a
subsidiary of LSB and was with the accounting firm of Arthur Young & Co., a predecessor to Ernst &
Young LLP. Mr. Shelby is a graduate of Oklahoma City University. Mr. Shelbys financial and
accounting experience, his demonstrated leadership skills within the Company, and extensive
understanding of the industries in which we operate, among other factors, led the Board to conclude
that he should serve as a director.
John A. Shelley, age 61. Mr. Shelley first became a director in 2005. His term will expire in 2012.
Mr. Shelley is the President and Chief Executive Officer of The Bank of Union located in Oklahoma.
He has held this position since 1997. Prior to 1997, Mr. Shelley held various senior level
positions in financial institutions in Oklahoma, including the position of President of Equity Bank
for Savings, N.A., a savings and loan that was owned by us prior to 1994, former member of the
Board of Directors of the Oklahoma Bankers Association and former Commissioner of the Oklahoma
Securities Commission. He is a Trustee of the Advantage Health Plans Trust and a Trustee of the
Oklahoma City Retailers Foundation Affiliated fund of the Oklahoma City Community Foundation. Mr.
Shelley is a graduate of the University of Oklahoma. Mr. Shelleys experience in the banking
industry and his financial experience obtained through his service as Chief Executive Officer of
the Bank of Union, among other factors, led the Board to conclude that he should serve as a
director.
Executive Officers
Certain information concerning our executive officers is contained in Part I of this annual report
on Form 10-K under the caption Executive Officers of the Registrant and is incorporated by
reference herein.
Family Relationships
Jack E. Golsen Father of Barry H. Golsen and Steven J. Golsen; Brother-in-law of Robert C. Brown.
Barry H. Golsen Son of Jack E. Golsen; Brother of Steven J. Golsen; Nephew of Robert C. Brown.
Steven J. Golsen Son of Jack E. Golsen; Brother of Barry H. Golsen; Nephew of Robert C. Brown.
Robert C. Brown Father of Heidi Brown Shear; Uncle of Barry H. Golsen and Steven J. Golsen.
David M. Shear Nephew by marriage to Jack E. Golsen; Son-in-law of Robert C. Brown.
Heidi Brown Shear, Vice President and Managing Counsel of the Company Daughter of Robert C. Brown
and spouse of David M. Shear.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934, as amended (the Exchange Act), requires our directors,
officers, and beneficial owners of more than 10% of LSBs common stock to file with the Securities
and Exchange Commission reports of holdings and changes in beneficial ownership of LSBs stock.
Based solely on a review of copies of the Forms 3, 4 and 5 and amendments thereto furnished to us
with respect to 2011, or written representations that no Form 5 was required to be filed, we
believe that during 2011 all our directors and officers and beneficial owners of more than 10% of
LSBs common stock filed timely their required Forms 3, 4, or 5, except for Horace Rhodes, Gail
Lapidus, James Murray, Kristy Carver and Harold Rieker, each of whom filed one inadvertently late
Form 4 to report one transaction each, Bernard G. Ille reported one Form 4 transaction late on a
timely-filed Form 5, Paul Rydlund filed one inadvertently late Form 4 to report three transactions,
and Michael Adams filed one inadvertently late Form 4 to report two transactions,.
Code of Ethics
The Chief Executive Officer, the Chief Financial Officer, the principal accounting officer, and the
controller of LSB and each of its subsidiaries, or persons performing similar functions, are
subject to our Code of Ethics. We have adopted a Statement of Policy Concerning Business Conduct
applicable to our employees.
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Our Code of Ethics and Statement of Policy Concerning Business Conduct are available on our website
at www.lsb-okc.com. We will post any amendments to these documents, as well as any waivers that are
required to be disclosed pursuant to the rules of either the Securities and Exchange Commission or
the NYSE Euronext (NYSE), on our website.
Audit Committee
We have a separately-designated standing audit committee established in accordance with Section
3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Messrs. Bernard Ille
(Chairman through February 24, 2012), Charles Burtch (Chairman
effective February 24, 2012), Horace Rhodes and John Shelley. The Board has determined that each
member of the Audit Committee is independent, as defined in the listing standards of the NYSE as of
our fiscal year end. The Board has adopted an Audit Committee Charter, which governs the
responsibilities of the Audit Committee. During 2011, the Audit Committee held five meetings.
Audit Committee Financial Expert
While the Board of Directors endorses the effectiveness of our Audit Committee, its membership does
not presently include a director that qualifies for designation as an audit committee financial
expert. However, each of the current members of the Audit Committee is financially literate and
able to read and understand fundamental financial statements and at least one of its members has
financial management expertise. The Board of Directors believes that the background and experience
of each member of the Audit Committee is sufficient to fulfill the duties of the Audit Committee.
For these reasons, although members of our Audit Committee are not professionally engaged in the
practice of accounting or auditing, our Board of Directors has concluded that the ability of our
Audit Committee to perform its duties is not impaired by the absence of an audit committee
financial expert.
Nominating and Corporate Governance Committee
We have a separately-designated standing Nominating and Corporate Governance Committee (the
Nominating Committee). The members of the Nominating Committee are Messrs. John Shelley
(Chairman), Bernard Ille, and Horace Rhodes. The Board has determined that each member of the
Nominating Committee is independent, in accordance with Section 10A-3 of the Exchange Act and the
listing standards of the NYSE. The Board has adopted a Nominating and Corporate Governance
Committee Charter which governs the responsibilities of the Nominating Committee. The Board has
also adopted Corporate Governance Guidelines. During 2011, the Nominating Committee held three
meetings.
Compensation and Stock Option Committee
We have a separately-designated Compensation and Stock Option Committee (the Compensation
Committee). The members of the Compensation Committee are Messrs. Horace Rhodes (Chairman),
Charles Burtch and Bernard Ille, each of whom is a non-employee, independent director in accordance
with the rules of the NYSE. The Board has adopted a Compensation and Stock Option Committee
Charter, which governs the responsibilities of the Compensation Committee. During 2011, the
Compensation Committee held five meetings.
The Compensation Committees responsibilities include, among other duties, the responsibility to:
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establish the base salary, incentive compensation and any other compensation for our
executive officers; |
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administer our management incentive and stock-based compensation plans, non-qualified
death benefits, salary continuation and welfare plans, and discharge the duties imposed on
the Compensation Committee by the terms of those plans; and |
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perform other functions or duties deemed appropriate by the Board. |
Decisions regarding non-equity compensation of our non-executive officers and our executive
officers named in the Summary Compensation Table (the named executive officers) other than the
Chief Executive Officer and the President, are made by our Chief Executive Officer and presented
for approval or modification by the Committee. Historically, the Compensation Committee has
generally adopted such recommendations of the Chief Executive Officer.
The agenda for meetings of the Compensation Committee is determined by its Chairman with the
assistance of our Chief Executive Officer. Committee meetings are regularly attended by the Chief
Executive Officer. At each
Compensation Committee meeting, the Compensation Committee also meets in executive session without
the Chief Executive Officer. The Committee may delegate authority to the Chief Executive Officer
in order to fulfill certain administrative duties regarding the compensation programs.
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The Compensation Committee has authority under its charter to retain, approve fees for, and
terminate advisors, consultants and agents as it deems necessary to assist in the fulfillment of
its responsibilities. If an outside consultant is engaged, the Compensation Committee reviews the
total fees paid to such outside consultant by the Company to ensure that the consultant maintains
its objectivity and independence when rendering advice to the Compensation Committee. For 2011, no
outside consultants were engaged by the Compensation Committee or by management of the Company.
Committee Charters
A current copy of the following charters and guidelines are available on our website at
www.lsb-okc.com and are also available from the Company upon request to the Secretary:
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Audit Committee Charter |
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Nominating and Corporate Governance Committee Charter |
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Corporate Governance Guidelines |
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Compensation and Stock Option Committee Charter |
Compensation Committee Interlocks and Insider Participation
The Compensation Committee has the authority to set the compensation of all of our officers. This
Compensation Committee considers the recommendations of the Chief Executive Officer when setting
the compensation of our officers. The Chief Executive Officer does not make a recommendation
regarding his own salary, and does not make any recommendation as to the Presidents salary. The
members of the Compensation Committee are the following non-employee directors: Horace G. Rhodes
(Chairman), Charles A. Burtch, and Bernard G. Ille. Neither Mr. Rhodes, Mr. Burtch nor Mr. Ille is,
or ever has been, an officer or employee of the Company or any of its subsidiaries. None of our
executive officers or members of the Compensation Committee had any relationship requiring
disclosure under Item 404 of Regulation S-K during 2011.
ITEM 11. EXECUTIVE COMPENSATION
Overview of Compensation Program
Our long-term success depends on our ability to efficiently operate our facilities, to continue to
develop our product lines and technologies, and to focus on developing our product markets. To
achieve these goals, it is important that we be able to attract, motivate, and retain highly
talented individuals who are committed to our values and goals.
The Compensation Committee has the responsibility to establish, in consultation with management,
our compensation philosophy for our senior executive officers and to implement and oversee a
compensation program consistent with the philosophy. This group of senior executive officers
includes the named executive officers, as well as our other executives.
A primary objective of the Compensation Committee is to ensure that the compensation paid to the
senior executive officers is fair, reasonable, competitive, and provides incentives for superior
performance. The Compensation Committee is responsible for approval of all decisions for the direct
compensation, including the base salary and bonuses, stock options and other benefit programs for
our senior executive officers, including the named executive officers.
In general, the day-to-day administration of savings, health and welfare plans and policies are
handled by a team of our legal and finance department employees. The Compensation Committee (or
Board) remains responsible for key policy changes outside of the day-to-day requirements necessary
to maintain these plans and policies.
64
Compensation Philosophy and Objectives
The Compensation Committee believes that the most effective executive compensation program rewards
the executives achievements and contribution towards the Company achieving its long-term strategic
goals. However, the Compensation Committee does not believe that executive compensation should be
tied to specific numeric or formulaic financial goals or only to stock price performance. The
Compensation Committee recognizes that, given the volatility of the markets in which we do
business, general economic conditions, and numerous other factors, our financial performance for a
particular period may or may not be an accurate measurement of our senior executive officers
performance.
The Compensation Committee values both personal contribution and teamwork as factors to be
rewarded. The Compensation Committee evaluates both performance and compensation to ensure that we
maintain our ability to attract and retain highly talented employees in key positions, with the
goal of ensuring that compensation to our senior executive officers remains competitive while
considering the internal pay ratios among executives and other key employees. The Compensation
Committee believes that executive compensation packages should include cash and bonus
compensation, as well as other benefit programs to encourage senior executive officers to remain
with the Company and have interests aligned with those of the Company. As a result, the
Compensation Committee reviews the number of stock options exercised by senior executive officers
during recent periods, if any, as well as stock options currently held by the senior executive
officers. This analysis enables the Compensation Committee to determine whether the grant of
additional stock-based compensation may be advisable to ensure that our senior executive officers
long term interests are aligned with those of the Company. Based on the foregoing, the Compensation
Committee focuses on the following criteria when developing our executive compensation program:
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Compensation should be based on the level of job responsibility, executive performance,
and our performance; |
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Compensation should enable us to attract and retain key talent; |
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Compensation should be competitive with compensation offered by other companies that
compete with us for talented individuals in our geographic area; |
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Compensation should reward performance; |
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Compensation should motivate executives to achieve our strategic and operational goals;
and |
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Executive compensation should be reasonable when compared to the average compensation
of our other employees. |
EXECUTIVE SUMMARY
Setting Executive Compensation
The Compensation Committee sets annual cash and non-cash executive compensation to reward the named
executive officers for achievement and to motivate the named executive officers to achieve
long-term business objectives. The Compensation Committee is unable to use direct comparisons to a
peer group in determining the compensation package because of the diverse nature of our lines of
business. The Compensation Committee reviewed some generally available national and regional
compensation information for companies of our size. This information was used to determine whether
our compensation amounts are within the range of similarly sized companies. The Compensation
Committee considered base salary and current bonus awards in determining overall compensation. The
Compensation Committee does not have a policy allocating long term and currently paid compensation,
but does consider stock options to be long-term compensation. The Compensation Committee also
considered the allocation between cash and non-cash compensation amounts, but does not have a
specific formula or required allocation between such compensation amounts. Instead, such amounts
are taken into account as part of the overall compensation determination. The Compensation
Committee compares the Chief Executive Officers total compensation to the total compensation of
our other named executive officers. However, the Compensation Committee has not established a
target ratio between total compensation of the Chief Executive Officer and the median total
compensation level for the next lower tier of management. The Compensation Committee also considers
internal pay equity among the named executive officers and in relation to next lower tier of
management and average compensation of all employees in order to maintain compensation levels that
are consistent with the individual contributions and responsibilities of those executive officers.
The Compensation Committee does not consider amounts payable under severance agreements when
setting the annual compensation of the named executive officers. Although the Compensation
Committee has not engaged outside consultants to assist in
conducting its annual review of the total compensation program, it may do so in the future.
65
Consideration of Stockholder Say-On-Pay Advisory Vote.
At our
annual meeting of stockholders held in June 2011, our stockholders voted, on a non-binding,
advisory basis, on the compensation of our named executive officers for 2010. A substantial
majority (more than 98%) of the total votes cast on our say-on-pay proposal at that meeting
approved the compensation of our named officers for 2010 on a non-binding, advisory basis. The
Compensation Committee and the Board believes that this affirms our stockholders support of our
approach to executive compensation, and, accordingly, the Compensation Committee did not materially
change its approach to executive compensation in 2011 in connection with the say-on-pay proposal.
The Compensation Committee expects to consider the results of future stockholder say-on-pay
advisory votes when making future compensation decisions for our named executive officers. We
will hold an advisory vote on the compensation of named executive officers at our 2012 annual
meeting of stockholders.
