LSB Industries
Annual Report 2006

Plain-text annual report

Building Blocks For Better Living™ 2006 Annual Report Our innovative climate control products are used by millions of people every day in prestigious buildings and homes throughout North America and around the world. Our technologically advanced and environmentally responsible “green” geothermal heat pumps reduce energy usage and greenhouse gas emissions. Our chemicals are used to produce dozens of products that benefit people everywhere every day, from clothing and paper products to advanced athletic gear made from high impact polyurethane. Our industrial chemicals help mine metals and coal vital to meeting the world’s growing demand for energy, and our agricultural chemicals fertilize food crops and pasture land for grazing livestock. Our engineered products are used for precision metalworking manufacturing throughout industry. At LSB Industries we make... Building Blocks for Better Living. Cover Photo: LSB’s climate control products heat and cool the Statue of Liberty. Profile LSB Industries, Inc. (AMEX: LXU) is a manufacturing, marketing, and engineering company with activities on a world wide basis. LSB’s principal business activities consist of the manufacture and sale of commercial and residential climate control products, the manufacture and sale of chemical products for the mining, agricultural and industrial markets, the provision of specialized engineering services, and other activities. Climate Control Chemical 2006 Sales $221.2 million 2006 Sales $260.6 million Key Products ■ Geothermal Heat Pumps ■ Water Source Heat Pumps ■ Hydronic Fan Coils ■ Large Custom Air Handlers ■ Modular Water Chillers Key Products ■ Concentrated Nitric Acid ■ Nitric Acid Blends ■ Sulfuric Acid ■ Mixed Acids ■ Ammonium Nitrate Solutions ■ Tube-in-Fin Heat Exchange Coils ■ E2 High Density Ammonium Nitrate Prills ■ Coaxial Heat Exchange Coils ■ Low Density Ammonium Nitrate Prills ■ Contracting Services Highlights ■ Anhydrous Ammonia Highlights ■ Leading U.S. market share for geothermal heat pumps and water source heat pumps ■ Leading U. S. marketer of nitric acid and nitric acid blends ■ Leading U.S. market share for hydronic fan coils ■ Leading marketer of ammonium nitrate fertilizer in the central southeast U.S. ■ Products marketed to residential, commercial and institutional new construction, renovation, and replacement ■ Diversified industrial and agricultural customer base Performance Revenues ($ in millions) Net Income ($ in millions) 15.9 492.0 364.0 397.1 283.6 317.0 5 0 0 4 0 0 3 0 0 2 0 0 10 0 0 16 12 8 4 0 5.1 2.9 1.4 0.1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2002 2003 2004 2005 2006 2 0 0 6 A N N U A L R E P O R T Letter To Our Shareholders By all measures, 2006 was an excellent year for LSB core products in this business enjoy leading U.S. Industries. Our two core businesses, Chemical and market shares. We have a huge installed base of Climate Control, both achieved record sales and millions of units in thousands of buildings operating income, making the year one of the best throughout the U.S. and around the world. ever for LSB Industries and its shareholders. Our balance sheet was substantially strengthened from The two largest companies in our Climate Control measures taken to reduce debt and interest expense business are ClimateMaster, the world’s leading and to increase net worth. We made, and continue manufacturer of geothermal and water source heat to make, improvements to promote greater effi- pumps and International Environmental, the lead- ciency, increase capacity, enhance product quality, ing U.S. producer of hydronic fan coils. These two and lower costs. Our stronger financials and the companies generated approximately 88% of Cli- momentum achieved in 2006 and early 2007 posi- mate Control revenues in 2006. ClimateMaster tion LSB for long-term profitable growth. sales increased nearly 58% while International En- vironmental achieved 11% top line growth. Consolidated 2006 sales totaled $492 million, up 24% from 2005. Sales for 2006 by our Climate Con- Over the past several years, but to a greater degree trol Business rose 41% to $221 million, while sales in 2006, our geothermal and water source heat by our Chemical Business rose to $261 million, a pump product lines have achieved substantial 12% improvement. Our total 2006 revenues also growth. Geothermal heat pumps are used in heat- include our Engineered Products and Services op- ing and cooling systems powered by the sun’s re- eration, shown as ‘other sales’ of $10 million, com- newable energy stored in the earth, resulting in pared to $7 million in 2005. utility bills reduced by as much as 60% compared to conventional heating and cooling systems. As Climate Control Business an added benefit, geothermal systems can generate Our Climate Control business consists of a group “free” domestic hot water. These ultra high effi- of companies that are niche market leaders in their ciency, zero ozone depleting products have esti- respective specialties within the heating, ventila- mated life spans of up to three times that of con- tion and air-conditioning (HVAC) industry. Our ventional systems and operate virtually noise free. 2 0 0 6 A N N U A L R E P O R T Geothermal systems make economic sense even products to several large hotel casinos in Las Ve- without the State and Federal energy efficiency