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.