LSB Industries Inc.
2009 Annual Report
LSB Industries
Financial Highlights
(thousands, except per share amounts)
2009
2008
2007
2006
2005
Net Sales
Gross Profi t
Operating Income
Net Income
$531,838 $748,967 $586,407 $491,952 $397,115
137,414
138,880
132,593
90,862
66,766
40,710
59,155
59,011
27,139
14,853
21,584
36,547
46,882
15,515
4,990
Net Income Applicable to Common Stock
21,278
36,241
41,274
12,885
Earnings per Diluted Share
0.96
1.58
1.84
0.76
2,707
0.18
Weighted Average Diluted Shares Outstanding
22,492
24,133
23,496
20,872
14,907
Total Assets
Shareholders’ Equity
338,633
335,767
307,554
219,927
188,963
150,607
130,044
94,283
43,634
14,861
Long-term Debt Due After One Year
98,596
103,600
121,064
86,113
105,036
Depreciation and Amortization
16,358
15,016
14,353
12,549
12,026
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Net income, as reported, is
shown in green and includes
Pryor facility start-up costs in
2008 and 2009. Net income,
excluding Pryor facility start-up
costs and related taxes ($0.9
million for 2008 and $6.5 million
for 2009), is shown in blue.
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Our Businesses
Climate Control Business
We are the U.S. market leader for geothermal and water
source heat pumps and hydronic fan coils. We also provide
modular chillers, custom air-handlers, and execute large
scale geothermal installations. Our products are targeted to
commercial, industrial and residential new-building construction,
renovation of existing buildings, and replacement of existing
systems. Our innovative products are used by millions of people
everyday in prestigious buildings and homes throughout North
America and around the world. Our technologically advanced and
environmentally responsible “green” geothermal heat pumps reduce
energy consumption and greenhouse gas emissions.
Chemical Business
We manufacture high density prilled ammonium nitrate, anhydrous
ammonia, and liquid fertilizers which are used to fertilize food crops,
biofuel feedstock crops, and pasture land for grazing livestock and
forage production. Our anhydrous ammonia is also used to reduce
emissions from power plants and our EarthPure® DEF (Diesel
Exhaust Fluid) is used to reduce nitrogen oxide emissions. We are
the leading merchant marketer of nitric acid in the U.S., offering
various concentrations of nitric acid, high-grade mixed acids, and
sulfuric acid for industrial markets. Our industrial acids are used to
produce dozens of products, from clothing and paper products
to advanced athletic gear made from high impact polyurethane.
We manufacture and sell low-density (industrial-grade) prilled
ammonium nitrate, and ammonium nitrate solution, which are
used to surface mine coal vital to meeting the world’s growing
demand for energy and other natural resources.
Engineered Products & Services
We market precision machine tools and design, engineer,
specify and furnish world-class chemical and industrial
manufacturing facilities for international clients.
Fellow Shareholders:
Preparing for growth opportunities during
a deep and protracted recession takes
vision, determination, and experience. While
managing our businesses to meet our
recession-adjusted expectations, we have
had our sights set on the future, laying the
foundation for profi table growth in both our
Climate Control and Chemical businesses.
One of those growth opportunities,
the Pryor, Oklahoma Chemical Facility,
signifi cantly depressed 2009 profi tability, but
we are confi dent that the Pryor Facility is a
valuable addition to our Chemical Business.
LSB’s businesses, excluding Pryor, performed
well in 2009 despite lower customer
demand across much of our product
spectrum due to the sharp decline in the
construction industry, tightness of credit,
and generally low demand for some of our
industrial products. Although 2009 was not
a year of growth, we generated signifi cant
profi ts and cash fl ow. We further improved
our balance sheet by reducing long-term
debt and increasing our shareholders’ equity.
During 2009 our total sales were $531.8
million, a signifi cant reduction from
2008. Our pre-tax income (income from
continuing operations before provisions
for income taxes and equity in earnings of
affi liate) also declined from $54.4 million
in 2008 to $35.9 million in 2009. Pryor
Facility start-up expenses affected our
pre-tax income by $17.2 million in 2009,
compared to $2.4 million in 2008. Excluding
Pryor Facility start-up expenses, the pre-tax
income of our businesses was $53.1 million
in 2009 compared to $56.8 million in 2008,
a relatively small 7% decline, considering that
sales were down 29%.
There are a number of factors that both
augmented and reduced our bottom
line in 2009 compared to 2008. Detailed
explanations of these and other factors that
combined to produce our fi nancial results
are included in the Annual Report on Form
10-K that follows this Letter to Shareholders.
Our fi nancial condition continued to
strengthen in 2009 and our fundamental
ratios improved. Net debt (total debt less
cash and short-term investments) declined
to $30.0 million at year-end 2009 while
stockholders’ equity rose to $150.6 million.
We also improved liquidity. At December 31,
2009 our cash and short-term investments
totaled $71.8 million; our $50.0 million
working capital revolver remained virtually
unused with $49.2 million of availability; and
our debt-to-equity ratio was .68 to 1.
During 2009, LSB’s accomplishments were
again recognized by the national business
press. We were named to Fortune Magazine’s
annual list of 100 Fastest Growing Companies,
published in the August 31, 2009 issue
and we were once again cited by Forbes
Magazine in its list of America’s 200 Best
Small Companies published in the October
14, 2009 issue.