gas, bringing our installed base there in recent incentives available. Geothermal systems are a years to over 70,000 units. truly “green” form of renewable energy and are a win for the environment, a win for cost-savings In addition to our core products, 12% of our Cli- and a win for foreign oil independence. mate Control sales in 2006 were by newer, very promising businesses that have yet to achieve In 2006, our sales of residential geothermal units break even results from operations. ClimateCraft rose 44% over 2005. This top line growth is even engineers and produces large custom air handling more impressive when you consider that overall units for environmentally-sensitive applications, U.S. factory shipments for conventional residential such as semiconductor and pharmaceutical manu- air conditioners and air source heat pumps de- facturing facilities and surgical suites, where con- clined approximately 18%, as reported by the Air trol of air temperature, humidity and purity are Conditioning and Refrigeration Institute (“ARI”). critical. ClimaCool produces modular water chill- The potential geothermal market is vast. The total ers that are connected to each other forming large U.S. residential heating and cooling market alone capacity chillers used in central air-conditioning represents an opportunity of some seven million systems. Individual chiller modules fit through units annually. In addition, geothermal systems standard doorways and passenger elevators, can be used in commercial and institutional build- avoiding the demolition and expensive installation ings. As the U.S. market share leader in this prod- costs associated with large one-piece chillers. uct, we believe we are poised to take advantage of Trison Construction offers design, engineering this potential. and construction services, specializing in large scale geothermal installations. It has provided geo- As we noted earlier, approximately 88% of 2006 thermal systems to some of the largest military Climate Control sales were water source heat housing privatization projects completed to date. pumps, including geothermal, and hydronic fan coils. A majority of these sales are to commercial Within our Climate Control business we have a and institutional buildings, such as hotels, resorts, number of initiatives in place designed to increase office buildings, apartments, condominiums, both our top and bottom lines. In addition to health care and extended care facilities, schools and maintaining our leadership positions in geother- universities. During 2006 we shipped fan coil mal, water source heat pumps and hydronic fan 2 0 0 6 A N N U A L R E P O R T coils, we regularly add new products and/or prod- While we are open to well-priced acquisitions of uct enhancements that are complementary to our either entire companies or products that are com- existing product line up and are well suited to our plementary and/or strategic, there are sufficient distribution channels. internal expansion opportunities within our estab- lished and newer ventures upon which to continue During 2006 total bookings of new orders for our to build our Climate Control business. We are op- Climate Control business were up 33% over 2005 timistic about the future of this business. and we closed the year with a backlog of $80.4 mil- lion, up 43% over $56.2 million at year-end 2005. Chemical Business This growth was led by geothermal and water During 2006, our Chemical Business achieved source heat pumps. To accommodate this growth nearly a 12% year-over-year increase in sales, de- and to prepare for the future, we added a 46,000 spite a serious drought in the agricultural markets square foot warehouse and a 100,000 square foot we serve. Strong gains in industrial market sales, distribution center to our ClimateMaster operation where we have cost-plus sales agreements in place, during the first quarter of 2007. This had the effect more than offset the impact of the agricultural of almost doubling the floor space available in this shortfall during 2006. As we have repeatedly operation for manufacturing. Newly installed fab- stated, one of the goals of the Chemical Business is rication equipment, assembly lines, automated line to increase sales to large industrial customers, testing and quality assurance systems are increas- where cost-plus sales agreements are mutually ing production output and will allow us to reduce beneficial. These pricing agreements pass through delivery times. In addition, we have added assem- certain key costs including the cost of raw material bly lines for International Environmental’s high feedstocks. rise fan coils, doubled the manufacturing floor space at our ClimateCraft large custom air handler When LSB entered the Chemical Business in 1984, plant, and are in the process of doubling the capac- most of its sales were to agricultural markets. In ity of our tube-in-fin heat transfer coil operation. 