NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of
Significant Accounting Policies
For a complete discussion of our significant accounting policies, refer to the notes to our audited consolidated
financial statements included in our Form
10-K
for the year ended December 31, 2016 (2016 Form
10-K),
filed with the Securities and Exchange Commission
(SEC) on February 27, 2017.
Basis of Consolidation
- LSB Industries, Inc. (LSB) and its subsidiaries (the
Company, We, Us, or Our) are consolidated in the accompanying condensed consolidated financial statements. LSB is a holding company with no significant operations or assets other than cash, cash
equivalents, and investments in its subsidiaries. Our ownership of working interests in natural gas properties is accounted for as an undivided interest, whereby we reflect our proportionate share of the underlying assets, liabilities, revenues and
expenses. Our working interest represents our share of the costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while our net revenue interest represents our share of the revenues from the sale of
natural gas. The net revenue interest is less than our working interest as the result of royalty interest due to others. We are not the operator of these natural gas properties. All material intercompany accounts and transactions have been
eliminated.
Nature of Business -
We are engaged in the manufacture and sale of chemical products. The chemical products we primarily manufacture,
market and sell are ammonia, fertilizer grade ammonium nitrate (HDAN), urea ammonium nitrate (UAN), and ammonium nitrate (AN) solution for agricultural applications, high purity and commercial grade ammonia, high
purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids, carbon dioxide, and diesel exhaust fluid for industrial applications, and industrial grade AN (LDAN) and solutions for the mining industry.
We manufacture and distribute our products in four facilities; three of which we own and are located in El Dorado, Arkansas (the El Dorado Facility); Cherokee, Alabama (the Cherokee Facility); and Pryor, Oklahoma (the
Pryor Facility); and one of which we operate on behalf of a global chemical company in Baytown, Texas (the Baytown Facility).
Sales to customers include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the United
States (U.S.); industrial users of acids throughout the U.S. and parts of Canada; and explosive manufacturers in the U.S.
In our opinion, the unaudited
condensed consolidated financial statements of the Company as of March 31, 2017 and for the three-month period ended March 31, 2017 and 2016 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 U.S. generally accepted accounting
principles (GAAP) have been condensed or omitted in this Form
10-Q
pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in connection
with our audited consolidated financial statements and notes thereto included in our 2016 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.
Concentration of Credit Risks for Cash and Cash Equivalents
Financial instruments relating to cash and cash equivalents potentially subject us
to concentrations of credit risk. These financial instruments were held by financial institutions within the U.S. and none of these financial instruments were in excess of the federally insured limits.
Inventories -
Inventories are stated at the lower of cost (determined using the
first-in,
first-out
(FIFO) basis) or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, transportation or disposal.
Finished goods include material, labor, and manufacturing overhead costs. On January 1, 2017 we adopted ASU
No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
as
discussed below in Recently Issued Accounting Pronouncements.
Redeemable Preferred Stocks
- Our redeemable preferred stocks that are
redeemable outside of our control are classified as temporary/mezzanine equity. The redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or discounts. In addition, certain embedded features included in the
Series E Redeemable Preferred required bifurcation and are classified as derivative liabilities. The carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet
declared or paid) using the interest method so that the carrying amount will equal the redemption value as of August 2, 2019, the earliest possible redemption date by the holder. The amount of accretion was recorded to retained earnings.
However, it is reasonably possible this accretion could accelerate if the expected redemption date is earlier than August 2, 2019.
8
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
Equity Awards
- Equity award transactions with employees are measured based on the estimated fair
value of the equity awards issued. For equity awards with only service conditions that have a graded vesting period, we recognize compensation cost on a straight-line basis over the requisite service period for the entire award. In addition,
historically we issue new shares of common stock upon the exercise of stock options but treasury shares may be used.
During the three months ended
March 31, 2017, the compensation committee of our Board of Directors (the Board) approved the grants of 136,142 shares of restricted stock (2017 Restricted Stock) to certain executives under the 2016 Long Term Incentive
Plan. The 2017 Restricted Stock carry dividend and voting rights. Sales of these shares are restricted prior to the date of vesting. Most of the 2017 Restricted Stock vest at the end of each
one-year
period at
a rate of
one-third
per year for three years. Pursuant to the terms of the 2017 Restricted Stock agreements, unvested restricted shares will immediately vest upon the occurrence of certain events (such as a
change in control), as defined by the agreements.
For the three months ended March 31, 2017 and 2016, the total stock-based compensation expense
associated with our continuing operations was $1.2 million and $0.9 million, respectively.
Income (Loss) per Common Share
- Net income
(loss) attributable to common stockholders is computed by adjusting net income (loss) by the amount of dividends and dividend requirements on preferred stocks and the accretion of redeemable preferred stocks, if applicable. Basic loss per common
share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, excluding contingently returnable common shares (unvested restricted stock), if applicable. For periods we earn
net income, a proportional share of net income is allocated to participating securities, if applicable, determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating
securities (the
two-class
method). Certain securities (Series E Redeemable Preferred and restricted stock units) participate in dividends declared on our common stock and are therefore considered
to be participating securities. Participating securities have the effect of diluting both basic and diluted income per common share during periods of net income. For periods we incur a net loss, no loss is allocated to participating securities
because they have no contractual obligation to share in our losses. Diluted loss per common share is computed after giving consideration to the dilutive effect of our potential common stock instruments that are outstanding during the period, except
where such
non-participating
securities would be anti-dilutive.
Recently Issued Accounting Pronouncements
- In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)
2014-09,
Revenue from Contracts with Customers (Topic 606)
, which will
supersede nearly all existing revenue recognition guidance under GAAP. This ASUs core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a
one-year
deferral of the effective date of this ASU with the option to early adopt but not
before the original effective date. In addition, the FASB has issued various ASUs further amending revenue recognition guidance, which includes ASU
2016-08,
2016-10,
2016-11,
2016-12
and
2016-20.
We plan to adopt this ASU on the effective date of January 1, 2018 using the modified
retrospective adoption method, meaning the standard is applied only to the most current period presented in the financial statements and apply only to existing contracts as of the effective date.
We have performed a preliminary review of a majority of our contracts with customers with significant sales in 2016. Most of these contracts are short-term
(have been completed or will be completed before the effective date); however, we do have certain long-term sales contracts that may be affected by the new requirements. In addition, although most of our revenue stream relates to the sale of
chemical products, we have identified additional smaller revenue streams, such as our working interest in natural gas properties, performing various services, and rental income. A contract review process has been implemented to obtain and review our
new or amended contracts for analysis for adopting this ASU. We are developing a preliminary accounting policy and the methodology of identifying performance obligations, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation for the contacts that will be affected. We plan to elect an accounting policy to account for shipping and handling activities performed after a customer obtains
control of the good as activities to fulfil the promise to transfer the good to the customer.
Although we anticipate that upon adoption of this new ASU,
the timing of revenue recognition for certain of our revenue streams might change, we have not determined the effect on our financial statements.
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of
Inventory
. The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary
9
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
course of business, less reasonably predictable costs of completion, disposal, and transportation, rather than the lower of cost or market in the previous guidance. This amendment applies to
inventory that is measured using FIFO. We prospectively adopted this ASU on January 1, 2017. The adoption of this ASU did not impact our financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes the lease requirements in Topic 840,
Leases
.
The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Extensive
quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. This
ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. We plan to adopt this ASU on January 1, 2019. Transition will require application of the new guidance at the beginning of the earliest
comparative period presented. Although we currently have a relatively small number of leases, we are evaluating the effect of this guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU
No. 2016-09,
CompensationStock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting,
which amends ASC Topic 718, Compensation - Stock Compensation. This guidance includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented
in the financial statements. We adopted this guidance on January 1, 2017 as discussed below.
Among other requirements, the new guidance requires all
tax effects related to share-based payments at settlement (or expiration) to be recorded through the income statement. Previously, tax benefits in excess of compensation cost (windfalls) were recorded in equity, and tax deficiencies
(shortfalls) were recorded in equity to the extent of previous windfalls, and then to the income statement. As required, this change was applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements.
Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess tax
benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulative effect adjustment as of the date of the adoption. As required, this change was applied on a
modified retrospective basis, with a cumulative effect adjustment of change in accounting principle of approximately $1.1 million as a deferred tax asset with the offset in retained earnings. We made an accounting policy election to account for
the amount related to excess tax benefits and deficiencies utilizing the direct effect approach.
Under the new guidance, all tax related cash flows
resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from
operating activities. In addition, cash paid by an employer to taxing authorities when the employer directly withholds shares for tax withholding purposes is to be reported as financing activities. These changes were applied on a retrospective
basis, but did not impact the statement of cash flows for the three months ended March 31, 2016.
Under the new guidance, we made an accounting
policy election to account for forfeitures as they occur, a change from the previous requirement to estimate forfeitures each period. As required, this change was applied on a modified retrospective basis; however, as of December 31, 2016, we
had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.
Going forward, the adoption of this ASU
could cause volatility in the effective tax rate.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU
is effective for us on January 1, 2018 and adoption will be applied on retrospective basis unless it is impracticable to apply, in which case we would be required to apply the ASU prospectively as of the earliest date practicable. Although we
anticipate that upon adoption of this new ASU, the presentation and classification for certain cash flow activities might change, we have not determined the effect on our statements of cash flows or disclosures.
In November 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash, a
consensus of the FASB Emerging Issues Task Force.
The amendments in this ASU revise the guidance in Topic 230, Statement of Cash Flows, to require cash and cash equivalents to include restricted cash (and restricted cash equivalents) on the
statement of cash flows. This ASU is effective for us on January 1, 2018 and adoption will be applied on retrospective basis for all periods presented. We plan to adopt this ASU on January 1, 2018.
Although we anticipate that upon
adoption of this new ASU, the presentation and classification for certain cash flow activities might change, we have not determined the effect on our statements of cash flows or disclosures.
10
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 2: Discontinued Operations
On July 1, 2016, LSB completed the sale of all the stock of Climate Control Group Inc. (an indirect subsidiary that conducted LSBs Climate Control
Business) pursuant to the terms of the stock purchase agreement. Additionally, pursuant to the stock purchase agreement, we agreed to have a certain portion of the purchase price proceeds deposited in an indemnity escrow account. In conjunction with
the Climate Control Business sale, we entered into a transition services agreement (TSA), pursuant to which, among other things, we agreed to provide certain information technology, payroll, legal, tax and other general services for up
to 18 months. At March 31, 2017 and December 31, 2016, our accounts receivable includes approximately $2.7 million representing an indemnity escrow balance. Additionally, at March 31, 2017 and December 31, 2016, our current
and noncurrent accrued and other liabilities include approximately $4.2 million and $5.5 million, respectively, relating primarily to estimated contingent liabilities, costs associated with the TSA and severance agreements associated with
the sale of the Climate Control Business.
Summarized results of discontinued operations are as follows for the three months ended March 31, 2016 (in
thousands):
|
|
|
|
|
Net sales
|
|
$
|
66,627
|
|
Cost of sales
|
|
|
45,454
|
|
Selling, general and administrative expense
|
|
|
15,968
|
|
Other expense, net
|
|
|
143
|
|
|
|
|
|
|
Income from operations of discontinued operations
|
|
|
5,062
|
|
Provision for income taxes
|
|
|
4,238
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
$
|
824
|
|
|
|
|
|
|
Summarized condensed cash flow information of discontinued operations is as follows for the three months ended March 31,
2016 (in thousands):
|
|
|
|
|
Deferred income taxes
|
|
$
|
3,608
|
|
Depreciation and amortization of property, plant and equipment
|
|
$
|
1,089
|
|
Stock-based compensation
|
|
$
|
230
|
|
Expenditures for property, plant and equipment
|
|
$
|
153
|
|
Software and software development costs
|
|
$
|
477
|
|
11
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3: Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars In Thousands, Except Per
Share Amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss:
|
|
$
|
(5,986
|
)
|
|
$
|
(14,941
|
)
|
Adjustments for basic net loss per common share:
|
|
|
|
|
|
|
|
|
Dividend requirements on Series E Redeemable Preferred
|
|
|
(5,536
|
)
|
|
|
(7,350
|
)
|
Dividend requirements on Series B Preferred
|
|
|
(60
|
)
|
|
|
(60
|
)
|
Dividend requirements on Series D Preferred
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Accretion of Series E Redeemable Preferred
|
|
|
(1,599
|
)
|
|
|
(2,243
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net loss per common share - net loss attributable to common
stockholders
|
|
$
|
(13,196
|
)
|
|
$
|
(24,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic and dilutive net loss per common share - weighted-average shares
(1)
|
|
|
27,248,059
|
|
|
|
22,868,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.48
|
)
|
|
$
|
(1.11
|
)
|
Income from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.48
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes the weighted-average shares of unvested restricted stock that are contingently returnable.
|
The
following weighted-average shares of securities were not included in the computation of diluted net loss per common share as their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted stock and stock units
|
|
|
1,117,426
|
|
|
|
833,642
|
|
Convertible preferred stocks
|
|
|
916,666
|
|
|
|
916,666
|
|
Series E Redeemable Preferred - embedded derivative
|
|
|
303,646
|
|
|
|
456,225
|
|
Stock options
|
|
|
219,011
|
|
|
|
559,167
|
|
Warrants
|
|
|
|
|
|
|
4,103,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,556,749
|
|
|
|
6,869,446
|
|
|
|
|
|
|
|
|
|
|
Note 4: Inventories
At March 31, 2017 and December 31, 2016, because costs exceeded the net realizable value, inventory reserves were $38,000 and $2,977,000,
respectively.
12
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 5: Current and Noncurrent Accrued and Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(In Thousands)
|
|
Accrued interest
|
|
$
|
5,445
|
|
|
$
|
13,425
|
|
Deferred revenue
|
|
|
5,401
|
|
|
|
5,757
|
|
Accrued payroll and benefits
|
|
|
4,793
|
|
|
|
4,696
|
|
Accrued liabilities associated with discontinued operations
|
|
|
4,182
|
|
|
|
5,498
|
|
Customer deposits
|
|
|
3,869
|
|
|
|
2,506
|
|
Series E Redeemable Preferred - embedded derivative
|
|
|
2,848
|
|
|
|
2,557
|
|
Accrued death and other executive benefits (1)
|
|
|
2,764
|
|
|
|
4,207
|
|
Other
|
|
|
33,908
|
|
|
|
17,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,210
|
|
|
|
56,363
|
|
Less noncurrent portion
|
|
|
10,431
|
|
|
|
12,326
|
|
|
|
|
|
|
|
|
|
|
Current portion of accrued and other liabilities
|
|
$
|
52,779
|
|
|
$
|
44,037
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During March 2017, a death benefit agreement with Jack E. Golsen, the Executive Chairman of our Board, was terminated pursuant to the terms of the agreement that allowed LSB to terminate at any time and for any reason
prior to the death of the employee. As a result, the liability of approximately $1.4 million for the estimated death benefit associated with this agreement was extinguished and derecognized with the offset classified as other income. For the
three months ended March 31, 2017, the effect of this adjustment (after income taxes of $0.5 million) decreased basic and diluted loss per share by $0.03 per share.
|
Note 6: Asset Retirement Obligations
Currently,
we have various legal requirements related to operations of our chemical facilities, including the disposal of waste water generated at certain of these facilities. Additionally, we have certain chemical facilities 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 (ARO). In addition, we currently have no plans to discontinue the use of these facilities, and these facilities have an
indefinite expected life. As a result, a liability for only a minimal amount relating to AROs associated with certain facilities has been established. However, we will continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made. In addition, we own working interests in certain natural gas properties. We recognized AROs associated with the obligation to plug and abandon wells when the natural gas reserves in the wells are depleted. At
March 31, 2017 and December 31, 2016, our accrued liability for AROs was $293,000 and $546,000, respectively.
