þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 73-1015226 | |
State or other jurisdiction of | I.R.S. Employer Identification No. | |
incorporation or organization | ||
16 South Pennsylvania Avenue, Oklahoma City, Oklahoma | 73107 | |
Address of principal executive offices | Zip Code |
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
2
Item 1. | Financial Statements |
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 107,983 | $ | 66,946 | ||||
Restricted cash |
512 | 31 | ||||||
Short-term investments |
| 10,003 | ||||||
Accounts receivable, net |
85,866 | 74,259 | ||||||
Inventories: |
||||||||
Finished goods |
38,553 | 32,072 | ||||||
Work in process |
4,367 | 2,981 | ||||||
Raw materials |
31,277 | 25,053 | ||||||
Total inventories |
74,197 | 60,106 | ||||||
Supplies, prepaid items and other: |
||||||||
Prepaid income taxes |
3,467 | | ||||||
Prepaid insurance |
745 | 4,449 | ||||||
Precious metals |
17,595 | 12,048 | ||||||
Supplies |
7,866 | 6,802 | ||||||
Fair value of derivatives and other |
7 | 1,454 | ||||||
Other |
1,915 | 1,174 | ||||||
Total supplies, prepaid items and other |
31,595 | 25,927 | ||||||
Deferred income taxes |
6,064 | 5,396 | ||||||
Total current assets |
306,217 | 242,668 | ||||||
Property, plant and equipment, net |
154,621 | 135,755 | ||||||
Other assets: |
||||||||
Debt issuance costs, net |
1,151 | 1,023 | ||||||
Investment in affiliate |
3,168 | 4,016 | ||||||
Goodwill |
1,724 | 1,724 | ||||||
Other, net |
3,479 | 2,795 | ||||||
Total other assets |
9,522 | 9,558 | ||||||
$ | 470,360 | $ | 387,981 | |||||
3
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 57,512 | $ | 51,025 | ||||
Short-term financing |
386 | 3,821 | ||||||
Accrued and other liabilities |
32,977 | 31,507 | ||||||
Current portion of long-term debt |
6,059 | 2,328 | ||||||
Total current liabilities |
96,934 | 88,681 | ||||||
Long-term debt |
77,245 | 93,064 | ||||||
Noncurrent accrued and other liabilities |
14,882 | 12,605 | ||||||
Deferred income taxes |
17,145 | 14,261 | ||||||
Commitments and contingencies (Note 10) |
||||||||
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,
26,584,650 shares issued (25,476,534 at December 31, 2010) |
2,658 | 2,548 | ||||||
Capital in excess of par value |
160,970 | 131,845 | ||||||
Retained earnings |
125,900 | 70,351 | ||||||
292,528 | 207,744 | |||||||
Less treasury stock at cost: |
||||||||
Common stock, 4,320,462 shares |
28,374 | 28,374 | ||||||
Total stockholders equity |
264,154 | 179,370 | ||||||
$ | 470,360 | $ | 387,981 | |||||
4
Nine Months | Three Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands, Except Per Share Amounts) | ||||||||||||||||
Net sales |
$ | 589,892 | $ | 437,750 | $ | 176,780 | $ | 138,948 | ||||||||
Cost of sales |
429,695 | 344,897 | 142,523 | 109,509 | ||||||||||||
Gross profit |
160,197 | 92,853 | 34,257 | 29,439 | ||||||||||||
Selling, general and administrative expense |
64,737 | 70,775 | 21,635 | 23,948 | ||||||||||||
Provision for (recoveries of) losses on accounts receivable |
160 | (14 | ) | 39 | 21 | |||||||||||
Other expense |
2,532 | 575 | 149 | 273 | ||||||||||||
Other income |
(2,035 | ) | (4,179 | ) | (58 | ) | (3,273 | ) | ||||||||
Operating income |
94,803 | 25,696 | 12,492 | 8,470 | ||||||||||||
Interest expense |
5,481 | 5,943 | 1,901 | 1,864 | ||||||||||||
Losses on extinguishment of debt |
136 | 52 | | | ||||||||||||
Non-operating other expense (income), net |
(3 | ) | (48 | ) | 2 | (10 | ) | |||||||||
Income from continuing operations before provisions
for income taxes and equity in earnings of affiliate |
89,189 | 19,749 | 10,589 | 6,616 | ||||||||||||
Provisions for income taxes |
33,582 | 8,821 | 4,433 | 2,930 | ||||||||||||
Equity in earnings of affiliate |
(375 | ) | (719 | ) | (168 | ) | (191 | ) | ||||||||
Income from continuing operations |
55,982 | 11,647 | 6,324 | 3,877 | ||||||||||||
Net loss from discontinued operations |
128 | 122 | 18 | 79 | ||||||||||||
Net income |
55,854 | 11,525 | 6,306 | 3,798 | ||||||||||||
Dividends on preferred stocks |
305 | 305 | | | ||||||||||||
Net income applicable to common stock |
$ | 55,549 | $ | 11,220 | $ | 6,306 | $ | 3,798 | ||||||||
Weighted-average common shares: |
||||||||||||||||
Basic |
21,851 | 21,182 | 22,241 | 21,094 | ||||||||||||
Diluted |
23,499 | 22,281 | 23,526 | 22,193 | ||||||||||||
Income (loss) per common share: |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | 2.55 | $ | .54 | $ | .28 | $ | .18 | ||||||||
Net loss from discontinued operations |
(.01 | ) | (.01 | ) | | | ||||||||||
Net income |
$ | 2.54 | $ | .53 | $ | .28 | $ | .18 | ||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
$ | 2.40 | $ | .53 | $ | .27 | $ | .17 | ||||||||
Net loss from discontinued operations |
(.01 | ) | (.01 | ) | | | ||||||||||
Net income |
$ | 2.39 | $ | .52 | $ | .27 | $ | .17 | ||||||||
5
Non- | ||||||||||||||||||||||||||||
Common | Redeemable | Common | Capital in | Treasury | ||||||||||||||||||||||||
Stock | Preferred | Stock Par | Excess of Par | Retained | Stock- | |||||||||||||||||||||||
Shares | Stock | Value | Value | Earnings | Common | Total | ||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||
Balance at December 31, 2010 |
25,477 | $ | 3,000 | $ | 2,548 | $ | 131,845 | $ | 70,351 | $ | (28,374 | ) | $ | 179,370 | ||||||||||||||
Net income |
55,854 | 55,854 | ||||||||||||||||||||||||||
Dividends paid on preferred stocks |
(305 | ) | (305 | ) | ||||||||||||||||||||||||
Stock-based compensation |
761 | 761 | ||||||||||||||||||||||||||
Conversion of convertible debt to common stock |
965 | 96 | 26,304 | 26,400 | ||||||||||||||||||||||||
Exercise of stock options |
143 | 14 | 960 | 974 | ||||||||||||||||||||||||
Excess income tax benefit associated with
stock-based compensation |
1,100 | 1,100 | ||||||||||||||||||||||||||
Balance at September 30, 2011 |
26,585 | $ | 3,000 | $ | 2,658 | $ | 160,970 | $ | 125,900 | $ | (28,374 | ) | $ | 264,154 | ||||||||||||||
6
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Cash flows from continuing operating activities: |
||||||||
Net income |
$ | 55,854 | $ | 11,525 | ||||
Adjustments to reconcile net income to net cash provided by continuing
operating activities: |
||||||||
Net loss from discontinued operations |
128 | 122 | ||||||
Deferred income taxes |
2,216 | 2,325 | ||||||
Losses on extinguishment of debt |
136 | 52 | ||||||
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 |
(92 | ) | | |||||
Losses on sales and disposals of property and equipment |
996 | 508 | ||||||
Gain on property insurance recoveries associated with property, plant
and equipment |
| (3,964 | ) | |||||
Depreciation of property, plant and equipment |
13,861 | 12,880 | ||||||
Amortization |
354 | 466 | ||||||
Stock-based compensation |
761 | 752 | ||||||
Provision for (recovery of) losses on accounts receivable |
160 | (14 | ) | |||||
Provision for (realization of) losses on inventory |
1,351 | (86 | ) | |||||
Realization of losses on firm sales commitments |
| (337 | ) | |||||
Equity in earnings of affiliate |
(375 | ) | (719 | ) | ||||
Distributions received from affiliate |
1,223 | 425 | ||||||
Changes in fair value of commodities contracts |
482 | (141 | ) | |||||
Changes in fair value of interest rate contracts |
635 | 344 | ||||||
Other |
| (10 | ) | |||||
Cash provided (used) by changes in assets and liabilities (net of
effects of discontinued operations): |
||||||||
Accounts receivable |
(11,777 | ) | (14,373 | ) | ||||
Inventories |
(15,392 | ) | (1,967 | ) | ||||
Other supplies, prepaid items and other |
(2,838 | ) | 1,449 | |||||
Accounts payable |
3,744 | 6,635 | ||||||
Accrued payroll and benefits |
(2,020 | ) | 1,794 | |||||
Accrued and prepaid income taxes |
(7,538 | ) | 319 | |||||
Customer deposits |
5,395 | 2,306 | ||||||
Other current and noncurrent liabilities |
4,322 | 2,394 | ||||||
Net cash provided by continuing operating activities |
52,531 | 22,685 | ||||||
Cash flows from continuing investing activities: |
||||||||
Capital expenditures |
(31,145 | ) | (26,129 | ) | ||||
Proceeds from property insurance recoveries associated with property, plant and equipment |
| 5,293 | ||||||
Proceeds from sales of property and equipment |
190 | 44 | ||||||
Proceeds from short-term investments |
10,012 | 20,053 | ||||||
Purchases of short-term investments |
(9 | ) | (20,006 | ) | ||||
Deposits of restricted cash |
(481 | ) | (167 | ) | ||||
Proceeds from sales of carbon credits |
1,665 | | ||||||
Payments on contractual obligations carbon credits |
(1,573 | ) | | |||||
Other assets |
(635 | ) | (427 | ) | ||||
Net cash used by continuing investing activities |
(21,976 | ) | (21,339 | ) |
7
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Cash flows from continuing financing activities: |
||||||||
Proceeds from revolving debt facility |
$ | 498,858 | $ | 394,221 | ||||
Payments on revolving debt facility |
(498,858 | ) | (394,221 | ) | ||||
Proceeds from modification of secured term loan, net of fees |
10,347 | | ||||||
Proceeds from secured term loan, net of fees |
14,766 | | ||||||
Proceeds from other long-term debt, net of fees |
| 47 | ||||||
Payments associated with induced conversion of 5.5% convertible
debentures |
(558 | ) | | |||||
Acquisition of 5.5% convertible debentures |
| (2,494 | ) | |||||
Payments on other long-term debt |
(12,001 | ) | (3,370 | ) | ||||
Payments on loans secured by cash value of life insurance policies |
(84 | ) | (380 | ) | ||||
Payments of debt issuance costs |
(112 | ) | | |||||
Payments on short-term financing |
(3,435 | ) | (3,017 | ) | ||||
Proceeds from exercise of stock options |
974 | 347 | ||||||
Purchase of treasury stock |
| (2,421 | ) | |||||
Excess income tax benefit associated with stock-based compensation |
1,100 | 212 | ||||||
Dividends paid on preferred stocks |
(305 | ) | (305 | ) | ||||
Net cash provided (used) by continuing financing activities |
10,692 | (11,381 | ) | |||||
Cash flows of discontinued operations: |
||||||||
Operating cash flows |
(210 | ) | (267 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
41,037 | (10,302 | ) | |||||
Cash and cash equivalents at beginning of period |
66,946 | 61,739 | ||||||
Cash and cash equivalents at end of period |
$ | 107,983 | $ | 51,437 | ||||
Supplemental cash flow information: |
||||||||
Cash payments for income taxes, net of refunds |
$ | 37,757 | $ | 5,993 | ||||
Noncash investing and financing activities: |
||||||||
Receivable associated with a property insurance claim |
$ | | $ | 171 | ||||
Accounts payable and long-term debt associated with property,
plant and equipment |
$ | 4,332 | $ | 7,272 | ||||
Debt issuance costs incurred associated with secured term loan |
$ | 839 | $ | | ||||
Debt issuance costs written off associated with 5.5% debentures |
$ | 350 | $ | 58 | ||||
Accrued liabilities extinguished associated with 5.5% debentures |
$ | 342 | $ | | ||||
5.5% debentures converted to common stock |
$ | 26,400 | $ | |
8
9
10
11
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 55,854 | $ | 11,525 | $ | 6,306 | $ | 3,798 | ||||||||
Dividends on Series B Preferred |
(240 | ) | (240 | ) | | | ||||||||||
Dividends on Series D Preferred |
(60 | ) | (60 | ) | | | ||||||||||
Dividends on Noncumulative Preferred |
(5 | ) | (5 | ) | | | ||||||||||
Total dividends on preferred stocks |
(305 | ) | (305 | ) | | | ||||||||||
Numerator for basic net income per common share net
income applicable to common stock |
55,549 | 11,220 | 6,306 | 3,798 | ||||||||||||
Dividends on preferred stocks assumed to be
converted, if dilutive |
305 | 305 | | | ||||||||||||
Interest expense including amortization of
debt issuance costs, net of income taxes, on
convertible debt assumed to be converted,
if dilutive |
298 | | 8 | | ||||||||||||
Numerator for diluted net income per common share |
$ | 56,152 | $ | 11,525 | $ | 6,314 | $ | 3,798 | ||||||||
Denominator: |
||||||||||||||||
Denominator for basic net income per common share
weighted-average shares |
21,851,184 | 21,182,180 | 22,240,536 | 21,093,732 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Convertible preferred stocks |
935,540 | 937,080 | 935,366 | 936,536 | ||||||||||||
Convertible notes payable |
366,894 | 4,000 | 32,391 | 4,000 | ||||||||||||
Stock options |
345,245 | 157,682 | 317,420 | 158,886 | ||||||||||||
Dilutive potential common shares |
1,647,679 | 1,098,762 | 1,285,177 | 1,099,422 | ||||||||||||
Denominator for diluted net income per common share
adjusted weighted-average shares and assumed
conversions |
23,498,863 | 22,280,942 | 23,525,713 | 22,193,154 | ||||||||||||
Basic net income per common share |
$ | 2.54 | $ | .53 | $ | .28 | $ | .18 | ||||||||
Diluted net income per common share |
$ | 2.39 | $ | .52 | $ | .27 | $ | .17 | ||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Convertible notes payable |
| 979,160 | | 979,160 | ||||||||||||
Stock options |
| 365,659 | 5,000 | 350,000 | ||||||||||||
| 1,344,819 | 5,000 | 1,329,160 | |||||||||||||
12
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Trade receivables |
$ | 85,691 | $ | 73,367 | ||||
Other |
946 | 1,528 | ||||||
86,637 | 74,895 | |||||||
Allowance for doubtful accounts |
(771 | ) | (636 | ) | ||||
