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. All material intercompany accounts and transactions have been eliminated.
On May 11, 2017, Zena
Energy L.L.C. (Zena), which is an indirect, wholly owned subsidiary of LSB, entered into a purchase and sale agreement with BKV Chelsea, LLC, (BKV). Under the terms of the purchase and sale agreement, Zena agreed to sell to
BKV substantially all of its assets, including Zenas right, title, and interest in all of its oil and natural gas properties (the Properties) located in Wyoming County, Pennsylvania for a purchase price of approximately
$16.3 million, subject to customary post-closing adjustments, which sale was completed on June 26, 2017. As a result, we recognized a loss on the sale of approximately $4.0 million which is included in operating other expense. The
carrying value of the assets sold was approximately $20.0 million and was included in plant, property and equipment (PP&E) at December 31, 2016. Concurrently with the closing of the purchase and sale agreement, a portion of
the net proceeds (approximately $3.5 million) was used to repay the remaining outstanding balance of a promissory note, which was secured by the Properties.
Zenas prior ownership of working interests in natural gas properties was accounted for as an undivided interest, whereby we reflected our proportionate
share of the underlying assets, liabilities, revenues and expenses. The working interest represented our share of the costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while the net revenue
interest represented our share of the revenues from the sale of natural gas. The net revenue interest was less than the working interest as the result of royalty interest due to others. We were not the operator of these natural gas properties.
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 June 30, 2017 and for the three and six months periods ended June 30, 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.
8
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
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.
Precious
MetalsPrecious metals are used as a catalyst in our manufacturing process. Precious metals are carried at cost, with cost being determined using the FIFO basis. Because some of the catalyst consumed in the production process cannot be readily
recovered and the amount and timing of recoveries are not predictable, we follow the practice of expensing precious metals as they are consumed. Occasionally, during major maintenance or capital projects, we may be able to perform procedures to
recover precious metals (previously expensed) which have accumulated over time within the manufacturing equipment. Recoveries of precious metals are recognized at historical FIFO costs. When we accumulate precious metals in excess of our production
requirements, we may sell a portion of the excess metals.
During the second quarter of 2017, we recognized a recovery of precious metals of approximately
$2.9 million, which recovery is classified as a reduction to cost of sales.
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.
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.
9
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
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 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 currently designing and developing changes to our processes, systems and controls to improve the ability to access, analyze, classify and account for our contracts. In addition, we are
designing a process to identify, store and access data needed for the new disclosure requirements.
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. We also plan to elect an
accounting policy to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction and collected by us from a 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 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, CompensationStock 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. 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.
10
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1: Summary of Significant Accounting Policies (continued)
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 six months ended June 30, 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. Upon
adoption of this new ASU, we anticipate the removal of the presentation of cash flow activities relating to current and noncurrent restricted cash and cash equivalents from our statement of cash flows for 2016.
11
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, which
services have been completed. At June 30, 2017 and December 31, 2016, our accounts receivable includes approximately $2.7 million representing an indemnity escrow balance. Additionally, at June 30, 2017 and December 31,
2016, our current and noncurrent accrued and other liabilities include approximately $3.7 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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Three Months
Ended
|
|
|
Six Months
Ended
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Net sales
|
|
$
|
71,982
|
|
|
$
|
138,609
|
|
Cost of sales
|
|
|
47,724
|
|
|
|
93,178
|
|
Selling, general and administrative expense
|
|
|
17,301
|
|
|
|
32,719
|
|
Transaction costs
|
|
|
1,985
|
|
|
|
2,535
|
|
Other expense (income), net
|
|
|
(25
|
)
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued operations
|
|
|
4,997
|
|
|
|
10,060
|
|
Benefit for income taxes (1)
|
|
|
(17,782
|
)
|
|
|
(13,543
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, including taxes
|
|
$
|
22,779
|
|
|
$
|
23,603
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The structure of the Climate Control Business sale will allow for additional tax basis to be recovered than was previously recorded as a deferred tax asset. The tax benefit associated with this additional tax basis was
recorded in discontinued operations in the second quarter of 2016 consistent with the period the Climate Control Business subsidiaries were designated as held for sale.
|
Summarized condensed cash flow information of discontinued operations is as follows for the six months ended June 30, 2016 (in thousands):
|
|
|
|
|
Deferred income taxes
|
|
$
|
(12,809
|
)
|
Depreciation and amortization of property, plant and equipment
|
|
$
|
1,607
|
|
Stock-based compensation
|
|
$
|
573
|
|
Expenditures for property, plant and equipment
|
|
$
|
273
|
|
Software and software development costs
|
|
$
|
675
|
|
12
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3: Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars In Thousands, Except Per Share Amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,033
|
)
|
|
$
|
15,091
|
|
|
$
|
(13,019
|
)
|
|
$
|
150
|
|
Adjustments for basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend requirements on Series E Redeemable Preferred
|
|
|
(5,789
|
)
|
|
|
(7,629
|
)
|
|
|
(11,325
|
)
|
|
|
(14,979
|
)
|
Dividend requirements on Series B Preferred
|
|
|
(60
|
)
|
|
|
(60
|
)
|
|
|
(120
|
)
|
|
|
(120
|
)
|
Dividend requirements on Series D Preferred
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
(30
|
)
|
|
|
(30
|
)
|
Accretion of Series E Redeemable Preferred
|
|
|
(1,618
|
)
|
|
|
(2,241
|
)
|
|
|
(3,217
|
)
|
|
|
(4,484
|
)
|
Net income attributable to participating securities
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and dilutive net income (loss) per common sharenet income (loss)
attributable to common stockholders
|
|
$
|
(14,515
|
)
|
|
$
|
5,055
|
|
|
$
|
(27,711
|
)
|
|
$
|
(19,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and dilutive net income (loss) per common shareadjusted
weighted-average shares (1)
|
|
|
27,249,304
|
|
|
|
25,240,224
|
|
|
|
27,248,682
|
|
|
|
23,822,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.53
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.81
|
)
|
Income from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.90
|
|
|
|
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.53
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.02
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.53
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(1.81
|
)
|
Income from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.90
|
|
|
|
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.53
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.02
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes the weighted-average shares of unvested restricted stock that are contingently returnable.