Role of Executive Officers in Compensation Decisions
Our Chief Executive Officer annually reviews the performance of each of our named executive
officers (other than the Chief Executive Officer, the President and Steven J. Golsen) and presents
to the Compensation Committee recommendations with respect to salary, bonuses and other benefit
items. The Compensation Committee considers such recommendations in light of the Compensation
Committees philosophy and objectives and exercises its discretion in accepting or modifying the
recommended compensation. Historically, the Compensation Committee has generally adopted the
recommended compensation. In determining compensation for the Chief Executive Officer and the
President, the Compensation Committee reviews the responsibilities and performance of each of them.
Such review includes interviewing both the Chief Executive Officer and the President and
consideration of the Compensation Committees observations of the Chief Executive Officer and the
President during the applicable year.
2011 Executive Compensation Components
For the fiscal year ended December 31, 2011, the principal components of compensation for the named
executive officers were:
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base salary; |
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cash bonus; |
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death benefit and salary continuation plans; and |
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perquisites and other personal benefits. |
The Compensation Committee did not award equity-based compensation, such as stock options, to the
named executive officers in 2011. As discussed below, the Compensation Committee awarded salary
increases and bonuses to the named executive officers for 2011. Those awards were considered
sufficient to provide competitively based incentives to our executives to advance company
performance, without granting equity based compensation as well. The Committees assessment was
that the named executive officers in 2011 continued to maintain a sufficient ownership interest in
the Company to provide alignment with the Companys long-term interests. We do not benchmark the
amount of total compensation or any material element of compensation.
Base Salary
We provide the named executive officers and other senior executive officers with base salary to
compensate them for services rendered during the year. We do not have a defined benefit or
qualified retirement plan for our executives. This factor is considered when setting the base
compensation for senior executive officers since it is expected that senior executive officers will
take responsibility for their individual retirement plan arrangements.
Base salaries are determined for the named executive officers in the discretion of the Compensation
Committee based upon the recommendations of the Chief Executive Officers assessment of the
executives compensation, both
individually and relative to the other senior executive officers, and based upon an assessment of
the individual performance of the executive during the preceding year. In determining the base
salary for the Chief Executive Officer, the President and Steven J. Golsen, the Compensation
Committee exercises its judgment based on its observations of such senior executive officers and
the Compensation Committees assessment of such officers contribution to the Companys performance
and other leadership achievements. Although the Compensation Committee does not use specific
performance targets to set base salaries or bonuses, the Compensation Committee awarded salary
increases in 2011 based on the above criteria and with consideration of the overall improved
financial performance of the Company during challenging economic conditions.
66
Cash Bonuses
The Compensation Committee may award cash bonuses to the named executive officers to reward
outstanding performance. No bonus is guaranteed, and there is no defined range of bonus amounts
that the Compensation Committee may award. Bonus awards are made at the Compensation Committees
discretion based upon an assessment of an individuals overall contribution to the Company. Based
on the assessments and recommendations described below, the Compensation Committee awarded bonuses
to the managers and executive officers in 2011.
Bonus awards are based upon assessment of an individuals overall contribution to the Company.
This assessment includes a subjective analysis of the achievement of an individuals goals for
their areas of responsibility, the individuals contribution to the achievement of our priorities
and strategic plans, and the individuals material accomplishments achieved during the year. In
considering an individuals overall contribution to the Company, the Compensation Committee will
account for the individuals level of experience relevant to the Companys businesses, the
individuals tenure with the Company, and the individuals level of responsibility. The assessment
is a subjective evaluation of accomplishment and contribution to the Company and is not based on
the achievement of specific performance metrics. Our CEO, Jack E. Golsen, provides the Compensation
Committee with his assessment of the contributions to the Company during the applicable year by our
named executive officers other than for himself, Barry H. Golsen, our President, and Steven J.
Golsen for purposes of determining bonus compensation for such year. The Compensation Committee
discusses our CEOs recommendations with the CEO, and in the past has generally accepted the CEOs
recommendations as to bonuses for our named executive officers. With respect to bonus awards for
Jack E. Golsen, Barry H. Golsen and Steven J. Golsen, the Compensation Committee assesses the
overall contribution of each of them based on the interaction with each of them, review of the
matters that are presented to the Board of Directors for consideration or discussion, and
interviews with other senior executive officers.
In assessing the overall contribution of Jack E. Golsen to the Company for purposes of bonus
compensation, the Compensation Committee considered Mr. Golsens management of the Company through
challenging global economic conditions, the profitability of the Company, the retention and
development of our executive team, his development of key business relationships for the Company,
and his efforts in developing strategies for the Companys future revenue and market growth. Mr.
Golsens level of responsibility and the effectiveness of his leadership were also considered in
the assessment of his overall contribution to the Company during 2011. In addition, the
Compensation Committee considered and complied with the terms of Mr. Golsens Employment Agreement
with the Company.
The assessment of Tony M. Shelbys overall contribution to the Company for purposes of bonus
compensation included an evaluation of the complexity of Mr. Shelbys responsibilities as our chief
financial officer, his leadership in the management of the Companys financial resources, his
efforts in developing strategies for the Companys future revenue growth, his accomplishments in
negotiating important commercial contracts, his development of key business relationships for the
Company, and his continued commitment to enhancing our internal audit function and improving its
finance processes.
The assessment of Barry H. Golsens overall contribution to the Company for purposes of determining
his bonus compensation included his leadership of the Company and our climate control and chemical
businesses through challenging global economic conditions, profitability of the Company for 2011,
his retention and development of our management, his accomplishments in developing improved
investor and shareholder communication, and his efforts in developing the Companys future market
growth.
The assessment of Steven J. Golsens overall contribution to the Company for purposes of
determining his bonus compensation included his leadership of our climate control business and
machine tool and specialized engineering business through challenging global economic conditions,
profitability of the Company for 2011, his recruitment, retention and development of our
management, and his involvement in developing plans for the Companys future growth.
67
The assessment of David R. Goss overall contribution to the Company for purposes of bonus
compensation included an evaluation of the complexity of Mr. Goss responsibilities as our
executive vice president of operations, especially during challenging global economic conditions,
his management and development of our chemical facility located in Pryor, Oklahoma, and his
management of our resources with a view to their most productive and efficient uses.
The assessment of David M. Shears overall contribution to the Company for purposes of bonus
compensation included an evaluation of the complexity of Mr. Shears responsibilities as our
general counsel, the effectiveness of his oversight of our legal department, his management of
litigation and corporate matters, his accomplishments in negotiating important commercial
contracts, the utility of his communications with our Board of Directors and executive officers,
his contributions to the oversight of the our corporate governance and compliance functions, and
his leadership in the design and implementation of the Companys recent subsidiary realignment.
Death Benefit and Salary Continuation Plans
We sponsor non-qualified arrangements to provide a death benefit to the designated beneficiary of
certain key employees (including certain of the named executive officers) in the event of such
executives death (the Death Benefit Plans). We also have a non-qualified arrangement with
certain of our key employees (including certain of the named executive officers) to provide
compensation to such individuals in the event that they are employed by the Company at age 65 (the
Salary Continuation Plans).
Attributed costs of the personal benefits described above for the named executive officers for the
fiscal year ended December 31, 2011, are discussed in footnote (1) and included in column (i) of
the Summary Compensation Table.
The Compensation Committee believes that the Death Benefit and Salary Continuation Plans are
significant factors in:
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enabling the Company to retain its named executive officers; |
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encouraging our named executive officers to render outstanding service; and |
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maintaining competitive levels of total compensation. |
Severance Agreements
We have entered into change of control severance agreements with certain key employees, including
the named executive officers. The severance agreements are designed to promote stability and
continuity of senior management. The severance agreements provide generally that if a executive
officer who is a party to a severance agreement is terminated, other than for cause, within 24
months after the occurrence of a change-in-control of the Company or the executive officer
terminates his employment for good reason following a change in control, we must pay the executive
officer an amount equal to 2.9 times the officers average annual gross salary for the last five
years preceding the change in control. The Compensation Committee believes that the severance
agreements are an important element in retaining our senior management. These severance agreements
are described under Severance Agreements below. Information regarding applicable payments under
such agreements for the named executive officers is provided under the heading Potential Payments
Upon Termination or Change-In-Control.
Perquisites and Other Personal Benefits
We and the Compensation Committee believe that perquisites are necessary and appropriate parts of
total compensation that contribute to our ability to attract and retain superior executives.
Accordingly, we and the Compensation Committee provided our named executive officers and certain
other executive officers a limited number of perquisites that are reasonable and consistent with
our overall compensation program.
We currently provide the named executive officers with the use of our automobiles, provide cell
phones that are used primarily for business purposes, and pay the country club dues for certain of
the executive officers. The executive officers are expected to use the country club in large part
for business purposes.
68
The Compensation Committee periodically reviews the levels of perquisites provided to the named
executive officers to determine whether such perquisites are consistent with our compensation
policies.
Employment Agreement
We have no employment agreements with our named executive officers, except with Jack E. Golsen, our
Chief Executive Officer. The terms of Mr. Golsens employment agreement are described below under
Employment Agreement. We believe that Mr. Golsens employment agreement promotes stability in our
senior management and encourages Mr. Golsen to provide superior service to us. The current term of
the Employment Agreement expires March 21, 2014, but will automatically renew for up to two
additional three-year periods, unless earlier terminated by either party with one years notice.
Ownership Guidelines
At this time, we have not established any guidelines which require our executive officers to
acquire and hold our common stock. However, our named executive officers have historically acquired
and maintained a significant ownership position in our common stock.
Tax and Accounting Implications
Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code, provides
that we may not deduct compensation of more than $1,000,000 of employee remuneration for named
executive officers. However, the statute exempts qualifying performance-based compensation from the
deduction limit when specified requirements are met. In the past, we have granted non-qualifying
stock options to the named executive officers that do not meet the performance-based compensation
criteria and are subject to the Section 162(m) limitation. Our compensation deduction was not
limited by Section 162(m) in 2011, 2010 and 2009.
Accounting for Stock-Based Compensation We account for stock-based payments, including our
incentive and nonqualified stock options, in accordance with United States generally accepted
accounting principles.
Compensation and Stock Option Committee Report
Our Compensation and Stock Option Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and, based on such review and discussions, the Compensation and Stock
Option Committee recommended to the Board that the Compensation Discussion and Analysis be included
herein.
Submitted by the Compensation and Stock Option Committee of the Companys Board of Directors.
Horace G. Rhodes, Chairman
Charles A. Burtch
Bernard G. Ille
The following table summarizes the total compensation paid or earned by each of the named executive
officers for each of the three fiscal years in the period ended December 31, 2011.
69
Summary Compensation Table
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(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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(f) |
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(g) |
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(h) |
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(i) |
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(j) |
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Change in |
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|
|
|
|
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|
Pension |
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|
|
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|
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|
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Value and |
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Nonqualified |
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Non-Equity |
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Deferred |
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Stock |
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Option |
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Incentive Plan |
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|
Compensation |
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All Other |
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Salary |
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|
Bonus |
|
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Awards |
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Awards |
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Compensation |
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Earnings |
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Compensation |
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Total |
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Name and Principal Position |
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Year |
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($) |
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($) |
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($) |
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($) |
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($) |
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($) |
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($) (1) |
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($) |
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Jack E. Golsen, |
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Chairman of the Board
of Directors and |
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2011 2010 |
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703,500 659,400 |
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200,000 150,000 |
|
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|
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|
|
|
|
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213,869 746,993 |
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1,117,369 1,556,393 |
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Chief Executive Officer |
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2009 |
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636,323 |
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200,000 |
|
|
|
|
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|
|
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|
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713,556 |
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1,549,879 |
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Tony M. Shelby,
Executive Vice President |
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2011 |
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287,115 |
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100,000 |
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16,932 |
|
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404,047 |
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of Finance and Chief |
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2010 |
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275,000 |
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100,000 |
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|
|
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|
|
|
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15,385 |
|
|
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390,385 |
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Financial Officer |
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2009 |
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275,000 |
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125,000 |
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16,824 |
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416,824 |
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Barry H. Golsen, |
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Vice Chairman of the Board of
Directors, President, and
President of the Climate |
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2011 2010 |
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574,831 550,600 |
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200,000 150,000 |
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|
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|
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34,311 32,803 |
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809,142 733,403 |
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Control Business |
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2009 |
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527,523 |
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200,000 |
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|
|
|
|
|
|
|
|
|
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|
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16,887 |
|
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744,410 |
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Steven J. Golsen, |
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Chief Operating Officer of the Climate |
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2011 2010 |
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369,385 350,000 |
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150,000 150,000 |
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|
|
|
|
|
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|
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30,211 29,028 |
|
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549,596 529,028 |
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Control Business |
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2009 |
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326,923 |
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150,000 |
|
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|
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16,578 |
|
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493,501 |
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David R. Goss, |
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Executive Vice President of |
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2011 2010 |
|
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285,039 270,500 |
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100,000 85,000 |
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|
|
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8,569 9,308 |
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393,608 364,808 |
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Operations |
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2009 |
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270,500 |
|
|
|
100,000 |
|
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|
|
|
|
|
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|
|
|
|
|
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4,195 |
|
|
|
374,695 |
|
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David M. Shear, |
|
|
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Senior Vice President and General |
|
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2011 2010 |
|
|
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287,116 275,000 |
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|
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100,000 85,000 |
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
20,837 20,126 |
|
|
|
407,953 380,126 |
|
Counsel |
|
|
2009 |
|
|
|
275,000 |
|
|
|
100,000 |
|
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|
|
9,068 |
|
|
|
384,068 |
|
|
|
|
(1) |
|
We have a death benefit agreement with each named executive officer, as described below
under 1981 Agreements and 2005 Agreement. Compensation reported for the death benefit under
these agreements is the greater of: |
|
|
|
the expense incurred for our accrued death benefit liability; or |
|
|
|
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit. |
Amounts accrued under these agreements are not paid until the death of the named executive officer.