$ | 85,866 | $ | 74,259 | |||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 1,793 | $ | 1,676 | $ | 1,988 | $ | 1,302 | ||||||||
Provisions for (realization of) losses |
1,351 | (87 | ) | 1,072 | 237 | |||||||||||
Write-offs and disposals |
(85 | ) | (54 | ) | (1 | ) | (4 | ) | ||||||||
Balance at end of period |
$ | 3,059 | $ | 1,535 | $ | 3,059 | $ | 1,535 | ||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Precious metals expense |
$ | 6,101 | $ | 4,508 | $ | 1,591 | $ | 1,047 | ||||||||
Recoveries of precious metals |
(4,654 | ) | (751 | ) | (2,012 | ) | (751 | ) | ||||||||
Gains on sales of precious metals |
(33 | ) | (112 | ) | (33 | ) | | |||||||||
Precious metals expense (recoveries), net |
$ | 1,414 | $ | 3,645 | $ | (454 | ) | $ | 296 | |||||||
13
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Customer deposits |
$ | 7,981 | $ | 2,586 | ||||
Deferred revenue on extended warranty contracts |
6,250 | 5,675 | ||||||
Accrued warranty costs |
4,993 | 3,996 | ||||||
Accrued payroll and benefits |
4,722 | 6,742 | ||||||
Accrued death benefits |
4,028 | 4,058 | ||||||
Accrued group health and workers compensation insurance claims |
3,062 | 2,459 | ||||||
Fair value of derivatives and other |
3,019 | 2,539 | ||||||
Accrued contractual manufacturing obligations |
2,480 | 1,968 | ||||||
Deferred revenue on product sales |
1,309 | 453 | ||||||
Accrued executive benefits |
1,296 | 1,187 | ||||||
Accrued precious metals costs |
1,206 | 449 | ||||||
Accrued general liability insurance claims |
1,145 | 1,230 | ||||||
Accrued commissions |
1,121 | 1,279 | ||||||
Accrued income taxes |
764 | 4,835 | ||||||
Accrued interest |
589 | 1,343 | ||||||
Other |
3,894 | 3,313 | ||||||
47,859 | 44,112 | |||||||
Less noncurrent portion |
14,882 | 12,605 | ||||||
Current portion of accrued and other liabilities |
$ | 32,977 | $ | 31,507 | ||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 3,996 | $ | 3,138 | $ | 4,598 | $ | 3,129 | ||||||||
Charged to costs and expenses |
4,870 | 2,669 | 1,636 | 1,026 | ||||||||||||
Costs and expenses incurred |
(3,873 | ) | (2,673 | ) | (1,241 | ) | (1,021 | ) | ||||||||
Balance at end of period |
$ | 4,993 | $ | 3,134 | $ | 4,993 | $ | 3,134 | ||||||||
14
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Working Capital Revolver Loan due 2012 (A) |
$ | | $ | | ||||
5.5% Convertible Senior Subordinated Notes due 2012 (B) |
500 | 26,900 | ||||||
Secured Term Loan (C) |
73,125 | 48,773 | ||||||
Other, with a current weighted-average interest rate of
6.56%, most of which is secured by machinery, equipment and
real estate |
9,679 | 19,719 | ||||||
83,304 | 95,392 | |||||||
Less current portion of long-term debt |
6,059 | 2,328 | ||||||
Long-term debt due after one year |
$ | 77,245 | $ | 93,064 | ||||
(A) | Our wholly-owned subsidiary, ThermaClime, LLC (ThermaClime) and its subsidiaries
(collectively, the Borrowers) are parties to a $50 million revolving credit facility (the
Working Capital Revolver Loan) that provides for advances based on specified percentages of
eligible accounts receivable and inventories for ThermaClime and its subsidiaries. The Working
Capital Revolver Loan accrues interest at a base rate (generally equivalent to the prime rate) plus
..50% or LIBOR plus 1.75% and matures on April 13, 2012. The interest rate at September 30, 2011 was
3.75%. Interest is paid monthly, if applicable. |
| incur additional indebtedness, |
| incur liens, |
| make restricted payments or loans to affiliates who are not Borrowers, |
| engage in mergers, consolidations or other forms of recapitalization, or |
| dispose assets. |
15
(B) | In June 2007, we entered into a purchase agreement with each of twenty two qualified
institutional buyers (QIBs), pursuant to which we sold $60 million aggregate principal amount of
the debentures (the 2007 Debentures) in a private placement to the QIBs pursuant to the
exemptions from the registration requirements of the Securities Act of 1933, as amended (the
Act), afforded by Section 4(2) of the Act and Regulation D promulgated under the Act. |
(C) | On March 29, 2011, ThermaClime and certain of its subsidiaries entered into an amended and
restated term loan agreement (the Amended Agreement), which amended ThermaClimes existing term
loan agreement (the Original Agreement), dated November 2, 2007, as previously amended. Pursuant
to the terms of the Amended Agreement, the maximum principal amount of ThermaClimes term loan
facility (the Secured Term Loan) was increased from $50 million to $60 million. 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 Amended Agreement also extended the
maturity of the Secured Term Loan from November 2, 2012, to March 29, 2016. The Secured Term Loan
continues to be guaranteed by LSB. For financial reporting purposes, this transaction is considered
a non-substantial modification of the Original Agreement. |
16
17
18
19
| fraudulent inducement and fraud, |
| violation of 10(b) of the Exchange Act and Rule 10b-5, |
| violation of 17-12A501 of the Kansas Uniform Securities Act, and |
| breach of contract. |
20
21
22
Fair Value Measurements at | ||||||||||||||||||||
September 30, 2011 Using | ||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||
Total Fair | in Active | Other | Significant | Total Fair | ||||||||||||||||
Value at | Markets for | Observable | Unobservable | Value at | ||||||||||||||||
September 30, | Identical Assets | Inputs | Inputs | December 31, | ||||||||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||||
(In Thousands) | ||||||||||||||||||||
Assets Supplies, prepaid
items and other: |
||||||||||||||||||||
Commodities contracts |
$ | | $ | | $ | | $ | | $ | 761 | ||||||||||
Carbon credits |
7 | | | 7 | 644 | |||||||||||||||
Foreign exchange contracts |
| | | | 49 | |||||||||||||||
Total |
$ | 7 | $ | | $ | | $ | 7 | $ | 1,454 | ||||||||||
Liabilities Current and
noncurrent accrued and
other liabilities: |
||||||||||||||||||||
Commodities contracts |
$ | 482 | $ | 482 | $ | | $ | | $ | | ||||||||||
Contractual obligations carbon
credits |
7 | | | 7 | 644 | |||||||||||||||
Interest rate contracts |
2,530 | | 2,530 | | 1,895 | |||||||||||||||
Total |
$ | 3,019 | $ | 482 | $ | 2,530 | $ | 7 | $ | 2,539 | ||||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
(In Thousands) | ||||||||||||||||
Beginning balance |
$ | 644 | $ | (644 | ) | $ | 9 | $ | (7 | ) | ||||||
Transfers into Level 3 |
| | | | ||||||||||||
Transfers out of Level 3 |
| | | | ||||||||||||
Total realized and unrealized gain (loss) included in
earnings |
1,028 | (936 | ) | (2 | ) | | ||||||||||
Purchases |
| | | | ||||||||||||
Issuances |
| | | | ||||||||||||
Sales |
(1,665 | ) | | | | |||||||||||
Settlements |
| 1,573 | | | ||||||||||||
Ending balance |
$ | 7 | $ | (7 | ) | $ | 7 | $ | (7 | ) | ||||||
23
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Total net gains (losses) included in earnings: |
||||||||||||||||
Cost of sales Commodities contracts |
$ | (624 | ) | $ | (764 | ) | $ | (430 | ) | $ | 140 | |||||
Cost of sales Foreign exchange contracts |
46 | 42 | | 66 | ||||||||||||
Other income Carbon credits |
1,028 | | (2 | ) | | |||||||||||
Other expense Contractual obligations
relating to carbon credits |
(936 | ) | | | | |||||||||||
Interest expense Interest rate contracts |
(1,825 | ) | (1,512 | ) | (799 | ) | (375 | ) | ||||||||
$ | (2,311 | ) | $ | (2,234 | ) | $ | (1,231 | ) | $ | (169 | ) | |||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Change in unrealized gains (losses)
relating to contracts still held at period
end: |
||||||||||||||||
Cost of sales Commodities contracts |
$ | (482 | ) | $ | 141 | $ | (430 | ) | $ | 342 | ||||||
Other income Carbon credits |
7 | 66 | (2 | ) | 66 | |||||||||||
Other expense Contractual obligations
relating to carbon credits |
(7 | ) | | | | |||||||||||
Interest expense Interest rate contracts |
(635 | ) | (344 | ) | (395 | ) | 4 | |||||||||
$ | (1,117 | ) | $ | (137 | ) | $ | (827 | ) | $ | 412 | ||||||
24
September 30, 2011 | December 31, 2010 | |||||||||||||||
Estimated | Carrying | Estimated | Carrying | |||||||||||||
Fair Value | Value | Fair Value | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Variable Interest Rate: |
||||||||||||||||
Secured Term Loan (1) |
$ | 73,125 | $ | 73,125 | $ | 26,721 | $ | 48,773 | ||||||||
Working Capital Revolver Loan |
| | | | ||||||||||||
Other debt (2) |
| | 2,437 | 2,437 | ||||||||||||
Fixed Interest Rate: |
||||||||||||||||
5.5% Convertible Senior Subordinated Notes |
522 | 500 | 27,976 | 26,900 | ||||||||||||
Other bank debt and equipment financing |
9,631 | 9,679 | 17,251 | 17,282 | ||||||||||||
$ | 83,278 | $ | 83,304 | $ | 74,385 | $ | 95,392 | |||||||||
(1) | Includes a fixed interest rate of 5.15% on the principal amount of $24.4 million at
September 30, 2011. |
|
(2) | At December 31, 2010, the balance includes a variable interest rate debt agreement with
a minimum interest rate of 6%, which interest rate was 6%. |
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Current: |
||||||||||||||||
Federal |
$ | 24,497 | $ | 5,059 | $ | 2,583 | $ | 586 | ||||||||
State |
6,869 | 1,437 | 1,200 | 263 | ||||||||||||
Total current provisions |
$ | 31,366 | $ | 6,496 | $ | 3,783 | $ | 849 | ||||||||
Deferred: |
||||||||||||||||
Federal |
$ | 1,932 | $ | 2,026 | $ | 554 | $ | 1,800 | ||||||||
State |
284 | 299 | 96 | 281 | ||||||||||||
Total deferred provisions |
2,216 | 2,325 | 650 | 2,081 | ||||||||||||
Provisions for income taxes |
$ | 33,582 | $ | 8,821 | $ | 4,433 | $ | 2,930 | ||||||||
25
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Other expense: |
||||||||||||||||
Losses on sales and disposals of property and equipment |
$ | 996 | $ | 508 | $ | 101 | $ | 249 | ||||||||
Loss on contractual obligations associated with carbon
credits |
936 | | | | ||||||||||||
Other miscellaneous expense (1) |
600 | 67 | 48 | 24 | ||||||||||||
Total other expense |
$ | 2,532 | $ | 575 | $ | 149 | $ | 273 | ||||||||
Other income: |
||||||||||||||||
Gain on carbon credits |
$ | 1,028 | $ | | $ | (2 | ) | $ | | |||||||
Settlements of litigation and potential litigation (2) |
757 | | | | ||||||||||||
Property insurance recoveries in excess of
losses incurred (3) |
| 3,982 | | 3,243 | ||||||||||||
Miscellaneous income (1) |
250 | 197 | 60 | 30 | ||||||||||||
Total other income |
$ | 2,035 | $ | 4,179 | $ | 58 | $ | 3,273 | ||||||||
Non-operating other income (expense), net: |
||||||||||||||||
Interest income |
$ | 61 | $ | 107 | $ | 20 | $ | 30 | ||||||||
Miscellaneous income (1) |
| 1 | | 1 | ||||||||||||
Miscellaneous expense (1) |
(58 | ) | (60 | ) | (22 | ) | (21 | ) | ||||||||
Total non-operating other income (expense), net |
$ | 3 | $ | 48 | $ | (2 | ) | $ | 10 | |||||||
(1) | Amounts represent numerous unrelated transactions, none of which are individually significant
requiring separate disclosure. |
|
(2) | Amount relates primarily to the Chemical Business relating to a lawsuit filed in 2009 by
Cherokee Nitrogen Company (CNC) against a vendor, which alleged that CNC suffered property
damages and lost income as a result of the vendors negligence in installing certain equipment
at the Cherokee Facility. In January 2011, a settlement at mediation was finalized, which
included a payment to CNC of $735,000. |
|
(3) | Amount relates to recoveries from property insurance claims associated with our Chemical
Business. |
26
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Net sales: |
||||||||||||||||
Climate Control |
$ | 212,628 | $ | 178,045 | $ | 71,804 | $ | 64,546 | ||||||||
Chemical (1) |
369,820 | 253,828 | 102,769 | 72,578 | ||||||||||||
Other |
7,444 | 5,877 | 2,207 | 1,824 | ||||||||||||
$ | 589,892 | $ | 437,750 | $ | 176,780 | $ | 138,948 | |||||||||
Gross profit: (2) |
||||||||||||||||
Climate Control |
$ | 67,689 | $ | 60,195 | $ | 22,808 | $ | 22,964 | ||||||||
Chemical (1) |
89,789 | 30,631 | 10,677 | 5,871 | ||||||||||||
Other |
2,719 | 2,027 | 772 | 604 | ||||||||||||
$ | 160,197 | $ | 92,853 | $ | 34,257 | $ | 29,439 | |||||||||
Operating income: (3) |
||||||||||||||||
Climate Control |
$ | 26,357 | $ | 22,632 | $ | 8,738 | $ | 10,112 | ||||||||
Chemical (1) |
78,923 | 12,310 | 7,105 | 1,247 | ||||||||||||
General corporate expenses and
other business operations, net (4) |
(10,477 | ) | (9,246 | ) | (3,351 | ) | (2,889 | ) | ||||||||
94,803 | 25,696 | 12,492 | 8,470 | |||||||||||||
Interest expense |
(5,481 | ) | (5,943 | ) | (1,901 | ) | (1,864 | ) | ||||||||
Losses on extinguishment of debt |
(136 | ) | (52 | ) | | | ||||||||||
Non-operating other income (expense), net: |
||||||||||||||||
Climate Control |
1 | 1 | | | ||||||||||||
Chemical |
1 | 6 | | 1 | ||||||||||||
Corporate and other business operations |
1 | 41 | (2 | ) | 9 | |||||||||||
Provisions for income taxes |
(33,582 | ) | (8,821 | ) | (4,433 | ) | (2,930 | ) | ||||||||
Equity in earnings of affiliate-Climate Control |
375 | 719 | 168 | 191 | ||||||||||||
Income from continuing operations |
$ | 55,982 | $ | 11,647 | $ | 6,324 | $ | 3,877 | ||||||||
(1) | During most of the first nine months of 2011, the Pryor Facility had sustained production of
anhydrous ammonia and UAN compared to limited production during the first nine months of 2010.