|
13
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3: Income (Loss) Per Common Share (continued)
The following weighted-average shares of securities were not included in the computation of diluted net
income (loss) per common share as their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Restricted stock and stock units
|
|
|
1,195,560
|
|
|
|
989,484
|
|
|
|
1,156,493
|
|
|
|
911,563
|
|
Convertible preferred stocks
|
|
|
916,666
|
|
|
|
916,666
|
|
|
|
916,666
|
|
|
|
916,666
|
|
Series E Redeemable Preferredembedded derivative
|
|
|
303,646
|
|
|
|
456,225
|
|
|
|
303,646
|
|
|
|
456,225
|
|
Stock options
|
|
|
217,608
|
|
|
|
517,273
|
|
|
|
218,309
|
|
|
|
538,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,633,480
|
|
|
|
2,879,648
|
|
|
|
2,595,114
|
|
|
|
2,822,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4: Inventories
At June 30, 2017 and December 31, 2016, because costs exceeded the net realizable value, inventory adjustments were $870,000 and $2,977,000,
respectively.
Note 5: Current and Noncurrent Accrued and Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Accrued interest
|
|
$
|
13,411
|
|
|
$
|
13,425
|
|
Deferred revenue
|
|
|
7,872
|
|
|
|
5,757
|
|
Accrued payroll and benefits
|
|
|
4,177
|
|
|
|
4,696
|
|
Accrued liabilities associated with discontinued operations
|
|
|
3,680
|
|
|
|
5,498
|
|
Series E Redeemable Preferredembedded derivative
|
|
|
3,137
|
|
|
|
2,557
|
|
Accrued death and other executive benefits
|
|
|
2,751
|
|
|
|
4,207
|
|
Customer deposits
|
|
|
1,475
|
|
|
|
2,506
|
|
Other
|
|
|
8,728
|
|
|
|
17,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,231
|
|
|
|
56,363
|
|
Less noncurrent portion
|
|
|
13,075
|
|
|
|
12,326
|
|
|
|
|
|
|
|
|
|
|
Current portion of accrued and other liabilities
|
|
$
|
32,156
|
|
|
$
|
44,037
|
|
|
|
|
|
|
|
|
|
|
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. As the result of the sale of Zenas working interests in
certain natural gas properties discussed in Note 1, our previously recognized AROs of approximately $193,000 associated with the obligation to plug and abandon wells were extinguished and derecognized with the offset included in the net loss on the
sale of a business classified as operating other expense. At June 30, 2017 and December 31, 2016, our accrued liability for AROs was $116,000 and $546,000, respectively.
14
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7: Long-Term Debt
Our long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Working Capital Revolver Loan, with a current interest rate of
4.75% (A)
|
|
$
|
|
|
|
$
|
|
|
Senior Secured Notes due 2019 (B)
|
|
|
375,000
|
|
|
|
375,000
|
|
Secured Promissory Note due 2017 (C)
|
|
|
|
|
|
|
6,566
|
|
Secured Promissory Note due 2019, with a current interest rate of 5.73% (D)
|
|
|
8,667
|
|
|
|
9,167
|
|
Secured Promissory Note due 2021, with a current interest rate of 5.25% (E)
|
|
|
12,786
|
|
|
|
14,272
|
|
Secured Promissory Note due 2023, with a current interest rate of 5.31% (F)
|
|
|
17,655
|
|
|
|
18,645
|
|
Other, with a current weighted-average interest rate of 4.53%, most of which is secured primarily
by machinery and equipment
|
|
|
3,553
|
|
|
|
4,185
|
|
Unamortized discount and debt issuance costs
|
|
|
(6,150
|
)
|
|
|
(7,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
411,511
|
|
|
|
420,220
|
|
Less current portion of long-term debt, net
|
|
|
9,622
|
|
|
|
13,745
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due after one year, net
|
|
$
|
401,889
|
|
|
$
|
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
June 30, 2017, our available borrowings under our Working Capital Revolver Loan were approximately $40.8 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)
|
Concurrently with the closing of the purchase and sale agreement discussed in Note 1, a portion of the net proceeds (approximately $3.5 million) from the sale was used to repay the remaining outstanding balance of this
promissory note.
|
(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.
|
15
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies
Natural Gas Purchase Commitments
At June 30, 2017, we did not have any natural gas contracts with volume purchase commitments
with fixed costs.
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 did not operate the natural gas wells where we previously owned a working interest and compliance with Environmental and
Health Laws was controlled by others. We are responsible for our working interest proportionate share of the costs involved. As of June 30, 2017, our accrued liabilities for environmental matters totaled $154,000 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.
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 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.
16
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
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 June 30, 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 June 30, 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 June 30, 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 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.