Because our two primary businesses are
in different industries, the best way to
understand LSB is to focus on each business
separately.
Climate Control Business
Our Climate Control Business is a leader in
certain product niches within the heating,
ventilation, and air-conditioning industry. We
are North America’s leading manufacturer
of geothermal and water source heat
pumps and the leading U.S. producer of
hydronic fan coils (according to statistics
published by the Air-Conditioning, Heating
and Refrigeration Institute). We also
produce large custom air handlers and high
effi ciency modular chillers.
In 2009, our Climate Control sales were
$266.2 million, declining 15% from 2008.
The decline was in the commercial and
institutional part of our business, caused by
the economic recession and the lack of credit
for new construction in these sectors. Sales
of our green, ultra-high effi ciency geothermal
heat pumps to the single family residential
sector increased 4% during 2009, bucking the
general trend in residential construction and
outperforming industry-wide sales of standard
air-conditioners and air-source heat pumps,
which declined approximately 12% in 2009.
Although overall sales were lower, gross
margin increased to 34.7% in 2009 from
31.0% in 2008. As a result, Climate Control’s
segment operating income only declined 3%
to $37.7 million in 2009 from $38.9 million
in 2008. As we have stated in our quarterly
conference calls, we believe that Climate
Control’s gross profi t will be lower in 2010
than it was in 2009 as a result of lower sales,
an extremely competitive market, and higher
material costs.
Overall we expect 2010 sales of our Climate
Control products to be lower than 2009
as a result of continued softness in the
commercial and institutional market segments.
It is worth noting that our Climate Control
business had a remarkable growth trajectory
until the current recession, growing 9% in
2008, 29% in 2007 and 41% in 2006 over the
immediately preceding year.
LSB Industries 2009 Annual Report
Although it has been slow in coming, we
see residential geothermal heat pump
growth opportunities as a result of the 30%
federal income tax credit provision of The
American Recovery and Reinvestment Act
of 2009. The credit applies to all-in costs of
the heat pump unit and its installation and is
available for both new construction as well as
replacement systems.
Purchasers of geothermal heat pumps for
commercial construction or replacement
are eligible for a 10% federal income tax
credit and other tax incentives. We expect
that as these incentives become better
known and understood, they will benefi t
sales of our geothermal products for
business applications.
Planning for the long-term, to the detriment
of short-term profi ts and during one of
the worst economic downturns in recent
memory, we stepped up our advertising
and marketing activities specifi cally for
geothermal heat pumps and expanded our
overall Climate Control sales and marketing
organization during 2009. We also undertook
an addition to our geothermal and water
source heat pump manufacturing facility
that was substantially completed in April
2010. We completed the phase-in of green
refrigerant R410A across our entire heat
pump product line and we introduced new,
high-effi ciency models of our modular water
chillers, including geothermal confi gurations.
During 2009, we completed a roll out of our
Fan Matrix™ technology and introduced
in-house manufactured heat transfer coils in
our large custom air handler products. Finally,
we completed the transition from purchased
to in-house manufactured fi n-tube heat
transfer coils for substantially all of our heat
pump products. These initiatives should place
us in an even stronger competitive position
as the economy improves.
Chemical Business
Our Chemical Business produces
concentrated and blended nitric acids,
nitrogen solutions, anhydrous ammonia,
mixed acids, sulfuric acid, low density
ammonium nitrate and ammonium nitrate
solutions for a wide range of industrial
and mining applications, and EarthPure™
DEF (diesel exhaust fl uid) to abate harmful
emissions from diesel engines. We also
produce high-density ammonium nitrate
(AN) and urea ammonium nitrate (UAN)
which are used as fertilizers for row crops,
grains, grasslands and biofuel feedstock crops.
Chemical Business sales were $257.8
million in 2009 compared to $424.1 million
for 2008. The decrease was primarily
attributable to declines in the selling prices
for our chemical products, refl ecting lower
raw material commodity pricing. For
2009, operating income was $15.1 million
compared to $31.3 million in 2008, which
included a one-time $7.6 million litigation
award. Excluding Pryor Facility startup costs
from both years, and excluding the litigation
award in 2008, the segment operating
income of our Chemical Business improved
from $26.1 million in 2008 to $32.3 million
in 2009.
In 2009, approximately 60% of our Chemical
Business’ sales were to the industrial and
mining sectors, which were depressed
through most of the year. However, we are
seeing early signs of a recovery, and business
activity by our large industrial customers is
showing improvement.
We are pleased to report that during 2009
we entered into a new fi ve year agreement
with Bayer Material Science to operate the
nitric acid plant, located in Baytown, Texas.
We built the Baytown Plant for Bayer in 1999
and have operated it for the past 11 years.
As part of our ongoing commitment to the
highest safety and environmental standards,
we are teaming with Bayer to install a catalyst
system at its Baytown plant to substantially
reduce nitrogen oxide (NOx) emissions.
Although the Baytown plant is compliant with
all environmental performance standards, we
are voluntarily taking this initiative to minimize
Baytown’s carbon footprint.
With respect to mining chemicals, we are also
pleased to report that in the fi rst quarter of
2010, one of our largest customers, Orica
International Pte Ltd., the worldwide leader
in the explosives industry and our El Dorado
Chemical Company subsidiary signed a
fi ve-year agreement to supply Orica with
250,000 tons of industrial grade ammonium
nitrate per year, up from 210,000 tons under
the prior agreement. We view this volume
increase as a further indicator of a recovering
economy.