For the nine and three months ended September 30, 2011, the Pryor Facility had net sales to
unrelated third parties of $63.3 million and $10.5 million, respectively and operating income
of $30.6 million and $0.1 million, respectively, resulting from those sales and an insurance
recovery of $8.6 million recognized during the first nine months of 2011 relating to a
business interruption claim, which was recorded as a reduction to cost of sales. In addition
for the nine and three months ended September 30, 2011, the Chemical Business realized a net
benefit of $4.4 million and $0.6 million, respectively, from the utilization by our other
facilities of lower cost ammonia produced at the Pryor Facility. For the nine and three months
ended September 30, 2010, the Pryor Facility had net sales to unrelated third parties of $7.8
million and $1.8 million and an operating loss of $11.2 million and $3.2 million,
respectively. Due to limited and intermittent production at the Pryor Facility during the
first nine months of 2010, most of its operating loss related to nonproduction-related
expenses incurred and were classified as selling, general and administrative expenses
(SG&A). |
|
(2) | Gross profit by business segment represents net sales less cost of sales. Gross profit
classified as Other relates to the sales of industrial machinery and related components. |
|
(3) | Our chief operating decision makers use operating income by business segment for purposes of
making decisions, which include resource allocations and performance evaluations. Operating
income by business segment represents gross profit by business segment less SG&A incurred by
each business segment plus other income and other expense earned/incurred by each business
segment before general corporate expenses and
other business operations, net. General corporate expenses and other business operations, net,
consist of unallocated portions of gross profit, SG&A, other income and other expense. |
27
Note 15: Segment Information (continued) |
||
(4) | The amounts included are not allocated to our Climate Control and Chemical Businesses since
these items are not included in the operating results reviewed by our chief
operating decision makers for purposes of making decisions as discussed above. A detail of
these amounts are as follows: |
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In Thousands) | ||||||||||||||||
Gross profit-Other |
$ | 2,719 | $ | 2,027 | $ | 772 | $ | 604 | ||||||||
Selling, general and administrative: |
||||||||||||||||
Personnel costs |
(6,338 | ) | (6,054 | ) | (2,187 | ) | (1,787 | ) | ||||||||
Professional fees |
(3,046 | ) | (3,105 | ) | (957 | ) | (1,180 | ) | ||||||||
All other |
(3,420 | ) | (2,333 | ) | (909 | ) | (682 | ) | ||||||||
Total selling, general and administrative |
(12,804 | ) | (11,492 | ) | (4,053 | ) | (3,649 | ) | ||||||||
Other income |
102 | 230 | 26 | 160 | ||||||||||||
Other expense |
(494 | ) | (11 | ) | (96 | ) | (4 | ) | ||||||||
Total general corporate expenses and
other business operations, net |
$ | (10,477 | ) | $ | (9,246 | ) | $ | (3,351 | ) | $ | (2,889 | ) | ||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In Thousands) | ||||||||
Climate Control |
$ | 122,790 | $ | 112,894 | ||||
Chemical |
215,294 | 179,033 | ||||||
Corporate assets and other |
132,276 | 96,054 | ||||||
Total assets |
$ | 470,360 | $ | 387,981 | ||||
28
29
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
| Climate Control Business manufactures and sells a broad range of air conditioning and
heating products in the niche markets we serve consisting of geothermal and water source
heat pumps, hydronic fan coils, large custom air handlers, modular geothermal chillers
and other related products used to control the environment in commercial/institutional
and residential new building construction, renovation of existing buildings and
replacement of existing systems. For the first nine months of 2011, approximately 36% of
our consolidated net sales relates to the Climate Control Business. |
| Chemical Business manufactures and sells nitrogen based chemical products produced
from four 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, industrial and fertilizer
grade ammonium nitrate (AN), UAN, sulfuric acids, nitric acids in various
concentrations, nitrogen solutions, DEF and various other products. For the first nine
months of 2011, approximately 63% of our consolidated net sales relates to the Chemical
Business. |
30
| Education |
| Single-Family Residential |
| Multi-Family Residential |
| Healthcare |
| Hospitality |
| Government/Public |
| Retail |
||
| Industrial |
31
32
Percentage Change of | ||||||||
Tons | Dollars | |||||||
Increase | ||||||||
Chemical products: |
||||||||
Agricultural |
22 | % | 63 | % | ||||
Industrial acids and other |
9 | % | 42 | % | ||||
Mining |
1 | % | 25 | % | ||||
Total weighted-average change |
9 | % | 42 | % |
33
2011 | 2010 | |||||||
Natural gas average price per MMBtu based upon Tennessee 500 pipeline pricing point |
$ | 4.40 | $ | 4.67 | ||||
Ammonia average price based upon low Tampa price per metric ton |
$ | 574 | $ | 386 | ||||
Sulfur price based upon Tampa average quarterly price per long ton |
$ | 220 | $ | 95 | ||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars In Millions) | ||||||||
Cash and cash equivalents |
$ | 108.0 | $ | 66.9 | ||||
Short-term investments (1) |
| 10.0 | ||||||
$ | 108.0 | $ | 76.9 | |||||
Long-term debt: |
||||||||
2007 Debentures |
$ | 0.5 | $ | 26.9 | ||||
Secured Term Loan |
73.1 | 48.8 | ||||||
Other |
9.7 | 19.7 | ||||||
Total long-term debt, including current portion |
$ | 83.3 | $ | 95.4 | ||||
Total stockholders equity |
$ | 264.2 | $ | 179.4 | ||||
Long-term debt to stockholders equity ratio (2) |
0.3 | 0.5 | ||||||
(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. |
|
(2) | This ratio is based on total long-term debt divided by total stockholders equity and
excludes the use of cash, cash equivalents and short-term investments to pay down debt. |
34
35
36
37
38
| 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. |
| $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. |
39
40
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: |
||||||||||||||||
Geothermal and water source heat pumps |
$ | 136,644 | $ | 122,967 | $ | 13,677 | 11.1 | % | ||||||||
Hydronic fan coils |
43,689 | 26,711 | 16,978 | 63.6 | % | |||||||||||
Other HVAC products |
32,295 | 28,367 | 3,928 | 13.8 | % | |||||||||||
Total Climate Control |
$ | 212,628 | $ | 178,045 | $ | 34,583 | 19.4 | % | ||||||||
Gross profit Climate Control |
$ | 67,689 | $ | 60,195 | $ | 7,494 | 12.4 | % | ||||||||
Gross profit percentage Climate Control (1) |
31.8 | % | 33.8 | % | (2.0 | )% | ||||||||||
Operating income Climate Control |
$ | 26,357 | $ | 22,632 | $ | 3,725 | 16.5 | % | ||||||||
(1) | As a percentage of net sales |
| Net sales of our geothermal and water source heat pump products increased primarily
as a result of a 21% improvement in sales of our commercial products due to the higher backlog
at the beginning of 2011 and stronger product order levels during the first nine months of
2011 partially offset by a 6% decline in sales of our residential products primarily due to
lower product order levels in the first nine months of 2011. During the first nine months of
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 a 34% increase in the number
of units sold due to increased construction and renovation activities in the markets we serve
and a 22% increase in the average unit sales price due to change in product mix. During the
first nine months of 2011, we continued to have a market share leadership position of
approximately 31% based on preliminary market data supplied by the AHRI; |
|
| Net sales of our other HVAC products increased primarily as the result of an increase in
the sales of our large custom air handlers, modular chillers, and engineering and construction
services. |
41
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: |
||||||||||||||||
Agricultural products |
$ | 163,060 | $ | 94,018 | $ | 69,042 | 73.4 | % | ||||||||
Industrial acids and other chemical products |
124,038 | 94,058 | 29,980 | 31.9 | % | |||||||||||
Mining products |
82,722 | 65,752 | 16,970 | 25.8 | % | |||||||||||
Total Chemical |
$ | 369,820 | $ | 253,828 | $ | 115,992 | 45.7 | % | ||||||||
Gross profit Chemical |
$ | 89,789 | $ | 30,631 | $ | 59,158 | 193.1 | % | ||||||||
Gross profit percentage Chemical (1) |
24.3 | % | 12.1 | % | 12.2 | % | ||||||||||
Operating income Chemical |
$ | 78,923 | $ | 12,310 | $ | 66,613 | 541.1 | % | ||||||||
(1) | As a percentage of net sales |
| Agricultural products sales Agricultural products sales increased $69.0 million, or
73%, primarily due to increased sales volumes and selling prices for UAN, partially offset
by lower sales of agricultural grade AN. Tons of agricultural products sold increased 31%
including 116,000 tons of UAN and 20,000 tons of ammonia from the Pryor Facility. 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 $30.0 million, or 32%, primarily due to 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 $17.0 million, or 26% and
volumes increased 7%. 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 supply contract in which the
customer agreed to purchase, and we agreed to reserve certain minimum volumes of industrial
grade AN during 2011. Pursuant to the terms of the contract, the customer has been invoiced
for the fixed costs and amounts associated with the reserved capacity despite not taking the
total minimum volume requirement during the first nine months of 2011. |
42
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales Other |
$ | 7,444 | $ | 5,877 | $ | 1,567 | 26.7 | % | ||||||||
Gross profit Other |
$ | 2,719 | $ | 2,027 | $ | 692 | 34.1 | % | ||||||||
Gross profit percentage Other (1) |
36.5 | % | 34.5 | % | 2.0 | % | ||||||||||
General corporate expense and other
business operations, net |
$ | (10,477 | ) | $ | (9,246 | ) | $ | (1,231 | ) | 13.3 | % | |||||
(1) | As a percentage of net sales |
43
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: |
||||||||||||||||
Geothermal and water source heat pumps |
$ | 46,458 | $ | 44,006 | $ | 2,452 | 5.6 | % | ||||||||
Hydronic fan coils |
15,806 | 10,506 | 5,300 | 50.4 | % | |||||||||||
Other HVAC products |
9,540 | 10,034 | (494 | ) | (4.9 | )% | ||||||||||
Total Climate Control |
$ | 71,804 | $ | 64,546 | $ | 7,258 | 11.2 | % | ||||||||
Gross profit Climate Control |
$ | 22,808 | $ | 22,964 | $ | (156 | ) | (0.7 | )% | |||||||
Gross profit percentage Climate Control (1) |
31.8 | % | 35.6 | % | (3.8 | )% | ||||||||||
Operating income Climate Control |
$ | 8,738 | $ | 10,112 | $ | (1,374 | ) | (13.6 | )% | |||||||
(1) | As a percentage of net sales |
| Net sales of our geothermal and water source heat pump products increased 6% primarily as a
result of a 20% improvement in sales of our commercial products primarily due to the higher
backlog at the beginning of third quarter of 2011 partially offset by a 12% decline in sales
of our residential products due to lower product order levels in the third quarter; |
| Net sales of our hydronic fan coils increased 50% primarily due to a 25% increase in the
number of units sold due to increased construction and renovation activities in the markets we
serve and a 19% increase in the average unit sales price due to change in product mix; |
| Net sales of our other HVAC products decreased as the result of a decrease in the sales of
our large custom air handlers and modular chillers partially offset by an increase in our
engineering and construction services. |
44
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales: |
||||||||||||||||
Agricultural products |
$ | 30,127 | $ | 18,522 | $ | 11,605 | 62.7 | % | ||||||||
Industrial acids and other chemical products |
42,887 | 30,224 | 12,663 | 41.9 | % | |||||||||||
Mining products |
29,755 | 23,832 | 5,923 | 24.9 | % | |||||||||||
Total Chemical |
$ | 102,769 | $ | 72,578 | $ | 30,191 | 41.6 | % | ||||||||
Gross profit Chemical |
$ | 10,677 | $ | 5,871 | $ | 4,806 | 81.9 | % | ||||||||
Gross profit percentage Chemical (1) |
10.4 | % | 8.1 | % | 2.3 | % | ||||||||||
Operating income Chemical |
$ | 7,105 | $ | 1,247 | $ | 5,858 | 469.8 | % | ||||||||
(1) | As a percentage of net sales |
| Agricultural products sales Agricultural products sales increased $11.6 million, or
63%, primarily due to increased sales volumes and selling prices for UAN partially offset
by lower sales of agricultural grade AN related to the severe drought in certain of our
markets for this product. Tons of agricultural products sold increased 22% including 23,000
tons of UAN from the Pryor Facility. 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 $12.7 million, or 42%, primarily due to 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 $5.9 million, or 25%. 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 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 2011. Pursuant to the terms
of the contract, the customer has been invoiced for the fixed costs and amounts associated
