19. Segment Information

Factors Used by Management to Identify the Enterprise’s Reportable Segments and Measurement of Segment Income or Loss and Segment Assets

We have two reportable segments (business segments): the Chemical Business and the Climate Control Business. Our reportable segments are based on business units that offer similar products and services. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.

We evaluate performance and allocate resources based on operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

Description of Each Reportable Segment

Chemical Business - The Chemical Business segment manufactures and sells:

•

anhydrous ammonia, fertilizer grade AN, UAN, and AN ammonia solution for agricultural applications,

•

high purity and commercial grade anhydrous ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids, and diesel exhaust fluid for industrial applications, and

•

industrial grade AN and solutions for the mining industry.

Our chemical production facilities are located in El Dorado, Arkansas; Cherokee, Alabama; Pryor, Oklahoma; and Baytown, Texas. Sales to customers of this segment primarily include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the United States; industrial users of acids throughout the United States and parts of Canada; and explosive manufacturers in the United States.

The Pryor Facility began limited production in the first quarter of 2010 but did not reach sustained production of anhydrous ammonia until the fourth quarter of 2010. Currently, this facility’s production is predominantly agricultural products, primarily UAN and anhydrous ammonia.

During 2012, our Chemical Business encountered a number of significant issues including an explosion in one of our nitric acid plants at the El Dorado Facility in May, a pipe rupture that damaged the ammonia plant at the Cherokee Facility in November and numerous mechanical issues at the Pryor Facility, all resulting in lost production and significant adverse effects on 2012 sales and operating income. Also see Note 17 – Property and Business Interruption Insurance Claims and Recovery.

See Note 2—Acquisition of Working Interest in Natural Gas Properties for the discussion of an acquisition of working interests in certain natural gas properties by a subsidiary within our Chemical Business. Since our Chemical Business purchases a significant amount of natural gas as a feedstock for the production of anhydrous ammonia, management considers this acquisition as an economic hedge against a potential rise in natural gas prices in the future for a portion of our future natural gas production requirements. We report the working interests as part of the Chemical Business reportable segment. All of our natural gas producing activities are within the United States (in Pennsylvania).

As of December 31, 2012, our Chemical Business employed 508 persons, with 149 represented by unions under agreements, which will expire in July through November of 2013.

Climate Control Business—The Climate Control Business segment manufactures and sells the following variety of heating, ventilation, and air conditioning (“HVAC”) products:

•

geothermal and water source heat pumps,

•

hydronic fan coils, and

•

other HVAC products including large custom air handlers, modular geothermal and other chillers and other products and services.

These HVAC products are primarily for use in commercial/institutional and residential new building construction, renovation of existing buildings and replacement of existing systems. Our various facilities located in Oklahoma City comprise substantially all of the Climate Control segment’s operations. Sales to customers of this segment primarily include original equipment manufacturers, contractors and independent sales representatives located throughout the world.

Other—The business operation classified as “Other” primarily sells industrial machinery and related components to machine tool dealers and end users located primarily in North America.

Segment Financial Information

Information about our continuing operations in different business segments is detailed below.


	2012			2011			2010
	(In Thousands)
Net sales:
Chemical:
Agricultural products	$	217,329		$	231,599		$	135,598
Industrial acids and other chemical products		162,498			161,776			126,846
Mining products		96,538			118,479			88,642
Natural gas		1,448			—			—

Total Chemical		477,813			511,854			351,086

Climate Control:
Geothermal and water source heat pumps		162,697			183,789			171,561
Hydronic fan coils		55,812			54,379			37,923
Other HVAC products		47,662			43,397			41,037

Total Climate Control		266,171			281,565			250,521
Other		15,047			11,837			8,298

	$	759,031		$	805,256		$	609,905

Gross profit:
Chemical	$	97,692		$	130,687		$	49,295
Climate Control		80,981			88,178			86,364
Other		5,063			4,153			2,966

	$	183,736		$	223,018		$	138,625

Operating income:
Chemical	$	82,101		$	116,503		$	31,948
Climate Control		25,834			32,759			35,338
General corporate expenses and other business operations, net (1)		(12,280	)		(12,819	)		(11,361	)

		95,655			136,443			55,925
Interest expense		4,237			6,658			7,427
Losses on extinguishment of debt		—			136			52
Non-operating expense (income), net:
Chemical		(1	)		(1	)		(7	)
Climate Control		(1	)		(2	)		(3	)
Corporate and other business operations		(279	)		3			(43	)
Provisions for income taxes		33,594			46,208			19,787
Equity in earnings of affiliate—Climate Control		(681	)		(543	)		(1,003	)

Income from continuing operations	$	58,786		$	83,984		$	29,715

(1)	General corporate expenses and other business operations, net consist of the following:


	2012			2011			2010
	(In Thousands)
Gross profit-Other	$	5,063		$	4,153		$	2,966
Selling, general and administrative:
Personnel costs		(9,994	)		(8,418	)		(7,865	)
Professional fees		(4,117	)		(3,805	)		(3,784	)
All other		(3,568	)		(4,224	)		(3,040	)

Total selling, general and adminsitrative		(17,679	)		(16,447	)		(14,689	)

Other income		394			118			366
Other expense		(58	)		(643	)		(4	)

Total general corporate expenses and other business operations, net	$	(12,280	)	$	(12,819	)	$	(11,361	)

Information about our PP&E and total assets by business segment is detailed below:


	2012		2011		2010
	(In Thousands)
Depreciation, depletion and amortization of PP&E:
Chemical	$	16,355	$	14,659	$	13,154
Climate Control		4,250		3,853		4,026
Corporate assets and other		76		250		149

Total depreciation, depletion and amortization of PP&E	$	20,681	$	18,762	$	17,329

Additions to PP&E:
Chemical	$	141,399	$	39,835	$	28,850
Climate Control		5,816		5,746		7,177
Corporate assets and other		3,590		2,376		518

Total additions to PP&E	$	150,805	$	47,957	$	36,545

Total assets at December 31:
Chemical	$	394,479	$	294,886	$	205,179
Climate Control		139,526		160,515		150,635
Corporate assets and other		42,607		46,608		32,167

Total assets (A)	$	576,612	$	502,009	$	387,981

(A) At December 31, 2012, we changed the methodology of allocating our cash, cash equivalents and short-term investment balances to our operating segments. As a result of this change, the assets balances by business segment at December 31, 2011 and 2010 have been reclassified to conform to the methodology utilized at December 31, 2012.

Net sales by business segment include net sales to unaffiliated customers as reported in the consolidated financial statements. Net sales classified as “Other” consist of sales of industrial machinery and related components. Intersegment net sales are not significant.

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.

Our chief operating decision makers use operating income by business segment for purposes of making decisions that include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less 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.

Identifiable assets by business segment are those assets used in the operations of each business. Corporate assets and other are those principally owned by LSB or by subsidiaries not involved in the two identified businesses.

All net sales and long-lived assets relate to domestic operations for the periods presented.

Net sales to unaffiliated customers are to U.S. customers except foreign export sales as follows:


Geographic Area	2012		2011		2010
	(In Thousands)
Canada	$	21,079	$	23,765	$	19,345
Other		11,091		12,450		12,511

	$	32,170	$	36,215	$	31,856

In general, foreign export sales are attributed based upon the location of the customer.

Major Customer

Net sales to one customer, Orica, of our Chemical Business segment represented approximately 9%, 11% and 11% of our total net sales for 2012, 2011 and 2010, respectively. See discussion concerning the supply agreement in Note 12 – Commitments and Contingencies.