70
We have separate death benefit and salary continuation agreements with each named executive
officer. As discussed below under 1992 Agreements, these agreements provide a death benefit
until the employee reaches age 65 and benefits for life commencing when the employee reaches age
65. Compensation reported for these benefits is the greater of:
|
|
|
the expense incurred associated with our accrued benefit liability or |
|
|
|
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit. |
The amounts set forth under All Other Compensation are comprised of the compensation expense
relating to the 1981 Agreements, 1992 Agreements, and 2005 Agreement, as described above, and
perquisites for 2011, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1981 |
|
|
1992 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Agreements |
|
|
Agreements |
|
|
Agreement |
|
|
Other (A) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack E. Golsen |
|
$ |
85,656 |
|
|
$ |
|
|
|
$ |
122,365 |
|
|
$ |
5,848 |
|
|
$ |
213,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony M. Shelby |
|
$ |
2,818 |
|
|
$ |
1,763 |
|
|
$ |
|
|
|
$ |
12,351 |
|
|
$ |
16,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry H. Golsen |
|
$ |
1,800 |
|
|
$ |
26,107 |
|
|
$ |
|
|
|
$ |
6,404 |
|
|
$ |
34,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven J. Golsen |
|
$ |
713 |
|
|
$ |
23,298 |
|
|
$ |
|
|
|
$ |
6,200 |
|
|
$ |
30,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. Goss |
|
$ |
3,394 |
|
|
$ |
1,113 |
|
|
$ |
|
|
|
$ |
4,062 |
|
|
$ |
8,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Shear |
|
$ |
|
|
|
$ |
16,614 |
|
|
$ |
|
|
|
$ |
4,223 |
|
|
$ |
20,837 |
|
|
|
|
(A) |
|
Amount relates to the personal use of automobiles, cell phones and country club dues. |
Employment Agreement
We have an employment agreement with Jack E. Golsen, which requires the Company to employ Mr.
Golsen as an executive officer of the Company. The current term of the employment agreement expires
March 21, 2014, but will be automatically renewed for up to two additional three-year periods,
unless terminated by either party by written notice at least one year prior to the expiration of
the then current term. Under the terms of the employment agreement, Mr. Golsen shall:
|
|
|
be paid an annual base salary at his 1995 base rate, as adjusted from time to time by
the Compensation Committee, but such shall never be adjusted to an amount less than Mr.
Golsens 1995 base salary, |
|
|
|
be paid an annual bonus in an amount as determined by the Compensation Committee, and |
|
|
|
receive from the Company certain other fringe benefits (vacation; health and disability
insurance). |
The employment agreement provides that Mr. Golsens employment may not be terminated, except:
|
|
|
upon conviction of a felony involving moral turpitude after all appeals have been
exhausted (Conviction), |
|
|
|
Mr. Golsens serious, willful, gross misconduct or willful, gross negligence of duties
resulting in material damage to the Company, taken as a whole, unless Mr. Golsen believed,
in good faith, that such action or failure to act was in our best interest (Misconduct),
and |
However, no termination for a Conviction or Misconduct may occur unless and until the Company has
delivered to Mr. Golsen a resolution duly adopted by an affirmative vote of three-fourths of the
entire membership of the Board of Directors at a meeting called for such purpose after reasonable
notice given to Mr. Golsen finding, in good faith, that Mr. Golsen violated such item.
71
The employment agreement provides that, if Mr. Golsens employment is terminated for reasons other
than due to a Conviction or Misconduct, then we shall pay to Mr. Golsen:
|
|
|
a cash payment on the date of termination, equal to the amount of Mr. Golsens annual
base salary at the time of such termination and the amount of the last bonus paid to Mr.
Golsen prior to such termination times the number of years remaining under the then current
term of the employment agreement, and |
|
|
|
provide to Mr. Golsen all of the fringe benefits that the Company was obligated to
provide during his employment under the employment agreement for the remainder of the term
of the employment agreement. |
If there is a change in control (as defined in the severance agreement between Mr. Golsen and the
Company as discussed below under Severance Agreements) and within 24 months after such change in
control Mr. Golsen is terminated, other than for Cause (as defined in the severance agreement),
then in such event, the severance agreement between Mr. Golsen and the Company shall be
controlling.
In the event Mr. Golsen becomes disabled and is not able to perform his duties under the employment
agreement as a result if the disability for a period of 12 consecutive months within any two-year
period, we will pay Mr. Golsen his full salary for the remainder of the term of the employment
agreement and thereafter 60% of such salary until Mr. Golsens death.
1981 Agreements
During 1981, we entered into individual death benefit agreements (the 1981 Agreements) with
certain key employees (including certain of the named executive officers). The designated
beneficiary of each named executive officer will receive a monthly benefit for a period of 10 years
if the officer dies while in the employment of the Company. The 1981 Agreements, as amended,
provide that we may terminate the agreement as to any officer at anytime prior to the officers
death. We have purchased life insurance on the life of each officer covered under the 1981
Agreements to provide a source of funds for our obligations under the 1981 Agreements. We are the
owner and sole beneficiary of each of the insurance policies and the proceeds are payable to the
Company upon the death of the officer. The following table sets forth the amounts of annual
benefits payable to the designated beneficiary or beneficiaries of the named executive officers
under the 1981 Agreements.
|
|
|
|
|
|
|
Amount of Annual |
|
Name of Individual |
|
Payment |
|
|
|
|
|
|
Jack E. Golsen |
|
$ |
175,000 |
|
Tony M. Shelby |
|
$ |
35,000 |
|
Barry H. Golsen |
|
$ |
30,000 |
|
Steven J. Golsen |
|
$ |
19,000 |
|
David R. Goss |
|
$ |
35,000 |
|
David M. Shear |
|
|
N/A |
|
1992 Agreements
During 1992, we entered into individual benefit agreements with certain of our key employees
(including certain of the named executive officers) to provide compensation to such individuals in
the event that they are employed by the Company at age 65 (the 1992 Agreements). Each officer
that has entered into a 1992 Agreement is eligible to receive a designated benefit (Benefit) as
set forth in the 1992 Agreements, as amended. The officer will receive the Benefit beginning at the
age 65 for the remainder of the officers life. If prior to attaining the age 65, the officer dies
while in the employment of the Company, the designated beneficiary of the officer will receive a
monthly benefit (Death Benefit) for a period of 10 years. The 1992 Agreements provide that we may
terminate the agreement as to any officer at any time and for any reason prior to the death of the
officer. We have purchased insurance on the life of each officer covered under the 1992 Agreements.
We are the owner and sole beneficiary of each insurance policy, and the proceeds are payable to the
Company to provide a source of funds for our obligations under the 1992 Agreements. Under the terms
of the 1992 Agreements, if the officer becomes incapacitated prior to retirement or prior to
reaching age 65, the officer may request us to cash-in any life insurance on the life of such
officer purchased to fund our obligations under the 1992 Agreements. Jack E. Golsen does not
participate in the 1992 Agreements.
72
The following table sets forth the amounts of annual benefits payable to the named executive
officers under the 1992 Agreements at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
|
of Annual |
|
|
of Annual |
|
Name of Individual |
|
Benefit |
|
|
Death Benefit |
|
|
|
|
|
|
|
|
|
|
Jack E. Golsen |
|
|
N/A |
|
|
|
N/A |
|
Tony M. Shelby |
|
$ |
15,605 |
|
|
|
N/A |
|
Barry H. Golsen |
|
$ |
17,480 |
|
|
$ |
11,596 |
|
Steven J. Golsen |
|
$ |
17,545 |
|
|
$ |
10,690 |
|
David R. Goss |
|
$ |
17,403 |
|
|
|
N/A |
|
David M. Shear |
|
$ |
17,822 |
|
|
$ |
7,957 |
|
2005 Agreement
During 2005, we entered into a death benefit agreement (2005 Agreement) with Jack E. Golsen. This
agreement replaced existing benefits that were payable to Mr. Golsen. The 2005 Agreement provides
that, upon Mr. Golsens death, we will pay to Mr. Golsens family or designated beneficiary $2.5
million to be funded from the net proceeds received by us under certain life insurance policies on
Mr. Golsens life that were purchased and are owned by the Company. The 2005 Agreement requires
that we are obligated to keep in existence no less than $2.5 million of the stated death benefit.
The life insurance policies in force provide an aggregate stated death benefit of $7.0 million to
the Company, as beneficiary.
Life Insurance Policies
As discussed above under the 1981 Agreements, 1992 Agreements and 2005 Agreements, we maintain life
insurance on the life of each named executive officer to provide a source of funds for our
obligations under these agreements. The following table sets forth the total face value of life
insurance policies in force for each named executive officer and the net cash surrender value of
the life insurance policies at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
Total Face Value |
|
|
Net Cash |
|
|
|
of Life Insurance |
|
|
Surrender |
|
Name of Individual |
|
Policies |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
Jack E. Golsen |
|
$ |
7,000,000 |
|
|
$ |
1,079,617 |
|
Tony M. Shelby |
|
$ |
788,049 |
|
|
$ |
22,671 |
|
Barry H. Golsen |
|
$ |
4,115,016 |
|
|
$ |
472,561 |
|
Steven J. Golsen |
|
$ |
871,127 |
|
|
$ |
24,146 |
|
David R. Goss |
|
$ |
1,334,372 |
|
|
$ |
313,047 |
|
David M. Shear |
|
$ |
450,000 |
|
|
$ |
5,315 |
|
401(k) Plan
We maintain The Savings Incentive Plan for LSB Industries, Inc. and Designated Subsidiaries (the
401(k) Plan) for qualifying employees (including the named executive officers) of the Company. As
relating to the named executive officers, the 401(k) Plan is funded by the officers contributions.
We make no contributions to the 401(k) Plan for any of the named executive officers. The amount
that an officer may contribute to the 401(k) Plan equals a certain percentage of the employees
compensation, with the percentage based on the officers income and certain other criteria as
required under Section 401(k) of the Internal Revenue Code. We deduct the amounts contributed to
the 401(k) Plan from the officers compensation each pay period, in accordance with the officers
instructions, and pay the amount into the 401(k) Plan pursuant to the officers election. The
salary and bonus set forth in the
Summary Compensation Table above include any amounts contributed by the named executive officers
during the 2011, 2010 and 2009 fiscal years pursuant to the 401(k) Plan.
73
Outstanding Equity Awards At December 31, 2011
At December 31, 2011, none of the named executive officers had any vested or unvested
outstanding equity awards.
Options Exercised in 2011 (1)
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
(a) |
|
(b) |
|
|
(c) |
|
|
|
Number of |
|
|
|
|
|
|
Shares |
|
|
Value |
|
|
|
Acquired on |
|
|
Realized |
|
|
|
Exercise |
|
|
on Exercise(2) |
|
Name |
|
(#) |
|
|
($) |
|
Jack E. Golsen |
|
|
|
|
|
|
|
|
Tony M. Shelby |
|
|
15,000 |
|
|
|
416,850 |
|
Barry H. Golsen |
|
|
|
|
|
|
|
|
Steven J. Golsen |
|
|
11,250 |
|
|
|
362,250 |
|
David R. Goss |
|
|
|
|
|
|
|
|
David M. Shear |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were no stock awards that vested in 2011. |
|
(2) |
|
Value realized was determined using the difference between the exercise price of the options
and the closing price of our common stock on the date of exercise. |
Severance Agreements
We have entered into severance agreements, as amended, with each of the named executive officers.
Each severance agreement provides that if, within 24 months after the occurrence of a change in
control (as defined) of the Company, we terminate the officers employment other than for cause (as
defined), or the officer terminates his employment for good reason (as defined), we must pay the
officer an amount equal to 2.9 times the officers base amount (as defined). The term base amount
means the average annual gross compensation paid by the Company to the officer and includable in
the officers gross income during the most recent five-year period immediately preceding the change
in control. If the officer has been employed by the Company for less than five years, the base
amount is calculated with respect to the most recent number of taxable years ending before the
change in control that the officer worked for the Company.
The severance agreements provide that a change in control means a change in control of the
Company of a nature that would require the filing of a Form 8-K with the SEC and, in any event,
would mean when:
|
|
|
any individual, firm, corporation, entity, or group (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended) becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of LSBs outstanding voting
securities having the right to vote for the election of directors, except acquisitions by: |
|
|
|
any person, firm, corporation, entity, or group which, as of the date of the
severance agreement, has that ownership, or |
|
|
|
|
Jack E. Golsen, his wife; his children and the spouses of his children; his estate;
executor or administrator of any estate, guardian or custodian for Jack E. Golsen, his
wife, his children, or the spouses of his children, any corporation, trust,
partnership, or other entity of which Jack E. Golsen, his wife, children, or the
spouses of his children own at least 80% of the outstanding beneficial voting or
equity interests, directly or indirectly, either by any one or more of the
above-described persons, entities, or estates; and certain affiliates and associates of
any of the above-described persons, entities, or estates; |
74
|
|
|
individuals who, as of the date of the severance agreement, constitute our Board of
Directors (the Incumbent Board) and who cease for any reason to constitute a majority of
the Board of Directors except that any person becoming a director subsequent to the date of
the severance agreement, whose election or nomination for election is approved by a
majority of the Incumbent Board (with certain limited exceptions), will constitute a member
of the Incumbent Board; or |
|
|
|
|
the sale by the Company of all or substantially all of its assets. |
Except for the severance agreement with Jack E. Golsen, the termination of an officers employment
with the Company for cause means termination because of:
|
|
|
the mental or physical disability from performing the officers duties for a period of
120 consecutive days or one hundred eighty days (even though not consecutive) within a 360
day period; |
|
|
|
|
the conviction of a felony; |
|
|
|
the embezzlement by the officer of our assets resulting in substantial personal
enrichment of the officer at the expense of the Company; or |
|
|
|
the willful failure (when not mentally or physically disabled) to follow a direct
written order from our Board of Directors within the reasonable scope of the officers
duties performed during the 60 day period prior to the change in control. |
The definition of Cause contained in the severance agreement with Jack E. Golsen means
termination because of:
|
|
|
the conviction of Mr. Golsen of a felony involving moral turpitude after all appeals
have been completed; or |
|
|
|
if due to Mr. Golsens serious, willful, gross misconduct or willful, gross neglect of
his duties has resulted in material damages to the Company, taken as a whole, provided
that: |
|
|
|
no action or failure to act by Mr. Golsen will constitute a reason for termination
if he believed, in good faith, that such action or failure to act was in our best
interest, and |
|
|
|
|
failure of Mr. Golsen to perform his duties hereunder due to disability shall not be
considered willful, gross misconduct or willful, gross negligence of his duties for any
purpose. |
The termination of an officers employment with the Company for good reason means termination
because of:
|
|
|
the assignment to the officer of duties inconsistent with the officers position,
authority, duties, or responsibilities during the 60 day period immediately preceding the
change in control of the Company or any other action which results in the diminishment of
those duties, position, authority, or responsibilities; |
|
|
|
|
the relocation of the officer; |
|
|
|
any purported termination by the Company of the officers employment with us otherwise
than as permitted by the severance agreement; or |
|
|
|
in the event of a change in control of the Company, the failure of the successor or
parent company to agree, in form and substance satisfactory to the officer, to assume (as
to a successor) or guarantee (as to a parent) the severance agreement as if no change in
control had occurred. |
Except for the severance agreement with Jack E. Golsen, each severance agreement expires on the
earlier of: (a) three years after the date of the severance agreement, or (b) the date of
retirement from the Company; however, beginning on the first anniversary of the severance agreement
and on each annual anniversary thereafter, the term of the severance agreement automatically
extends for an additional one-year period, unless we give notice otherwise at least 60 days prior
to the anniversary date. The severance agreement with Jack E. Golsen is effective for a period of
three years from the date of the severance agreement; except that, commencing on the date one year
after the date of such severance agreement and on each anniversary thereafter, the term of such
severance agreement shall be automatically extended so as to terminate three years from such
renewal date, unless we give notices otherwise at least one year prior to the renewal date.