with the reserved capacity despite not taking the total minimum volume requirement during
the third quarter of 2011. |
45
Percentage | ||||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Net sales Other |
$ | 2,207 | $ | 1,824 | $ | 383 | 21.0 | % | ||||||||
Gross profit Other |
$ | 772 | $ | 604 | $ | 168 | 27.8 | % | ||||||||
Gross profit percentage Other (1) |
35.0 | % | 33.1 | % | 1.9 | % | ||||||||||
General corporate expense and other
business operations, net |
$ | (3,351 | ) | $ | (2,889 | ) | $ | (462 | ) | 16.0 | % | |||||
(1) | As a percentage of net sales |
| an increase of $9.4 million relating to the Chemical Business primarily as the result of
increased sales from our Pryor Facility and higher raw material costs passed through in the
form of higher selling prices to certain customers of our El Dorado Facility and |
||
| an increase of $2.4 million relating to the Climate Control Business due primarily to
the timing of collections at the end of the third quarter of 2011. |
46
| an increase of $7.4 million relating to the Climate Control Business due primarily to
higher costs of raw materials and components and inventory associated with modular
geothermal chillers and |
||
| an increase of $6.9 million relating to the Chemical Business primarily relating to
increased raw material costs at our El Dorado Facility. |
| long-term debt, |
||
| interest payments on long-term debt, |
||
| interest rate contracts, |
||
| capital expenditures, |
||
| operating leases, |
||
| futures/forward contracts, |
||
| contractual obligations carbon credits |
||
| accrued contractual manufacturing obligations, and |
||
| other contractual obligations. |
47
| our purchase obligations relating to natural gas contracts were $5.1 million as of
September 30, 2011, |
||
| our contractual obligations relating to futures/forward contracts were $1.7 million as
of September 30, 2011 and |
||
| our committed capital expenditures were approximately $11.4 million for the fourth
quarter of 2011. |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
48
Item 4. | Controls and Procedures |
49
| the commercial/institutional construction and residential construction sectors we serve are expected to
decline slightly in 2011 from 2010 levels and continual swings between increasing and decreasing design
activity with no significant developing trends due to the weak economy; |
||
| purchased ammonia is in tight supply globally and the U.S. Tampa price is expected to continue to increase
in the fourth quarter; |
||
| shipment of backlog; |
||
| the recent softening of demand for certain of our industrial chemical and agricultural grade AN products
could result in adjustments to the operating rates at the El Dorado Facility in the fourth quarter; |
||
| the current fertilizer outlook according to most market indicators point to positive supply and demand
fundamentals for the types of nitrogen fertilizer products we produce and sell; |
||
| a slow recovery in the short-term and it is currently unclear when we will return to pre-recession levels as
it relates to our Climate Control Business; |
||
| the cost to construct the wastewater pipeline and associated operating costs and that the construction would
be completed in 2013; |
||
| the matter regarding the dissolved minerals will not be an issue once the pipeline is operational; |
||
| expenses in connection with environmental regulatory issues for the fourth quarter of 2011; |
||
| future emission regulations or new laws affecting our businesses, operations, liquidity or financial results; |
||
| the amount of committed and planned capital expenditures for the fourth quarter of 2011 and being funded
from available cash and working capital; |
||
| the amount and timing of Turnarounds for the fourth quarter of 2011; |
||
| our primary cash needs will be for working capital to fund our operations, capital expenditures, and general
obligations for the fourth quarter and funding these cash needs from internally generated cash flows and
cash on hand; |
||
| the amount of advanced manufacturing energy credits to be utilized to partially offset our federal tax
liability for 2011; |
||
| the amount of capital expenditures necessary in order to bring the equipment into compliance with the Clean
Air Act could be substantial; |
||
| meeting all required covenant tests for the fourth quarter of 2011; |
||
| expansion of the market for our products, including GHPs; |
||
| 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; |
||
| our working capital is adequate to fund operations for the near term; |
||
| 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; |
||
| costs relating to environmental and health laws and enforcement policies thereunder; and |
||
| negotiate renewal of our Working Capital Revolver Loan. |
| changes in general economic conditions, both domestic and foreign, |
||
| material reduction in revenues, |
||
| material changes in interest rates, |
||
| ability to collect in a timely manner a material amount of receivables, |
||
| increased competitive pressures, |
50
| changes in federal, state and local laws and regulations, especially environmental regulations, the
American Reinvestment and Recovery act, or in interpretation of such, |
||
| releases of pollutants into the environment exceeding our permitted limits, |
||
| material increases in equipment, maintenance, operating or labor costs not presently anticipated by us, |
||
| the requirement to use internally generated funds for purposes not presently anticipated, |
||
| the inability to pay or secure additional financing for planned capital expenditures, |
||
| material changes in the cost of certain precious metals, anhydrous ammonia, natural gas, copper, steel
and purchased components, |
||
| changes in competition, |
||
| the loss of any significant customer, |
||
| changes in operating strategy or development plans, |
||
| inability to fund the working capital and expansion of our businesses, |
||
| changes in the production efficiency of our facilities, |
||
| adverse results in our contingencies including pending litigation, |
||
| changes in production rates at our chemical facilities, |
||
| inability to obtain necessary raw materials and purchased components, |
||
| material changes in accounting estimates, |
||
| significant problems with our production equipment, |
||
| fire or natural disasters, |
||
| inability to obtain or retain our insurance coverage, |
||
| other factors described in the MD&A contained in this report, and |
||
| other factors described in Risk Factors of our 2010 Form 10-K and Special Note Regarding
Forward-Looking Statements contained in our 2010 Form 10-K. |
Item 1. | Legal Proceedings |
51
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults upon Senior Securities |
Item 4. | (Reserved) |
Item 5. | Other Information |
52
Item 6. | Exhibits |
(a | ) | Exhibits The Company has included the following exhibits in this report: |
||
10.1 | 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. |
|||
10.2 | 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. |
|||
10.3 | 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. |
|||
31.1 | Certification of Jack E. Golsen, Chief Executive Officer, pursuant
to Sarbanes-Oxley Act of 2002, Section 302. |
|||
31.2 | Certification of Tony M. Shelby, Chief Financial Officer, pursuant
to Sarbanes-Oxley Act of 2002, Section 302. |
|||
32.1 | Certification of Jack E. Golsen, Chief Executive Officer,
furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906. |
|||
32.2 | Certification of Tony M. Shelby, Chief Financial Officer,
furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906. |
|||
101.INS | XBRL Instance Document* |
|||
101.SCH | XBRL Taxonomy Extension Schema Document* |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
|||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
|||
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document* |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
|||
* | 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. |
53
LSB INDUSTRIES, INC. |
||||
By: | /s/ Tony M. Shelby | |||
Tony M. Shelby | ||||
Executive Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
||||
By: | /s/ Harold L. Rieker, Jr. | |||
Harold L. Rieker, Jr. | ||||
Vice President and Principal Accounting Officer | ||||
54
(i) | that certain real property located in The City of Oklahoma
City, Oklahoma County, Oklahoma, more particularly described on Exhibit A
attached hereto (the Land); |
(ii) | all right, title and interest of Seller in and to all streets,
alleys, easements and rights-of-way in, on, across, in front of, abutting or
adjoining the Land and any other appurtenances belonging thereto (collectively,
the Appurtenances); and |
(iii) | all right, title and interest of Seller in and to all
structures, sidewalks, parking areas, access ways, landscaping and other
improvements located on the Land (collectively the Site
Improvements). |
2
(i) | to waive any such uncured Title Objections, close the Transaction without
reduction in the Purchase Price and accept such title as Seller is able to convey, and
by such waiver and acceptance Buyer shall be deemed to have waived any and all claims
and/or causes of action against Seller for damages or any other remedies for any and
all defects in and/or exceptions to the title to the Property; or |
(ii) | to terminate this Agreement by notifying Seller and the Title Company in
writing, in which event the Earnest Money Deposit shall be returned to Buyer, Seller
shall bear the cost of all title work, including the Survey, procured in connection
with this Agreement and thereafter Seller and Buyer shall have no further rights or
obligations hereunder. |
3
4
5
6
7
8
9
10
11
12
13
If to Seller: | DPMG Inc. | |||
2817 Crain Highway | ||||
P.O. Box 1880 | ||||
Upper Marlboro, Maryland 20774 | ||||
Attn: Mr. William W. Vaughan, III | ||||
Fax: (301) 374-3301 | ||||
If to Buyer: | Prime Financial L.L.C. | |||
16 South Pennsylvania Avenue | ||||
Oklahoma City, Oklahoma 73107 | ||||
Attn: Mr. David M. Shear | ||||
Fax: (405) 236-1209 | ||||
With a copy to: | Spradling, Kennedy & McPhail, L.L.P. | |||
1601 NW Expressway, Suite 1750 | ||||
Oklahoma City, Oklahoma 73118 | ||||
Attn: Mr. T. Scott Spradling | ||||
Fax: (405) 418-2705 |
14
If to Landmark: | Landmark Land Company, Inc. | |||
2817 Crain Highway | ||||
P.O. Box 1880 | ||||
Upper Marlboro, Maryland 20774 | ||||
Attn: Mr. William W. Vaughan, III | ||||
Fax: (301) 374-3301 | ||||
If to Barton: | Mr. Gerald G. Barton | |||
2817 Crain Highway | ||||
P.O. Box 1880 | ||||
Upper Marlboro, Maryland 20774 | ||||
Fax: (301) 374-3301 | ||||
With a copy to: | Mr. William W. Vaughan, III | |||
2817 Crain Highway | ||||
P.O. Box 1880 | ||||
Upper Marlboro, Maryland 20774 | ||||
Fax: (301) 374-3301 | ||||
If to Golsen: | Mr. Jack Golsen | |||
16 South Pennsylvania Avenue | ||||
Oklahoma City, Oklahoma 73107 | ||||
Fax: (405) 236-1209 |
15
16
17
Seller: | DPMG INC., a Delaware corporation |
||||
By: | /s/ Joe Olree | ||||
Name: | |||||
Title: | Vice President | ||||
Date of Execution: May 26, 2011 |
18
Buyer: | PRIME FINANCIAL L.L.C., an Oklahoma limited liability company |
||||
By: | /s/ David R. Goss | ||||
Name: | David R. Goss | ||||
Title: | Manager | ||||
Date of Execution: 3/26/11, 2011 |
19
Landmark: | LANDMARK LAND COMPANY, INC., a Delaware corporation |
||||
By: | /s/ W. W. Vaughn | ||||
Name: | |||||
Title: | President | ||||
Date of Execution: 5/26/11, 2011 |
20
Barton: | /s/ Gerald G. Barton | ||||
Gerald G. Barton, an individual | |||||
Date of Execution: 5/26/11, 2011 |
21
Golsen: | /s/ Jack E. Golsen | ||||
Jack E. Golsen, an individual | |||||
Date of Execution: May 26, 2011 |
22
23
Grantor: | DPMG INC., a Delaware corporation |
|||
By: | ||||
Name: | ||||
Title: | _________ President | |||
STATE OF
|
) | |||||
) SS. | ||||||
COUNTY OF
|
) |
(a) | Buyer desires to purchase from Seller the following: |
(i) | that certain real property located in Cameron County, Texas,
more particularly described on Exhibit A attached hereto (the Land); |
||
(ii) | all right, title and interest of Seller in and to all streets,
alleys, easements and rights-of-way in, on, across, in front of, abutting or
adjoining the Land and any other appurtenances belonging thereto (collectively,
the Appurtenances); and |
||
(iii) | all right, title and interest of Seller in and to all
structures, sidewalks, parking areas, access ways, landscaping and other
improvements located on the Land (collectively the Site
Improvements). |
2
(i) | to waive any such uncured Title Objections, close the Transaction without
reduction in the Purchase Price and accept such title as Seller is able to convey, and
by such waiver and acceptance Buyer shall be deemed to have waived any and all claims
and/or causes of action against Seller for damages or any other remedies for any and
all defects in and/or exceptions to the title to the Property associated with such
uncured Title Objections; or |
||
(ii) | to terminate this Agreement by notifying Seller and the Title Company in
writing, in which event Seller shall return the Earnest Money Deposit to Buyer within