13
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7: Long-Term Debt
Our long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(In Thousands)
|
|
Working Capital Revolver Loan, with a current interest rate of 4.5% (A)
|
|
$
|
|
|
|
$
|
|
|
Senior Secured Notes due 2019 (B)
|
|
|
375,000
|
|
|
|
375,000
|
|
Secured Promissory Note due 2017, with a current interest rate of 4.05% (C)
|
|
|
4,723
|
|
|
|
6,566
|
|
Secured Promissory Note due 2019, with a current interest rate of 5.73% (D)
|
|
|
8,917
|
|
|
|
9,167
|
|
Secured Promissory Note due 2021, with a current interest rate of 5.25% (E)
|
|
|
13,532
|
|
|
|
14,272
|
|
Secured Promissory Note due 2023, with a current interest rate of 5.04% (F)
|
|
|
18,150
|
|
|
|
18,645
|
|
Other, with a current weighted-average interest rate of 4.55%, most of which is secured primarily
by machinery and equipment
|
|
|
3,833
|
|
|
|
4,185
|
|
Unamortized discount and debt issuance costs
|
|
|
(6,883
|
)
|
|
|
(7,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
417,272
|
|
|
|
420,220
|
|
Less current portion of long-term debt
|
|
|
11,752
|
|
|
|
13,745
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due after one year, net
|
|
$
|
405,520
|
|
|
$
|
406,475
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Our revolving credit facility (the Working Capital Revolver Loan), as amended in January 2017, provides advances up to $50 million (but provides an ability to expand the commitment an additional $25
million), based on specific percentages of eligible accounts receivable and inventories and up to $10 million of letters of credit, the outstanding amount of which reduces the available for borrowing under the Working Capital Revolver Loan. At
March 31, 2017, our available borrowings under our Working Capital Revolver Loan were approximately $44.9 million, based on our eligible collateral, less outstanding letters of credit.
|
The maturity date of the Working Capital Revolver Loan is January 17, 2022, with a springing earlier maturity date (the Springing Maturity
Date) that is 90 days prior to the maturity date of our Senior Secured Notes, to the extent the Senior Secured Notes are not refinanced or repaid prior to the Springing Maturity Date.
The Working Capital Revolver Loan also provides for a springing financial covenant (the Financial Covenant), which requires that, if the borrowing
availability is less than or equal to the greater of 10.0% of the total revolver commitments and $5 million, then the borrowers must maintain (a) with respect to relevant periods ending on or prior to September 30, 2017, a minimum
EBITDA in the amount set forth in the Working Capital Revolver Loan Amendment and (b) with respect to relevant periods ending after September 30, 2017, a minimum fixed charge coverage ratio of not less than 1.00 to 1.00. The Financial
Covenant, if triggered, is tested monthly.
(B)
|
The Senior Secured Notes mature on August 1, 2019. Interest is to be paid semiannually on February 1st and August 1st. In September 2016, we entered into the First Supplemental Indenture to the original Indenture
(the Original 7.75% Indenture) that, among other things, increased the annual interest rate to 8.5% from 7.75%, effective August 1, 2016.
|
(C)
|
Zena Energy L.L.C. (Zena), one of our subsidiaries, is party to a secured promissory note due December 1, 2017. Principal and interest are payable in monthly installments. Interest is based on the LIBOR
rate plus 300 basis points.
|
(D)
|
El Dorado Chemical Company (EDC), one of our subsidiaries, is party to a secured promissory note due June 29, 2019. Principal and interest are payable in equal monthly installments with a final balloon
payment of approximately $6.7 million.
|
(E)
|
El Dorado Chemical Company (EDC), one of our subsidiaries, is party to a secured promissory note due March 26, 2021. Principal and interest are payable in monthly installments.
|
(F)
|
El Dorado Ammonia L.L.C. (EDA), one of our subsidiaries, is party to a secured promissory note due in May 2023. Principal and interest are payable in equal monthly installments with a final balloon payment
of approximately $6.1 million. This promissory note bears interest at a rate that is based on the monthly LIBOR rate plus a base rate.
|
14
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies
Natural Gas Purchase Commitments
At March 31, 2017, our natural gas contracts, which are exempt from
mark-to-market
accounting, included volume purchase commitments with fixed costs of approximately 1.2 million MMBtu of natural gas. These contracts extend through June
2017 at a weighted-average cost of $3.17 per MMBtu ($3.8 million) and a weighted-average market value of $3.03 per MMBtu ($3.6 million).
Legal
Matters
-
Following is a summary of certain legal matters involving the Company:
A. Environmental Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health and safety matters
(collectively, the Environmental and Health Laws). In particular, the manufacture, production and distribution of products activities that entail environmental and public health risks and impose obligations under the Environmental and
Health Laws, many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint and several liability for costs required
to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities of third
parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions
were taken. In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that could expose us to material losses. In certain instances, citizen groups also have the ability
to bring legal proceedings against us if we are not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to operate. In addition, claims for damages to persons or property, including
natural resources, may result from the environmental, health and safety effects of our operations.
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. Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage if an environmental claim is
made against us. The Environmental and Health Laws and related enforcement policies have in the past resulted, and could in the future result, in significant compliance expenses, cleanup costs (for our sites or third-party sites where our wastes
were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products.
Further, a number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material adverse effect on their operations and our financial condition.
Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental and Health Laws, and
significant capital expenditures are expected to be incurred in the future. We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a
facility. We do not operate the natural gas wells where we own a working interest and compliance with Environmental and Health Laws is controlled by others. We are responsible for our working interest proportionate share of the costs involved. As of
March 31, 2017, our accrued liabilities for environmental matters totaled $175,000 relating primarily to the matters discussed below. It is reasonably possible that a change in the estimate of our liability could occur in the near term. Also,
see discussion in Note 6
Asset Retirement Obligations.
1. Discharge Water Matters
Each of our manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control streams, contact storm
water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental agencies as
authorized and overseen by the U.S. Environmental Protection Agency (the EPA). These permits limit the type and amount of effluents that can be discharged and control the method of such discharge.
15
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
Our facility located in Pryor, Oklahoma (the Pryor Facility) is authorized by permit to inject
wastewater into an
on-site
underground injection well through 2018. The Oklahoma Department of Environmental Quality (ODEQ) has indicated that the permit may not be renewed following its
expiration, and the Pryor Chemical Company (PCC) may have to find an alternative means of waste water disposal after the permit expires. PCC has engaged in ongoing discussions both internally and with the ODEQ regarding future disposal
of this wastewater stream.
Our El Dorado Facility is subject to a National Pollutant Discharge Elimination System (NPDES) permit issued by
the Arkansas Department of Environmental Quality (ADEQ) in 2004. In 2010, the ADEQ issued a draft NPDES permit renewal for the El Dorado Facility, which contains more restrictive discharge limits than the previous 2004 permit. These more
restrictive limits could impose additional costs on the El Dorado Facility, and may require the facility to make operational changes in order to meet these more restrictive limits. From time to time, the El Dorado Facility has had difficulty meeting
the more restrictive dissolved minerals NPDES permit levels, primarily related to storm-water runoff and EDC is currently working with ADEQ to resolve this issue through a new permit, which is currently in progress.
EDC believes that the El Dorado Facility has generally demonstrated its ability to comply with applicable ammonia and nitrate permit levels, but has, from
time to time, had difficulty meeting the more restrictive dissolved minerals permit levels, primarily related to storm-water runoff. We do not believe this matter regarding meeting the permit requirements as to the dissolved minerals is a continuing
issue for the process wastewater as the result of the El Dorado Facility disposing its wastewater (beginning in September 2013) via a pipeline constructed by the City of El Dorado, Arkansas. We believe that the issue with the storm-water runoff
should be resolved if and when the ADEQ issues a new NPDES discharge water permit, which we have been advised that the ADEQ is currently processing.