17
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
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 June 30, 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 June 30, 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.
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 June 30, 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.
18
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8: Commitments and Contingencies (continued)
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 June 30, 2017 and December 31, 2016, we did not have any carbon credits or related contractual obligations associated with carbon credits. The cash flows associated with the carbon credits and the associated contractual obligations are
included in cash flows from continuing investing activities.
19
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. As 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 June 30, 2017 based on low probability that the remaining shares of
Series E Redeemable Preferred would be redeemed prior to August 2, 2019. At June 30, 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 $10.33
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
June 30, 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 June 30, 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 June 30, 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 embedded derivative.
The following details our liabilities
that are measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:
|
|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
June 30, 2017 Using
|
|
|
|
|
Description (1)
|
|
Total Fair
Value at
June 30,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical
Contracts
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value at
December 31,
2016
|
|
|
|
(In Thousands)
|
|
LiabilitiesCurrent and noncurrent accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,137
|
)
|
|
|
(2,557
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,137
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,137
|
)
|
|
$
|
(2,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
There were no assets that were measured at fair value on a recurring basis at June 30, 2017 or December 31, 2016.
|
20
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
None of our liabilities measured at fair value on a recurring basis transferred between Level 1 and
Level 2 classifications for the periods presented below. As the result of entering into the stock purchase agreement relating to the sale of the Climate Control Business in 2016 as discussed in Note 2, the valuation of the embedded derivative
transferred from Level 2 to Level 3 since the probability increased relating to contingent redemption features requiring the use of significant unobservable inputs. The classification transfer of this derivative was deemed to occur at the
beginning of the second quarter of 2016. 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
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Beginning balance
|
|
$
|
867
|
|
|
$
|
1,214
|
|
|
$
|
(3,715
|
)
|
|
$
|
(1,214
|
)
|
|
$
|
|
|
|
$
|
1,154
|
|
|
$
|
(2,557
|
)
|
|
$
|
(1,154
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,817
|
)
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in operating results
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
4,209
|
|
|
|
867
|
|
|
|
60
|
|
|
|
(1,267
|
)
|
|
|
4,149
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
(867
|
)
|
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
|
|
(867
|
)
|
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
(3,137
|
)
|
|
$
|
(1,871
|
)
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
(3,137
|
)
|
|
$
|
(1,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(289
|
)
|
|
$
|
3,952
|
|
|
$
|
|
|
|
$
|
60
|
|
|
|
(580
|
)
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) included in continuing operating results and the statement of operations classifications are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Total net gains (losses) included in operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of salesUndesignated commodities contracts
|
|
$
|
|
|
|
$
|
80
|
|
|
$
|
|
|
|
$
|
63
|
|
Cost of salesUndesignated foreign exchange contracts
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
6
|
|
Other incomeCarbon credits
|
|
|
|
|
|
|
257
|
|
|
|
867
|
|
|
|
317
|
|
Other expenseContractual obligations relating to
carbon credits
|
|
|
180
|
|
|
|
|
|
|
|
(687
|
)
|
|
|
(60
|
)
|
Non-operating
other expenseembedded
derivative
|
|
|
(289
|
)
|
|
|
3,952
|
|
|
|
(580
|
)
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses) included in operating results
|
|
$
|
(109
|
)
|
|
$
|
4,282
|
|
|
$
|
(400
|
)
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9: Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
At June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In Millions)
|
|
Senior Secured Notes (1)
|
|
$
|
375
|
|
|
$
|
380
|
|
|
$
|
375
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on a quoted price of 101.25 at June 30, 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 6Asset Retirement Obligations.
Note 10: Income Taxes
Benefit for income taxes from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
1
|
|
|
|
24
|
|
|
|
(39
|
)
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
1
|
|
|
$
|
24
|
|
|
$
|
(39
|
)
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,558
|
)
|
|
$
|
(3,572
|
)
|
|
$
|
(3,770
|
)
|
|
$
|
(8,831
|
)
|
State
|
|
|
(204
|
)
|
|
|
(123
|
)
|
|
|
(234
|
)
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
$
|
(2,762
|
)
|
|
$
|
(3,695
|
)
|
|
$
|
(4,004
|
)
|
|
$
|
(8,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
(2,761
|
)
|
|
$
|
(3,671
|
)
|
|
$
|
(4,043
|
)
|
|
$
|
(8,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 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.
22
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10: Income Taxes (continued)
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 $7.8 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 six months ended June 30, 2017 was $4.0 million (24% of
pre-tax
loss) and the tax benefit for the six months ended June 30, 2016 was $8.5 million (27% of
pre-tax
loss). For the first six months of 2017, the
effective tax rate is 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.
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 June 30, 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 June 30,
2017, the 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 and 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
|
|
|
|
|
|
|
2,261
|
|
Accretion for discount and issuance costs on preferred stock
|
|
|
|
|
|
|
956
|
|
Accumulated dividends
|
|
|
|
|
|
|
11,325
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
139,768
|
|
|
$
|
159,571
|
|
|
|
|
|
|
|
|
|
|
23
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: Related Party Transactions
As the result of Jack E. Golsen, the Executive Chairman of our Board of Directors (the Board), informing the Board of his election to retire as
Executive Chairman effective December 31, 2017, we determined not to extend the employment agreement with Mr. Golsen beyond its current term expiring on December 31, 2017 (the Retirement Date) and, in accordance with the
terms of the Employment Agreement, delivered a notice of
non-renewal
to Mr. Golsen. Mr. Golsen will remain a member of the Board and, following the Retirement Date, will have the title of Chairman
Emeritus.