five (5) calendar days of the termination of the Agreement, Seller shall bear the cost
of all title work, including the Survey and the survey consultation services of Pena
Engineering, procured in connection with this Agreement and thereafter Seller and Buyer
shall have no further rights or obligations hereunder. |
3
4
5
6
7
8
9
10
11
12
13
If to Seller: | South Padre Island Development, LLC 2817 Crain Highway P.O. Box 1880 Upper Marlboro, Maryland 20774 Attn: Mr. William W. Vaughan, III Fax: (301) 374-3301 |
|||
If to Buyer: | Prime Financial L.L.C. 16 South Pennsylvania Avenue Oklahoma City, Oklahoma 73107 Attn: Mr. David M. Shear Fax: (405) 236-1209 |
|||
With a copy to: | Atlas & Hall, L.L.P. 818 Pecan Blvd. P. O. Drawer 3725 McAllen, Texas 78502-3725 Attn: Mr. Frederick J. Biel Fax: (956) 686 6109 |
14
If to Landmark: | Landmark Land Company, Inc. 2817 Crain Highway P.O. Box 1880 Upper Marlboro, Maryland 20774 Attn: Mr. William W. Vaughan, III Fax: (301) 374-3301 |
|||
If to Barton: | Mr. Gerald G. Barton 2817 Crain Highway P.O. Box 1880 Upper Marlboro, Maryland 20774 Fax: (301) 374-3301 |
|||
With a copy to: | Mr. William W. Vaughan, III 2817 Crain Highway P.O. Box 1880 Upper Marlboro, Maryland 20774 Fax: (301) 374-3301 |
|||
If to Golsen: | Mr. Jack Golsen 16 South Pennsylvania Avenue Oklahoma City, Oklahoma 73107 |
|||
Fax: (405) 236-1209 | ||||
If to Title Company: | Ms. Diana Kaufold 3111 West Freddy Gonzalez Edinburg, Texas 78539 Fax: (956) 289 3006 |
15
16
17
(i) | is not situated in a utility or other statutorily created
district providing water, sewer, drainage or flood control facilities and
services, except for the Laguna Madre Water District. Seller, prior to
Closing, will deliver to Buyer, and Buyer will execute, a statutory notice
relating to the tax rate, bonded indebtedness, and/or standby fees of the
Laguna Madre Water District, and Seller will provide Buyer a copy of the
proposed disclosure during the Inspection Period. |
||
(ii) | does not adjoin or share a common boundary with the tidally
influenced submerged lands of the State of Texas. |
||
(iii) | is not located seaward of the Gulf Intracoastal Waterway. |
||
(iv) | is not located outside the limits of a municipality. If the
Property is located outside the limits of a municipality, the Property may now
or later be included in the extra-territorial jurisdiction (AETJ@)
of a municipality and may now or later be subject to annexation by the
municipality. Each municipality maintains a map that depicts its boundaries
and ETJ. To determine if the Property is located within a municipality=s
ETJ, Buyer should contact all municipalities located in the general proximity
of the Property for further information. |
||
(v) | is not located within an Agricultural Development District
subject to Chapter 60 of the Texas Agriculture Code. |
||
(vi) | is not located in a certificated service area of a utility
service provider, as such term is defined in Section 13.257, Texas Water Code. |
18
Seller: | SOUTH PADRE ISLAND DEVELOPMENT, LLC, a | |||||
Delaware limited liability company | ||||||
By: | /s/ Joe Olree
|
|||||
Title: Vice President | ||||||
Date of Execution: September 1, 2011 |
19
Buyer: |
PRIME FINANCIAL, L.L.C. an Oklahoma limited liability company | |||||
By: | /s/ David R. Goss
|
|||||
Title:Vice President | ||||||
Date of Execution: September 8, 2011 |
20
Landmark: | LANDMARK LAND COMPANY, INC., a Delaware corporation | |||||
By: | /s/ W. W. Vaughan
|
|||||
Title: President | ||||||
Date of Execution: September 1, 2011 |
21
Barton:
|
/s/ Gerald G. Barton
|
|||
Date of Execution: September 1, 2011 |
22
Golsen:
|
/s/ Jack E. Golsen | |
Jack E. Golsen, an individual | ||
Date of Execution: September 8, 2011 |
23
Exhibit A
|
Legal Description of the Land | |
Exhibit B
|
Form of General Warranty Deed |
24
Exhibit B
Seller: |
SOUTH PADRE ISLAND DEVELOPMENT, LLC, a Delaware limited liability company | |||||
By: | /s/ W.W. Vaughn
|
|||||
Title: Vice President | ||||||
Date of Execution: 10/31/2011 |
Buyer: |
PRIME FINANCIAL, L.L.C. an Oklahoma limited liability company | |||||
By: | ||||||
Title: | ||||||
Date of Execution: ________, 2011 |
Landmark: |
LANDMARK LAND COMPANY, INC., a Delaware corporation | |||||
By: | /s/ Joe Olree | |||||
Name: | ||||||
Title: Vice President | ||||||
Date of Execution: October 31, 2011 |
Barton: |
/s/ Gerald G. Barton
|
|||
Date of Execution: 10/31/2011 |
Golsen: |
||||
Date of Execution: , 2011 |
1. | I have reviewed this quarterly report on Form 10-Q of LSB Industries, Inc. (the
registrant); |
|
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. | Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. | The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which
this report is being prepared; |
||
b) | Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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; |
||
c) | Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
||
d) | Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in this case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
a) | All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
||
b) | Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
/s/ Jack E. Golsen
|
||
Chairman of the Board and |
||
Chief Executive Officer |
1. | I have reviewed this quarterly report on Form 10-Q of LSB Industries, Inc. (the
registrant); |
|
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. | Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. | The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which
this report is being prepared; |
||
b) | Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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; |
||
c) | Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
||
d) | Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in this case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
a) | All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
||
b) | Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
/s/ Tony M. Shelby
|
||
Executive Vice President of Finance |
||
and Chief Financial Officer |
(1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
||
(2) | the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of LSB. |
/s/ Jack E. Golsen | ||||
Jack E. Golsen | ||||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
||||
(1) | the Report fully complies with the requirements of section 13 (a) or 15 (d) of
the Securities Exchange Act of 1934; and |
||
(2) | the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of LSB. |
/s/ Tony M. Shelby | ||||
Tony M. Shelby | ||||
Executive Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
||||
Condensed Consolidated Balance Sheets (Parenthetical) (USD $) | 9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2011 | Dec. 31, 2010 | |
Stockholders' equity: | ||
Common stock, par value | $ 0.10 | $ 0.10 |
Common stock, shares authorized | 75,000,000 | 75,000,000 |
Common stock, shares issued | 26,584,650 | 25,476,534 |
Less treasury stock at cost: | ||
Treasury stock, common shares | 4,320,462 | 4,320,462 |
Series B Preferred stock | ||
Stockholders' equity: | ||
Convertible preferred stock dividend rate | $ 12.00% | $ 12.00% |
Series B cumulative, convertible preferred stock, par value | $ 100 | $ 100 |
Preferred stock, shares issued | 20,000 | 20,000 |
Preferred stock, shares outstanding | 20,000 | 20,000 |
Series D Preferred stock | ||
Stockholders' equity: | ||
Convertible preferred stock dividend rate | $ 6.00% | $ 6.00% |
Series D cumulative, convertible Class C preferred stock, par value | ||
Preferred stock, shares issued | 1,000,000 | 1,000,000 |
Preferred stock, shares outstanding | 1,000,000 | 1,000,000 |
Related Party Transactions | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Related Party Transactions [Abstract] | |
Related Party Transactions |
Note 16: Related Party Transactions
Golsen Group
In January 2010, we paid interest of $137,500 relating to $5,000,000 of the 2007 Debentures held by
the Golsen Group that was accrued at December 31, 2009. In March 2010, we paid dividends totaling
$300,000 on our Series B Preferred and our Series D Preferred, all of the outstanding shares of
which are owned by the Golsen Group. During the nine months ended September 30, 2010, we incurred
interest expense of $206,250 relating to the debentures held by the Golsen Group, of which $137,500
was paid in June 2010.
In January 2011, we paid interest of $137,500 relating to the debentures held by the Golsen Group
that was accrued at December 31, 2010. In March 2011, we paid dividends totaling $300,000 on our
Series B Preferred and our Series D Preferred, all of the outstanding shares of which are owned by
the Golsen Group. In March 2011, the Golsen Group sold $3,000,000 of the 2007 Debentures it held to
a third party. 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 the
nine months ended September 30, 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.
The Series B Preferred and Series D Preferred are non-redeemable preferred stocks issued in 1986
and 2001, respectively.
Landmark Transactions
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 $2,250,000, which
transaction was consummated in June 2011. 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 Prime’s purchase of the Oklahoma Real Estate. If a put option is
exercised, the purchase price for the Oklahoma Real Estate will be $2,250,000, 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.
As 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
$2,500,000, which transaction is expected to consummate during the fourth quarter of 2011. 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 Prime’s purchase of the
Texas Real Estate. If a put option is exercised, the purchase price for the Texas Real Estate will
be $2,500,000, 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 1,000,000 shares of Landmark’s
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 to use its reasonable
efforts to use, where technically feasible, geothermal heating and air conditioning units
manufactured by one of the LSB’s 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
$1,000,000 to the LLC. The LLC subsequently loaned Landmark approximately $2,000,000. 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 $1,100,000, 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. Ille’s 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. Also 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.
|
Document and Entity Information (USD $) In Millions, except Share data | 9 Months Ended | ||
---|---|---|---|
Sep. 30, 2011 | Oct. 31, 2011 | Jun. 30, 2010 | |
Document and Entity Information [Abstract] | |||
Entity Registrant Name | LSB INDUSTRIES INC | ||
Entity Central Index Key | 0000060714 | ||
Document Type | 10-Q | ||
Document Period End Date | Sep. 30, 2011 | ||
Amendment Flag | false | ||
Document Fiscal Year Focus | 2011 | ||
Document Fiscal Period Focus | Q3 | ||
Current Fiscal Year End Date | --12-31 | ||
Entity Well-known Seasoned Issuer | Yes | ||
Entity Voluntary Filers | No | ||
Entity Current Reporting Status | Yes | ||
Entity Filer Category | Accelerated Filer | ||
Entity Public Float | $ 222 | ||
Entity Common Stock, Shares Outstanding | 22,289,813 |
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Precious Metals | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Precious Metals [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Precious Metals |
Note 5: Precious Metals
Precious metals are included in supplies, prepaid items and other
in the accompanying condensed consolidated balance sheets. In addition, precious metals expense
(recoveries), net, is included in cost of sales in the accompanying condensed consolidated
statements of income.
Precious metals expense (recoveries), net, consists of the following:
|
Commitments and Contingencies | 9 Months Ended | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||
Commitments and Contingencies [Abstract] | |||||||||||||||||
Commitments and Contingencies |
Note 10: Commitments and Contingencies
Purchase Commitments —
We entered into the following significant purchase commitments during the
nine months ended September 30, 2011:
During the first nine months of 2011, certain subsidiaries within the Chemical Business entered
into contracts to purchase natural gas for anticipated production needs at the Cherokee Facility
and the chemical production facility located in Pryor, Oklahoma (the “Pryor Facility”). Since these
contracts are considered normal purchases because they provide for the purchase of natural gas that
will be delivered in quantities expected to be used over a reasonable period of time in the normal
course of business and are documented as such, these contracts are exempt from the accounting and
reporting requirements relating to derivatives. At September 30, 2011, our purchase commitments
under these contracts were for approximately 1.2 million MMBtu of natural gas through December 2011
at the weighted-average cost of $4.14 per MMBtu ($5.1 million).
Legal Matters — Following is a summary of certain legal matters involving the Company.