During 2012, EDC paid a penalty of $100,000 to settle an administrative complaint issued by the EPA, and thereafter handled by the U.S. Department of Justice
(DOJ), relating to certain alleged violations of EDCs 2004 NPDES permit from 2004 through 2010. At the time of settlement, the DOJ advised that an additional action may be brought for alleged permit violations occurring after 2010.
As of the date of this report, no action has been filed by the DOJ against EDC. As a result, the cost (or range of costs) cannot currently be reasonably estimated regarding this matter. Therefore, no liability has been established for potential
future penalties as of March 31, 2017.
In addition, the El Dorado Facility is currently operating under a consent administrative order (the
CAO) that recognizes the presence of nitrate contamination in the shallow groundwater. The 2006 CAO required EDC to continue semiannual 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 risk assessment was submitted in August 2007. In February 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should
continue semi-annual monitoring. 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, of which cost (or range of costs) cannot currently be reasonably estimated. Therefore, no liability has been established at
March 31, 2017, in connection with this matter.
2. Air Matters
PCC has been advised by the ODEQ that the agency is conducting an investigation into whether the Pryor Facility is in compliance with certain ODEQ air quality
rules and regulations and whether PCCs reports of certain air emissions, primarily in 2011, were intentionally misreported to the ODEQ. PCC is cooperating with the ODEQ in connection with this ongoing investigation. As of March 31, 2017,
we are not aware of any recommendations made or to be made by the ODEQ with respect to legal action to be taken or recommended as a result of this ongoing investigation.
3. Other Environmental Matters
In
November 2006, EDC entered into a Consent Administrative Order (CAO) with the ADEQ to address nitrates in shallow groundwater. The CAO requires EDC to perform semi-annual groundwater monitoring, continue operation of a groundwater
recovery system, submit a human health and ecological risk assessment, and submit a remedial action plan. EDCs risk assessment and the remedial action plan, initially submitted to the ADEQ in 2007, recommended monitored natural attenuation.
The ADEQs review of the EDC proposed remedy is ongoing. Under the CAO, the ADEQ may require additional wells be added to the program or may allow EDC to remove wells from the program. At this time, the duration and cost (or range of costs) of
the ground water monitoring program or the necessity for any additional remediation cannot be reasonably estimated.
16
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
During 2014, the Cherokee Facility received Notice of Violation (NOV) from the EPA as a result of
a 2013 risk management inspection at the facility. The NOV listed eleven alleged violations. We reached a settlement of the NOV in March 2016 whereby we agreed and paid a penalty in the form of providing approximately $100,000 to purchase emergency
response equipment for local first responders plus a civil penalty to the EPA of approximately $26,000.
In 2002, certain of our subsidiaries sold
substantially all of their operating assets relating to a Kansas chemical facility (the Hallowell Facility) but retained ownership of the real property where the facility is located. 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 develop 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.
As the successor to a prior owner of the
Hallowell Facility, Chevron Environmental Management Company (Chevron) has agreed in writing, within certain limitations, to pay and has been paying
one-half
of the costs of the investigation and
interim measures relating to this matter as approved by the Kansas Department of Health and Environment (the KDHE), subject to reallocation.
Our subsidiary and Chevron have retained an environmental consultant to prepare and perform a corrective action study work plan as to the appropriate method
to remediate the Hallowell Facility. The proposed strategy includes long-term surface and groundwater monitoring to track the natural decline in contamination. The KDHE is currently evaluating the corrective action strategy, and, thus, it is unknown
what additional work the KDHE may require, if any, at this time. We are advised by our consultant that until the study is completed there is not sufficient information to develop a meaningful and reliable estimate (or range of estimate) as to the
cost of the remediation. We accrued our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which is included in our accrued liabilities for environmental matters
discussed above. The estimated amount is not discounted to its present value. As more information becomes available, our estimated accrual will be refined
B. Other Pending, Threatened or Settled Litigation
In
April 2013, an explosion and fire occurred at the West Fertilizer Co. (West Fertilizer) located in West, Texas, causing death, bodily injury and substantial property damage. West Fertilizer is not owned or controlled by us, but West
Fertilizer was a customer of EDC, and purchased AN from EDC from time to time. LSB and EDC received letters from counsel purporting to represent subrogated insurance carriers, personal injury claimants and persons who suffered property damages
informing LSB and EDC that their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether AN manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the
time of the explosion and, if so, whether such AN may have been one of the contributing factors of the explosion. Initial lawsuits filed named West Fertilizer and another supplier of AN as defendants. In 2014, EDC and LSB were named as defendants,
together with other AN manufacturers and brokers that arranged the transport and delivery of AN to West Fertilizer, in the case styled
City of West, Texas vs. CF Industries, Inc., et al.
, in the District Court of McLennan County, Texas. The
plaintiffs allege, among other things, that LSB and EDC were negligent in the production and marketing of fertilizer products sold to West Fertilizer, resulting in death, personal injury and property damage. EDC retained a firm specializing in cause
and origin investigations with particular experience with fertilizer facilities, to assist EDC in its own investigation. LSB and EDC placed its liability insurance carrier on notice, and the carrier is handling the defense for LSB and EDC concerning
this matter. Our product liability insurance policies have aggregate limits of general liability totaling $100 million, with a self-insured retention of $250,000. In August 2015, the trial court dismissed plaintiffs negligence claims
against us and EDC based on a duty to inspect, but allowed the plaintiffs to proceed on claims for design defect and failure to warn.
Subsequently, we
and EDC have entered into confidential settlement agreements (with approval of our insurance carriers) with several plaintiffs that had claimed wrongful death and bodily injury and insurance companies asserting subrogation claims for damages from
the explosion. A portion of these settlements have been paid by the insurer as of March 31, 2017. While these settlements resolve the claims of a number of the claimants in this matter for us, we continue to be party to litigation related to
this explosion by other plaintiffs, in addition to indemnification or defense obligations we may have to other defendants. We intend to continue to defend these lawsuits vigorously and we are unable to estimate a possible range of loss at this time
if there is an adverse outcome in this matter as to EDC. As of March 31, 2017, no liability reserve has been established in connection with this matter, except for the unpaid portion of the settlement agreements discussed above, but we have
incurred professional fees up to our self-insured retention amount.
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
In May 2015, our subsidiary, EDC, was sued in the matter styled
BAE Systems Ordinance Systems, Inc.
(BAE),
et al. vs. El Dorado Chemical Company
, in the United States District Court, Western District of Arkansas, for an alleged breach of a supply agreement to provide BAE certain products. It is EDCs position, among other
things, that its inability to deliver to BAE was due to a
force majeure
event caused by a fire and explosion at EDCs nitric acid plant, and that a
force majeure
clause in the supply agreement therefore excuses EDCs
performance under the supply agreement. BAEs
pre-litigation
demand indicated a claim of approximately $18 million. EDC intends to vigorously defend this matter. The cost (or range of costs), if any,
EDC would incur relating to this matter cannot currently be reasonably estimated. Therefore, no liability has been established at March 31, 2017.
In
September 2015, a case styled
Dennis Wilson vs. LSB Industries, Inc
., et al., was filed in the United States District Court for the Southern District of New York. The plaintiff purports to represent a class of our shareholders and asserts
that we violated federal securities laws by allegedly making material misstatements and omissions about delays and cost overruns at our El Dorado Chemical Company manufacturing facility and about our financial well-being and prospects. The lawsuit,
which also names certain current and former officers, seeks an unspecified amount of damages. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class
certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
In September
2015, we and El Dorado Ammonia L.L.C. (EDA) received formal written notice from Global Industrial, Inc. (Global) of Globals intention to assert mechanic liens for labor, service, or materials furnished under certain
subcontract agreements for the improvement of the new ammonia plant at our El Dorado Facility. Global is a subcontractor of Leidos Constructors, LLC (Leidos), the general contractor for EDA for the construction for the ammonia plant.