On June 30, 2017, we entered into a transition agreement (the Transition Agreement) with Mr. Golsen that will commence on
January 1, 2018 and end upon the earlier of his death or a change in control as defined in the Transition Agreement. During the term, Mr. Golsen will receive an annual cash retainer of $480,000 and an additional monthly amount of $4,400 to
cover certain expenses. In accordance with the terms of the Transition Agreement, we will also reimburse Mr. Golsen for his cost of certain medical insurance coverage until his death. Effective as of the Retirement Date, our existing severance
agreement with Mr. Golsen will terminate. In consideration for his services, including as Chairman Emeritus, we will pay Mr. Golsen a
one-time
payment equal to $2,320,000 upon the consummation of a
change in control that occurs prior to his death.
During the first quarter of 2017, a death benefit agreement with Mr. Golsen was terminated
pursuant to the terms of the agreement that allowed us to terminate at any time and for any reason prior to the death of the employee. As a result, the liability of approximately $1,400,000 for the estimated death benefit associated with this
agreement was extinguished and derecognized with the offset classified as other income for the six months ended June 30, 2017.
No dividends were
declared during the first six months of 2017 or 2016. At June 30, 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.
Note 13: Supplemental Cash Flow Information
The
following provides additional information relating to cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
1,040
|
|
|
$
|
380
|
|
Noncash continuing investing and financing activities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities associated with additions of property, plant and
equipment
|
|
$
|
13,967
|
|
|
$
|
34,681
|
|
Long-term debt associated with additions of capitalized
internal-use
software and software development
|
|
$
|
|
|
|
$
|
759
|
|
Dividends accrued on Series E Redeemable Preferred
|
|
$
|
11,325
|
|
|
$
|
14,979
|
|
Accretion of Series E Redeemable Preferred
|
|
$
|
3,217
|
|
|
$
|
4,484
|
|
24
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 June 30, 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 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 several 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 have been realizing this benefit
during the first half of 2017. In addition, we have enacted plant cost reductions at each manufacturing facility that has an annual aggregate savings of approximately $6 million that are being reflected in the first half of 2017. We
continue to review our overall costs and believe that we will be able to further reduce costs in the second half of 2017.
|
|
|
|
Selling
non-core
assets.
At the end of 2016, we had identified certain assets that are no longer necessary in the operations of our business, which a majority of those
assets have been sold as discussed below under Recent Developments. During the fourth quarter of 2016, we sold assets for a total of approximately $5.0 million and during the second quarter of 2017 we sold assets totaling
$18.8 million.
|
|
|
|
Evaluate strategic initiatives for our business.
See additional discussion under Recent Developments.
|
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.
Recent Developments
Sale of Working Interests in Natural Gas Properties and Other
Non-Core
Assets
On May 11, 2017, Zena Energy L.L.C. (Zena), which is an indirect, wholly owned subsidiary of LSB, entered into a purchase and sale agreement
with BKV Chelsea, LLC, (BKV). Under the terms of the purchase and sale agreement, Zena agreed to sell to BKV substantially all of its assets, including Zenas right, title, and interest in all of its oil and natural gas properties
(the Properties) located in Wyoming County, Pennsylvania for a purchase price of approximately $16.3 million, subject to customary post-closing adjustments, which sale was completed on June 26, 2017. Concurrently with the
closing of the purchase and sale agreement, a portion of the net proceeds (approximately $3.5 million) was used to repay the remaining outstanding balance of a promissory note, which was secured by the Properties. As a result of the sale, we no
longer own any material oil and natural gas assets. During the second quarter of 2017, we also sold various other
non-core
assets. The total net proceeds from the sale of the Properties and other
non-core
assets was approximately $18.8 million.
25
Update on Strategic Alternatives Review
Because our Board has not been presented with a sale transaction that they feel is in the best interests of our shareholders, at this time, the Board
has made a decision to terminate the sale process portion of its strategic review. The Board will, however, continue to work with its outside advisors on evaluating other strategic, financial and operational options.
Key Industry Factors
Supply and
Demand
Agricultural
Sales of our
agricultural products were approximately 47% of our total net sales for the second 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 affecting prices. The World
Agricultural Supply and Demand Estimates Report (WASDE), dated July 11, 2017, estimates that U.S. corn production for 2016/2017 was 15.1 billion bushels (unchanged from the April report), up 11% from 2015/2016 production,
reflecting an increase in planted and harvested areas, in addition to higher yields per acre. The report estimates U.S. corn production for 2017/2018 will be 14.3 billion bushels, down 6% from 2016/2017 production reflecting a decrease in
planted and harvested acres. The yield per acre is also lower at 170.7 bushels per acre for 2017/2018 compared to 174.6 bushels per acre for 2016/2017. Additionally, this report estimates world corn ending stocks for 2016/2017 at 227.5 million
tons (an increase of 4.5 million tons from the April report). Estimates of the world corn ending stocks for 2017/2018 are projected at 200.8 million tons, a decrease over 2016/2017 ending stocks of approximately 12% and U.S. corn ending
stocks of 53.6 million tons, a decrease of 6.6 million tons or approximately 11% over the prior year. The USDA Acreage report, released in June 2017, estimates that U.S. growers will plant 90.9 million acres of corn in 2017 (an
increase of 0.9 million acres from the March report), a decrease of approximately 3.1 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 perceived 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 during the first half of 2017, which we expect to continue through the remainder of 2017.