A. Environmental Matters
Our operations are subject to numerous environmental laws (“Environmental Laws”) and to other
federal, state and local laws regarding health and safety matters (“Health Laws”). In particular,
the manufacture and distribution of chemical products are activities which entail environmental
risks and impose obligations under the Environmental Laws and the Health Laws, many of which
provide for certain performance obligations, substantial fines and criminal sanctions for
violations. There can be no assurance that we will not incur material costs or liabilities in
complying with such laws or in paying fines or penalties for violation of such laws. The
Environmental Laws and Health Laws and enforcement policies thereunder relating to our Chemical
Business have in the past resulted, and could in the future result, in compliance expenses, cleanup
costs, penalties or other liabilities relating to the handling, manufacture, use, emission,
discharge or disposal of effluents at or from our facilities or the use or disposal of certain of
its chemical products. Historically, significant expenditures have been incurred by subsidiaries
within our Chemical Business in order to comply with the Environmental Laws and Health Laws and are
reasonably expected to be incurred in the future.
We will recognize a liability for the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated. We are obligated to monitor certain
discharge water outlets at our Chemical Business facilities should we discontinue the operations of
a facility. We are also contractually obligated to pay a portion of the operating costs of a
municipally owned wastewater pipeline currently being constructed, which will serve the El Dorado
Facility through at least December 2053. 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.
1. Discharge Water Matters
The El Dorado Facility owned by EDC generates process wastewater, which includes cooling tower and
boiler blowdowns, contact storm water (rain water inside the facility area which picks up
contaminants) and miscellaneous spills and leaks from process equipment. The process water
discharge, storm-water runoff and miscellaneous spills and leaks are governed by a state National
Pollutant Discharge Elimination System (“NPDES”) discharge water permit issued by the Arkansas
Department of Environmental Quality (“ADEQ”), which permit is generally required to be renewed
every five years. The El Dorado Facility is currently operating under a NPDES discharge water
permit, which became effective in 2004 (“2004 NPDES permit”). In November 2010, a preliminary draft
of a discharge water permit renewal, which contains more restrictive ammonia limits, was issued by
the ADEQ for EDC’s review. EDC submitted comments to the ADEQ on the draft permit in December 2010.
The El Dorado Facility has generally demonstrated its ability to comply with applicable ammonia and
nitrate permit limits, and believes that if it is required to meet the more restrictive dissolved
minerals permit levels, it should be able to do so. However, as part of our long-term compliance
plan, EDC is pursuing a rulemaking and permit modification with the ADEQ. The ADEQ approved a rule
change, but on August 31, 2011, the United States Environmental Protection Agency (“EPA”) formally
disapproved the rule change. EDC has filed an appeal of the EPA’s decision in Federal District
Court in El Dorado, Arkansas. EDC has intermittently failed the more restrictive dissolved
minerals permit limits while the rulemaking has been pursued. However, we do not believe that the
occasional noncompliance will have a material adverse impact on EDC. While we are hopeful that EDC
will prevail in the appeal, it is unknown how the Court will rule. We do not believe this matter
regarding the dissolved minerals will be an issue once the pipeline is operational as discussed
below.
During January 2010, EDC received an Administrative Order from the EPA noting certain violations of
the 2004 NPDES permit and requesting EDC to demonstrate compliance with the permit or provide a
plan and schedule for returning to compliance. EDC has provided the EPA a response which states
that the El Dorado Facility is now in compliance with the permit, that the El Dorado Facility
expects to maintain compliance and that a majority of the alleged violations were resolved through
a consent administrative order with the ADEQ. In June 2011, EDC received an Administrative
Complaint from the EPA acknowledging EDC had achieved compliance with the 2004 NPDES permit but has
assessed a penalty of $124,000 for past violations of the permit. EDC has met, and continues to
meet, with the EPA to explain its objections against the proposed penalty. However, a liability of
$124,000 has been established at September 30, 2011 as a result of the Administrative Complaint.
The city of El Dorado, Arkansas received approval to construct a pipeline for disposal of
wastewater generated by the city and by certain companies in the El Dorado area. The companies
intending to use the pipeline will contribute to the cost of construction and operation of the
pipeline. Although EDC believes it can comply with the more restrictive permit limits without the
pipeline, EDC will participate in the construction of the pipeline that will be owned by the city
in order to ensure that EDC will be able to comply with future permit limits. 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. EDC anticipates its capital cost in
connection with the construction of the pipeline including EDC’s right to use the pipeline to
dispose of its wastewater will be approximately $4.0 million, of which $0.4 million has been
capitalized as of September 30, 2011. The City plans to complete the construction of the pipeline
in 2013. Once the pipeline is completed, EDC’s estimated share of the annual operating costs is to
be $100,000 to $150,000. The initial term of the operating agreement is through December 2053.
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
September 30, 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 United States, including our El Dorado and Cherokee Facilities and the Baytown, Texas nitric
acid plant operated by EDN (the “Baytown Facility”) under Section 114 of the Clean Air Act as to
construction and modification activities at each of these facilities over a period of years. These
information requests will enable the EPA to determine whether these facilities are in compliance
with certain provisions of the Clean Air Act. In connection with a review by our Chemical Business
of these facilities in obtaining information for the EPA pursuant to the EPA’s request, our
Chemical Business management believes, subject to further review, investigation and discussion with
the EPA, that certain facilities within our Chemical Business may be required to make certain
capital improvements to certain emission equipment in order to comply with the requirements of the
Clean Air Act. If changes to the production equipment at these facilities are required in order to
bring this equipment into compliance with the Clean Air Act, the type of emission control equipment
that might be 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.” We are currently unable to determine
the amount (or range of amounts) of any penalties that may be assessed by the EPA. Therefore no
liability has been established at September 30, 2011, in connection with this matter.
3. Other Environmental Matters
In 2002, two subsidiaries within our Chemical Business, sold substantially all of their operating
assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained ownership of the
real property. At December 31, 2002, even though we continued to own the real property, we did not
assess our continuing involvement with our former Hallowell Facility to be significant and
therefore accounted for the sale as discontinued operations. In connection with this sale, our
subsidiary leased the real property to the buyer under a triple net long-term lease agreement.
However, our subsidiary retained the obligation to be responsible for, and perform the activities
under, a previously executed consent order to investigate the surface and subsurface contamination
at the real property and a corrective action strategy based on the investigation. In addition,
certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental
matters. Based on the assessment discussed above, we account for transactions associated with the
Hallowell Facility as discontinued operations.
The successor (“Chevron”) of a prior owner of the Hallowell Facility has agreed in writing, within
certain limitations, to pay and has been paying one-half of the costs of the interim measures
relating to this matter as approved by the Kansas Department of Environmental Quality, subject to
reallocation.
Our subsidiary and Chevron are pursuing a course with the state of Kansas of long-term surface and
groundwater monitoring to track the natural decline in contamination. Currently, our subsidiary and
Chevron are in the process of performing additional surface and groundwater testing. We have
accrued for our allocable portion of costs for the additional testing, monitoring and risk
assessments that could be reasonably estimated.
In addition, the Kansas Department of Health and Environment (“KDHE”) notified our subsidiary and
Chevron that the Hallowell Facility has been referred to the KDHE’s Natural Resources Trustee, who
is to consider and recommend restoration, replacement and/or whether to seek compensation. KDHE
will consider the recommendations in their evaluation.
Currently, it is unknown what damages, if any, the KDHE 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 September 30, 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 $165,000.
The estimated amount is not discounted to its present value. It is reasonably possible that a
change in the estimate of our liability could occur in the near term.
B. Other Pending, Threatened or Settled Litigation
The Jayhawk Group
In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC, Jayhawk
Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the manager and sole
member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the Jayhawk Group agreed,
among other things, that if we undertook, in our sole discretion, within one year from the date of
agreement a tender offer for our Series 2 $3.25 convertible exchangeable Class C preferred stock
(“Series 2 Preferred”) or to issue our common stock for a portion of our Series 2 Preferred
pursuant to a private exchange, that they would tender or exchange an aggregate of no more than
180,450 shares of the 340,900 shares of the Series 2 Preferred beneficially owned by the Jayhawk
Group, subject to, among other things, the entities owned and controlled by Jack E. Golsen, our
chairman and chief executive officer (“Golsen”), and his immediate family, that beneficially own
Series 2 Preferred only being able to exchange or tender approximately the same percentage of
shares of Series 2 Preferred beneficially owned by them as the Jayhawk Group was able to tender or
exchange under the terms of the agreement.
During 2007, we made a tender offer for our outstanding Series 2 Preferred at the rate of 7.4
shares of our common stock for each share of Series 2 Preferred so tendered. In July 2007, we
redeemed the balance of our outstanding shares of Series 2 Preferred. Pursuant to its terms, the
Series 2 Preferred was convertible into 4.329 shares of our common stock for each share of Series 2
Preferred. As a result of the redemption, the Jayhawk Group converted the balance of its Series 2
Preferred pursuant to the terms of the Series 2 Preferred in lieu of having its shares redeemed.
The Jayhawk Group has filed suit against us and Golsen alleging that the Jayhawk Group should have
been able to tender all of its Series 2 Preferred pursuant to the tender offer, notwithstanding the
above-described agreement, based on the following claims against us and Golsen:
The Jayhawk Group seeks damages up to $12 million based on the additional number of common shares
it allegedly would have received on conversion of all of its Series 2 Preferred through the
February 2007 tender offer, plus punitive damages. In May 2008, the General Counsel for the Jayhawk
Group offered to settle its claims against us and Golsen in return for a payment of $100,000,
representing the approximate legal fees it had incurred investigating the claims at that time.
Through counsel, we verbally agreed to the settlement offer and confirmed the agreement by e-mail.
Afterward, the Jayhawk Group’s General Counsel purported to withdraw the settlement offer, and
asserted
that Jayhawk is not bound by any settlement agreement. We contend that the settlement agreement is
binding on the Jayhawk Group. We intend to contest the lawsuit vigorously, and have asserted that
Jayhawk is bound by an agreement to settle the claims for $100,000. On April 28, 2011, the court
granted Golsen’s summary judgment motion, and dismissed all claims against Golsen. During September
2011, this case was tried before the court in the United States District Court for the District of
Kansas. We are awaiting the court’s decision in this matter. Our insurer, Chartis, a subsidiary of
AIG, has agreed to defend this lawsuit on our behalf and on behalf of Golsen and to indemnify under
a reservation of rights to deny liability under certain conditions. We have incurred expenses
associated with this matter up to our insurance deductible of $250,000, and our insurer is paying
defense 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
September 30, 2011 as a result of this matter.
Pryor Chemical Company
A subsidiary within our Chemical Business, Pryor Chemical Company (“PCC”) has filed lawsuits
against certain vendors of PCC related to work performed during the start-up of the Pryor Facility.
The claims allege certain damages resulting from improperly performed work by the vendors and for
lost profits and other costs due to delays in restarting the Pryor Facility. The total amount for
damages and lost profits claimed is substantial but the amount and timing of the ultimate recovery
is uncertain. As a result, any recovery from litigation or settlement of these
claims is a gain contingency and will be recognized if, and when, realized or realizable and
earned.
Other Claims and Legal Actions
We are also involved in various other claims and legal actions including claims for damages
resulting from water leaks related to our Climate Control products and other product liability
occurrences. Most of the product liability claims are covered by our general liability insurance,
which generally includes a deductible of $250,000 per claim. For any claims or legal actions that
we have assessed the likelihood of our liability as probable, we have recognized our estimated
liability up to the applicable deductible. At September 30, 2011, our accrued general liability
insurance claims were $1,145,000 and are included in accrued and other liabilities. It is possible
that the actual development of claims could be different than our estimates but, after consultation
with legal counsel, if those general liability insurance claims for which we have not recognized a
liability were determined adversely to us, it would not have a material effect on our business,
financial condition or results of operations.
|
Summary of Significant Accounting Policies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Summary of Significant Accounting Policies [Abstract] | |
Summary of Significant Accounting Policies |
Note 1: Summary of Significant Accounting Policies
For a complete discussion of our significant accounting policies, refer to the notes to our audited
consolidated financial statements included in our Form 10-K for the year ended December 31, 2010
(“2010 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 3, 2011.
Basis of Consolidation and Presentation — LSB Industries, Inc. (“LSB”) and its subsidiaries (the
“Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying condensed consolidated
financial statements. We are involved in manufacturing, marketing and engineering operations. We
are primarily engaged in the manufacture and sale of geothermal and water source heat pumps and air
handling products (the “Climate Control Business”) and the manufacture and sale of chemical
products (the “Chemical Business”). LSB is a holding company with no significant operations or
assets other than cash, cash equivalents, and investments in its subsidiaries. Entities that are
20% to 50% owned and for which we have significant influence are accounted for on the equity
method. All material intercompany accounts and transactions have been eliminated.
In the opinion of management, the unaudited condensed consolidated financial statements of the
Company as of September 30, 2011 and for the nine and three-month periods ended September 30, 2011
and 2010 include all adjustments and accruals, consisting of normal, recurring accrual adjustments
which are necessary for a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year due, in part, to the seasonality
of our sales of agricultural products and the timing of performing our major plant maintenance
activities. Our selling seasons for agricultural products are primarily during the spring and fall
planting seasons, which typically extend from March through June and from September through
November.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles (“GAAP”) have been condensed
or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These condensed
consolidated financial statements should be read in connection with our audited consolidated
financial statements and notes thereto included in our 2010 Form 10-K.