75
Potential Payments Upon Termination or Change-In-Control
The following table reflects the total amount that we would have been required to pay to each of
the named executive officers under the applicable agreement if the respective trigger event had
occurred on December 31, 2011.
Severance Pay Trigger Event*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
Voluntary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Than |
|
|
For Good |
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary |
|
|
|
|
|
|
For Cause |
|
|
Reason |
|
|
|
|
|
|
|
Name and |
|
|
|
|
|
Other Than |
|
|
Involuntary |
|
|
Termination |
|
|
Termination |
|
|
|
|
|
|
|
Executive Benefit |
|
Voluntary |
|
|
For Cause |
|
|
For Cause |
|
|
- Change of |
|
|
- Change of |
|
|
Disability/ |
|
|
|
|
and Payments |
|
Termination |
|
|
Termination |
|
|
Termination |
|
|
Control |
|
|
Control |
|
|
Incapacitation |
|
|
Death |
|
Upon Separation |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack E. Golsen: (1)(2)(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
1,582,875 |
|
|
|
|
|
|
|
2,279,098 |
|
|
|
2,279,098 |
|
|
|
3,376,800 |
|
|
|
|
|
Bonus |
|
|
|
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,250,000 |
|
Other |
|
|
|
|
|
|
68,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tony M. Shelby: (2)(3)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,117,414 |
|
|
|
1,117,414 |
|
|
|
|
|
|
|
|
|
Death Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
Other |
|
|
212,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry H. Golsen: (2)(3)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,982,113 |
|
|
|
1,982,113 |
|
|
|
|
|
|
|
|
|
Death Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven J. Golsen: (2)(3)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,362,488 |
|
|
|
1,362,488 |
|
|
|
|
|
|
|
|
|
Death Benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. Goss: (2)(3)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,036,897 |
|
|
|
1,036,097 |
|
|
|
|
|
|
|
|
|
Death Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
Other |
|
|
225,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Shear: (2)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,056,510 |
|
|
|
1,056,510 |
|
|
|
|
|
|
|
|
|
Death Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,567 |
|
|
|
|
* |
|
The terms of payment of the amounts set forth in this table are described in the
agreements referenced in the footnotes to this table. |
|
(1) |
|
See Employment Agreement above for a description of the terms of Mr. Golsens
employment agreement. |
|
(2) |
|
See Severance Agreements above for a description of the terms of our severance
agreements. |
|
(3) |
|
See 1981 Agreements for a discussion of the terms of our death benefit agreements. |
|
(4) |
|
See 1992 Agreements for a description of the terms of our retention and death benefit
agreements. |
|
(5) |
|
See 2005 Agreement for a description of the terms of Mr. Golsens death benefit
agreement. |
76
Our Compensation Policies May Discourage Other Parties From Attempting to Acquire Us
We have entered into severance agreements with our executive officers and some of the executive
officers of our subsidiaries that provide, among other things, that if, within a specified period
of time after the occurrence of a change in control of our Company, these officers are terminated,
other than for cause, or the officer terminates his employment for good reason, we must pay such
officer an amount equal to 2.9 times the officers average annual gross salary for the last five
years preceding the change in control. See Severance Agreements and Employment Agreement,
above. These agreements may discourage a third party tender offer, proxy contest, or other attempts
to acquire control of us and could have the effect of making it more difficult to remove incumbent
management.
Compensation Risk Assessment
We determined that our compensation policies do not create risks that are reasonably likely to have
a material adverse effect on us. This conclusion was based on the assessment performed by us, with
input from our executive management and our legal counsel. Our assessment included consideration of
Item 402(s) of Regulation S-K as discussed between our management and our legal counsel. In
conducting the compensation risk assessment, numerous factors were considered, including:
|
|
|
we do not offer significant short-term incentives that would reasonably be considered
as motivating high-risk investments or other conduct that is not consistent with the long
term goals of the Company; |
|
|
|
the mix between short-term and long-term compensation, which is also discussed herein; |
|
|
|
the type of equity awards granted to employees and level of equity and equity award
holdings; and |
|
|
|
the historical emphasis on long term growth and profitability, over short term gains. |
Equity Compensation Plan Information
The following table sets forth the information as of December 31, 2011, with respect to our
equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available |
|
|
|
Number of securities |
|
|
|
|
|
|
for future issuance |
|
|
|
to be issued upon |
|
|
Weighted-average |
|
|
under equity |
|
|
|
exercise of outstanding |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
options, warrants |
|
|
outstanding options, |
|
|
(excluding securities |
|
|
|
and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by stockholders |
|
|
832,855 |
|
|
$ |
16.43 |
|
|
|
624,370 |
|
Equity compensation plan not
approved by stockholders |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
832,855 |
|
|
$ |
16.43 |
|
|
|
624,370 |
|
|
|
|
|
|
|
|
|
|
|
77
Compensation of Directors
In 2011, we compensated our non-employee directors for their services as directors on our Board.
Directors who are employees of the Company receive no compensation for their services as directors.
The following table summarizes the compensation paid by us to our non-employee directors during the
year ended December 31, 2011.
Director Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
(b) |
|
|
(d) |
|
|
(g) |
|
|
(h) |
|
|
|
Fees Earned or Paid |
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
in Cash (1) |
|
|
Option Awards (2) |
|
|
Compensation |
|
|
Total |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Raymond B. Ackerman |
|
|
14,000 |
* |
|
|
|
|
|
|
|
|
|
|
14,000 |
|
Robert C. Brown, M.D. |
|
|
40,500 |
|
|
|
|
|
|
|
48,000 |
** |
|
|
88,500 |
|
Charles A. Burtch |
|
|
50,500 |
|
|
|
|
|
|
|
|
|
|
|
50,500 |
|
Robert A. Butkin |
|
|
40,500 |
|
|
|
|
|
|
|
|
|
|
|
40,500 |
|
Bernard G. Ille |
|
|
50,500 |
|
|
|
|
|
|
|
|
|
|
|
50,500 |
|
Gail P. Lapidus |
|
|
40,500 |
|
|
|
81,232 |
|
|
|
|
|
|
|
121,732 |
|
Donald W. Munson |
|
|
40,500 |
|
|
|
|
|
|
|
|
|
|
|
40,500 |
|
Ronald V. Perry |
|
|
40,500 |
|
|
|
|
|
|
|
|
|
|
|
40,500 |
|
Horace G. Rhodes |
|
|
50,500 |
|
|
|
|
|
|
|
|
|
|
|
50,500 |
|
John A. Shelley |
|
|
50,500 |
|
|
|
|
|
|
|
|
|
|
|
50,500 |
|
|
|
|
(1) |
|
This amount includes as to each director, an annual fee of $13,000 for services as a director
and $500 for each Board meeting attended during 2011. In addition, each director that serves on one
or more committees of the Board receives an additional $25,000 to $35,000 for such service. As
noted below, each of our directors served on at least one committee during 2011, except for Mr.
Ackerman: |
|
* |
|
Mr. Ackerman retired from the Board of Directors as of the election of his successor at the 2011
Annual Meeting of Stockholders on June 2, 2011. |
|
|
|
Dr. Brown is a member of the Benefits and Programs Committee. The amount shown above
does not include amounts paid by the Company to Dr. Brown for consulting and medical
services rendered by him, which amounts are described under ** below. |
|
|
|
Mr. Burtch is a member of the Audit Committee and Compensation Committee. |
|
|
|
Mr. Butkin is a member of the Business Development Committee. |
|
|
|
Mr. Ille is a member of the Audit Committee, Compensation Committee, Nominating and
Corporate Governance Committee and Public Relations and Marketing Committee. |
|
|
|
Ms. Lapidus is a member of the Public Relations and Marketing Committee. |
|
|
|
Mr. Munson is a member of the Business Development Committee. |
|
|
|
Mr. Perry is a member of the Public Relations and Marketing Committee. |
|
|
|
Mr. Rhodes is a member of the Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee. |
|
|
|
Mr. Shelley is a member of the Audit Committee, Public Relations and Marketing Committee
and Nominating and Corporate Governance Committee. |
78
|
|
|
** |
|
During 2011, pursuant to an agreement with us to perform medical examinations of the management
and supervisory personnel of the Company, Dr. Robert C. Brown was paid $2,000 per month to perform
such examinations. In addition, Dr. Brown receives a fee of $2,000 per month to perform medical
director consulting services for the Company in connection with our self-insured health plan and
workers compensation benefits. |
|
(2) |
|
On November 14, 2011, our Board of Directors (with Ms. Lapidus abstaining) approved the
grant of 5,000 shares of non-qualified stock options to Ms. Lapidus under the 2008 Plan (the 2011
Non-Qualified Options). The exercise price of the 2011 Non-Qualified Options is $34.50 per share,
which is the market value of our common stock at the date of grant. The 2011 Non-Qualified Options
have a 10-year term and vest at the end of each one-year period at the rate of 16.5% per year for
the first five years, with the remaining unvested options vesting at the end of the sixth year, or
November 14, 2017. Pursuant to the terms of the 2011 Non-Qualified Options, if a termination event
occurs, as defined, the non-vested 2011 Non-Qualified Options will become fully vested and
exercisable for a period of one year from the date of the termination event. The total amount of
director compensation relating to option awards is the aggregate grant date fair value computed in
accordance with generally accepted accounting principles. For accounting purposes, the expense
recognized in 2011 relating to the 2011 Non-Qualified Options was approximately $1,800. The
following is the aggregate number of outstanding non-qualified stock options held by non-employee
directors at December 31, 2011: |
Outstanding Options
|
|
|
|
|
|
|
Options Outstanding as of |
|
Name |
|
December 31, 2011 |
|
Raymond B. Ackerman |
|
|
|
|
Robert C. Brown, M.D. |
|
|
5,000 |
|
Charles A. Burtch |
|
|
5,000 |
|
Robert A. Butkin |
|
|
5,000 |
|
Bernard G. Ille |
|
|
5,000 |
|
Gail P. Lapidus |
|
|
5,000 |
|
Donald W. Munson |
|
|
5,000 |
|
Ronald V. Perry |
|
|
4,000 |
|
Horace G. Rhodes |
|
|
5,000 |
|
John A. Shelley |
|
|
2,525 |
|
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of February 15, 2012, regarding the ownership
of our voting common stock and voting preferred stock by each person (including any group as used
in Section 13(d)(3) of the Securities Act of 1934, as amended) that we know to be beneficial owner
of more than 5% of our voting common stock and voting preferred stock. A person is deemed to be the
beneficial owner of shares of the Company which he or she could acquire within 60 days of February
15, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts |
|
|
|
|
Name and Address |
|
Title |
|
of Shares |
|
|
Percent |
|
of |
|
of |
|
Beneficially |
|
|
of |
|
Beneficial Owner |
|
Class |
|
owned (1) |
|
|
Class+ |
|
|
Jack E. Golsen and certain |
|
Common |
|
|
4,180,630 |
(3) (4) |
|
|
18.0 |
% |
members of his family (2) |
|
Voting Preferred |
|
|
1,020,000 |
(5) |
|
|
99.9 |
% |
Royce & Associates, LLC |
|
Common |
|
|
2,462,212 |
|
|
|
11.0 |
% |
Neuberger Berman Group LLC |
|
Common |
|
|
1,977,635 |
|
|
|
8.9 |
% |
BlackRock, Inc. |
|
Common |
|
|
1,349,567 |
|
|
|
6.1 |
% |
|
|
|
+ |
|
Because of the requirements of the SEC as to the method of determining the amount of shares an
individual or entity may own beneficially, the amount shown for an individual may include shares
also considered beneficially owned by others. Any shares of stock which a person does not own, but
which he or she has the right to acquire within 60 days of February 15, 2012 are deemed to be
outstanding for the purpose of computing the percentage of outstanding stock of the class owned by
such person but are not deemed to be outstanding for the purpose of computing the percentage of the
class owned by any other person. |
|
(1) |
|
We based the information with respect to beneficial ownership on information furnished by the
above-named individuals or entities or contained in filings made with the Securities and Exchange
Commission or our records. |
|
(2) |
|
Includes Jack E. Golsen (J. Golsen) and the following members of his family: wife, Sylvia H.