Although the spring agricultural season in our
primary markets got off to a late start due
to excessive rain, the outlook is favorable for
2010 and beyond. The worldwide demand
for increased food production, as well as
industry wide reduced production capacity
for our agricultural products in the U.S. over
the past several years, add up to a generally
optimistic outlook.
DEF is a recent value-added expansion of our
product mix. We are producing DEF at our
Cherokee Nitrogen chemical manufacturing
facility under a long-term agreement with
Yara North America, Inc. which is using its
vast expertise in the European, Asian and
Australian DEF markets to build the market
for DEF in the U.S. DEF is an exhaust system
additive and scrubbing agent used to reduce
NOx emissions from diesel engines. U.S.
Environmental Protection Agency (EPA)
emissions standards require the reduction of
NOx emissions for new heavy-duty diesel
engine vehicles. Reduced NOx emissions will
be phased in over time to apply to other
new diesel vehicle applications in future EPA
directives. Although we anticipate that for
the fi rst several years this will not be a large
business for LSB, the direction of clean air
standards and legislation indicates that this
could grow in the long-term. As this market
matures, we will consider the production
of EarthPure™ DEF at our other chemical
facilities.
Pryor Facility Update
The Pryor Facility began producing anhydrous
ammonia, the initial feedstock for the
production of UAN in January 2010. UAN
production began in March, although at less
than targeted rates, and not on a sustained
basis. When in full production, the Pryor
Facility should produce and sell approximately
325,000 tons of UAN and approximately
35,000 tons of ammonia annually. As noted,
Pryor Facility start-up and related expenses
in 2009 were approximately $17.2 million
plus capitalized costs of $8.8 million. We
estimate that our all-in costs of reactivating
this facility, both capitalized and expensed as
incurred, will be a fraction of those required
to build and equip a new facility with similar
production capacity.
LSB Industries 2009 Annual Report
most of our industrial and mining customers.
We expect to see increased sales as the
Pryor Facility ramps up its production output.
Both our Climate Control and Chemical
Businesses have a wide range of products
serving diverse markets. We also have
a solid balance sheet, modern effi cient
manufacturing facilities, management with
exceptional experience and know-how,
and a terrifi c team of approximately 1,750
people working to build the company. As the
economy recovers we plan to capitalize on
the investments we have made to further
grow our businesses.
We appreciate the contributions of the
entire LSB team and your continued support.
Looking Forward
Although 2010 will continue to be
challenging for LSB, we look forward to the
future with enthusiasm. With respect to our
Climate Control Business, we have been able
to maintain our leadership positions during
this economic downturn. We have continued
to invest in new products which we believe
have growth potential. We excel in clean
green technology which addresses a market
with exceptional growth prospects. We are a
vertically integrated manufacturer which we
believe makes us a low cost producer.
While subject to economic upswings and
downturns, our Chemical Business’s risk
profi le is minimized as a result of cost-plus
pricing and/or take or pay agreements with
April 28, 2010
Sincerely,
Jack E. Golsen
Chairman of the Board & CEO
Barry H. Golsen
Vice Chairman of the Board
President & COO
This letter contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements generally are identifi able by use of the words “believe”, “expects”, “intends”, “anticipates”, “plans to”, “estimates”, “projects” or similar expressions,
and such forward-looking statements include, but are not limited to, profi table growth; all statements about the Pryor Facility relating to: it will be a valuable
addition, production or production rates, cost to activate, sales levels; 2010 sales and gross profi ts of our Climate Control Products to be lower than
2009;Climate Control 2010 material costs to be higher than 2009; growth opportunities for our residential geothermal heat products stemming from The
American Recovery and Reinstatement Act of 2009; expect to be in a stronger position when the economy improves; outlook for spring agricultural season for
our primary agricultural markets is favorable for 2010 and beyond; we are optimistic about our agricultural products; installation of catalyst system at Baytown
Plant and NOx emission reduction; DEF business growth in the long term; enthusiasm about the future; recovering economy; growth potential of new production
and products; and growth prospects for green markets. Please see “A Special Note Regarding Forward-Looking Statement” confi rmed in the Form 10-K for a
discussion of a variety of factors which could cause the future outcome to differ materially from the forward-looking statements contained in this letter.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation)
16 South Pennsylvania Avenue
Oklahoma City, Oklahoma
(Address of Principal Executive Offices)
73-1015226
(I.R.S. Employer)
Identification No.)
73107
(Zip Code)
Registrant's Telephone Number, Including Area Code: (405) 235-4546
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, Par Value $.10
Preferred Share Purchase Rights
Name of Each Exchange
On Which Registered
New York Stock Exchange
New York Stock Exchange
1
(Facing Sheet Continued)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter
period that the Registrant has had to file the reports), and (2) has been subject to the filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such files). [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Act). [ ] Yes [X] No
The aggregate market value of the Registrant’s voting common equity held by non-affiliates of
the Registrant, computed by reference to the price at which the voting common stock was last
sold as of June 30, 2009, was approximately $227 million. As a result, the Registrant is an
accelerated filer as of December 31, 2009. For purposes of this computation, shares of the
Registrant’s common stock beneficially owned by each executive officer and director of the
Registrant were deemed to be owned by affiliates of the Registrant as of June 30, 2009. Such
determination should not be deemed an admission that such executive officers and directors of
our common stock are, in fact, affiliates of the Registrant or affiliates as of the date of this Form
10-K.