Use of Estimates — The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income per Common Share — Net income applicable to common stock is computed by adjusting net income
by the amount of preferred stock dividends and dividend requirements, if applicable. Basic income
per common share is based upon net income applicable to common stock and the weighted-average
number of common shares outstanding during each year. Diluted income per share is based on net
income applicable to common stock plus preferred stock dividends and dividend requirements on
preferred stock assumed to be converted, if dilutive, and interest expense including amortization
of debt issuance cost, net of income taxes, on convertible debt assumed to be converted, if
dilutive, and the weighted-average number of common shares and dilutive common equivalent shares
outstanding, and the assumed conversion of dilutive convertible securities outstanding.
Short-Term Investments — Investments, which consisted of certificates of deposit with an original
maturity of 13 weeks, are considered short-term investments. These investments are carried at cost
which approximates fair value. All of these investments were held by financial institutions within
the United States (“U.S.”) and none of these investments were in excess of the federally insured
limits.
Accounts Receivable — Our accounts receivable are stated at net realizable value. This value
includes an appropriate allowance for estimated uncollectible accounts to reflect any loss
anticipated on accounts receivable balances. Our estimate is based on historical experience and
periodic assessment of outstanding accounts receivable, particularly those accounts which are past
due (based upon the terms of the sale). Our periodic assessment of our accounts receivable is based
on our best estimate of amounts that are not recoverable.
Inventories — Inventories are stated at the lower of cost (determined using the first-in, first-out
(“FIFO”) basis) or market (net realizable value). Finished goods and work-in-process inventories
include material, labor, and manufacturing overhead costs. Additionally, we review inventories and
record inventory reserves for slow-moving inventory items.
Precious Metals — Precious metals are used as a catalyst in the Chemical Business manufacturing
process. Precious metals are carried at cost, with cost being determined using the FIFO basis.
Because some of the catalyst consumed in the production process cannot be readily recovered and the
amount and timing of recoveries are not predictable, we follow the practice of expensing precious
metals as they are consumed. Occasionally, during major maintenance or capital projects, we may be
able to perform procedures to recover precious metals (previously expensed) which have accumulated
over time within the manufacturing equipment. Recoveries of precious metals are recognized at
historical FIFO costs. When we accumulate precious metals in excess of our production requirements,
we may sell a portion of the excess metals.
Product Warranty — Our Climate Control Business sells equipment that has an expected life, under
normal circumstances and use, which extends over several years. As such, we provide warranties
after equipment shipment/start up covering defects in materials and workmanship.
Our accounting policy and methodology for warranty arrangements is to measure and recognize the
expense and liability for such warranty obligations at the time of sale using a percentage of sales
and cost per unit of equipment, based upon our historical and estimated future warranty costs. We
also recognize the additional warranty expense and liability to cover atypical costs associated
with a specific product, or component thereof, or project installation, when such costs are
probable and reasonably estimable. It is reasonably possible that our estimated accrued warranty
costs could change in the near term.
Contingencies — Certain conditions may exist which may result in a loss, but which will only be
resolved when future events occur. We and our legal counsel assess such contingent liabilities, and
such assessment inherently involves an exercise of judgment. If the assessment of a contingency
indicates that it is probable that a loss has been incurred, we would accrue for such contingent
losses when such losses can be reasonably estimated. If the assessment indicates that a potentially
material loss contingency is not probable but reasonably possible, or is probable but cannot be
estimated, the nature of the contingent liability, together with an estimate of the range of
possible loss if determinable and material, would be disclosed. Estimates of potential legal fees
and other directly related costs associated with contingencies are not accrued but rather are
expensed as incurred. Loss contingency liabilities are included in current and noncurrent accrued
and other liabilities and are based on current estimates that may be revised in the near term. In
addition, we recognize contingent gains when such gains are realized or realizable and earned.
Derivatives, Hedges, Financial Instruments and Carbon Credits — Derivatives are recognized in the
balance sheet and are measured at fair value. Changes in fair value of derivatives are recorded in
results of operations unless the normal purchase or sale exceptions apply or hedge accounting is
elected.
Climate reserve tonnes (“carbon credits”) are recognized in the balance sheet and are measured at
fair value. Changes in fair value of carbon credits are recorded in results of operations.
Contractual obligations associated with carbon credits are recognized in the balance sheet and are
measured at fair value unless we enter into a firm sales commitment to sell the associated carbon
credits. When we enter into a firm sales commitment, the sales price, pursuant to the terms of the
firm sales commitment, establishes the amount of the associated contractual obligation. Changes in
fair value of contractual obligations associated with carbon credits are recorded in results of
operations.
Income Taxes — We do not recognize a tax benefit unless we conclude that it is more-likely-than-not
that the benefit will be sustained on audit by the taxing authority based solely on the technical
merits of the associated tax position. If the recognition threshold is met, we recognize a tax
benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than
50% likely to be realized. We also record interest related to unrecognized tax positions in
interest expense and penalties in operating other expense.
Income tax benefits associated with amounts that are deductible for income tax purposes but that do
not affect earnings are credited to equity. These benefits are principally generated from exercises
of non-qualified stock options.
Recognition of Insurance Recoveries — If an insurance claim relates to a recovery of our losses, we
recognize the recovery when it is probable and reasonably estimable. If our insurance claim relates
to a contingent gain, we recognize the recovery when it is realized or realizable and earned.
Amounts recoverable from our insurance carriers, if any, are included in accounts receivable.
Recently Issued Accounting Pronouncements — In January 2010, the Financial Accounting Standards
Board (“FASB”) issued an accounting standards update (“ASU”) requiring additional disclosures about
an entity’s derivative and hedging activities for the purpose of improving the transparency of
financial reporting. A portion of the new disclosure requirements became effective for us on
January 1, 2010 and the remaining new disclosure requirements became effective for us on January 1,
2011. These disclosure requirements were applied prospectively. See Note 11 — Derivatives, Hedges,
Financial Instruments and Carbon Credits.
In May 2011, the FASB issued an ASU clarifying how to measure and disclose fair value. The
requirements under this ASU become effective for us on January 1, 2012 and are to be applied
prospectively. We currently do not expect a significant impact from adopting this ASU.
In June 2011, the FASB issued an ASU amending current comprehensive income guidance. This ASU
eliminates the option to present the components of other comprehensive income as part of the
statement of stockholders’ equity. Instead, we must report comprehensive income in either a single
continuous statement of comprehensive income which contains two sections, net income and other
comprehensive income, or in two separate but consecutive statements. The requirements under this
ASU become effective for us on January 1, 2012 and are to be applied retrospectively; however, the
FASB is considering issuing an exposure draft to propose a deferral of certain requirements under this
ASU. We currently expect the impact from adopting this ASU to change the format of our
presentation.
In September 2011, the FASB issued an ASU amending current guidance for testing goodwill for
impairment. This ASU added an option to first assess qualitative factors to determine if the
current two-step impairment test is required. The assessment of qualitative factors is performed
to determine whether the existence of events or circumstances leads to the determination that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.
Pursuant to the provisions of this ASU, we early adopted this ASU effective July 1, 2011, which
provisions were applied prospectively. Our financial statements were not impacted from the adoption
of this ASU.
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Current and Noncurrent Accrued and Other Liabilities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current and Noncurrent Accrued and Other Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current and Noncurrent Accrued and Other Liabilities |
Note 7: Current and Noncurrent Accrued and Other Liabilities
Our current and noncurrent
accrued and other liabilities consist of the following:
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Income Taxes | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes |
Note 12: Income Taxes
Provisions for income taxes are as follows:
For the nine and three months ended September 30, 2011 and 2010, the current provision for federal
income taxes shown above includes regular federal income tax after the consideration of permanent
and temporary differences between income for GAAP and tax purposes. For the nine and three months
ended September 30, 2011 and 2010, the current provision for state income taxes shown above
includes regular state income tax and provisions for uncertain state income tax positions. At
December 31, 2010, we have remaining state tax net operating loss (“NOL”) carryforwards of
approximately $7,200,000 that begin expiring in 2011.
Our annual estimated effective tax rate for 2011 includes the impact of permanent tax differences,
such as the domestic manufacturer’s deduction, the advanced energy credit and other permanent
items.
During June 2010, we determined that certain nondeductible expenses had not been properly
identified relating to the 2007-2009 provisions for income taxes. As a result, we recorded an
additional income tax provision of approximately $800,000 for the nine months ended September 30,
2010. For the nine months ended September 30, 2010, the effect of this adjustment decreased basic
and diluted net income per share by $.04. Management of the Company evaluated the impact of this
accounting error and concluded the effect of this adjustment was immaterial to our 2007-2010
consolidated financial statements.
The tax provision for the nine months ended September 30, 2011 and 2010 was $33,582,000 (37% of
pre-tax income) and $8,821,000 (43% of pre-tax income), respectively.
We had approximately $764,000 and $700,000 accrued for uncertain tax liabilities at September 30,
2011 and December 31, 2010, respectively, which are included in current and noncurrent accrued and
other liabilities.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. 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.
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Accrued Warranty Costs | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Warranty Costs [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Warranty Costs |
Note 8: Accrued Warranty Costs
Our Climate Control Business sells equipment that has an
expected life, under normal circumstances and use, which extends over several years. As such, we
provide warranties after equipment shipment/start up covering defects in materials and workmanship.
Generally for commercial/institutional products, the base warranty coverage for most of the
manufactured equipment in the Climate Control Business is limited to eighteen months from the date
of shipment or twelve months from the date of start up, whichever is shorter, and to ninety days
for spare parts. For residential products, the base warranty coverage for manufactured equipment in
the Climate Control Business is limited to ten years from the date of shipment for material and to
five years from the date of shipment for labor associated with the repair. The warranty provides
that most equipment is required to be returned to the factory or an authorized representative and
the warranty is limited to the repair and replacement of the defective product, with a maximum
warranty of the refund of the purchase price. Furthermore, companies within the Climate Control
Business generally disclaim and exclude warranties related to merchantability or fitness for any
particular purpose and disclaim and exclude any liability for consequential or incidental damages.
In some cases, the customer may purchase or a specific product may be sold with an extended
warranty. The above discussion is generally applicable to such extended warranties, but variations
do occur depending upon specific contractual obligations, certain system components, and local
laws.
Changes in our product warranty obligation (accrued warranty costs) are as follows:
|
Investment in Affiliate | 9 Months Ended |
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Sep. 30, 2011 | |
Investment in Affiliate [Abstract] | |
Investment in Affiliate |
Note 6: Investment in Affiliate
Cepolk Holdings, Inc. (“CHI”), a subsidiary within the
Climate Control Business, is a limited partner and has a 50% equity interest in Cepolk Limited
Partnership (“Partnership”), which is accounted for on the equity method. The Partnership owns an
energy savings project located at the Ft. Polk Army base in Louisiana. The income recognized from
the Partnership is reported as equity in earnings of affiliate. During 2010, CHI filed a lawsuit
against the general partner of the Partnership and subsequently, the general partner filed a
lawsuit against CHI. During June 2011, these lawsuits involving the Partnership were settled
through mediation. As the result of this settlement, our equity in earnings of affiliate decreased
by approximately $480,000 for the nine months ended September 30, 2011. In addition, CHI will
receive an increase of $74,000 in the quarterly distribution from the Partnership, which began
during the third quarter of 2011.
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Income Per Common Share | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Per Common Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Per Common Share |
Note 2: Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
(Dollars In Thousands, Except Per Share Amounts)
The following weighted-average shares of securities were not included in the computation of diluted
net income per common share as their effect would have been antidilutive:
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Accounts Receivable, net | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Receivable, net [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Receivable, net |
Note 3: Accounts Receivable, net
Our accounts receivables, net, consists of the following:
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Derivatives, Hedges, Financial Instruments and Carbon Credits | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Derivatives, Hedges, Financial Instruments and Carbon Credits [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives, Hedges, Financial Instruments and Carbon Credits |
Note 11: Derivatives, Hedges, Financial Instruments and Carbon Credits
We have three
classes of contracts that are accounted for on a fair value basis, which are commodities
futures/forward contracts (“commodities contracts”), foreign exchange contracts and interest rate
contracts as discussed below. All of these contracts are used as economic hedges for risk
management purposes but are not designated as hedging instruments. In addition as discussed below,
periodically we are issued carbon credits, which a certain portion of the carbon credits are to be
sold and the proceeds given to Bayer Material Science LLC (“Bayer”). The carbon credits are
accounted for on a fair value basis as discussed below. Also the contractual obligations associated
with these carbon credits are accounted for on a fair value basis (as discussed below) unless we
enter into a firm sales commitment to sell the carbon credits as discussed in Note 1 — Summary of
Significant Accounting Policies. The valuations of these assets and liabilities were determined
based on quoted market prices or, in instances where market quotes are not available, other
valuation techniques or models used to estimate fair values.