Golsen; son, Barry H. Golsen (B. Golsen) (a director, Vice Chairman of the Board of Directors,
and President of the Company and its Climate Control Business); son, Steven J. Golsen (S. Golsen)
(a director and executive officer of several subsidiaries of the Company), Golsen Family LLC
(LLC) which is wholly-owned by J. Golsen (43.516% owner), Sylvia H. Golsen (43.516% owner), B.
Golsen (4.323% owner), S. Golsen (4.323% owner), and Linda F. Rappaport (4.323% owner and daughter
of J. Golsen (L. Rappaport)), and SBL LLC (SBL) which is wholly-owned by the LLC (49% owner),
B. Golsen (17% owner), S. Golsen (17% owner), and L. Rappaport (17% owner). J Golsen and Sylvia H.
Golsen are the managers of the LLC and share voting and dispositive power over the shares
beneficially owned by the LLC. J. Golsen and B. Golsen, as the only directors and officers of SBL,
share the voting and dispositive power of the shares beneficially owned by SBL and its wholly owned
subsidiary, Golsen Petroleum Corp (GPC). The address of Jack E. Golsen, Sylvia H. Golsen, and
Barry H. Golsen is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107; and Steven J.
Golsens address is 7300 SW 44th Street, Oklahoma City, Oklahoma 73179. The address for SBL, LLC,
GPC and L. Rappaport is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107. |
|
(3) |
|
Includes: |
|
|
|
|
|
|
(a) |
|
the following shares over which J. Golsen has the sole voting and dispositive
power: (i) 218,320 shares of common stock owned of record by certain trusts for the
benefit of B. Golsen, S. Golsen and L. Rappaport over which J. Golsen is the trustee;
(ii) 350,984 shares held in certain trusts for the benefit of grandchildren and great
grandchildren of J. Golsen and Sylvia H. Golsen over which J. Golsen is the trustee;
(iii) 4,000 shares owned of record by J. Golsen; and (iv) 100,000 shares owned of
record by J. Golsens revocable trust; |
80
|
|
|
|
|
(b) |
|
the following shares over which J. Golsen and Sylvia H. Golsen share voting and
dispositive power: (i) 15,876 shares held in S. Golsens revocable trust; (ii) 15,392
shares owned of record by the LLC; and (iii) 133,333 shares that the LLC has the right
to acquire upon the conversion of 4,000 shares of the Series B Preferred owned of
record by the LLC; |
|
|
(c) |
|
292,467 shares over which B. Golsen has the sole voting and dispositive power; |
|
|
(d) |
|
263,493 shares over which S. Golsen has the sole voting and dispositive power; |
|
|
(e) |
|
the following shares over which J. Golsen and L. Rappaport share voting and
dispositive power: (i) 30,000 shares owned directly by L. Rappaport; and (ii) 14,578
shares owned by her revocable trust; |
|
|
(f) |
|
the following shares over which J. Golsen and B. Golsen share voting and
dispositive power: (i) 1,674,899 shares owned of record by SBL; (ii) 400,000 shares
that SBL has the right to acquire upon conversion of 12,000 shares of Series B
Preferred owned of record by SBL; (iii) 250,000 shares that SBL has the right to
acquire upon conversion of 1,000,000 shares of the Series D Preferred owned of record
by SBL; (iv) 283,955 shares owned of record by GPC; and 133,333 shares that GPC has the
right to acquire upon conversion of 4,000 shares of Series B Preferred owned of record
by GPC. |
See Certain Relationships and Related Transactions and Director Independence.
|
|
|
(4) |
|
J. Golsen and Sylvia H. Golsen disclaim beneficial ownership of the shares over which B.
Golsen, S. Golsen and L. Rappaport each have sole voting and investment power. Sylvia H. Golsen, B.
Golsen, S. Golsen and L. Rappaport disclaim beneficial ownership of the shares that J. Golsen has
sole voting and investment power. B. Golsen, S. Golsen and L. Rappaport disclaim beneficial
ownership of the shares owned of record by the LLC, except to the extent of their respective
pecuniary interest therein. S. Golsen and L. Rappaport disclaims beneficial ownership of the shares
owned of record by SBL and GPC and all shares beneficially owned by SBL through the LLC, except to
the extent of their respective pecuniary interest therein. L. Rappaport disclaims beneficial
ownership of the 81,433 shares over which her spouse has sole voting and investment power over, and
this amount excludes such shares. B. Golsen disclaims beneficial ownership of the 533 shares over
which his spouse has sole voting and investment power, and this amount excludes such shares. |
|
(5) |
|
Includes: (a) 4,000 shares of Series B Preferred owned of record by the LLC; (b) 12,000 shares
of Series B Preferred owned of record by SBL; (c) 4,000 shares Series B Preferred owned of record
by GPC and (d) 1,000,000 shares of Series D Preferred owned of record by SBL |
81
Security Ownership of Management
The following table sets forth certain information obtained from our directors and executive
officers as a group as to their beneficial ownership of our voting common stock and voting
preferred stock as of February 15, 2012.
|
|
|
|
|
|
|
|
|
|
|
Name of |
|
|
|
Amount of Shares |
|
|
|
|
Beneficial Owner |
|
Title of Class |
|
Beneficially Owned (1) |
|
|
Percent of Class+ |
|
|
Michael G. Adams |
|
Common |
|
|
21,425 |
(2) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Robert C. Brown, M.D. |
|
Common |
|
|
44,362 |
(3) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Charles A. Burtch |
|
Common |
|
|
3,475 |
(4) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Robert A. Butkin |
|
Common |
|
|
3,475 |
(5) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Barry H. Golsen |
|
Common |
|
|
3,041,083 |
(6) |
|
|
13.2 |
% |
|
|
Voting Preferred |
|
|
1,016,173 |
(6) |
|
|
99.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Jack E. Golsen |
|
Common |
|
|
3,624,670 |
(7) |
|
|
15.6 |
% |
|
|
Voting Preferred |
|
|
1,020,000 |
(7) |
|
|
99.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Steven J. Golsen |
|
Common |
|
|
794,180 |
(8) |
|
|
3.5 |
% |
|
|
Voting Preferred |
|
|
194,415 |
(8) |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
David R. Goss |
|
Common |
|
|
101,690 |
(9) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Bernard G. Ille |
|
Common |
|
|
12,475 |
(10) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Jim D. Jones |
|
Common |
|
|
50,000 |
(11) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Gail P. Lapidus |
|
Common |
|
|
125 |
(12) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Donald W. Munson |
|
Common |
|
|
6,215 |
(13) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Ronald V. Perry |
|
Common |
|
|
1,475 |
(14) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Horace G. Rhodes |
|
Common |
|
|
10,475 |
(15) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Harold L. Rieker, Jr. |
|
Common |
|
|
7,425 |
(16) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Paul H. Rydlund |
|
Common |
|
|
8,000 |
(17) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
David M. Shear |
|
Common |
|
|
35,581 |
(18) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Tony M. Shelby |
|
Common |
|
|
117,785 |
(19) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
John A. Shelley |
|
Common |
|
|
1,055 |
(20) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Michael D. Tepper |
|
Common |
|
|
32,000 |
(21) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
as a group number (20 |
|
Common |
|
|
4,593,090 |
(22) |
|
|
19.7 |
% |
persons) |
|
Voting Preferred |
|
|
1,020,000 |
|
|
|
99.9 |
% |
82
|
|
|
* |
|
Less than 1%. |
|
+ |
|
See footnote + to the table under Security Ownership of Certain Beneficial Owners. |
|
(1) |
|
We based the information, with respect to beneficial ownership, on information furnished by
each director or officer, contained in filings made with the SEC, or contained in our records. |
|
(2) |
|
These shares are held by a trust, over which Mr. Adams has the sole voting and dispositive
power. |
|
(3) |
|
This amount includes 11,160 shares held in a joint account owned by a trust, of which Dr.
Browns wife is the trustee, and by a trust, of which Dr. Brown is the trustee. As trustees, Dr.
Brown and his wife share voting and dispositive power over these shares. The amount also includes
(a) 2,475 shares of common stock that Dr. Brown may purchase pursuant to currently exercisable
non-qualified stock options, and (b) 30,727 shares owned by Robert C. Brown, MD, Inc. over which
Dr. Brown has voting and dispositive power. The amount shown does not include shares owned
directly, or through trusts, by the children of Dr. Brown and the son-in-law of Dr. Brown, David M.
Shear, all of which Dr. Brown disclaims beneficial ownership. |
|
(4) |
|
Mr. Burtch has the sole voting and dispositive power over these shares, which include 2,475
shares of common stock that Mr. Burtch may purchase pursuant to currently exercisable non-qualified
stock options. |
|
(5) |
|
This amount includes (a) 1,000 shares that are held in certain trusts and (b) 2,475 shares of
common stock that Mr. Butkin may purchase pursuant to currently exercisable non-qualified stock
options over which Mr. Butkin has voting and dispositive power. |
|
(6) |
|
See footnotes (2), (3), (4), and (5) of the table under Security Ownership of Certain
Beneficial Owners for a description of the amount and nature of the shares beneficially owned by
B. Golsen. |
|
(7) |
|
See footnotes (2), (3), (4), and (5) of the table under Security Ownership of Certain
Beneficial Owners for a description of the amount and nature of the shares beneficially owned by
J. Golsen. |
|
(8) |
|
See footnotes (2), (3), (4), and (5) of the table under Security Ownership of Certain
Beneficial Owners for a description of the amount and nature of the shares beneficially owned by
S. Golsen. |
|
(9) |
|
Mr. Goss has the sole voting and dispositive power over these shares. |
|
(10) |
|
The amount includes 10,000 shares held by Mr. Illes trust and 2,475 shares of common stock
that Mr. Ille may purchase pursuant to currently exercisable non-qualified stock options, over
which Mr. Ille possesses sole voting and dispositive power. |
|
(11) |
|
Mr. Jones and his wife share voting and dispositive power over these shares. |
|
(12) |
|
Ms. Lapidus has sole voting and dispositive power over these shares. |
|
(13) |
|
Mr. Munson has the sole voting and dispositive power over these shares, which include 2,475
shares that Mr. Munson may acquire pursuant to currently exercisable non-qualified stock options. |
|
(14) |
|
This amount represents shares that Mr. Perry may acquire pursuant to currently exercisable
stock options, over which Mr. Perry has sole dispositive power. |
|
(15) |
|
The amount includes 2,475 shares of common stock that Mr. Rhodes may purchase pursuant to
currently exercisable non-qualified stock options, over which Mr. Rhodes has the sole voting and
dispositive power. |
|
(16) |
|
This amount represents shares that Mr. Rieker may acquire pursuant to currently exercisable
stock options, over which Mr. Rieker has sole dispositive power. |
|
(17) |
|
This amount represents shares that Mr. Rydlund may acquire pursuant to currently exercisable
stock options, over which Mr. Rydlund has sole dispositive power. |
83
|
|
|
(18) |
|
These shares are held in a joint account owned by Mr. Shears revocable trust of which Mr.
Shear is the trustee and by Mr. Shears spouses revocable trust of which his spouse is the
trustee. As trustees, Mr. Shear and his wife share voting and dispositive power over these shares. |
|
(19) |
|
The amount includes 38,396 shares held by a trust, over which Mr. Shelby has the sole voting
and dispositive power. |
|
(20) |
|
Mr. Shelley has the sole voting and dispositive power over these shares. |
|
(21) |
|
These shares are held by a trust, over which Mr. Tepper has the sole voting and dispositive
power. |
|
(22) |
|
The shares of common stock include 31,750 shares of common stock that executive officers and
directors have the right to acquire within 60 days under our stock option plans and 916,666 shares
of common stock that executive officers, directors, or entities controlled by our executive
officers and directors, have the right to acquire within 60 days under other convertible
securities. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Policy as to Related Party Transaction
Pursuant to the Audit Committee Charter, our Audit Committee reviews any related party transactions
involving any of our directors and executive officers. Although the Audit Committee has not adopted
specific standards and procedures with respect to its review of related party transactions, the
Audit Committee believes that it considers all relevant facts and circumstances in its review
process. The following related party transactions were reviewed by the Audit Committee or the
Board of Directors as a whole, except the transactions with Landmark were reviewed and approved by
a special committee of the Board, as described below.
Related Party Transactions
Golsen Group
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 Jack E. Golsen, our Chairman of the
Board and Chief Executive Officer, members of his immediate family (spouse and children), including
Barry H. Golsen, our Vice Chairman and President, Steven J. Golsen, a Director and Chief Operating
Officer of our Climate Control Business, entities owned by them and trusts for which they possess
voting or dispositive power as trustee (together, the Golsen Group).
In July 2011, the Golsen Group converted $2,000,000 of the 2007 Debentures into 72,800 shares of
LSB common stock in accordance with the terms of the 2007 Debentures. During 2011, we incurred
interest expense of $60,500 relating to the $2,000,000 of the 2007 Debentures that was held by the
Golsen Group, of which $55,000 was paid in June 2011 and the remaining amount was forfeited and
credited to capital in excess of par value as the result of the conversion. In July 2011, the
Golsen Group converted a convertible promissory note, dated August 16, 1985, having a remaining
principal balance of $8,000 into 4,000 shares of LSB common stock in accordance with the terms of
such note. The closing price on the date of the conversion was $43.58 per share.
During 2011, GPC occupied approximately 1,400 square feet of office space within our corporate
complex for which the annual rent is $12,000.
Transactions with Landmark
As approved by a special committee of our board of directors, in May 2011, Prime Financial L.L.C.
(Prime), a subsidiary of LSB, entered into an agreement (the First Purchase Agreement) to
purchase from Landmark Land Company, Inc. (Landmark) certain undeveloped real estate located in
Oklahoma City, Oklahoma (the Oklahoma Real Estate) for the purchase price of $2.25 million, which
transaction was consummated in June 2011 and funded from working capital. The First Purchase
Agreement grants Prime put options to sell the Oklahoma Real Estate to Landmark or to Gerald G.