Leidos terminated the services of Global with respect to their work performed at our El Dorado Facility in July 2015 and Global claims it is entitled to payment for certain work prior to its termination in the sum of approximately $18 million.
Leidos reports that it made an estimated $6 million payment to Global on or about September 11, 2015, and EDA paid Leidos approximately $3.5 million relating to work performed by subcontractors of Global. Leidos has not approved
certain payments to Global pending the result of
on-going
audits and investigation undertaken to quantify the financial impact of Globals work. EDA intends to monitor the Leidos audit, and conduct its
own investigation, in an effort to determine whether any additional payment should be released to Global for any work not in dispute. LSB and EDA intend to pursue recovery of any damage or loss caused by Globals work performed at our El Dorado
Facility. In January 2016, El Dorado, Leidos and Global reached an agreement whereby the approximately $3.6 million claims of Leidos remaining unpaid subcontracts, vendors and suppliers will be paid (and these suppliers and subcontractors
will in turn issue releases of their respective claims and liens). In addition, Global will reduce the value of its claim as against Leidos, and its lien amount as against the project by a like amount. After all such lower tier supplier and
subcontractors are satisfied, the Global claim and lien amount will be reduced to approximately $5 million. In March 2016, EDC and we were served a summons in a case styled
Global Industrial, Inc. d/b/a Global Turnaround vs. Leidos
Constructors, LLC et al.,
where in Global seeks damages under breach of contract and other claims. We have requested indemnifications from Leidos under the terms of our contracts and we intend to vigorously defend against the allegation made by
Global. No liability has been established in connection with the remaining $5 million claim. In addition, LSB and EDA intend to pursue recovery of any damage or loss caused by Globals work performed at our El Dorado Facility.
We are also involved in various other claims and legal actions. It is possible that the actual future development of claims could be different from our
estimates but, after consultation with legal counsel, we believe that changes in our estimates will not have a material effect on our business, financial condition, results of operations or cash flows.
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits
For the periods presented, the following significant instruments are accounted for on a fair value basis:
Carbon Credits and Associated Contractual Obligation
Periodically, we are issued climate reserve tonnes (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 Covestro, a certain portion of the carbon credits are to be sold and the proceeds given to Covestro to recover the costs of the Project, and any
balance thereafter to be allocated between Covestro and EDN. We have no obligation to reimburse Covestro 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
assets for 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 sales commitment to sell the carbon credits).
At March 31, 2017, we had approximately 369,000
carbon credits (none at December 31, 2016), 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.
18
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Embedded Derivative
Certain embedded features (embedded derivative) relating to the redemption of the Series E Redeemable Preferred, which includes certain contingent
redemption features and the participation rights value have been bifurcated from the Series E Redeemable Preferred and recorded as a liability. At March 31, 2017, the result of the Indenture Amendments in connection with the previously reported
redemption of a portion of our Senior Secured Notes and the redemption of the portion of Series E Redeemable Preferred, we estimate that the contingent redemption feature has no fair value at March 31, 2017 based on low probability that the
remaining shares of Series E Redeemable Preferred would be redeemed prior to August 2, 2019. At March 31, 2017 and December 31, 2016, the fair value of the participation rights was based on the equivalent of 303,646 shares of our
common stock at $9.38 and $8.42 per share, respectively.
The following is a summary of the classifications of valuations of fair value:
Level 1 -
The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. At
March 31, 2017 and December 31, 2016, we did not have any contracts classified as Level 1.
Level 2 -
The valuations of contracts
classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At March 31, 2017 and December 31, 2016, we did not have any significant
contracts classified as Level 2.
Level 3 -
The valuations of assets and liabilities classified as Level 3 are based on prices or
valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. At March 31, 2017, the valuation ($2.35 per carbon credit) of the carbon credits and the contractual obligations
associated with these carbon credits is classified as Level 3 and is based on the most recent sales transaction and reevaluated for market changes, if any, and on the range of ask/bid prices obtained from a broker adjusted for minimal market
volume activity. At December 31, 2016, we did not have any carbon credits or related contractual obligations associated with carbon credits. The valuation is using undiscounted cash flows based on managements assumption that the carbon
credits would be sold and the associated contractual obligations would be extinguished in the near term. At March 31, 2017 and December 31, 2016, the valuations of the embedded derivative are classified as Level 3. This derivative is
valued using market information, managements redemption assumptions, the underlying number of shares as defined in the terms of the Series E Redeemable Preferred, and the market price of our common stock. In addition, no valuation input
adjustments were considered necessary relating to nonperformance risk for the carbon credits or the embedded derivative.
19
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis at
March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
March 31, 2017 Using
|
|
|
|
|
Description
|
|
Total Fair
Value at
March 31,
2017
|
|
|
Quoted Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value at
December 31,
2016
|
|
|
|
(In Thousands)
|
|
Assets - Supplies, prepaid items and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon credits
|
|
$
|
867
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
867
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
867
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
867
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities - Current and noncurrent accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations - carbon credits
|
|
$
|
(867
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(867
|
)
|
|
$
|
|
|
Embedded derivative
|
|
|
(2,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,848
|
)
|
|
|
(2,557
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,715
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,715
|
)
|
|
$
|
(2,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and
Level 2 classifications for the periods presented below. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Three Months Ended
March 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
1,154
|
|
|
$
|
(2,557
|
)
|
|
$
|
(1,154
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in operating results
|
|
|
867
|
|
|
|
60
|
|
|
|
(1,158
|
)
|
|
|
(60
|
)
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
867
|
|
|
$
|
1,214
|
|
|
$
|
(3,715
|
)
|
|
$
|
(1,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) for the period included in operating results attributed to the change in
unrealized gains or losses on assets and liabilities still held at the reporting date
|
|
$
|
867
|
|
|
$
|
60
|
|
|
$
|
(1,158
|
)
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Net gains (losses) included in continuing operating results and the statement of operations classifications
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Total net gains (losses) included in operating results:
|
|
|
|
|
|
|
|
|
Cost of sales - Undesignated commodities contracts
|
|
$
|
|
|
|
$
|
(17
|
)
|
Cost of sales - Undesignated foreign exchange contracts
|
|
|
|
|
|
|
13
|
|
Other income - Carbon credits
|
|
|
867
|
|
|
|
60
|
|
Other expense - Contractual obligations relating to carbon credits
|
|
|
(867
|
)
|
|
|
(60
|
)
|
Non-operating
other expense - embedded derivative
|
|
|
(291
|
)
|
|
|
(2,509
|
)
|
|
|
|
|
|
|
|
|
|
Total net losses included in operating results
|
|
$
|
(291
|
)
|
|
$
|
(2,513
|
)
|
|
|
|
|
|
|
|
|
|
At March 31, 2017 and December 31, 2016, we did not have any financial instruments with fair values significantly
different from their carrying amounts (which excludes issuance costs, if applicable), except for the Senior Secured Notes as shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In Millions)
|
|
Senior Secured Notes (1)
|
|
$
|
375
|
|
|
$
|
366
|
|
|
$
|
375
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on a quoted price of 97.5 at March 31, 2017 and 94.88 at December 31, 2016.
|
The Senior
Secured Notes valuations are classified as Level 2. The valuations of our other long-term debt agreements are classified as Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the
overall fair value measurement. The fair value measurements of our other long-term debt agreements are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and
applies estimated current market interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms. In addition, no valuation input adjustments were
considered necessary relating to nonperformance risk for our debt agreements. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities since financial instruments do not include all assets,
including intangibles, and all liabilities.
Also see discussions concerning certain assets and liabilities initially accounted for on a fair value basis
under Note 6 - Asset Retirement Obligations. In addition, see discussion under Impairment of Long-Lived Assets in Note 1 - Summary of Significant Accounting Policies.