2006, sales of products to the agricultural markets represented only 35% of Chemical Business sales The pursuit of cost savings is an essential part of volume and only 18% of LSB’s total sales. As we our corporate culture and is an ongoing endeavor. write this letter, anticipated demand for agricul- We have several important cost reductions initia- tural grade nitrogen fertilizer is stronger than in tives underway at this time. recent years, in part because of increased corn 2 0 0 6 A N N U A L R E P O R T planting to use as feedstock for ethanol as an alter- ing of coal, iron and copper as well as road con- native to fossil fuel, in part because of world wide struction and quarrying. demand for grain, and in part due to better weather conditions in the markets we serve. How- A detailed description of our manufacturing facili- ever, as experience has taught us, these circum- ties at El Dorado, Arkansas, Cherokee, Alabama, stances can easily change. Over time, our goal is to and Baytown, Texas, including their size, output continue to increase our Chemical Business’ sales and feedstocks is provided in the 2006 10-K. Our subject to long-term cost-plus agreements with ma- manufacturing strategy is to maximize plant run jor corporate and industrial customers, up from the rates to increase absorption of fixed costs and to 65% currently sold to these sectors. If we are suc- increase capacity and sales volume through proc- cessful in achieving this goal, most of our Chemical ess optimization. We believe that cost reduction Business will be more predictable and less subject measures undertaken in 2006, including improved to seasonality, weather and natural gas price fluc- energy management systems, will have lasting tuations, while still maintaining a foothold in the value. Continued improvements in yield, at all agricultural markets which generally result in facilities, is an ongoing mission. higher than average gross margins. During 2006 our El Dorado Chemical Company Our Industrial Chemical Business is the largest subsidiary received a unanimous jury verdict in merchant marketer of concentrated nitric acid in which it was awarded approximately $9.8 million North America. It is also a large marketer of all in damages for the negligence of the defendants, grades of nitric acid, which is used to produce vari- Ingersoll-Rand Co. and DR Holding Corp., as gen- ous specialty chemicals including polyurethane, eral partners of Dresser Rand Company. The de- flame resistant fibers and carbon fibers. The spe- tails of the case are documented in the 2006 10-K. cialty blends and the mixed acids we produce are Not unexpectedly, an appeal was filed by the de- used for metal treatment, diesel fuel additives, her- fendants in January 2007. As of this date, we have bicides, ordnance, and pharmaceuticals. We also not received nor have we booked the jury award. produce sulfuric acid which is used for pulp and If the verdict withstands the appeal, we should paper manufacture, water treatment, metals proc- realize 70% of the net recovery. essing, and a variety of other uses. Our industrial grade ammonium nitrate is required for the manu- Other Business facture of commercial explosives for surface min- In addition to our two core businesses, we have a 2 0 0 6 A N N U A L R E P O R T small, self-sufficient and profitable Engineered vertible Senior Subordinated Debentures Products and Services business that is classified (“Debentures”), which allowed us to purchase or within “other” in the Segment Reporting section of redeem $13.6 million of a subsidiary’s 10-3/4% our 10-K. Within this area, under the trade name senior unsecured notes, plus accrued interest of “Summit”, we market standard and computer nu- $300,000. Since then all of the 7% debentures have merical control precision machine tools required in been converted into common stock. many metalworking manufacturing operations and tool and die shops. We also provide design and In the fourth quarter of 2006 and in February 2007, construction services for metal manufacturing and exchange offers were completed for 410,000 of the chemical facilities. 603,000 outstanding shares of the $3.25 Convertible Our Balance Sheet Focus: Strengthen and Simplify Exchangeable Class C Preferred Stock, Series 2 (the “Series 2 Preferred”). Holders received 7.4 shares of LSB common stock for each share of Series 2 pre- Our continued focus on strengthening and simpli- ferred exchanged. At this time, only 193,000 shares fying our balance sheet should have lasting bene- of Class C Preferred remain outstanding and as a fits and enhance the positive impact of growing result of the exchanges, we reduced the cumulative sales and profits. The 2006 10-K provides an exten- dividends in arrears by $9.8 million to a remaining sive review of our capital structure including, bor- balance of $4.8--million at March 31, 2007. rowings, financings, refinancings, debenture con- versions, preferred stock exchanges into common We are pursuing opportunities to prepay our $50 stock, and credit agreements. The objective is to million 11% senior secured loan and replacing it replace higher cost borrowings and dividend bear- with a less costly and less restrictive lending agree- ing preferred stock with lower cost capital. In 2006 ment. we reduced total long-term debt and increased shareholders’ equity. As a result of the Exchange At the start of 2006, our market cap was under $90 of Preferred stock for Common that we completed million, and at year end it was just under $195 mil- in 2006 and 2007, we have taken a large bite out of lion. As we finalized this letter, our market cap the accrued and unpaid dividends on our preferred was $320 million. We started 2006 with sharehold- shares. ers’ equity of $13.5 million and by year-end it in- creased to $42.6 million. As of March 30, 2007 our During March 2006 we sold $18 million 7% Con- shareholder’s equity was $------ million. 