Barton (Barton), who is the chief executive officer and a substantial stockholder of
Landmark. The put option may be exercised during the sixth year following Primes purchase of the
Oklahoma Real Estate. If a put option is exercised, the purchase price for the Oklahoma Real Estate
will be $2.25 million, plus a premium equal to a simple 10% annual return on the purchase price
beginning as of the closing of the First Purchase Agreement, subject to certain adjustments. For
financial reporting purposes, no value from the purchase price was allocated to the put options
because the appraised value of the Oklahoma Real Estate exceeded the purchase price.
84
Also approved by a special committee of our board of directors, in September 2011, Prime entered
into an agreement (the Second Purchase Agreement) to purchase from Landmark certain undeveloped
real estate located in Laguna Vista, Texas (the Texas Real Estate) for the purchase price of $2.5
million. The Second Purchase Agreement grants Prime put options to sell the Texas Real Estate to
Landmark or to Barton. The put option may be exercised during the sixth year following Primes
purchase of the Texas Real Estate. If a put option is exercised, the purchase price for the Texas
Real Estate will be $2.5 million, plus a premium equal to a simple 10% annual return on the
purchase price beginning as of the closing of the Second Purchase Agreement, subject to certain
adjustments. The Second Purchase Agreement also grants Prime warrants to purchase up to one million
shares of Landmarks common stock, at $1.00 per share. The right of Prime to acquire Landmark
shares under any unexercised warrants shall terminate on the completed exercise of the put options.
Landmark has also agreed to enter into a separate agreement at the closing of the Second Purchase
Agreement to use its reasonable efforts to use, where technically feasible, geothermal heating and
air conditioning units manufactured by one of the LSBs subsidiaries on other Landmark properties
in the development where the Texas Real Estate is located.
Jack E. Golsen (Golsen), our chairman of the board of directors and chief executive officer and
another individual previously formed a limited liability company (LLC), and each contributed $1.0
million to the LLC. The LLC subsequently loaned Landmark approximately $2.0 million. In March 2011,
Golsen sold his membership interest in the LLC to Barton in consideration for a promissory note in
the principal amount of approximately $1.1 million, representing the amount that Golsen had
invested in the LLC, plus interest (the Barton Note). The Barton Note was due and payable in June
2011. Pursuant to the terms of the First and Second Purchase Agreements, until the expiration of
the put options, no payment will be made on the Barton Note and payment of the amounts owing under
the Barton Note will be subordinate to any amounts owing Prime upon the exercise of a put option.
Further, Golsen has agreed under the Second Purchase Agreement that no portion of the purchase
price shall be used by Landmark to repay any indebtedness owing to Golsen.
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. Illes past relationship with
Landmark, our board of directors appointed a special committee for the purpose of reviewing and
determining whether the LSB should purchase the Oklahoma and Texas Real Estate. The special
committee believed, based on an analysis of a real estate consultant, that the price that we were
to pay for the properties approximated the market value, and also believed that these properties,
when developed, have the potential to establish a model geothermal community.
Effective February 7, 2012, the transaction relating to the Second Purchase Agreement to purchase
the Texas Real Estate, as discussed above, was consummated on terms substantially as originally
agreed, including Landmark to use its reasonable efforts to use, where technically feasible,
geothermal heating and air conditioning units manufactured by one of the LSBs subsidiaries on
other Landmark properties in the development where the Texas Real Estate is located.
Other
Heidi Brown Shear, our Vice President and Managing Counsel, received approximately $194,000 in
compensation during 2011, which included $30,000 cash bonus and a $4,100 automobile allowance.
Director Independence
The Board of Directors has determined that each of Messrs. Burtch, Butkin, Ille, Munson, Rhodes,
Perry, Shelley and Ms. Lapidus is an independent director in accordance with the current listing
standards of the NYSE, and that Mr. Ackerman was an independent director prior to his retirement on
June 2, 2011.
85
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Ernst & Young LLP for professional services rendered for the audit of
our annual financial statements for the fiscal years ended December 31, 2011 and 2010, for the
reviews of the financial statements included in our Quarterly Reports on Form 10-Q for those fiscal
years, and for review of SEC-related documents for those fiscal years
were approximately $1,374,000
and $1,386,000, respectively.
Audit-Related Fees
Ernst & Young LLP billed the Company $28,600 and $106,980 during 2011 and 2010, respectively, for
audit-related services, which included benefit plan audits and accounting consultations involving a
proposed business acquisition.
Tax Fees
Ernst & Young LLP billed the Company $450,034 and $328,687 during 2011 and 2010, respectively, for
tax services, which included tax return review and preparation, tax consultations and planning,
including services relating to the current examination by the IRS for the tax years 2007-2010.
All Other Fees
We did not engage our accountants to provide any other services for the fiscal years ended December
31, 2011 and 2010.
Engagement of the Independent Registered Public Accounting Firm
The Audit Committee is responsible for approving all engagements with Ernst & Young LLP to perform
audit or non-audit services for us prior to us engaging Ernst & Young LLP to provide those
services. All of the services under the headings Audit Related, Tax Services, and All Other Fees
were approved by the Audit Committee in accordance with paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X of the Exchange Act. The Audit Committee of our Board of Directors has considered
whether Ernst & Young LLPs provision of the services described above for the fiscal years ended
December 31, 2011 and 2010 is compatible with maintaining its independence.
86
PART IV
|
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1) Financial Statements
The following consolidated financial statements of the Company appear immediately following this
Part IV:
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
F-2 |
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2011 and 2010 |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2011 |
|
|
F-5 |
|
|
|
|
|
|
Consolidated Statements of Stockholders Equity for each of the three
years in the period ended December 31, 2011 |
|
|
F-6 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2011 |
|
|
F-8 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
F-11 |
|
|
|
|
|
|
Quarterly Financial Data (Unaudited) |
|
|
F-50 |
|
|
|
|
|
|
(a) (2) Financial Statement Schedules |
|
|
|
|
|
|
|
|
|
The Company has included the following schedules in this report: |
|
|
|
|
|
|
|
|
|
I Condensed Financial Information of Registrant |
|
|
F-52 |
|
|
|
|
|
|
II Valuation and Qualifying Accounts |
|
|
F-56 |
|
We have omitted all other schedules because the conditions requiring their filing do not exist or
because the required information appears in our Consolidated Financial Statements, including the
notes to those statements.
87
(a)(3) Exhibits
|
|
|
|
|
|
3(i).1 |
|
|
Restated Certificate of Incorporation, as amended, which the Company hereby
incorporates by reference from Exhibit 3.1 to the Companys Form 10-K for the fiscal year
ended December 31, 2008. |
|
|
|
|
|
3(ii).1
|
|
Amended and Restated Bylaws of LSB Industries, Inc. dated August 20, 2009, as amended
February 18, 2010, which the Company hereby incorporates by reference from Exhibit 3(ii).1
to the Companys Form 10-K for the fiscal year ended December 31, 2010. |
|
|
|
|
|
|
4.1 |
|
|
Specimen Certificate for the Companys Noncumulative Preferred Stock, having a par
value of $100 per share, which the Company hereby incorporates by reference from Exhibit 4.1
to the Companys Form 10-K for the fiscal year ended December 31, 2010. |
|
|
|
|
|
|
4.2 |
|
|
Specimen Certificate for the Companys Series B Preferred Stock, having a par value of
$100 per share, which the Company hereby incorporates by reference from Exhibit 4.27 to the
Companys Registration Statement No. 33-9848. |
|
|
|
|
|
|
4.3 |
|
|
Specimen of Certificate of Series D 6% Cumulative, Convertible Class C Preferred Stock,
which the Company hereby incorporates by reference from Exhibit 4.3 to the Companys Form
10-K for the fiscal year ended December 31, 2010. |
|
|
|
|
|
|
4.4 |
|
|
Specimen Certificate for the Companys Common Stock, which the Company incorporates by
reference from Exhibit 4.4 to the Companys Registration Statement No. 33-61640. |
|
|
|
|
|
|
4.5 |
|
|
Renewed Rights Agreement, dated as of December 2, 2008, between the Company and UMB
Bank, n.a., which the Company hereby incorporates by reference from Exhibit 4.1 to the
Companys Form 8-K, dated December 5, 2008. |
|
|
|
|
|
|
4.6 |
|
|
First Amendment to Renewed Rights Agreement, dated December 3, 2008, between LSB
Industries, Inc. and UMB Bank, n.a., which the Company hereby incorporates by reference from
Exhibit 4.3 to the Companys Form 8-K, dated December 5, 2008. |
|
|
|
|
|
|
4.7 |
|
|
Amended and Restated Loan and Security Agreement by and among LSB Industries, Inc.,
ThermaClime, Inc. and each of its subsidiaries that are Signatories, the lenders and Wells
Fargo Foothill, Inc., which the Company hereby incorporates by reference from Exhibit 4.2 to
the Companys Form 10-Q for the fiscal quarter ended September 30, 2007. |
|
|
|
|
|
|
4.8 |
|
|
Exhibits and Schedules to the Amended and Restated Loan and Security Agreement by and among
LSB Industries, Inc., ThermaClime, Inc. and each of its subsidiaries that are Signatories,
the lenders and Wells Fargo Foothill, Inc., which the Company hereby incorporates by
reference from Exhibit 4.1b to the Companys Form 10-Q for the fiscal quarter ended June 30,
2010. |
|
|
|
|
|
|
4.9 |
|
|
First Amendment to the Amended and Restated Loan and Security Agreement, dated as of
November 24, 2009, by and among LSB Industries, Inc., ThermaClime, Inc. and each of its
subsidiaries that are Signatories, the lenders and Wells Fargo Foothill, Inc., which the
Company hereby incorporates by reference from Exhibit 4.9 to the Companys Form 10-K for the
fiscal year ended December 31, 2009. |
|
|
|
|
|
|
4.10 |
|
|
Consent, Joinder and Second Amendment, dated as of April 1, 2010, by and among LSB
Industries, Inc., ThermaClime, Inc., each of the Subsidiaries of ThermaClime identified on
the signature pages thereof, the lenders identified on the signature pages thereof, Wells
Fargo Capital Finance, Inc., as the arranger and administrative agent, and Consolidated
Industries Corp., which the Company hereby incorporates by reference from Exhibit 99.3 to
the Companys Form 8-K, filed April 7, 2010. |
88
|
|
|
|
|
|
4.11 |
|
|
Amended and Restated Term Loan Agreement, dated as of March 29, 2011, among LSB
Industries, Inc., ThermaClime, L.L.C. and certain subsidiaries of ThermaClime, L.L.C.,
Cherokee Nitrogen Holdings, Inc., the Lenders signatory thereto, Banc of America Leasing &
Capital, LLC as the Administrative and Collateral Agent, and Bank of Utah as Payment Agent,
which the Company hereby incorporates by reference from Exhibit 4.1 to the Companys Form
8-K, filed by April 4, 2011. |
|
|
|
|
|
|
4.12 |
|
|
Exhibits and Schedules to the Amended and Restated Term Loan Agreement, dated as of
March 29, 2011, among LSB Industries, Inc., ThermaClime, L.L.C. and certain subsidiaries of
ThermaClime, L.L.C., Cherokee Nitrogen Holdings, Inc., the Lenders signatory thereto, Banc
of America Leasing & Capital, LLC as the Administrative and Collateral Agent, and Bank of
Utah as Payment Agent, which the Company hereby incorporates by reference from Exhibit 4.1
to the Companys Form 8-K, filed April 4, 2011. |
|
|
|
|
|
|
4.13 |
|
|
Amendment Number One to the Amended and Restated Term Loan Agreement, dated as of April
21, 2011, among LSB Industries, Inc., ThermaClime, L.L.C. and certain subsidiaries of
ThermaClime, L.L.C., Cherokee Nitrogen Holdings, Inc., the Required Lenders signatory
thereto, Banc of America Leasing & Capital, LLC as the Administrative and Collateral Agent,
and Bank of Utah as Payment Agent, which the Company hereby incorporates by reference from
Exhibit 4.3 to the Companys Form 10-Q, filed May 5, 2011. |
|
|
|
|
|
|
4.14 |
|
|
Joining Lender Agreement, dated as of May 26, 2011, by and among LSB Industries, Inc.,
ThermaClime, L.L.C. and certain subsidiaries of ThermaClime, L.L.C., Cherokee Nitrogen
Holdings, Inc., Consolidated Industries Corp., Banc of America Leasing & Capital, LLC, as
Administrative Agent, and MassMutual Asset Finance LLC, which the Company hereby
incorporates by reference from Exhibit 4.4 to the Companys Form 8-K, filed June 2, 2011. |
|
|
|
|
|
|
10.1 |
|
|
Limited Partnership Agreement dated as of May 4, 1995 between the general partner, and
LSB Holdings, Inc., an Oklahoma Corporation, as limited partner, which the Company hereby
incorporates by reference from Exhibit 10.11 to the Companys Form 10-K for the fiscal year
ended December 31, 1995. See SEC file number 001-07677. |
|
|
|
|
|
|
10.2 |
|
|
Form of Death Benefit Plan Agreement between the Company and the employees covered
under the plan, which the Company incorporates by reference from Exhibit 10.2 to the
Companys Form 10-K for the fiscal year ended December 31, 2005. |
|
|
|
|
|
|
10.3 |
|
|
The Companys 1998 Stock Option and Incentive Plan, which the Company hereby
incorporates by reference from Exhibit 10.44 to the Companys Form 10-K for the fiscal year
ended December 31, 1998. See SEC file number 001-07677. |
|
|
|
|
|
|
10.4 |
|
|
LSB Industries, Inc. Outside Directors Stock Option Plan, which the Company hereby
incorporates by reference from Exhibit C to the Companys Proxy Statement, dated May 24,
1999 for its 1999 Annual Meeting of Stockholders. See SEC file number 001-07677. |
|
|
|
|
|
|
10.5 |
|
|
Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries, Inc.
and Dan Ellis, which the Company hereby incorporates by reference from Exhibit 99.1 to the
Companys Form S-8, dated September 10, 2007. |
|
|
|
|
|
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10.6 |
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Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries, Inc.
and John Bailey, which the Company hereby incorporates by reference from Exhibit 99.2 to the
Companys Form S-8, dated September 10, 2007. |
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10.7 |
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LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5, 2008, which the
Company hereby incorporates by reference from Exhibit 99.1 to the Companys Form 8-K, dated
June 6, 2008. |
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10.8 |
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Severance Agreement, dated January 17, 1989 between the Company and Jack E. Golsen,
which the Company hereby incorporates by reference from Exhibit 10.13 to the Companys Form
10-K for the fiscal year ended December 31, 2005. The Company also entered into identical
agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen, David M. Shear, and Jim D.