21
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Income Taxes
Benefit for income taxes from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
(40
|
)
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
(40
|
)
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,212
|
)
|
|
$
|
(5,259
|
)
|
State
|
|
|
(30
|
)
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
$
|
(1,242
|
)
|
|
$
|
(4,937
|
)
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
(1,282
|
)
|
|
$
|
(4,850
|
)
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, the current provision (benefit) for state income taxes shown above
includes regular state income tax and provisions for uncertain state income tax positions.
Our annual estimated effective rate for 2017 includes the
impact of permanent tax differences, such as a loss on embedded derivatives, valuation allowances, and other permanent items.
We reduce our deferred tax
assets by a valuation allowance if, based upon the weight of available evidence, it is
more-likely-than-not
that we will not realize some portion or all of the deferred tax assets. We consider relevant
evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities
and tax carrybacks, as well as an evaluation of currently available information about future years. We determined it was
more-likely-than-not
that a portion of the state NOL carryforwards would not be able to
be utilized before expiration and we estimate the valuation allowance associated with these state NOL carryforwards to be recorded during 2017 will be approximately $6.1 million.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to
our deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated
financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.
The tax
benefit from continuing operations for the three months ended March 31, 2017 was $1.3 million (18% of
pre-tax
loss) and the tax benefit for the three months ended March 31, 2016 was
$4.9 million (24% of
pre-tax
loss). For the first quarter of 2017, the effective tax rate is significantly less than the statutory tax rate primarily due to the impact of the valuation allowances
associated with the state NOL carryforwards.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, the 2013-2015 years remain open for all purposes of examination by the U.S. Internal Revenue Service and other major tax jurisdictions.
22
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11. Securities Financing Including Redeemable Preferred Stocks
Series E Redeemable Preferred
The Series E
Redeemable Preferred has a 14% annual dividend rate and a participating right in dividends and liquidating distributions equal to 303,646 shares of common stock as of March 31, 2017. Dividends accrue semi-annually in arrears and are compounded.
As discussed in Note 9, the embedded derivative, which includes certain contingent redemption features and the participation rights value, relating to
the redemption of the Series E Redeemable Preferred has been bifurcated from the Series E Redeemable Preferred and recorded as a liability.
Series
F Redeemable Preferred
As of March 31, 2017, the one share of Series F Redeemable Preferred has voting rights (the Series F Voting
Rights) to vote as a single class on all matters which the common stock have the right to vote and is entitled to a number of votes equal to 456,225 shares of our common stock.
Changes in our Series E Redeemable Preferred (no change to the Series F Redeemable Preferred) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Series E Redeemable Preferred
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(Dollars In Thousands)
|
|
Balance at December 31, 2016
|
|
|
139,768
|
|
|
$
|
145,029
|
|
Accretion relating to liquidation preference on preferred stock
|
|
|
|
|
|
|
1,124
|
|
Accretion for discount and issuance costs on preferred stock
|
|
|
|
|
|
|
475
|
|
Accumulated dividends
|
|
|
|
|
|
|
5,536
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
139,768
|
|
|
$
|
152,164
|
|
|
|
|
|
|
|
|
|
|
Note 12: Related Party Transactions
No dividends were declared during the first quarter of 2017 or 2016. At March 31, 2017, accumulated dividends on the Series B and Series D Preferred
totaled approximately $453,000. The Series B Preferred and Series D Preferred are
non-redeemable
preferred stocks issued in 1986 and 2001, respectively, of which all outstanding shares are owned by the Golsen
Holders.
See discussion in Note 5 concerning the termination of a death benefit agreement with Jack E. Golsen, the Executive Chairman of our Board.
Note 13: Supplemental Cash Flow Information
The
following provides additional information relating to cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Cash refunds for:
|
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
(115
|
)
|
|
$
|
(122
|
)
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accounts receivable and accounts payable associated with additions of property, plant and
equipment
|
|
$
|
8,844
|
|
|
$
|
54,237
|
|
Long-term debt associated with additions of capitalized
internal-use
software and software development
|
|
$
|
|
|
|
$
|
153
|
|
Dividends accrued on Series E Redeemable Preferred
|
|
$
|
5,536
|
|
|
$
|
7,350
|
|
Accretion of Series E Redeemable Preferred
|
|
$
|
1,599
|
|
|
$
|
2,243
|
|
23
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) should be read in conjunction with a review of the other Items included in this Form
10-Q
and our March 31, 2017 condensed consolidated financial statements included elsewhere in
this report. This MD&A reflects the results of continuing operations, unless otherwise noted. Certain statements contained in this MD&A may be deemed to be forward-looking statements. See Special Note Regarding
Forward-Looking
Statements.
Overview
General
LSB is headquartered in Oklahoma City, Oklahoma
and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining, and industrial markets. We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operate a facility for
Covestro in Baytown, Texas. Our products are sold through distributors and directly to end customers throughout the U.S.
Key Initiatives for 2017
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following
key initiatives:
|
|
|
Improving the
on-stream
rates of our chemical plants.
We have made and continue to make: (1) upgrades to the operations teams at our chemical facilities;
(2) investments of capital to enhance the reliability of each of our plants at each facility in order to reduce unplanned outages, unplanned downtime, and the frequency of planned Turnarounds; and (3) continued efforts to focus on safety
and efficiency throughout our operations.
|
|
|
|
Broadening the distribution of our AN and Nitric Acid products.
Given the reduction in our LDAN sales from the declining use of coal, we have expanded our overall sales of HDAN through a number of marketing
initiatives that have broadened our addressable market. Those initiatives include, storing and distributing HDAN at our Pryor and Cherokee Facilities and selling to new markets and customers out of those facilities. In addition, through our
marketing efforts, we are working on expanding our market for our nitric acid products in North America.
|
|
|
|
Reducing and controlling our cost structure.
In 2016, we put in place SG&A expense reductions that will reduce annual SG&A by approximately $6 million. We began to realize that benefit during
the first quarter of 2017. In addition, we have enacted plant cost reductions at each manufacturing facility that has an annual savings of approximately $6 million. We continue to review our overall costs and believe that we will be able
to further reduce costs during 2017.
|
|
|
|
Selling
non-core
assets.
At the end of 2016, we identified assets that are no longer necessary in the operations of our business, which we believe could generate
approximately $15 million to $20 million of net cash proceeds (net of any outstanding debt against these assets).
|
|
|
|
Evaluate strategic initiatives for our business.
We are exploring and evaluating potential strategic alternatives for our business, which may include a sale, a merger with another party, or another strategic
transaction involving some or all of our assets. We have retained Morgan Stanley & Co. LLC as our financial advisor to assist with this process.
|
We may not successfully implement any or all of these initiatives. Even if we successfully implement the initiatives, they may not achieve the beneficial
results that we expect or desire.
Key Industry Factors
Supply and Demand
Agricultural
Sales of our agricultural products were approximately 51% of our total net sales for the first quarter of 2017. The price at which our agricultural
products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage,
weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors facilities and international and domestic political and economic developments continue to play an important role in
the global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.
One of the key factors that affects demand of our agricultural products is corn prices. Changes in corn prices can affect the number of acres of corn planted
in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely
24
affecting prices. The World Agricultural Supply and Demand Estimates Report (WASDE), dated April 11, 2017, estimates that U.S. corn production for 2016 was 15.1 billion
bushels, up 11% from 2015 production, reflecting an increase in planted and harvested areas, in addition to higher yields per acre. Additionally, this report estimates world corn ending stocks for 2016/2017 at 223 million tons, an increase over
2015/2016 ending stocks of approximately 5% and U.S. corn ending stocks of 58.9 million tons, an increase of approximately 33.5% over the prior year. The USDA is estimating that U.S. growers will plant 90 million acres of corn in 2017, a
decrease of only approximately 4 million acres from the previous year.