Industrial
Sales of our industrial products were
approximately 43% of our total net sales for the second 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.
26
Mining
Sales of our mining products were approximately 8% of our total net sales for the second 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) on July 11, 2017, annual
coal production in the U.S. for the full year of 2016 was down approximately 19% from 2015 levels and at its lowest levels since 1978, continuing an eight-year decline. EIA is forecasting an 8% increase in U.S. coal production due to an increase in
demand from coal-fired electricity generation in 2017 and remaining relatively unchanged in 2018 due to higher expected natural gas prices. As reported, the EIA expects the average price for natural gas (Henry Hub) to increase 10% in 2018 compared
to the estimated average price for 2017. We believe that coal production in the U.S. continues to face 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 and construction
industries, 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 increased 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 has been positively affected.
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
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Natural gas volumes (MMBtu in millions) (1)
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Natural gas average cost per MMBtu
|
|
$
|
3.09
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The increase in volume is attributed to the new ammonia plant at the El Dorado Facility which was in the startup process during the second quarter of 2016.
|
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.
27
For 2017, we had one planned Turnaround, which was previously planned for the fourth quarter of 2017 but was
performed during July at the Pryor Facility due to unplanned downtime caused by a power failure. Given that the facility was already down and considering the low agricultural selling price environment, and other maintenance that needed to be
completed, we elected to pull forward the Turnaround. Total downtime for the Turnaround was 17 days.
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 Second Quarter of 2017
Our consolidated net sales for the second quarter of 2017 were $122.9 million compared to $110.0 million for the same period in 2016. Our
consolidated operating loss was $0.3 million compared to a consolidated operating loss of $8.9 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 of the Second Quarter
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.
On-stream
rates do not include the impact of Turnarounds. 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 was 100% for our
ammonia plant for the second quarters of 2017 and 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 second quarter of 2017 for our ammonia plant was 78% compared to 96%
for the same period of 2016. The decrease in the current period
on-stream
rate was caused by a lightning strike causing a loss of power to the facility and 16 days of unplanned downtime. In July, the
Pryor Facility experienced an additional electrical outage shutting the facility down. As the facility was already down and considering the low selling price environment for our agricultural products, and other maintenance needing to be completed,
the election was made to complete the Turnaround previously scheduled for the fourth quarter at this time. This Turnaround was completed on July 21
st
. We expect
on-stream
rates to average approximately 92% for 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 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
slightly declined to 87% for the second quarter of 2017. The decrease in the
on-stream
rate was due to 12 days of unplanned downtime during which we performed proactive adjustments to allow for the facility to
operate at higher daily production on a sustained basis. We believe that the ammonia plant will operate at an average
on-stream
rate of approximately 95% for the remainder of 2017. The plant produces ammonia
at a daily production rate of approximately 1,350 tons per day, above its nameplate capacity of 1,150 tons per day.
Because of the improving ammonia
production at the El Dorado Facility despite the 12 days of unplanned downtime noted above, during the second quarter of 2017 we sold approximately 53,000 tons of ammonia that were in excess of our internal needs at this facility.
Selling Prices
During the second
quarter of 2017, selling prices for our agricultural products decreased significantly compared to the 2016 second quarter selling prices. Average selling prices for our ammonia, UAN and HDAN decreased 21%, 14% and 5% respectively, compared to 2016
average selling prices for the same period. The decrease in ammonia selling prices was impacted by two of our competitors introducing new product capacity into the market resulting from recent facility expansion projects, which we expect this excess
capacity to be absorbed by early 2018 based on these competitors disclosures. The decrease in UAN and HDAN 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
.
28
Depreciation Expense
During the second quarter of 2017 and 2016, depreciation expense was $17 million and $14 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 second quarter of 2017 and 2016, interest expense was $9.3 million and $6.4 million, net of capitalized interest of
$0.1 million and $5.0 million, respectively. Interest was capitalized based upon construction in progress of the El Dorado expansion and certain other capital projects.