Jones and the Company will provide copies thereof to the Commission upon request. |
89
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10.9 |
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Amendment to Severance Agreement, dated December 17, 2008, between Barry H. Golsen and
the Company, which the Company hereby incorporates by reference from Exhibit 99.2 to the
Companys Form 8-K, dated December 23, 2008. Each Amendment to Severance Agreement with
Jack E. Golsen, Tony M. Shelby, David R. Goss and David M. Shear is substantially the same
as this exhibit and will be provided to the Commission upon request. |
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10.10 |
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Employment Agreement and Amendment to Severance Agreement dated January 12, 1989
between the Company and Jack E. Golsen, dated March 21, 1996, which the Company hereby
incorporates by reference from Exhibit 10.15 to the Companys Form 10-K for fiscal year
ended December 31, 1995. See SEC file number 001-07677. |
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10.11 |
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First Amendment to Employment Agreement, dated April 29, 2003 between the Company and
Jack E. Golsen, which the Company hereby incorporates by reference from Exhibit 10.52 to the
Companys Form 10-K/A Amendment No.1 for the fiscal year ended December 31, 2002. |
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10.12 |
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Third Amendment to Employment Agreement, dated December 17, 2008, between the Company
and Jack E. Golsen, which the Company hereby incorporates by reference from Exhibit 99.1 to
the Companys Form 8-K, dated December 23, 2008. |
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10.13 |
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Nitric Acid Supply Operating and Maintenance Agreement, dated October 23, 2008, between
El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer MaterialScience, LLC, which
the Company hereby incorporates by reference from Exhibit 10.1 to the Companys Form 10-Q
for the fiscal quarter ended September 30, 2008. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #22844, DATED NOVEMBER 24,
2008, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. |
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10.14 |
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Second Amendment to the Nitric Acid Supply, Operating and Maintenance Agreement, dated
June 16, 2010, between El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience, LLC., which the Company hereby incorporates by reference from Exhibit 10.2
to the Companys Form 10-Q for the fiscal quarter ended June 30, 2010. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER
CF #25613, DATED SEPTEMBER 24, 2010, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION
ACT. |
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10.15 |
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Loan Agreement dated December 23, 1999 between ClimateCraft, Inc. and the City of
Oklahoma City, which the Company hereby incorporates by reference from Exhibit 10.49 to the
Companys Amendment No. 2 to its 1999 Form 10-K. See SEC file number 001-07677. |
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10.16 |
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|
Promissory Note, dated March 26, 2010, executed by Climate Master, Inc. in favor of
Coppermark Bank, which the Company hereby incorporates by reference from Exhibit 99.1 to the
Companys Form 8-K, filed March 31, 2010. |
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10.17 |
|
|
AN Supply Agreement, dated effective January 1, 2010, between El Dorado Chemical
Company and Orica International Pte Ltd., which the Company hereby incorporates by reference
from Exhibit 10.27 to the Companys Form 10-K for the fiscal year ended December 31, 2009.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A
COMMISSION ORDER CF #24842, DATED MARCH 25, 2010, GRANTING REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. |
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10.18 |
|
|
First Amendment to AN Supply Agreement, dated effective March 1, 2010, between El
Dorado Chemical Company and Orica International Pte Ltd., which the Company hereby
incorporates by reference from Exhibit 10.28 to the Companys Form 10-K for the fiscal year
ended December 31, 2009. |
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10.19 |
|
|
Agreement, effective August 1, 2010, between El Dorado Chemical Company and United
Steelworkers of America International Union on behalf of Local 13-434., which the Company
hereby incorporates by reference from Exhibit 10.1 to the Companys Form 10-Q for the fiscal
quarter ended September 30, 2010. |
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10.20 |
|
|
Agreement, effective October 17, 2010, between El Dorado Chemical Company and
International Association of Machinists and Aerospace Workers, AFL-CIO Local No. 224., which
the Company hereby incorporates by reference from Exhibit 10.2 to the Companys Form 10-Q
for the fiscal quarter ended September 30, 2010. |
90
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10.21 |
|
|
Agreement, dated November 12, 2010, between United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO,
CLC, on behalf of Local No. 00417 and Cherokee Nitrogen Company, which the Company hereby
incorporates by reference from Exhibit 25 to the Companys Form 10-K for the fiscal year
ended December 31, 2010. |
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10.22 |
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|
Asset Purchase Agreement, dated as of December 6, 2002 by and among Energetic Systems
Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc. LLC, Energetic
Properties, LLC, Slurry Explosive Corporation, Universal Tech Corporation, El Dorado
Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and Slurry Explosive
Manufacturing Corporation, LLC, which the Company hereby incorporates by reference from
Exhibit 2.1 to the Companys Form 8-K, dated December 12, 2002. |
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10.23 |
|
|
Exhibits and Disclosure Letters to the Asset Purchase Agreement, dated as of December
6, 2002 by and among Energetic Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp.
LLC, DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal
Tech Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc. and
Slurry Explosive Manufacturing Corporation, LLC., which the Company hereby incorporates by
reference from Exhibit 10.1b to the Companys Form 10-Q for the fiscal quarter ended June
30, 2010. |
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10.24 |
|
|
Anhydrous Ammonia Sales Agreement, dated effective January 1, 2009 between Koch
Nitrogen International Sarl and El Dorado Chemical Company, which the Company hereby
incorporates by reference from Exhibit 10.49 to the Companys Form 10-K for the fiscal year
ended December 31, 2008. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT
IS THE SUBJECT OF A COMMISSION ORDER CF #25535, DATED SEPTEMBER 27, 2010, GRANTING REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
THE FREEDOM OF INFORMATION ACT. |
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10.25 |
|
|
Second Amendment to Anhydrous Ammonia Sales Agreement, dated February 23, 2010, between
Koch Nitrogen International Sarl and El Dorado Chemical Company, which the Company hereby
incorporates by reference from Exhibit 10.35 to the Companys Form 10-K for the fiscal year
ended December 31, 2009. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT
IS THE SUBJECT OF A COMMISSION ORDER CF #24842, DATED MARCH 25, 2010, GRANTING REQUEST BY
THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
FREEDOM OF INFORMATION ACT. |
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10.26 |
|
|
Urea Ammonium Nitrate Purchase and Sale Agreement, dated May 7, 2009, between Pryor
Chemical Company and Koch Nitrogen Company, LLC., which the Company hereby incorporates by
reference from Exhibit 99.1 to the Companys Form 8-K, filed May 13, 2009. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER
CF #23659, DATED JUNE 9, 2009, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. |
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10.27 |
|
|
Amendment No. 1 to Urea Ammonium Nitrate Purchase and Sale Agreement, dated October 29,
2009, between Pryor Chemical Company and Koch Nitrogen Company, LLC, which the Company
hereby incorporates by reference from Exhibit 99.1 to the Companys Form 8-K, filed November
4, 2009. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT
OF A COMMISSION ORDER CF #24284, DATED NOVEMBER 19, 2009, GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT. |
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10.28 |
|
|
Railcar Management Agreement, dated May 7, 2009, between Pryor Chemical Company and
Koch Nitrogen Company, LLC, which the Company hereby incorporates by reference from Exhibit
99.2 to the Companys Form 8-K, filed May 13, 2009. |
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10.29 |
|
|
Agreement, dated November 10, 2006 by and among LSB Industries, Inc., Kent C. McCarthy,
Jayhawk Capital Management, L.L.C., Jayhawk Institutional Partners, L.P. and Jayhawk
Investments, L.P., which the Company hereby incorporates by reference from Exhibit 99(d)(1)
to the Companys Schedule TO-I, filed February 9, 2007. |
|
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10.30 |
|
|
Real Estate Purchase Contract, dated as of May 26, 2011, by and between DPMG, Inc.,
Prime Financial L.L.C., Landmark Land Company, Gerald G. Barton and Jack E. Golsen, which
the Company hereby incorporates by reference from Exhibit 10.1 to the Companys Form 10-Q,
filed November 7, 2011. |
91
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10.31 |
|
|
Real Estate Purchase Contract, dated as of September 8, 2011, by and between South
Padre Island Development, LLC, Prime Financial L.L.C., Landmark Land Company, Gerald G.
Barton and Jack E. Golsen, which the Company hereby incorporates by reference from Exhibit
10.2 to the Companys Form 10-Q, filed November 7, 2011. |
|
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|
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10.32 |
|
|
First Amendment to Real Estate Purchase Contract, effective October 20, 2011, by and
among South Padre Island Development, LLC, Prime Financial L.L.C., Landmark Land Company,
Gerald G. Barton and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 10.3 to the Companys Form 10-Q, filed November 7, 2011. |
|
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|
10.33 |
|
|
Second Amendment to Real Estate Purchase Contract, effective December 16, 2011, by and
among South Padre Island Development, LLC, Prime Financial L.L.C., Landmark Land Company,
Gerald G. Barton and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 99.1 to the Companys Form 8-K, filed December 22, 2011. |
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|
10.34 |
|
|
Common Stock Purchase Warrant granted by Landmark Land Company to Prime Financial,
L.L.C., dated February 7, 2012, which the Company hereby incorporates by reference from
Exhibit 99.4 to the Companys Form 8-K, filed February 16, 2012. |
|
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|
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|
10.35 |
|
|
Geothermal Use Contract, between South Padre Island Development, LLC and Prime
Financial, L.L.C., dated February 7, 2012, which the Company hereby incorporates by
reference from Exhibit 99.5 to the Companys Form 8-K, filed February 16, 2012. |
|
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|
12.1 |
|
|
Calculation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends. |
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21.1 |
|
|
Subsidiaries of the Company. |
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23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
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31.1 |
|
|
Certification of Jack E. Golsen, Chief Executive Officer, pursuant to Sarbanes-Oxley
Act of 2002, Section 302. |
|
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31.2 |
|
|
Certification of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley
Act of 2002, Section 302. |
|
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|
32.1 |
|
|
Certification of Jack E. Golsen, Chief Executive Officer, furnished pursuant to
Sarbanes-Oxley Act of 2002, Section 906. |
|
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|
32.2 |
|
|
Certification of Tony M. Shelby, Chief Financial Officer, furnished pursuant to
Sarbanes-Oxley Act of 2002, Section 906. |
|
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|
|
101.INS
|
|
|
XBRL Instance Document* |
|
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|
|
101.SCH
|
|
|
XBRL Taxonomy Extension Schema Document* |
|
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|
101.CAL
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document* |
|
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|
101.DEF
|
|
|
XBRL Taxonomy Extension Definition Linkbase Document* |
|
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|
101.LAB
|
|
|
XBRL Taxonomy Extension Labels Linkbase Document* |
|
|
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|
101.PRE
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document* |
|
|
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* |
|
Pursuant to Rule 406T of Regulation S-T, the
Interactive Data Files in Exhibit 101 hereto are
deemed not filed or part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, as amended, are deemed not
filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and otherwise are
not subject to liability under those sections. |
92
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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LSB INDUSTRIES, INC. |
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Dated:
February 28, 2012
|
|
By:
|
|
/s/ Jack E. Golsen
Jack E. Golsen
|
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|
|
Chairman of the Board and |
|
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|
Chief Executive Officer |
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|
|
(Principal Executive Officer) |
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Dated:
February 28, 2012
|
|
By:
|
|
/s/ Tony M. Shelby
Tony M. Shelby
|
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|
|
Executive Vice President of Finance |
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|
and Chief Financial Officer |
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(Principal Financial Officer) |
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Dated:
February 28, 2012
|
|
By:
|
|
/s/ Harold L. Rieker Jr.
Harold L. Rieker Jr.
|
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|
Vice President and |
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Principal Accounting Officer |
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|
93
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
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Dated:
February 28, 2012
|
|
By:
|
|
/s/ Jack E. Golsen
Jack E. Golsen, Director
|
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Dated:
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By:
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/s/ Tony M. Shelby |
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February 28, 2012
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Tony M. Shelby, Director |
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Dated:
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By:
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/s/ Barry H. Golsen |
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February 28, 2012
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Barry H. Golsen, Director |
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Dated:
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By:
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/s/ David R. Goss |
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February 28, 2012
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David R. Goss, Director |
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Dated:
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By:
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/s/ Steven J. Golsen |
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February 28, 2012
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Steven J. Golsen, Director |
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Dated:
February 28, 2012
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By:
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/s/ Robert C. Brown MD
Robert C. Brown MD, Director
|
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Dated:
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By:
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/s/ Charles A. Burtch |
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February 28, 2012
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Charles A. Burtch, Director |
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Dated:
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By:
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/s/ Robert A. Butkin |
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February 28, 2012
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Robert A. Butkin, Director |
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Dated:
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By:
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/s/ Bernard G. Ille |
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February 28, 2012
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Bernard G. Ille, Director |
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Dated:
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By:
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/s/ Gail P. Lapidus |
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February 28, 2012
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Gail P. Lapidus, Director |
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Dated:
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By:
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/s/ Donald W. Munson |
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February 28, 2012
|
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Donald W. Munson, Director |
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Dated:
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By:
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/s/ Ronald V. Perry |
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February 28, 2012
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Ronald V. Perry, Director |
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Dated:
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By:
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/s/ Horace G. Rhodes |
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February 28, 2012
|
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Horace G. Rhodes, Director |
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Dated:
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By:
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/s/ John A. Shelley |
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February 28, 2012
|
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John A. Shelley, Director |
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94
LSB Industries, Inc.