2 0 0 6 A N N U A L R E P O R T Future Outlook Simply put, we look to enhance shareholder value Our goals for 2007 are consistent with our long- through long-term profitable growth and by term strategic objectives. We will continue to look strengthening LSB’s financial position. for ways to reduce debt and interest expense, while ensuring that we have the capital we need to grow On behalf of the Board of Directors, we thank all of the business. We will continue to move our the members of the LSB family. The financial re- Chemical Business in the direction of long-term sults achieved in 2006, are a result of their perform- cost-plus type agreements, and we will continue to ance, their hard work and their dedication. We emphasize energy efficient and environmentally also appreciate the support and cooperation of our responsible technology such as geothermal as we investors, lenders, customers and suppliers. grow our Climate Control Business. Sincerely, We are enthusiastic about LSB’s prospects. As large LSB shareholders, management’s interests are aligned with those of our public shareholders. Jack E. Golsen Chairman of the Board Vice Chairman of the and CEO Board, President and Barry H. Golsen COO This letter contains certain forward-looking statements, including, but not limited to, actions taken have placed us on right course for long-term growth, potential geothermal market is vast, opportunities of U.S. residential heating and cooling mar- ket, our Climate Control business is poised to take advantage of the Geothermal market, our Climate Control business is working to increase volume of its newer promising business and become profitable, initiatives designed to increase our product lines, optimistic about the future of our Climate Control business, goal of our Chemical business to increase sales to large industrial customers, strategy of our Chemical business, replace our senior secured loan with a less costly and less restrictive lending agreement, goals for 2007 and look for ways to reduce debt and interest expense and enhance share- holder value. Please read “A Special Note Regarding Forward-Looking Statements” contained in the Form 10-K for a dis- cussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements contained in this letter. LSB Directors and Officers: Directors Officers Subsidiary Executive Officers RAYMOND B. ACKERMAN Chairman Emeritus of Ackerman McQueen, Inc. MICHAEL G. ADAMS, C.P.A. Vice President, Financial Services DAN ELLIS President, ClimateMaster, Inc. HEIDI L. BROWN, J.D., L.L.M. Vice President, Managing Counsel JUDI BURNETT Assistant Vice President, Risk Management JOHN CARVER Vice President, Environmental and Safety Compliance. JIM D. JONES, C.P.A. Senior Vice President, Corporate Controller and Treasurer ANN MUISE-MILLER, J.D. Vice President, Associate General Counsel JAMES W.M. MURRAY, III, J.D. Vice President, Senior Associate General Counsel HAROLD RIEKER, C.P.A. Vice-President, Financial Reporting DAVID M. SHEAR, J.D. Senior Vice President, General Counsel and Secretary MIKE TEPPER Senior Vice President, International Operations STEVE J. GOLSEN Co-Chairman, CEO ClimateMaster, Inc. and COO Climate Control Business PHIL GOUGH President, Agrochemical Group BRIAN HAGGART President, The Climate Control Group, Inc. LARRY W. HOLLEY President, El Dorado Chemical Company and Cherokee Nitrogen Company LARRY L. JEWELL President, International Environmental Corporation WALTER P. MECOZZI President, ClimateCraft, Inc. ANNE RENDON President, El Dorado Nitric Company PAUL RYDLUND President, LSB Chemical Corporation BRUCE SMITH President, Summit Machine Tool Manufacturing Corporation ROBERT C. BROWN, M.D. V.P, Plaza Medical Group, P.C. President and CEO ClaimLogic, LLC CHARLES (CHUCK) A. BURTCH Former Executive Vice President And West Division Manager of BankAmerica GRANT J. DONOVAN President, Galehead, Inc. N. ALLEN FORD, PH.D Professor, University of Kansas JACK E. GOLSEN Board Chairman and CEO BARRY H. GOLSEN, J.D. Board Vice Chairman, COO and President, LSB Industries and Climate Control Business DAVID R. GOSS, C.P.A. Executive Vice President of Operations BERNARD G. ILLE Former CEO and Board Chairman First Life Assurance Company DONALD W. MUNSON Former President of Lennox Corp. President Ducane Europe HORACE G. RHODES, L.L.B. Chairman, Kerr, Irvine, Rhodes and Ables TONY M. SHELBY, C.P.A. Executive Vice President of Finance, CFO JOHN A. SHELLY President, CEO and Chairman, The Bank of Union Building Blocks For Better Living™ Headquarters LSB Industries, Inc. 16 South Pennsylvania Avenue Oklahoma City, Oklahoma 73107 Tel: (405) 235-4546 Fax: (405) 235-5067 Email: info@lsb-okc.com Investor Relations The Equity Group, Inc. Linda Latman Tel: (212) 836-9609 Fax: (212) 421-1278 Email: llatman@equityny.com Independent Auditors Ernst & Young LLP Oklahoma City, Oklahoma Security Listing Common Stock listed on the American Stock Exchange AMEX Ticker Symbol: LXU Series 2, $3.25 Convertible Exchangeable Class C Preferred Stock (Ticker Symbol: LSBDP) Transfer Agent & Registrar UMB Bank, N.A. Securities Transfer Division P.O. Box 410064 Kansas City, Missouri 64141-0064 Tel: (816) 860-7786 Website www.lsb-okc.com Visit our website for details about our plants, products, operations and policies. 

Continue reading text version or see original annual report in PDF format above