As of February 28, 2010, the Registrant had 21,226,063 shares of common stock outstanding
(excluding 4,143,362 shares of common stock held as treasury stock).
2
FORM 10-K OF LSB INDUSTRIES, INC.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
3
Page
4
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26
28
30
30
32
35
36
71
75
75
75
78
81
88
104
110
111
112
PART I
ITEM 1. BUSINESS
General
LSB Industries, Inc. (the "Company", “Registrant”, “LSB”, "We", "Us", or "Our") was formed in
1968 as an Oklahoma corporation, and became a Delaware corporation in 1977. We are a
diversified holding
Inc.
(“ThermaClime”) through its subsidiaries, owns substantially all of our core businesses
consisting of the:
company. Our wholly-owned
subsidiary, ThermaClime,
(cid:120) Climate Control Business engaged in the manufacturing and selling of a broad range of
heating, ventilation and air conditioning (“HVAC”) products for the niche markets we
serve. These products are used to control the environment in commercial and residential
new building construction, renovation of existing buildings and replacement of existing
systems.
(cid:120) Chemical Business engaged in the manufacturing and selling of nitrogen based chemical
products produced from three plants located in Arkansas, Alabama and Texas for the
agricultural, industrial, and mining markets.
Certain of our other subsidiaries outside of ThermaClime own facilities and operations, including
our previously idled chemical facility located in Pryor, Oklahoma (the “Pryor Facility”), within
our above described core businesses.
We believe our Climate Control Business has developed leadership positions in certain niche
markets by offering extensive product lines, customized products and improved technologies.
Under this focused strategy, we have developed what we believe to be the most extensive line of
geothermal and water source heat pumps and hydronic fan coils in the United States. Further, we
believe that we were a pioneer in the use of geothermal technology in the climate control
industry and have used it to create what we believe to be the most energy efficient climate
control systems commercially available today. We employ highly flexible production capabilities
that allow us to custom design units for new construction as well as the retrofit and replacement
markets.
Our Chemical Business has three chemical production facilities located in El Dorado, Arkansas
(the “El Dorado Facility”), Cherokee, Alabama (the “Cherokee Facility”) and Baytown, Texas
(the “Baytown Facility”). Our products include fertilizer and industrial grade ammonium nitrate
(“AN”), urea ammonium nitrate (“UAN”), nitric acid in various concentrations, nitrogen
solutions and various other products. Our Chemical Business is a supplier to some of the world’s
leading chemical and industrial companies. By focusing on specific geographic areas, we have
developed freight and distribution advantages over many of our competitors, and we believe our
Chemical Business has established leading regional market positions, a key element in the
success of this business.
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In addition as discussed below under “Chemical Business - Agricultural Products,” during 2009,
we activated a portion of our previously idled Pryor Facility. We encountered numerous
unanticipated delays, but began production of anhydrous ammonia in January 2010, however at
production rates lower than our targeted rates. Anhydrous ammonia is the initial feedstock for
the production of UAN.
Certain statements contained in this Part I may be deemed to be forward-looking statements. See
"Special Note Regarding Forward-Looking Statements."
Current State of the Economy
Since our two business segments serve several diverse markets, we consider market
fundamentals for each market individually as we evaluate economic conditions.
Climate Control Business - The downturn in commercial and residential construction has had a
significant adverse effect on our Climate Control Business’ product order level and sales in
2009. Based upon published reports of leading indicators, including the Construction Market
Forecasting Service published by McGraw-Hill Construction Research & Analytics, a business
unit of the McGraw-Hill Companies (“McGraw-Hill”), and the national architecture billings
index published by the American Institute of Architects (“AIA”), the overall commercial
construction sector is not expected to recover during 2010. On the other hand, McGraw-Hill has
projected an increase in both single-family residential and multi-family construction during
2010. Another factor that may affect product order rates going forward is the potential for
growth in our highly energy-efficient geothermal water-source heat pumps, which could benefit
significantly from government stimulus programs, including various tax incentives, although we
can not predict the impact these programs will have on our business.
Chemical Business - In our Chemical Business, approximately 60% of our 2009 sales were into
industrial and mining markets. Approximately 75% of these sales are to customers that have
contractual obligations to purchase a minimum quantity or allow us to recover our cost plus a
profit, irrespective of the volume of product sold. It is unclear to us how these markets will
respond in 2010 but it appears that market demand for these products could be flat to slightly up
for the first half of 2010.
The remaining 40% of our Chemical Business 2009 sales were made into the agricultural
fertilizer markets to customers that do not purchase pursuant to contractual arrangements. Our
agricultural sales volumes and margins depend upon the supply of, and the demand, for fertilizer,
which in turn depends on the market fundamentals for crops including corn, wheat and forage.
The current outlook remains uncertain but most market indicators, including reports in Green
Markets, Fertilizer Week and other industry publications, point to positive supply and demand
fundamentals for the types of nitrogen fertilizer products we produce and sell. However, it is
possible that the fertilizer outlook could be adversely affected by lower grain prices,
unanticipated spikes in natural gas prices, or unfavorable weather conditions.