Results of Operations
The following Results of
Operations should be read in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 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.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
The following table contains certain financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products
|
|
$
|
57,236
|
|
|
$
|
60,258
|
|
|
$
|
(3,022
|
)
|
|
|
(5.0
|
)%
|
Industrial acids and other chemical products
|
|
|
53,217
|
|
|
|
35,370
|
|
|
|
17,847
|
|
|
|
50.5
|
%
|
Mining products
|
|
|
10,344
|
|
|
|
11,776
|
|
|
|
(1,432
|
)
|
|
|
(12.2
|
)%
|
Other products
|
|
|
2,056
|
|
|
|
2,578
|
|
|
|
(522
|
)
|
|
|
(20.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
122,853
|
|
|
$
|
109,982
|
|
|
$
|
12,871
|
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
11,340
|
|
|
$
|
2,129
|
|
|
$
|
9,211
|
|
|
|
432.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage (1)
|
|
|
9.2
|
%
|
|
|
1.9
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
8,232
|
|
|
|
10,874
|
|
|
|
(2,642
|
)
|
|
|
(24.3
|
)%
|
Other expense, net
|
|
|
3,406
|
|
|
|
138
|
|
|
|
3,268
|
|
|
|
2368.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(298
|
)
|
|
|
(8,883
|
)
|
|
|
8,585
|
|
|
|
(96.7
|
)%
|
Interest expense, net
|
|
|
9,292
|
|
|
|
6,446
|
|
|
|
2,846
|
|
|
|
44.2
|
%
|
Non-operating
other expense (income), net
|
|
|
204
|
|
|
|
(3,970
|
)
|
|
|
4,174
|
|
|
|
105.1
|
%
|
Benefit for income taxes
|
|
|
(2,761
|
)
|
|
|
(3,671
|
)
|
|
|
910
|
|
|
|
(24.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,033
|
)
|
|
|
(7,688
|
)
|
|
|
655
|
|
|
|
(8.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment:
|
|
$
|
7,588
|
|
|
$
|
46,258
|
|
|
$
|
(38,670
|
)
|
|
|
(83.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization of property, plant and equipment:
|
|
$
|
17,047
|
|
|
$
|
14,028
|
|
|
$
|
3,019
|
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a percentage of net sales
|
29
The following tables provide key sales metrics for the agricultural products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
|
118,488
|
|
|
|
120,481
|
|
|
|
(1,993
|
)
|
|
|
(2
|
)%
|
HDAN
|
|
|
105,115
|
|
|
|
87,688
|
|
|
|
17,427
|
|
|
|
20
|
%
|
Ammonia
|
|
|
12,248
|
|
|
|
18,657
|
|
|
|
(6,409
|
)
|
|
|
(34
|
)%
|
Other
|
|
|
12,829
|
|
|
|
11,237
|
|
|
|
1,592
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
248,680
|
|
|
|
238,063
|
|
|
|
10,617
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
Average Selling Prices (price per ton)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
$
|
165
|
|
|
$
|
192
|
|
|
$
|
(27
|
)
|
|
|
(14
|
)%
|
HDAN
|
|
$
|
252
|
|
|
$
|
265
|
|
|
$
|
(13
|
)
|
|
|
(5
|
)%
|
Ammonia
|
|
$
|
307
|
|
|
$
|
387
|
|
|
$
|
(80
|
)
|
|
|
(21
|
)%
|
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
June 30,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Nitric AcidBaytown
|
|
|
113,192
|
|
|
|
93,767
|
|
|
|
19,425
|
|
|
|
21
|
%
|
Nitric AcidAll Other
|
|
|
24,806
|
|
|
|
21,361
|
|
|
|
3,445
|
|
|
|
16
|
%
|
LDAN/HDAN
|
|
|
33,448
|
|
|
|
19,404
|
|
|
|
14,044
|
|
|
|
72
|
%
|
AN Solution
|
|
|
10,352
|
|
|
|
25,251
|
|
|
|
(14,899
|
)
|
|
|
(59
|
)%
|
Ammonia
|
|
|
66,313
|
|
|
|
18,378
|
|
|
|
47,935
|
|
|
|
261
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
248,111
|
|
|
|
178,161
|
|
|
|
69,950
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Our
second quarter 2017 agricultural sales were lower due to decreased UAN and ammonia average selling prices and sales volume for these agricultural products and unfavorable weather conditions partially offset by increased sales volume for HDAN, which
experienced lower price erosion during the period. Industrial sales were higher due to ammonia sales volume partially offset by lower selling prices. Mining sales were lower due to volume and selling price decreases.
|
|
|
Agricultural products sales decreased due to lower averages selling prices for ammonia, UAN and HDAN primarily as a result of lower average commodity prices and pricing pressures from North American ammonia inventory
buildup and the nitrogen production capacity being added globally, and in North America specifically, that has created uncertainty on the ability of producers to efficiently distribute the additional production in addition to unfavorable weather
conditions, which shortened the
pre-plant
application season. The impact from the decrease in selling prices was partially offset by higher sales volume of HDAN as a result of broadening our distribution to
new markets and customers. Partially offsetting the HDAN sales volume increase were lower sales volumes of ammonia and UAN due primarily to increased import and domestic capacity and the unplanned downtime at our Pryor Facility which reduced UAN
available for sale.
|
|
|
|
Industrial acids and other industrial chemical products sales increased as a result of strong industrial ammonia sales at our El Dorado Facility given the higher plant
on-stream
rates compared to the second quarter of 2016 and higher than nameplate daily production. In addition, nitric acid sales from El Dorado are continuing to expand and sales volume was significantly higher compared to the same quarter of 2016, although
at lower net prices due to longer shipping distances and stronger market competitive pressures.
|
|
|
|
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 and stronger market
competitive pressures. Partially offsetting this decrease were increased sales volumes of LDAN from our El Dorado Facility.
|
|
|
|
Other products consist of natural gas sales from our former working interests in certain natural gas properties that were sold during the second quarter of 2017 and sales of industrial machinery and related components.
|
30
Gross Profit
As noted in the table above, we recognized a gross profit of $11.3 million for the second quarter of 2017 compared to $2.1 million in the second
quarter of 2016, or an increase of $9.2 million. In addition to the net positive effect from the higher sales discussed above, our gross profit improved primarily through:
|
|
|
a reduction in our feedstock and other operating costs at our El Dorado Facility as (i) this facility produced ammonia from natural gas in the second quarter of 2017 compared to purchasing ammonia during a portion
of the second quarter of 2016 and (ii) costs associated with the
start-up
and commissioning activities performed on the ammonia plant during the second quarter of 2016 were not incurred in the second
quarter of 2017;
|
|
|
|
a reduction in overall fixed plant expenses;
|
|
|
|
a recovery of precious metals of $2.9 million in the second quarter of 2017, which metals had accumulated over time within certain manufacturing equipment; and
|
|
|
|
improved absorption of fixed costs from improved
on-stream
rates at our Cherokee Facility.
|
The increase in gross profit was partially offset by an increase in overall depreciation expense of approximately $3.0 million primarily as our new
ammonia plant at our El Dorado facility was in the
start-up
and commissioning phase during the second quarter of 2016 and did not have a full quarter of depreciation. In addition, higher average natural gas
feedstock costs at the Cherokee and Pryor Facilities decreased gross profit.