The valuations of contracts classified as Level 1 are based on quoted prices in active markets for
identical contracts. The valuations of contracts classified as Level 2 are based on quoted prices
for similar contracts and valuation inputs other than quoted prices that are observable for these
contracts. At September 30, 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 3.29% and the total
estimated market weighted-average receive rate of 1.06%. No valuation input adjustments were
considered necessary relating to nonperformance risk for the contracts. The valuations of assets
and liabilities classified as Level 3 are based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair value measurement. At
September 30, 2011, the valuations ($1.50 per carbon credit) of the carbon credits and the
contractual obligations associated with these carbon credits are classified as Level 3 and are
based on the range of ask/bid prices ($1.50 to $3.00) per carbon credit obtained from a broker
involved in this low volume market, pricing terms included in sales agreements entered into during
the first nine months of 2011, and inquiries from market participants concerning our listed ask
price through a broker. The valuations are using undiscounted cash flows based on management’s
assumption that the carbon credits would be sold and the associated contractual obligations would
be extinguished in the near term.
In addition, no valuation input adjustments were considered necessary relating to nonperformance
risk for the carbon credits and associated contractual obligations. At December 31, 2010, the
valuations ($3.25 per carbon credit) of contracts classified as Level 3 related to carbon credits
and contractual obligations associated with these carbon credits.
Commodities Contracts
Raw materials for use in our manufacturing processes include copper used by our Climate Control
Business and anhydrous ammonia and natural gas used by our Chemical Business. As part of our raw
material price risk management, we periodically enter into futures/forward contracts for these
materials, which contracts are generally accounted for on a mark-to-market basis. At December 31,
2010, our futures/forward copper contracts were for 750,000 pounds of copper through May 2011 at a
weighted-average cost of $3.75 per pound. At September 30, 2011, our futures/forward copper
contracts were for 375,000 pounds of copper through December 2011 at a
weighted-average cost of $4.44 per pound. At December 31, 2010, our futures/forward natural gas
contracts were
for 800,000 MMBtu of natural gas through February 2011 at a weighted-average cost of $4.10 per
MMBtu. At September 30, 2011, we did not have any futures/forward natural gas contracts. The cash
flows relating to these contracts are included in cash flows from continuing operating activities.
Foreign Exchange Contracts
One of our business operations purchases industrial machinery and related components from vendors
outside of the United States. As part of our foreign currency risk management, we periodically
enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange rates. These
contracts are free-standing derivatives and are accounted for on a mark-to-market basis. At
December 31, 2010, our foreign exchange contracts were for the receipt of approximately 783,000
Euros through June 2011 and for the payment of approximately 110,000 Euros through March 2011, at
the total contractual weighted-average exchange rate of 1.26 (U.S. Dollar/Euro). At September 30,
2011, we did not have any foreign exchange contracts. The cash flows relating to these contracts
are included in cash flows from continuing operating activities.
Interest Rate Contracts
As part of our interest rate risk management, we periodically purchase and/or enter into various
interest rate contracts. In April 2008, we entered into an interest rate swap at no cost, which
sets a fixed three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. In September
2008, we acquired an interest rate swap at a cost basis of $0.4 million, which sets a fixed
three-month LIBOR rate of 3.595% on $25 million and matures in April 2012. In February 2011, we
entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.23%
on a declining balance (from $23.8 million to $18.8 million) for the period beginning in April 2012
through March 2016.
These contracts are free-standing derivatives and are accounted for on a mark-to-market basis.
During the nine months ended September 30, 2011 and 2010, no cash flows occurred relating to the
purchase or sale of interest rate contracts. The cash flows associated with the interest rate swap
payments are included in cash flows from continuing operating activities.
Carbon Credits and Associated Contractual Obligation
During December 2010 and May 2011, we were issued carbon credits by the Climate Action Reserve in
relation to a greenhouse gas reduction project (“Project”) performed at the Baytown Facility.
Pursuant to the terms of the agreement with Bayer (the “Bayer Agreement”), a certain portion of the
carbon credits are to be used to recover the costs of the Project, and any balance thereafter to be
allocated between Bayer and EDN. We have no obligation to reimburse Bayer for their costs
associated with the Project, except through the transfer or sale of the carbon credits when such
credits are issued to us. The carbon credits are accounted for on a fair value basis and the
contractual obligations associated with these carbon credits are also accounted for on a fair value
basis (unless we enter into a firm sales commitment to sell the carbon credits). At December 31,
2010, we had approximately 198,000 carbon credits, all of which were subject to contractual
obligations. At September 30, 2011, we had a minimal amount of carbon credits, all of which were
subject to contractual obligations. The cash flows associated with the carbon credits and the
associated contractual obligations are included in cash flows from continuing investing activities.
The following details our assets and liabilities that are measured at fair value on a recurring
basis at September 30, 2011 and December 31, 2010:
During the nine months ended September 30, 2011 and 2010, none of our assets or liabilities
measured at fair value on a recurring basis transferred between Level 1 and Level 2
classifications. In addition, the following is a reconciliation of the beginning and ending
balances for assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the nine and three months ended September 30, 2011 (not
applicable for the nine and three months ended September 30, 2010):
Realized and unrealized net losses included in earnings and the income statement classifications
are as follows:
The following discussion of fair values is not indicative of the overall fair value of our assets
and liabilities since it does not include all assets, including intangibles.
Our long-term debt agreements are the only financial instruments with fair values significantly
different from their carrying amounts. At September 30, 2011 and December 31, 2010, the fair value
for variable interest rate debt (excluding the secured term loan at December 31, 2010) is believed
to approximate their carrying value. At December 31, 2010, the estimated fair value of the secured
term loan is based on defined LIBOR rates plus 6% utilizing information obtained from the lender.
The fair values of fixed 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 September 30, 2011, the estimated fair value of the
2007 Debentures is based on the conversion rate and market price of LSB common stock. At December
31, 2010, the estimated fair value of the 2007 Debentures is based on quoted prices obtained from a
broker for these debentures.
The estimated fair value and carrying value of our long-term debt are as follows:
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Inventories | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Inventories [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories |
Note 4: Inventories
At September 30, 2011 and December 31, 2010, inventory reserves for
certain slow-moving inventory items (Climate Control products) were $1,984,000 and $1,616,000,
respectively. In addition, because cost exceeded the net realizable value, inventory reserves for
certain nitrogen-based inventories provided by our Chemical Business were $1,075,000 and $177,000
at September 30, 2011 and December 31, 2010, respectively.
Changes in our inventory reserves are as follows:
The provisions for (realization of) losses are included in cost of sales in the accompanying
condensed consolidated statements of income.
|
Business Interruption Insurance Claim and Recovery | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Business Interruption Insurance Claim and Recovery [Abstract] | |
Business Interruption Insurance Claim and Recovery |
Note 14: Business Interruption Insurance Claim and Recovery
In June 2010, a pipe failure
in the primary reformer of the ammonia plant at the Pryor Facility resulted in a fire that damaged
the ammonia plant. The fire was immediately extinguished and there were no injuries. As a result of
this damage, the Pryor Facility was unable to produce anhydrous ammonia or urea ammonium nitrate
(“UAN”) during substantially all of third quarter of 2010. Our insurance policy provides for
business interruption coverage for certain lost profits and extra expense with a 30-day waiting
period. Therefore, we filed an insurance claim for business interruption. During the nine months
ended September 30, 2011, we recognized an insurance recovery of $8.6 million relating to this
business interruption claim, which was recorded as a reduction to cost of sales. As of September
30, 2011, we do not have any remaining insurance claims associated with our business interruption
coverage relating to this event.
|
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) (USD $) In Thousands | Total | Common Stock Shares | Non-Redeemable Preferred Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock- Common |
---|---|---|---|---|---|---|
Beginning balance at Dec. 31, 2010 | $ 179,370 | $ 2,548 | $ 3,000 | $ 131,845 | $ 70,351 | $ (28,374) |
Beginning balance, shares at Dec. 31, 2010 | 25,477 | |||||
Net income | 55,854 | 55,854 | ||||
Dividends paid on preferred stocks | (305) | (305) | ||||
Stock-based compensation | 761 | 761 | ||||
Conversion of convertible debt to common stock | 26,400 | 96 | 26,304 | |||
Conversion of convertible debt to common stock, shares | 965 | |||||
Exercise of stock options | 974 | 14 | 960 | |||
Exercise of stock options, shares | 143 | |||||
Excess income tax benefit associated with stock-based compensation | 1,100 | 1,100 | ||||
Ending balance at Sep. 30, 2011 | $ 264,154 | $ 2,658 | $ 3,000 | $ 160,970 | $ 125,900 | $ (28,374) |
Ending balance, shares at Sep. 30, 2011 | 26,585 |
Segment Information | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Segment Information [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information |
Note 15: Segment Information
Information about our total assets by industry segment is as follows:
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Condensed Consolidated Statements of Cash Flows (Unaudited) (Parenthetical) | Sep. 30, 2011 | Sep. 30, 2010 |
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Net Cash Provided by (Used in) Financing Activities, Continuing Operations [Abstract] | ||
Interest rate on convertible debentures | 5.50% | 5.50% |
Long-Term Debt | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Long-Term Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Debt |
Note 9: Long-Term Debt
Our long-term debt consists of the following:
The Working Capital Revolver Loan provides for up to $8.5 million of letters of credit. All letters
of credit outstanding reduce availability under the Working Capital Revolver Loan. As of September
30, 2011, amounts available for borrowing under the Working Capital Revolver Loan were
approximately $48.6 million. Under the Working Capital Revolver Loan, the lender also requires the
Borrowers to pay a letter of credit fee equal to 1% per annum of the undrawn amount of all
outstanding letters of credit, an unused line fee equal to .375% per annum for the excess amount
available under the Working Capital Revolver Loan not drawn and various other audit, appraisal and
valuation charges.
The lender may, upon an event of default, as defined, terminate the Working Capital Revolver Loan
and make the balance outstanding, if any, due and payable in full. The Working Capital Revolver
Loan is secured by the assets of all the ThermaClime entities other than El Dorado Nitric Company
and its subsidiaries (“EDN”) but excluding the assets securing the secured term loan discussed in
(C) below, certain production equipment and facilities utilized by the Climate Control
Business, and certain distribution-related assets of El Dorado Chemical Company (“EDC”). In addition, EDN is neither a borrower under, nor guarantor of, the Working Capital Revolver Loan.
The carrying value of the pledged assets is approximately $256 million at September 30, 2011.
The Working Capital Revolver Loan requires ThermaClime to meet certain financial covenants,
including an EBITDA requirement of greater than $25 million; a minimum fixed charge coverage ratio
of not less than 1.10 to 1; and a maximum senior leverage coverage ratio of not greater than 4.50
to 1. These requirements are measured quarterly on a trailing twelve-month basis and as defined in
the agreement. ThermaClime was in compliance with those covenants for the twelve-month period ended
September 30, 2011. The Working Capital Revolver Loan also contains covenants that, among other
things, limit the Borrowers’ (which does not include LSB) ability, without consent of the lender
and with certain exceptions, to:
The Working Capital Revolver Loan also requires all collections on accounts receivable be made
through a bank account in the name of the lender or their agent.
The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012. Interest
is payable in arrears on January 1 and July 1 of each year.
In previous periods, we acquired a certain portion of the 2007 Debentures, with each purchase being
negotiated, including $2.5 million during the nine months ended September 30, 2010. In March 2011,
one of the holders converted $24.4 million principal amount of the 2007 Debentures into 888,160
shares of LSB common stock. For financial reporting purposes, the March 2011 transaction is
considered an induced conversion.
In July 2011, Jack E. Golsen, our chairman of the board and chief executive officer (“CEO”),
members of his immediate family (spouse and children), entities owned by them and trusts for which
they possess voting or dispositive power as trustee (collectively, the “Golsen Group”) converted
$2.0 million principal amount of the 2007 Debentures into 72,800 shares of LSB common stock in
accordance with the terms of the 2007 Debentures as discussed in Note 16-Related Party
Transactions. As a result of these acquisitions and conversions, only $0.5 million of the 2007
Debentures remain outstanding at September 30, 2011, all of which were converted into 18,200 shares
of LSB common stock in October 2011.
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 September 30, 2011,
the stated interest rate on the Secured Term Loan includes a variable interest rate of
approximately 3.36% on the principal amount of $48.7 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 $24.4 million. At September 30, 2011, the resulting
weighted-average interest rate was approximately 3.96%.
The Secured Term Loan is secured by the real property and equipment located at our chemical
production facilities located in El Dorado, Arkansas (the “El Dorado Facility”) and Cherokee,
Alabama (the “Cherokee Facility”). The carrying value of the pledged assets is approximately $68
million at September 30, 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 September 30,
2011, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was
approximately $84 million. As defined in the agreement, the Secured Term Loan borrowers are also
subject to a minimum fixed charge coverage ratio of not less than 1.10 to 1 and a maximum leverage
ratio of not greater than 4.50 to 1. Both of these requirements are measured quarterly on a
trailing twelve-month basis. The Secured Term Loan borrowers were in compliance with these
financial covenants for the twelve-month period ended September 30, 2011.
The maturity date of the Secured Term Loan can be accelerated by the lender upon the occurrence of
a continuing event of default, as defined.
The Working Capital Revolver Loan agreement (discussed in (A) above) and the Secured Term Loan
contain cross-default provisions. If ThermaClime fails to meet the financial covenants of either of
these agreements, the lenders may declare an event of default.
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.
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Other Expense, Other Income and Non-Operating Other Income (Expense), net | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other Expense, Other Income and Non-Operating Other Income (Expense), net [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Expense, Other Income and Non-Operating Other Income (Expense), net |
Note 13: Other Expense, Other Income and Non-Operating Other Income (Expense), net
|