See further discussion relating to the economy under various risk factors under Item 1A of this
Part 1 and “Overview-Economic Conditions” of the Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) contained in this report.
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Website Access to Company's Reports
Our internet website address is www.lsb-okc.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge
through our website within a reasonable amount of time after they are electronically filed with,
or furnished to, the Securities and Exchange Commission (“SEC”).
Segment Information and Foreign and Domestic Operations and Export Sales
Schedules of the amounts of net sales, gross profit, operating income (loss) and identifiable
assets attributable to each of our lines of business and of the amount of our export sales in the
aggregate and by major geographic area for each of the last three years appear in Note 22 of the
Notes to Consolidated Financial Statements included elsewhere in this report.
Climate Control Business
General
Our Climate Control Business manufactures and sells a broad range of standard and custom
designed geothermal and water source heat pumps and hydronic fan coils as well as large custom
air handlers and modular chiller systems. These products are for use in commercial and
residential HVAC systems. Our products are currently installed in some of the most recognizable
commercial developments in the country, including Prudential Tower, Rockefeller Plaza, Trump
Tower, and Time Warner Center and many others. In addition, we have a significant presence in
the lodging industry with installations in numerous Hyatt, Marriott, Four Seasons, Starwood,
Ritz Carlton and Hilton hotels. We also have a substantial share of resort destinations in Las
Vegas where we have units installed in over 70,000 rooms for a number of premier properties,
including the MGM Grand, Luxor, Venetian, Treasure Island, Bellagio, Mandalay Bay, Caesar’s
Palace, Monte Carlo, Mirage, Golden Nugget, Hard Rock, Wynn resorts, and many others.
During 2009, our Climate Control Business saw a significant decline in sales associated with the
lodging industry due to the economic downturn.
The following table summarizes net sales information relating to our products of the Climate
Control Business:
Percentage of net sales of the Climate Control Business:
Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products
Percentage of LSB’s consolidated net sales:
Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products
2009
2008
2007
68 %
17 %
15 %
100 %
34 %
9 %
7 %
50 %
61 %
27 %
12 %
100 %
25 %
11 %
5 %
41 %
58 %
30 %
12 %
100 %
28 %
15 %
6 %
49 %
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Market Conditions for Climate Control Business
We discuss below certain details of our marketing, distribution, production, backlog, competition
and new products relative to our geothermal and water source heat pumps, hydronic fan coils and
other products produced by our Climate Control Business. At this time, we are unable to assess
the possible impact to our Climate Control Business’ sales level as a result of the well
documented downturn in commercial and residential construction. For the short term, we do
expect to see lower demand for most of our products.
We believe that tax credits and incentives, and certain planned direct spending by the federal
government contained in the American Reinvestment and Recovery Act of 2009, could stimulate
sales of our geothermal heat pump products, as well as other products that could be used to
modernize federally owned and operated buildings, military installations, public housing and
hospitals. Also see discussion concerning Advanced Manufacturing Energy Credits awarded to
two of our subsidiaries under “Liquidity and Capital Resources - Capital Expenditures” of Item 7
of Part II of this report.
Geothermal and Water Source Heat Pumps
We believe we are a leading provider of geothermal and water source heat pumps to the
commercial construction and renovation markets in the United States. Water source heat pumps
are highly efficient heating and cooling products, which enable individual room climate control
through the transfer of heat using a water pipe system, which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a broad range of commercial
applications, particularly in medium to large sized buildings with many small, individually
controlled spaces. Despite the current economic downturn, we believe the market share for
commercial water source heat pumps relative to other types of heating and air-conditioning
systems will continue to grow due to the relative efficiency and longevity of such systems, as
well as due to the emergence of the replacement market for those systems.
Our Climate Control Business has also developed the use of geothermal heat pumps in
residential and commercial applications. Geothermal systems, which circulate water and
antifreeze through an underground heat exchanger, are among the most energy efficient systems
currently available in the market. We believe the energy efficiency, longer life, and relatively
short payback periods of geothermal systems, as compared with air-to-air systems, as well as tax
incentives that are available to builders and homeowners when installing geothermal systems,
will continue to increase demand for our geothermal products. We specifically target the
commercial and institutional markets, as well as single-family new construction, renovation and
replacements.
Hydronic Fan Coils
We believe that our Climate Control Business is a leading provider of hydronic fan coils. Our
Climate Control Business targets the commercial and institutional markets. Hydronic fan coils
use heated or chilled water provided by a centralized chiller or boiler, through a water pipe
system, to condition the air and allow individual room control. Hydronic fan coil systems are
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quieter, have longer lives and lower maintenance costs than other comparable systems used
where individual room control is required. Important components of our strategy for competing
in the commercial and institutional renovation and replacement markets include the breadth of
our product line coupled with customization capability provided by a flexible manufacturing
process. Hydronic fan coils enjoy a broad range of commercial applications, particularly in
medium to large sized buildings with many small, individually controlled spaces.
Geothermal and Water Source Heat Pump and Hydronic Fan Coil Market
We estimate the annual United States market for geothermal and water source heat pumps and
hydronic fan coils was approximately $600 million in 2009 based on December 2009 data
supplied by the Air-Conditioning, Heating and Refrigeration Institute (“AHRI”). Levels of
repair, replacement, and new construction activity generally drive demand in these markets.
However, this market is being impacted by the current economic conditions.