Given the low price of natural gas in North America over the last several
years, North American fertilizer producers have become the global low cost producers for delivered fertilizer products to the Midwest U.S. Several years ago, the market believed that low natural gas prices would continue. That belief, combined with
favorable fertilizer pricing, led to the announcement of numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities. Since those announcements, fertilizer prices have declined and many of
the announced expansions and new nitrogen chemical facilities have been cancelled. However, approximately 5 million tons of annual ammonia production capacity has either been added or are expected to be added by the end of 2017. Ammonia
production in North America is expected to increase from approximately 15 million tons annually to approximately 20 million tons annually, replacing most of the ammonia that has been imported into North America to cover the total annual
demand of approximately 21 million tons. Additional domestic supply of ammonia will likely also change the physical flow of ammonia in North America. However, since most of the added domestic ammonia production will likely come with additional
production capacity for upgraded nitrogen products (Urea, UAN and DEF), North America will likely continue to import between 2 million to 3 million tons of ammonia annually. All of this has created uncertainty in the fertilizer markets and
has put pressure on all fertilizer prices in North America that, we believe, will last throughout 2017. However, since the fertilizer market is seasonal, selling prices and demand increased ahead of the 2017 spring season as compared to the fourth
quarter of 2016 and are expected to remain elevated until the end of the season with prices typically falling after the spring season is completed.
Industrial
Sales of our industrial products were
approximately 40% of our total net sales for the first quarter of 2017. Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries. According to the American
Chemistry Council, the U.S. economic indicators continue to be mostly positive for these sectors domestically. Our sales prices generally vary with the market price of our feedstock (ammonia or natural gas, as applicable) in our pricing arrangements
with customers.
Mining
Sales of our mining products
were approximately 6% of our total net sales for the first quarter of 2017. Our mining products are LDAN and AN solutions, which are primary used as AN fuel oil and specialty emulsions for surface mining of coal and for usage in quarries and the
construction industry. As reported by the U.S. Energy Information Administration (EIA), annual coal production in the U.S. for the full year of 2016 was down 18% from 2015 levels and at its lowest levels since 1978, continuing an
eight-year decline. EIA is forecasting a 4% increase in U.S. coal production due to an increase in demand from coal-fired electricity generation in 2017 and an additional 2% increase in 2018 due to higher expected natural gas prices. We believe that
coal production in the U.S. continues to face significant challenges from natural gas usage and renewable energy. While we believe our plants are well-located to support the more stable coal-producing regions in the upcoming years, our current
mining sales volumes are being affected by overall lower customer demand for LDAN and AN Solution. Although recent changes in U.S federal policies are expected to be favorable to the coal industry, we do not expect a significant increase in our
mining business in the near term, due in part, to the current natural gas prices.
Farmer Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual
farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the
types of crops planted.
Natural Gas Prices
Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural gas reserves have been
increasing significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive position
and that of other North American nitrogen fertilizer producers have been positively affected.
25
We historically have purchased natural gas in the spot market, using forward purchase contracts, or through a
combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed
supply quantity. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems. The following table shows the volume of natural gas we purchased and
the average cost per MMBtu:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Natural gas volumes (MMBtu in millions) (1)
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Natural gas average cost per MMBtu
|
|
$
|
3.15
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The increase in volume is primarily attributed to the new ammonia plant at the El Dorado Facility.
|
Transportation Costs
Costs for
transporting nitrogen based products can be significant relative to their selling price. For example, ammonia is a hazardous gas at ambient temperatures and must be transported in specialized equipment, which can be more expensive than other forms
of nitrogen fertilizers. In recent years, a significant amount of the ammonia consumed annually in the U.S was imported. Therefore, nitrogen fertilizer prices in the U.S. are influenced by the cost to transport product from exporting countries,
giving domestic producers who transport shorter distances an advantage.
Key Operational Factors
Facility Reliability
Consistent,
reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds, are mitigated through a diligent planning
process that considers the availability of resources to perform the needed maintenance, feedstock logistics and other factors. Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed
cost absorption from lower production of our products and increased costs related to repairs and maintenance. All Turnarounds result in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our
products, and increased costs related to repairs and maintenance, which repair and maintenance costs are expensed as incurred.
For 2017, we have one
planned Turnaround that we expect to perform in the fourth quarter at the Pryor Facility
.
Prepay Contracts
We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These sales are made by offering
customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon. We use this program to varying degrees during the year depending on market conditions and our view of changing price
environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of
shipment.
Consolidated Results of the First Quarter of 2017
Our consolidated net sales for the first quarter of 2017 were $123.3 million compared to $99.0 million for the same period in 2016. Our consolidated
operating income was $2.3 million compared to a consolidated operating loss of $17.3 million for the same period in 2016. The items impacting our operating results are discussed in more detail below and under Results of
Operations.
Items Affecting Comparability of Results
On-Stream
Rates and Additional Ammonia Sales Volume
The
on-stream
rates of our plants affect our production, the absorption of fixed costs of each plant and sales of our
products. It is a key operating metric that we use to manage our business. In particular, we closely monitor the
on-stream
rates of our ammonia plants as that is the basic product used to produce all upgraded
products. At our Cherokee Facility, the
on-stream
rate for the first quarter of 2017 for our ammonia plant was 99% compared to 96% for the same period of 2016. We expect
on-stream
rates to average a minimum of 95% for the remainder of 2017.
At our Pryor Facility, the
on-stream
rate for the first quarter of 2017 for our ammonia plant was 96% compared to 92% for the first quarter of 2016. We expect
on-stream
rates to continue at this
level during the remainder of 2017.
The El Dorado Facilitys ammonia plant began production in
mid-2016.
It
is typical for newly operated plants that are in production to go through a period of optimization (Shakedown) that may require the plant to be taken out of operation for a period of time. Our reported 2016
on-stream
rate for the ammonia plant at El Dorado was 64%. However, since going into operation, the
on-stream
rate
26
has steadily improved on a quarterly basis with the
on-stream
rate for the fourth quarter of 73%. The
on-stream
rate continued to improve in the first quarter of 2017 to 90% and we believe that the ammonia plant will operate at an average
on-stream
rate of approximately 94% for 2017. In addition to improving
on-stream
rates, the plant is producing ammonia at a daily production rate greater than 1,300 tons per day, above its nameplate capacity of 1,150 tons per day.
Because of the improving ammonia production at the El Dorado Facility, during the first quarter of 2017 we sold approximately 49,000 tons of ammonia that were
in excess of our internal needs at this facility.
Selling Prices
During the first quarter of 2017, selling prices for our agricultural products decreased significantly compared to the 2016 first quarter selling prices.
Average selling prices for our HDAN, UAN and ammonia decreased 21%, 16% and 7%, respectively, compared to 2016 average selling prices for the same period. The decreases in overall agricultural products selling prices were caused by lower average
commodity prices and the nitrogen production capacity being added globally, and in North America specifically, that created uncertainty on the ability of producers to efficiently distribute the additional production
.
Depreciation Expense
During the
first quarter of 2017 and 2016, depreciation expense was $17.1 million and $10.6 million, respectively. The increase is primarily due to our El Dorado expansion project being completed and placed into service during the second quarter
of 2016.
Debt and Interest Expense
During the first quarter of 2017 and 2016, interest expense was $9.4 million and $1.4 million, net of capitalized interest of $0.1 million and
$10.0 million, respectively. Interest was capitalized based upon construction in progress of the El Dorado expansion and certain other capital projects.
Certain
One-Time
and Other Expenses (2016 only)
During the first quarter of 2016, EDC incurred a
one-time
fee of $12.1 million related to consulting services
associated with the reduction of assessed property values for the El Dorado projects real and personal property for both the nitric acid plant, nitric acid concentrator plant and the ammonia plant. We expect material property tax savings in future
periods through a reduction of property taxes paid.
Results of Operations
The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended
March 31, 2017 and 2016 and accompanying notes and the discussions under Overview and Liquidity and Capital Resources included in this MD&A.
We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the consolidated financial
statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales.