Consolidated Financial Statements
And Schedules for Inclusion in Form 10-K
For the Fiscal Year ended December 31, 2011
Table of Contents
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Page |
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Financial Statements |
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F 2 |
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F 3 |
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F 5 |
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F 6 |
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F 8 |
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F 11 |
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F 50 |
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Financial Statement Schedules |
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F 52 |
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F 56 |
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F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB Industries, Inc. as of December
31, 2011 and 2010, and the related consolidated statements of income, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2011. Our audits also
included the financial statement schedules listed in the Index at Item 15(a)(2). These financial
statements and schedules are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of LSB Industries, Inc. at December 31, 2011 and
2010, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), LSB Industries, Inc.s internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
28, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Oklahoma City, Oklahoma
February 28, 2012
F-2
LSB Industries, Inc.
Consolidated Balance Sheets
|
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|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In Thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
124,929 |
|
|
$ |
66,946 |
|
Restricted cash |
|
|
31 |
|
|
|
31 |
|
Short-term investments |
|
|
10,005 |
|
|
|
10,003 |
|
Accounts receivable, net |
|
|
87,351 |
|
|
|
74,259 |
|
Inventories |
|
|
59,506 |
|
|
|
60,106 |
|
Supplies, prepaid items and other: |
|
|
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|
|
|
|
Prepaid insurance |
|
|
5,953 |
|
|
|
4,449 |
|
Precious metals |
|
|
17,777 |
|
|
|
12,048 |
|
Supplies |
|
|
7,513 |
|
|
|
6,802 |
|
Fair value of derivatives and other |
|
|
53 |
|
|
|
1,454 |
|
Prepaid income taxes |
|
|
8,679 |
|
|
|
|
|
Other |
|
|
2,034 |
|
|
|
1,174 |
|
|
|
|
|
|
|
|
Total supplies, prepaid items and other |
|
|
42,009 |
|
|
|
25,927 |
|
Deferred income taxes |
|
|
4,275 |
|
|
|
5,396 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
328,106 |
|
|
|
242,668 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
164,547 |
|
|
|
135,755 |
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Investment in affiliate |
|
|
2,910 |
|
|
|
4,016 |
|
Goodwill |
|
|
1,724 |
|
|
|
1,724 |
|
Other, net |
|
|
4,722 |
|
|
|
3,818 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
9,356 |
|
|
|
9,558 |
|
|
|
|
|
|
|
|
|
|
$ |
502,009 |
|
|
$ |
387,981 |
|
|
|
|
|
|
|
|
(Continued on following page)
F-3
LSB Industries, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets (continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In Thousands) |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
57,891 |
|
|
$ |
51,025 |
|
Short-term financing |
|
|
5,646 |
|
|
|
3,821 |
|
Accrued and other liabilities |
|
|
28,677 |
|
|
|
31,507 |
|
Current portion of long-term debt |
|
|
4,935 |
|
|
|
2,328 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
97,149 |
|
|
|
88,681 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
74,525 |
|
|
|
93,064 |
|
|
|
|
|
|
|
|
|
|
Noncurrent accrued and other liabilities |
|
|
15,239 |
|
|
|
12,605 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
21,826 |
|
|
|
14,261 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Series B 12% cumulative, convertible preferred
stock, $100 par value; 20,000 shares issued and
outstanding |
|
|
2,000 |
|
|
|
2,000 |
|
Series D 6% cumulative, convertible Class C
preferred stock, no par value; 1,000,000 shares
issued and outstanding |
|
|
1,000 |
|
|
|
1,000 |
|
Common stock, $.10 par value; 75,000,000 shares
authorized, 26,638,285 shares issued
(25,476,534 shares at December 31, 2010) |
|
|
2,664 |
|
|
|
2,548 |
|
Capital in excess of par value |
|
|
162,092 |
|
|
|
131,845 |
|
Retained earnings |
|
|
153,888 |
|
|
|
70,351 |
|
|
|
|
|
|
|
|
|
|
|
321,644 |
|
|
|
207,744 |
|
Less treasury stock, at cost: |
|
|
|
|
|
|
|
|
Common stock, 4,320,462 shares |
|
|
28,374 |
|
|
|
28,374 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
293,270 |
|
|
|
179,370 |
|
|
|
|
|
|
|
|
|
|
$ |
502,009 |
|
|
$ |
387,981 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands, Except Per Share Amounts) |
|
|
Net sales |
|
$ |
805,256 |
|
|
$ |
609,905 |
|
|
$ |
531,838 |
|
Cost of sales |
|
|
582,238 |
|
|
|
471,280 |
|
|
|
394,424 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
223,018 |
|
|
|
138,625 |
|
|
|
137,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
|
|
86,343 |
|
|
|
89,720 |
|
|
|
96,374 |
|
Provisions for losses on accounts receivable |
|
|
347 |
|
|
|
145 |
|
|
|
90 |
|
Other expense |
|
|
3,823 |
|
|
|
1,262 |
|
|
|
527 |
|
Other income |
|
|
(3,938 |
) |
|
|
(8,427 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
136,443 |
|
|
|
55,925 |
|
|
|
40,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
6,658 |
|
|
|
7,427 |
|
|
|
6,746 |
|
Losses (gain) on extinguishment of debt |
|
|
136 |
|
|
|
52 |
|
|
|
(1,783 |
) |
Non-operating other income, net |
|
|
|
|
|
|
(53 |
) |
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
provisions for income taxes and equity in
earnings of affiliate |
|
|
129,649 |
|
|
|
48,499 |
|
|
|
35,877 |
|
Provisions for income taxes |
|
|
46,208 |
|
|
|
19,787 |
|
|
|
15,024 |
|
Equity in earnings of affiliate |
|
|
(543 |
) |
|
|
(1,003 |
) |
|
|
(996 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
83,984 |
|
|
|
29,715 |
|
|
|
21,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
142 |
|
|
|
141 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
83,842 |
|
|
|
29,574 |
|
|
|
21,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stocks |
|
|
305 |
|
|
|
305 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
83,537 |
|
|
$ |
29,269 |
|
|
$ |
21,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.81 |
|
|
$ |
1.39 |
|
|
$ |
1.01 |
|
Net loss from discontinued operations |
|
|
(.01 |
) |
|
|
(.01 |
) |
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3.80 |
|
|
$ |
1.38 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.59 |
|
|
$ |
1.33 |
|
|
$ |
.97 |
|
Net loss from discontinued operations |
|
|
(.01 |
) |
|
|
(.01 |
) |
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3.58 |
|
|
$ |
1.32 |
|
|
$ |
.96 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
LSB Industries, Inc.
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Redeemable |
|
|
Common |
|
|
Capital in |
|
|
Other |
|
|
|
|
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Preferred |
|
|
Stock |
|
|
Excess of |
|
|
Comprehensive |
|
|
Retained |
|
|
Stock - |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Par Value |
|
|
Par Value |
|
|
Loss |
|
|
Earnings |
|
|
Common |
|
|
Total |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
24,958 |
|
|
$ |
3,000 |
|
|
$ |
2,496 |
|
|
$ |
127,337 |
|
|
$ |
(120 |
) |
|
$ |
19,804 |
|
|
$ |
(22,473 |
) |
|
$ |
130,044 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,584 |
|
|
|
|
|
|
|
21,584 |
|
Amortization of cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,704 |
|
Dividends paid on preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(306 |
) |
|
|
|
|
|
|
(306 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021 |
|
Exercise of stock options |
|
|
409 |
|
|
|
|
|
|
|
41 |
|
|
|
848 |
|
|
|
|
|
|
|
|
|
|
|
(280 |
) |
|
|
609 |
|
Excess income tax benefit
associated with stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731 |
|
Acquisition of 275,900 shares of
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,200 |
) |
|
|
(3,200 |
) |
Conversion of 36 shares of
redeemable preferred stock to
common stock |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
25,369 |
|
|
$ |
3,000 |
|
|
$ |
2,537 |
|
|
$ |
129,941 |
|
|
$ |
|
|
|
$ |
41,082 |
|
|
$ |
(25,953 |
) |
|
$ |
150,607 |
|
(Continued on following page)
F-6
LSB Industries, Inc.
Consolidated Statements of Stockholders Equity
Consolidated Statements of Stockholders Equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Redeemable |
|
|
Common |
|
|
Capital in |
|
|
Other |
|
|
|
|
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Preferred |
|
|
Stock |
|
|
Excess of |
|
|
Comprehensive |
|
|
Retained |
|
|
Stock - |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Par Value |
|
|
Par Value |
|
|
Loss |
|
|
Earnings |
|
|
Common |
|
|
Total |
|
|
|
(In Thousands) |
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,574 |
|
|
|
|
|
|
$ |
29,574 |
|
Dividends paid on preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305 |
) |
|
|
|
|
|
|
(305 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005 |
|
Exercise of stock options |
|
|
106 |
|
|
|
|
|
|
|
11 |
|
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829 |
|
Excess income tax benefit associated with
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
Acquisition of 177,100 shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,421 |
) |
|
|
(2,421 |
) |
Conversion of 37 shares of redeemable
preferred stock to common stock |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
25,477 |
|
|
|
3,000 |
|
|
|
2,548 |
|
|
|
131,845 |
|
|
|
|
|
|
|
70,351 |
|
|
|
(28,374 |
) |
|
|
179,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,842 |
|
|
|
|
|
|
|
83,842 |
|
Dividends paid on preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305 |
) |
|
|
|
|
|
|
(305 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,099 |
|
Conversion of convertible debt to common stock |
|
|
983 |
|
|
|
|
|
|
|
98 |
|
|
|
26,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,904 |
|
Exercise of stock options |
|
|
178 |
|
|
|
|
|
|
|
18 |
|
|
|
1,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,197 |
|
Excess income tax benefit associated with
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162 |
|
Conversion of 13 shares of redeemable
preferred stock to common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
|
26,638 |
|
|
$ |
3,000 |
|
|
$ |
2,664 |
|
|
$ |
162,092 |
|
|
$ |
|
|
|
$ |
153,888 |
|
|
$ |
(28,374 |
) |
|
$ |
293,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(In Thousands) |
|
Cash flows from continuing operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
83,842 |
|
|
$ |
29,574 |
|
|
$ |
21,584 |
|
Adjustments to reconcile net income to net cash provided by
continuing operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
142 |
|
|
|
141 |
|
|
|
265 |
|
Deferred income taxes |
|
|
8,688 |
|
|
|
2,310 |
|
|
|
11,231 |
|
Losses (gain) on extinguishment of debt |
|
|
136 |
|
|
|
52 |
|
|
|
(1,783 |
) |
Expense associated with modification of secured term loan |
|
|
387 |
|
|
|
|
|
|
|
|
|
Expense associated with induced conversion of 5.5% convertible
debentures |
|
|
558 |
|
|
|
|
|
|
|
|
|
Net gain on carbon credits |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
Losses on sales and disposals of property and equipment |
|
|
1,280 |
|
|
|
460 |
|
|
|
378 |
|
Gain on property insurance recoveries associated with
property, plant and equipment |
|
|
|
|
|
|
(7,500 |
) |
|
|
|
|
Depreciation of property, plant and equipment |
|
|
18,762 |
|
|
|
17,329 |
|
|
|
15,601 |
|
Amortization |
|
|
440 |
|
|
|
651 |
|
|
|
757 |
|
Stock-based compensation |
|
|
1,099 |
|
|
|
1,005 |
|
|
|
1,021 |
|
Provisions for losses on accounts receivable |
|
|
347 |
|
|
|
145 |
|
|
|
90 |
|
Provisions for (realization of) losses on inventory |
|
|
590 |
|
|
|
184 |
|
|
|
(2,404 |
) |
Provision for (realization of) losses on firm sales commitments |
|
|
|
|
|
|
(371 |
) |
|
|
371 |
|
Equity in earnings of affiliate |
|
|
(543 |
) |
|
|
(1,003 |
) |
|
|
(996 |
) |
Distributions received from affiliate |
|
|
1,649 |
|
|
|
825 |
|
|
|
786 |
|
Changes in fair value of commodities contracts |
|
|
(11 |
) |
|
|
(761 |
) |
|
|
(138 |
) |
Changes in fair value of interest rate contracts |
|
|
346 |
|
|
|
(34 |
) |
|
|
(508 |
) |
Other |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
Cash provided (used) by changes in assets and liabilities
(net of effects of discontinued operations): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(13,451 |
) |
|
|
(17,340 |
) |
|
|
22,118 |
|
Inventories |
|
|
60 |
|
|
|
(9,277 |
) |
|
|
11,880 |
|
Prepaid and accrued income taxes |
|
|
(12,805 |
) |
|
|
5,947 |
|
|
|
(2,738 |
) |
Other supplies, prepaid items and other |
|
|
(8,755 |
) |
|
|
(1,585 |
) |
|
|
230 |
|
Accounts payable |
|
|
2,175 |
|
|
|
15,556 |
|
|
|
(6,154 |
) |
Commodities contracts |
|
|
761 |
|
|
|
150 |
|
|
|
(5,922 |
) |
Customer deposits |
|
|
1,919 |
|
|
|
1,951 |
|
|
|
(2,607 |
) |
Deferred rent expense |
|
|
|
|
|
|
|
|
|
|
(1,424 |
) |
Other current and noncurrent liabilities |
|
|
2,506 |
|
|
|
5,802 |
|
|
|
(3,965 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities |
|
|
89,971 |
|
|
|
44,201 |
|
|
|
57,673 |
|
(Continued on following page)
F-8
LSB Industries, Inc.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
  |