Production, Capital Investments and Backlog
We manufacture our products in many sizes and configurations, as required by the purchaser, to
fit the space and capacity requirements of hotels, motels, schools, hospitals, apartment buildings,
office buildings and other commercial or residential structures. In addition, most of the customer
product orders are placed well in advance of required delivery dates.
During 2009, we invested approximately $6.4 million in additional property, plant and
equipment primarily relating to production equipment and other upgrades for additional capacity
relating to our Climate Control Business.
As of December 31, 2009, we have committed to spend an additional $1.3 million primarily for
facilities expansion and upgrades and production equipment in 2010. Our investment in the
Climate Control Business will continue if customer product order intake levels warrant such
investment. These investments have and will increase our capacity to produce and distribute our
Climate Control products. Additional investments will depend upon our long-term outlook for
the economic conditions that might affect our markets. See discussions under “Liquidity and
Capital Resources-Capital Expenditures” of Item 7 of Part II of this report, including Advanced
Manufacturing Energy Credits awarded to two of our subsidiaries.
As of December 31, 2009 and 2008, the backlog of confirmed customer product orders (purchase
orders from customers that have been accepted and received credit approval) for our Climate
Control Business was approximately $32.2 million and $68.5 million, respectively. The decrease
in our backlog is primarily the result of lower product order levels during 2009 in all major
product categories and markets due to the economic downturn. At December 31, 2009, included
within our reported backlog is a confirmed order for approximately $3.2 million that has been
placed on hold by the customer pending refinancing arrangements. Historically, we have not
experienced significant cancellations relating to our backlog of confirmed customer product
orders and we expect to ship substantially all of these orders within the next twelve months;
however, due to the current economic conditions in the markets we serve, it is possible that some
of our customers could cancel a portion of our backlog or extend the shipment terms beyond
twelve months.
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Distribution
Our Climate Control Business sells its products to mechanical contractors, original equipment
manufacturers (“OEMs”) and distributors. Our sales to mechanical contractors primarily occur
through independent manufacturers' representatives, who also represent complementary product
lines not manufactured by us. OEMs generally consist of other air conditioning and heating
equipment manufacturers who resell under their own brand name the products purchased from
our Climate Control Business in competition with us. The following table summarizes net sales
to OEMs relating to our products of the Climate Control Business:
Net sales to OEMs as a percentage of:
Net sales of the Climate Control Business
LSB’s consolidated net sales
Market
2009
2008
2007
23 %
11 %
20 %
9 %
19 %
9 %
Our Climate Control Business depends primarily on the commercial construction industry,
including new construction and the remodeling and renovation of older buildings, and on the
residential construction industry and existing homes for both new and replacement markets
relating to their geothermal products.
Raw Materials
Numerous domestic and foreign sources exist for the materials used by our Climate Control
Business, which materials include copper, compressors, steel, aluminum, electric motors, and
valves. Periodically, our Climate Control Business enters into futures contracts for copper. We
do not anticipate any difficulties in obtaining necessary materials for our Climate Control
Business. Although we believe we will be able to pass to our customers the majority of any raw
material cost increases in the form of higher prices, the timing of these price increases could lag
the increases in the cost of materials. While we believe we will have sufficient sources for
materials, a shortage of raw materials could impact production of our Climate Control products.
Regulatory Matters
The American Reinvestment and Recovery Act of 2009 contains significant incentives for the
installation of our geothermal products. Also see discussion concerning Advanced
Manufacturing Energy Credits awarded to two of our subsidiaries under “Liquidity and Capital
Resources - Capital Expenditures” of Item 7 of Part II of this report.
Competition
Our Climate Control Business competes primarily with seven companies, some of whom are also
our customers. Some of our competitors serve other markets and have greater financial and other
resources than we do. Our Climate Control Business manufactures a broader line of geothermal
and water source heat pump and fan coil products than any other manufacturer in the United
States, and we believe that we are competitive as to price, service, warranty and product
performance.
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Continue to Introduce New Products
Based on business plans and key objectives submitted by our subsidiaries within our Climate
Control Business, we expect to continue to launch new products and product upgrades in an
effort to maintain and increase our current market position and to establish a presence in new
markets served by the Climate Control Business.
Chemical Business
General
Our Chemical Business manufactures products for three principal markets:
(cid:120) anhydrous ammonia, fertilizer grade AN, UAN, and ammonium nitrate ammonia solution
(“ANA”) for the agricultural applications,
(cid:120) concentrated, blended and regular nitric acid, mixed nitrating acids, metallurgical grade
anhydrous ammonia, sulfuric acid, and high purity AN for industrial applications, and
industrial grade AN and solutions for the mining industry.
(cid:120)
The following table summarizes net sales information relating to our products of the Chemical
Business:
Percentage of net sales of the Chemical Business:
Industrial acids and other chemical products
Agricultural products
Mining products
Percentage of LSB’s consolidated net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Market Conditions for Chemical Business
2009
2008
2007
37 %
41 %
22 %
100 %
20 %
18 %
11 %
49 %
38 %
36 %
26 %
100 %
20 %
22 %
15 %
57 %
33 %
41 %
26 %
100 %
20 %
16 %
13 %
49 %
We discuss below certain details of our agricultural products, industrial acids and other chemical
products, mining products, major customers, raw materials and other sales and industry issues
affecting our Chemical Business.