Selling General and Administrative
Our SG&A expenses were $8.2 million for the second quarter of 2017, a decrease of $2.6 million compared to the same period in 2016. The decrease
was primarily driven by a $1.1 million reduction in compensation related cost, $0.7 million reduction in professional fees and $0.7 million reduction in insurance and other miscellaneous costs.
Other expense, net
Our net other expense was
$3.4 million for the second quarter of 2017 (minimal for the same period of 2016) primarily consisting of a total net loss on the sale of our working interest of certain natural gas properties and other
non-core
assets.
Interest Expense, net
Interest expense for the second quarter of 2017 was $9.3 million compared to $6.4 million for the same period in 2016. The net increase is due
primarily to a reduction in capitalized interest of $4.9 million as the result of the completion of the El Dorado expansion project during the second quarter of 2016. This increase was partially offset by a decrease of $1.7 million
relating to the 12% Senior Secured Notes sold in November 2015 and repaid in October 2016.
Non-operating
Other Expense (Income), net
Non-operating
other expense for the second quarter of 2017 was
$0.2 million compared to
non-operating
other income $4 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 second quarter of 2017 was $2.8 million compared to $3.7 million for the same period
in 2016. The resulting effective tax rate for the second quarters of 2017 and 2016 was 28% and 32%, respectively. For the second quarter of 2017, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation
allowances associated with state NOL carryforwards.
Income from Discontinued Operations, including taxes
The results of operations of our former Climate Control Business are presented as discontinued operations. For the second quarter of 2016, income from
discontinued operations was $22.8 million, including a tax benefit of $17.8 million.
31
Six months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
The following table contains certain financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural products
|
|
$
|
120,499
|
|
|
$
|
110,032
|
|
|
$
|
10,467
|
|
|
|
9.5
|
%
|
Industrial acids and other chemical products
|
|
|
102,097
|
|
|
|
72,238
|
|
|
|
29,859
|
|
|
|
41.3
|
%
|
Mining products
|
|
|
17,960
|
|
|
|
21,602
|
|
|
|
(3,642
|
)
|
|
|
(16.9
|
)%
|
Other products
|
|
|
5,641
|
|
|
|
5,082
|
|
|
|
559
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
246,197
|
|
|
$
|
208,954
|
|
|
$
|
37,243
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
$
|
22,955
|
|
|
$
|
(4,035
|
)
|
|
$
|
26,990
|
|
|
|
668.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) percentage (1)
|
|
|
9.3
|
%
|
|
|
(1.9
|
)%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
18,777
|
|
|
|
21,768
|
|
|
|
(2,991
|
)
|
|
|
(13.7
|
)%
|
Other expense, net
|
|
|
2,155
|
|
|
|
389
|
|
|
|
1,766
|
|
|
|
454.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,023
|
|
|
|
(26,192
|
)
|
|
|
28,215
|
|
|
|
107.7
|
%
|
Interest expense, net
|
|
|
18,650
|
|
|
|
7,796
|
|
|
|
10,854
|
|
|
|
139.2
|
%
|
Non-operating
other expense (income), net
|
|
|
435
|
|
|
|
(2,014
|
)
|
|
|
2,449
|
|
|
|
121.6
|
%
|
Benefit for income taxes
|
|
|
(4,043
|
)
|
|
|
(8,521
|
)
|
|
|
4,478
|
|
|
|
(52.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,019
|
)
|
|
|
(23,453
|
)
|
|
|
10,434
|
|
|
|
(44.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment:
|
|
$
|
15,216
|
|
|
$
|
140,405
|
|
|
$
|
(125,189
|
)
|
|
|
(89.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization of property, plant and equipment:
|
|
$
|
34,162
|
|
|
$
|
24,618
|
|
|
$
|
9,544
|
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a percentage of net sales
|
The following tables provide key sales metrics for the agricultural products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
|
276,272
|
|
|
|
214,787
|
|
|
|
61,485
|
|
|
|
29
|
%
|
HDAN
|
|
|
196,286
|
|
|
|
142,236
|
|
|
|
54,050
|
|
|
|
38
|
%
|
Ammonia
|
|
|
56,490
|
|
|
|
55,302
|
|
|
|
1,188
|
|
|
|
2
|
%
|
Other
|
|
|
17,740
|
|
|
|
15,974
|
|
|
|
1,766
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
546,788
|
|
|
|
428,299
|
|
|
|
118,489
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
Average Selling Prices (price per ton)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
UAN
|
|
$
|
163
|
|
|
$
|
192
|
|
|
$
|
(29
|
)
|
|
|
(15
|
)%
|
HDAN
|
|
$
|
238
|
|
|
$
|
272
|
|
|
$
|
(34
|
)
|
|
|
(13
|
)%
|
Ammonia
|
|
$
|
314
|
|
|
$
|
357
|
|
|
$
|
(43
|
)
|
|
|
(12
|
)%
|
32
With respect to sales of industrial, mining and other chemical products, the following table indicates the
volumes sold of our major products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
Percentage
|
|
Product (tons sold)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Nitric AcidBaytown
|
|
|
242,781
|
|
|
|
218,268
|
|
|
|
24,513
|
|
|
|
11
|
%
|
Nitric AcidAll Other
|
|
|
53,934
|
|
|
|
37,390
|
|
|
|
16,544
|
|
|
|
44
|
%
|
LDAN/HDAN
|
|
|
53,662
|
|
|
|
38,966
|
|
|
|
14,696
|
|
|
|
38
|
%
|
AN Solution
|
|
|
22,656
|
|
|
|
47,678
|
|
|
|
(25,022
|
)
|
|
|
(52
|
)%
|
Ammonia
|
|
|
110,237
|
|
|
|
26,051
|
|
|
|
84,186
|
|
|
|
323
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
483,270
|
|
|
|
368,353
|
|
|
|
114,917
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Our
agricultural sales for the first half of 2017 were higher due to increased sales volume for UAN, HDAN and ammonia partially offset by lower average prices for these products due to a weak pricing environment, unplanned downtime at our Pryor and El
Dorado Facilities that reduced product available for sale and a shortened ammonia
pre-plant
application season due to unfavorable weather conditions. Industrial sales were higher due to ammonia sales volume
partially offset by lower selling prices. Mining sales were lower due to volume and selling price decreases.