27
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
The following table contains certain financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products
|
|
$
|
63,263
|
|
|
$
|
49,774
|
|
|
$
|
13,489
|
|
|
|
27.1
|
%
|
Industrial acids and other chemical products
|
|
|
48,880
|
|
|
|
36,868
|
|
|
|
12,012
|
|
|
|
32.6
|
%
|
Mining products
|
|
|
7,616
|
|
|
|
9,827
|
|
|
|
(2,211
|
)
|
|
|
(22.5
|
)%
|
Other products
|
|
|
3,585
|
|
|
|
2,503
|
|
|
|
1,082
|
|
|
|
43.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
123,344
|
|
|
$
|
98,972
|
|
|
$
|
24,372
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
$
|
11,615
|
|
|
$
|
(6,164
|
)
|
|
$
|
17,779
|
|
|
|
288.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) percentage (1)
|
|
|
9.4
|
%
|
|
|
(6.2
|
)%
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
10,545
|
|
|
|
10,894
|
|
|
|
(349
|
)
|
|
|
(3.2
|
)%
|
Other expense (income), net
|
|
|
(1,251
|
)
|
|
|
251
|
|
|
|
(1,502
|
)
|
|
|
598.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,321
|
|
|
|
(17,309
|
)
|
|
|
19,630
|
|
|
|
113.4
|
%
|
Interest expense, net
|
|
|
9,358
|
|
|
|
1,350
|
|
|
|
8,008
|
|
|
|
593.2
|
%
|
Non-operating
other expense, net
|
|
|
231
|
|
|
|
1,956
|
|
|
|
(1,725
|
)
|
|
|
(88.2
|
)%
|
Benefit for income taxes
|
|
|
(1,282
|
)
|
|
|
(4,850
|
)
|
|
|
3,568
|
|
|
|
(73.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(5,986
|
)
|
|
|
(15,765
|
)
|
|
|
9,779
|
|
|
|
(62.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment:
|
|
$
|
7,628
|
|
|
$
|
94,147
|
|
|
$
|
(86,519
|
)
|
|
|
(91.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization of property, plant and equipment:
|
|
$
|
17,115
|
|
|
$
|
10,590
|
|
|
$
|
6,525
|
|
|
|
61.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a percentage of net sales
|
The following tables provide key operating metrics for the Agricultural
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
|
157,784
|
|
|
|
94,306
|
|
|
|
63,478
|
|
|
|
67
|
%
|
HDAN
|
|
|
91,171
|
|
|
|
54,548
|
|
|
|
36,623
|
|
|
|
67
|
%
|
Ammonia
|
|
|
44,242
|
|
|
|
36,644
|
|
|
|
7,598
|
|
|
|
21
|
%
|
Other
|
|
|
4,911
|
|
|
|
4,738
|
|
|
|
173
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
298,108
|
|
|
|
190,236
|
|
|
|
107,872
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Percentage
|
|
Average Selling Prices (price per ton)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
$
|
161
|
|
|
$
|
192
|
|
|
$
|
(31
|
)
|
|
|
(16
|
)%
|
HDAN
|
|
$
|
222
|
|
|
$
|
281
|
|
|
$
|
(59
|
)
|
|
|
(21
|
)%
|
Ammonia
|
|
$
|
317
|
|
|
$
|
342
|
|
|
$
|
(25
|
)
|
|
|
(7
|
)%
|
28
With respect to sales of Industrial, Mining and Other Chemical Products, the following table indicates the
volumes sold of our major products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Nitric Acid - Baytown
|
|
|
129,589
|
|
|
|
124,501
|
|
|
|
5,088
|
|
|
|
4
|
%
|
Nitric Acid - All Other
|
|
|
29,128
|
|
|
|
16,029
|
|
|
|
13,099
|
|
|
|
82
|
%
|
LDAN/HDAN
|
|
|
20,214
|
|
|
|
19,562
|
|
|
|
652
|
|
|
|
3
|
%
|
AN Solution
|
|
|
12,304
|
|
|
|
22,427
|
|
|
|
(10,123
|
)
|
|
|
(45
|
)%
|
Ammonia
|
|
|
43,924
|
|
|
|
7,673
|
|
|
|
36,251
|
|
|
|
472
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
235,159
|
|
|
|
190,192
|
|
|
|
44,967
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Our
first quarter 2017 agricultural sales were higher due to increased sales volume for UAN, HDAN and ammonia largely offset by lower average prices for these products. Industrial sales and mining sales both were lower due to lower selling prices
partially offset by overall higher sales volume.
|
|
|
Agricultural products sales increased, driven primarily by higher sales volume of UAN, HDAN and ammonia. The impact from the sales volume increase was largely offset by lower average selling prices of nitrogen based
fertilizers. The increase in sales volume was primarily the result of improved
on-stream
rates/production, broadening our distribution of HDAN to new markets and customers and an earlier start of the spring
fertilizer season. The lower average selling prices were due primarily to lower average commodity prices and the nitrogen production capacity being added globally, and in North America specifically, that created uncertainty on the ability of
producers to efficiently distribute the additional production.
|
|
|
|
Industrial acids and other chemical products sales increased as a result of strong industrial ammonia sales at our El Dorado Facility with high plant
on-stream
rates (no
production in the first quarter of 2016). In addition, nitric acid sales from El Dorado are continuing to expand and sales were significantly higher compared to the first quarter of 2016, although at lower net prices due to longer shipping
distances.
|
|
|
|
Mining products sales decreased primarily as the result of lower sales volume of AN solution from our Cherokee Facility as demand from our customers remains suppressed by overall market conditions.
|
|
|
|
Other products consist of natural gas sales from our working interests in certain natural gas properties and sales of industrial machinery and related components.
|
Gross Profit (Loss)
As noted in the table above,
we recognized a gross profit of $11.6 million for the first quarter of 2017 compared to a gross loss of $6.2 million in the first quarter of 2016, or an increase of $17.8 million. In addition to the net positive effect from the higher
sales discussed above, our gross profit improved through:
|
|
|
a reduction in our feedstock costs at our El Dorado Facility as it produced ammonia from natural gas in the first quarter of 2017 versus purchasing ammonia in the first quarter of 2016;
|
|
|
|
a reduction in fixed plant expenses; and
|
|
|
|
improved absorption of fixed costs from improved
on-stream
rates.
|
In
addition, during the first quarter of 2016, we incurred a
one-time
cost of $12.1 million relating to consulting services associated with the reduction of property taxes from fixing the assessed value for
our El Dorado Facility.
The increase in gross profit was partially offset by an increase in overall depreciation expense in the first quarter of 2017 as our new ammonia plant at our El Dorado facility is now in service and higher average
natural gas feedstock cost at the Cherokee and Pryor Facilities.
Other expense (income), net
During the first quarter of 2017, a liability of approximately $1.4 million was extinguished and derecognized associated with a death benefit agreement as
discussed in Note 5 to the Condensed Consolidated Financial Statements.
29
Interest Expense, net
Interest expense for the first quarter of 2017 was $9.4 million compared to $1.4 million for the same period in 2016. The increase is due primarily
to a reduction in capitalized interest of $9.9 million as the result of the completion of the El Dorado expansion project in the second quarter of 2016. In addition, interest expense decreased $1.8 million relating to the 12% Senior
Secured Notes sold in November 2015 and repaid in October 2016.
Non-operating
Other Expense, net
Non-operating
other expense for the first quarter of 2017 was $0.2 million compared to
$2.0 million for the same period in 2016, which primarily related to an unrealized loss from the change in fair value associated with the embedded derivative included in the Series E Preferred.
Benefit for Income Taxes
The benefit for income
taxes from continuing operations for the first quarter of 2017 was $1.3 million compared to $4.9 million for the same period in 2016. The resulting effective tax rate for the first quarters of 2017 and 2016 was 18% and 24%, respectively.
For the first quarter of 2017, the effective tax rate is significantly less than the statutory tax rate primarily due to the impact of the valuation allowances associated with state NOL carryforwards.
Income from Discontinued Operations, net of taxes
The results of operations of our former Climate Control Business are presented as discontinued operations. For the first quarter of 2016, income from
discontinued operations was $0.8 million, net of a tax provision of $4.2 million.