As discussed in more detail under “Overview-Economic Conditions” of the MD&A contained in
this report, we are unable to definitively assess the impact to our Chemical Business’ sales level
as a result of the current economic recession. At this time based upon information from our sales
personnel, it appears that the market demand for our industrial acids and mining products will be
flat to slightly up, for the first half of 2010, and the nitrogen fertilizer supply and demand
fundamentals appear to be favorable. However, it is possible that the fertilizer outlook could be
adversely affected by lower grain prices, unanticipated spikes in natural gas prices, or
unfavorable weather conditions.
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Agricultural Products
Our Chemical Business produces AN at the El Dorado Facility and anhydrous ammonia, UAN,
and ANA at the Cherokee Facility; all of which are nitrogen based fertilizers. The Cherokee
Facility also has the ability to produce agricultural grade AN. Although, to some extent, the
various forms of nitrogen-based fertilizers are interchangeable, each has its own characteristics,
which produce agronomic preferences among end users. Farmers and ranchers decide which type
of nitrogen-based fertilizer to apply based on the crop planted, soil and weather conditions,
regional farming practices and relative nitrogen fertilizer prices. Our agricultural markets include
a high concentration of pastureland and row crops, which favor our products. We sell these
agricultural products to farmers, ranchers, fertilizer dealers and distributors located in the Central
and Southeastern United States, which are in relatively close proximity to the El Dorado and
Cherokee Facilities. We develop our market position in these areas by emphasizing high quality
products, customer service and technical advice. During the past few years, we have been
successful in expanding outside our traditional markets by barging to distributors on the
Tennessee and Ohio rivers, and by railing into certain Western States. The El Dorado Facility
produces a high performance AN fertilizer that, because of its uniform size, is easier to apply
than many competing nitrogen-based fertilizer products. Our subsidiary, El Dorado Chemical
Company (“EDC”) establishes long-term relationships with end-users through its network of
wholesale and retail distribution centers and our subsidiary, Cherokee Nitrogen Company
(“CNC”) sells directly to agricultural customers.
During 2009, we proceeded to activate a portion of our previously idled Pryor Facility. We
encountered numerous unanticipated delays, but began production of anhydrous ammonia in
January 2010, which is the initial feedstock for the production of UAN, however at production
rates lower than our targeted rates. We are continuing to produce and store anhydrous ammonia
while we are activating the Urea plant. The start up of the Urea plant has encountered delays as
discussed under “Overview-Chemical Business” of Item 7 of Part II of this report. At the Pryor
Facility, natural gas is a primary raw material for producing UAN and anhydrous ammonia.
When producing at a sustained level, we expect the Pryor Facility to produce and sell at an
annualized rate of approximately 325,000 tons of UAN and 35,000 tons of anhydrous ammonia.
One of our subsidiaries, Pryor Chemical Company (“PCC”), is a party to a contract with Koch
Nitrogen Company (“Koch”) under which Koch agreed to purchase and distribute substantially
all of the UAN produced at the Pryor Facility. Pursuant to the terms of the contract, the UAN
will be priced at market prices less a distribution fee and certain shipping costs where applicable.
Industrial Acids and Other Chemical Products
Our Chemical Business manufactures and sells industrial acids and other chemical products
primarily to the polyurethane, paper, fibers, fuel additives, emission control, and electronics
industries. We are a major supplier of concentrated nitric acid and mixed nitrating acids,
specialty products used in the manufacture of fibers, gaskets, fuel additives, ordnance, and other
chemical products. In addition, at the El Dorado Facility, we produce and sell blended and
regular nitric acid and we are a niche market supplier of sulfuric acid, primarily to the region’s
key paper and related chemical manufacturers. At the Cherokee Facility, we are also a niche
market supplier of industrial and high purity ammonia for many specialty applications, including
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chemicals to reduce air emissions from power plants. As discussed below under “Introduction of
New Product” of this Item 1, as of January 2010, the Cherokee Facility began producing and
selling diesel exhaust fluid.
We compete based upon service, price, location of production and distribution sites, product
quality and performance. We also believe we are the largest domestic merchant marketer of
concentrated and blended nitric acids and provide inventory management as part of the value-
added services offered to certain customers.
The Baytown Facility is one of the two largest nitric acid manufacturing units in the United
States, with demonstrated capacity exceeding 1,350 short tons per day. The majority of the
Baytown Facility’s production is sold to Bayer Material Science LLC (“Bayer”) pursuant to a
long-term contract. See discussion below under “Bayer Agreement” of this Item 1 concerning the
replacement of the original Bayer agreement with a new agreement in 2009.
Mining Products
Our Chemical Business manufactures industrial grade AN at the El Dorado Facility and 83% AN
solution at the Cherokee Facility for the mining industry. Effective January 1, 2010, EDC is a
party to a long-term cost-plus supply agreement. Under this supply agreement, EDC supplies
Orica International Pte Ltd. with a significant volume of industrial grade AN per year for a term
through December 2014. This new agreement replaces EDC’s previous agreement to supply
industrial grade AN to Orica USA, Inc. (“Orica”).