|
|
|
Agricultural products sales increased due primarily by higher sales volume across all product categories. This increase from improved sales volume was partially offset by significantly lower average selling prices of
nitrogen based fertilizers. The increase in sales volume was primarily the result of improved
on-stream
rates/production at our Cherokee and El Dorado Facilities (despite certain unplanned downtime) and
broadening our distribution of HDAN to new markets and customers partially offset by a shortened
pre-application
application season due to unfavorable weather conditions during the second quarter of 2017. The
lower average selling prices were due primarily to lower average commodity prices and pricing pressures from North American ammonia inventory buildup 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 driven by strong industrial ammonia sales at our El Dorado Facility with high plant
on-stream
rates (minimal
production during the first half of 2016). In addition, nitric acid sales from El Dorado are continuing to expand and sales volume was significantly higher compared to the same period of 2016, although at lower net prices due to longer shipping
distances and stronger market competitive pressures.
|
|
|
|
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 and increased
competitive production capacity in our region. Partially offsetting this decrease were increased sales volumes of LDAN from our El Dorado Facility.
|
|
|
|
Other products consist of natural gas sales from our former working interests in certain natural gas properties that were sold during the second quarter of 2017 and sales of industrial machinery and related components.
|
Gross Profit (Loss)
As noted
in the table above, we recognized a gross profit of $23 million for the first half of 2017 compared to a gross loss of $4 million for the same period of 2016, or an increase of $27 million. In addition to the net positive effect from
the higher sales discussed above, our gross profit improved primarily through:
|
|
|
a reduction in our feedstock and other operating costs at our El Dorado Facility as (i) this facility produced ammonia from natural gas in the first half of 2017 compared to purchasing ammonia during most of the
same period of 2016 and (ii) costs associated with the
start-up
and commissioning activities performed on the ammonia plant during the second quarter of 2016 were not incurred in the second quarter of
2017;
|
|
|
|
a reduction in overall fixed plant expenses;
|
|
|
|
a recovery of precious metals of $2.9 million during the second quarter of 2017, which metals had accumulated over time within certain manufacturing equipment; and
|
|
|
|
improved absorption of fixed costs from improved
on-stream
rates at our Cherokee Facility.
|
33
In addition, during the first half 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 of approximately $9.5 million primarily as a result of our new ammonia plant at our El Dorado facility was in the
start-up
and commissioning phase during the second quarter of 2016 and did not
have a full
six-month
period of depreciation and higher average natural gas feedstock cost at the Cherokee and Pryor Facilities decreased gross profit.
Selling General and Administrative
Our SG&A
expenses were $18.8 million for the first half of 2017, a decrease of $3.0 million compared to the same period in 2016. The decrease was driven by $1.1 million reduction in professional fees, $0.8 million reduction in
compensation-related cost and $0.7 million reduction in insurance and other miscellaneous costs.
Other Expense, net
Our net other expense for the first six months of 2017 was $2.2 million (minimal for the first half of 2016) primarily consisting of a total net loss of
$4.2 million primarily relating to the sale of our working interest of certain natural gas properties and other
non-core
assets partially offset by the extinguishment and derecognition of a liability of
approximately $1.4 million associated with a death benefit agreement as discussed in Note 12 to the Condensed Consolidated Financial Statements.
Interest Expense, net
Interest expense for the
first six months of 2017 was $18.7 million compared to $7.8 million for the same period in 2016. The increase is due primarily to a reduction in capitalized interest in the first half of 2017 of $14.7 million as a result of the El
Dorado expansion project completion. This increase was partially offset by a decrease of $3.5 million relating to the 12% Senior Secured Notes sold in November 2015 and repaid in October 2016.
Benefit for Income Taxes
The benefit for income
taxes from continuing operations for the first half of 2017 was $4.0 million compared to $8.5 million for the same period in 2016. The resulting effective tax rate for the first half of 2017 and 2016 was 24% and 27%, respectively. For the
first half of 2017, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation allowances associated with state NOL carryforwards.
Income from Discontinued Operations, including taxes
The results of operations of our former Climate Control Business are presented as discontinued operations. For the first half of 2016, income from discontinued
operations was $10.1 million including a tax benefit of $13.5 million.