Major Customers
The following summarizes net sales to our major customers relating to our products of the
Chemical Business:
Net sales to Bayer as a percentage of:
Net sales of the Chemical Business
LSB’s consolidated net sales
Net sales to Orica as a percentage of:
Net sales of the Chemical Business
LSB’s consolidated net sales
Raw Materials
2009
2008
2007
14%
7%
14%
7%
19%
11%
15 %
7 %
19%
11%
19 %
9 %
The products our Chemical Business manufacture are primarily derived from the following raw
material feedstocks: anhydrous ammonia, natural gas and sulfur. These raw material feedstocks
are commodities, subject to price fluctuations.
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The El Dorado Facility purchases approximately 200,000 tons of anhydrous ammonia and
50,000 tons of sulfur annually and produces and sells approximately 470,000 tons of nitrogen-
based products and approximately 150,000 tons of sulfuric acid per year. Although anhydrous
ammonia is produced from natural gas, the price does not necessarily follow the spot price of
natural gas in the U.S. because anhydrous ammonia is an internationally traded commodity and
the relative price is set in the world market while natural gas is primarily a nationally traded
commodity. The ammonia supply to the El Dorado Facility is transported from the Gulf of
Mexico by pipeline. Under an agreement with its principal supplier of anhydrous ammonia, EDC
purchases a majority of its anhydrous ammonia requirements for its El Dorado Facility through
December 2012 from this supplier. Periodically, we will enter into futures/forward contracts to
economically hedge certain of the anhydrous ammonia requirements. We believe that we can
obtain anhydrous ammonia from other sources in the event of an interruption of service under the
above-referenced contract. Prices for anhydrous ammonia were volatile during 2009, ranging
from $125 to $355 per metric ton. During 2009, the average prices for sulfur ranged from
minimal to $30 per long ton.
The Cherokee Facility normally consumes 5 to 6 million MMBtu’s of natural gas annually and
produces and sells approximately 300,000 to 370,000 tons of nitrogen-based products per year.
Natural gas is a primary raw material for anhydrous ammonia. The Cherokee Facility’s natural
gas feedstock requirements are generally purchased at spot market price. Periodically, we will
enter into futures/forward contracts to economically hedge certain of the natural gas
requirements. Natural gas prices continue to exhibit volatility. In 2009, daily spot prices per
MMBtu, excluding transportation, ranged from $1.87 to $6.08. Periodically, the Cherokee
Facility purchases anhydrous ammonia to supplement its annual production capacity of
approximately 175,000 tons. Anhydrous ammonia can be delivered to Cherokee Facility by
truck, rail or barge.
The Baytown Facility typically consumes more than 100,000 tons of purchased anhydrous
ammonia per year. The majority of the Baytown Facility’s production is sold to Bayer pursuant
to a long-term contract that provides for a pass-through of certain costs, including the anhydrous
ammonia costs, plus a profit. See discussion concerning a new long-term contract below under
“Bayer Agreement” of this Item 1.
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Spot anhydrous ammonia, natural gas and sulfur costs have fluctuated dramatically in recent
years. The following table shows, for the periods indicated, the high and low published prices
for:
(cid:120) ammonia based upon the low Tampa metric price per ton as published by Fertecon and
FMB Ammonia reports,
(cid:120) natural gas based upon the daily spot price at the Tennessee 500 pipeline pricing point,
and
(cid:120) sulfur based upon the average quarterly Tampa price per long ton as published in Green
Markets.
Ammonia Price
Per Metric Ton
2009
2008
2007
High
$355
$931
$460
Low
$125
$125
$295
Daily Spot Natural Gas
Prices Per MMBtu
Low
High
$1.87
$ 6.08
$5.36
$13.16
$5.30
$10.59
Sulfur Price
Per Long Ton
High
$ 30
$617
$112
Low
minimal
$150
$ 56
As of March 1, 2010, the published price, as described above, for ammonia was $450 per metric
ton and natural gas was $4.75 per MMBtu. The average quarterly price per long ton for sulfur
was $90 per long ton.
See discussion above under “Agricultural Products” of this Item 1 concerning our previously
idled Pryor Facility that began production of anhydrous ammonia in 2010.
Sales Strategy
Our Chemical Business has pursued a strategy of developing customers that purchase substantial
quantities of products pursuant to sales agreements and/or pricing arrangements that provide for
the pass through of raw material costs in order to minimize the impact of the uncertainty of the
sales prices of our products in relation to the cost of anhydrous ammonia, natural gas and sulfur.
These pricing arrangements help mitigate the volatility risk inherent in the raw material
feedstocks of natural gas, anhydrous ammonia and sulfur. For 2009, approximately 60% of the
Chemical Business’ sales were into industrial and mining markets. Approximately 75% of our
industrial and mining sector sales were made pursuant to these types of arrangements. The
remaining 40% of our 2009 sales are primarily into agricultural markets at the price in effect at
time of shipment. However, we enter into futures/forward contracts to economically hedge the
cost of natural gas and anhydrous ammonia for the purpose of securing the profit margin on a
significant portion of our sales commitments with firm sales prices in our Chemical Business.
The sales prices of our agricultural products have only a moderate correlation to the anhydrous
ammonia and natural gas feedstock costs and reflect market conditions for like and competing
nitrogen sources. This can compromise our ability to recover our full cost to produce the product
in this market. Additionally, the lack of sufficient non-seasonal sales volume to operate our
manufacturing facilities at optimum levels can preclude the Chemical Business from reaching
full performance potential. Our primary efforts to improve the results of our Chemical Business
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include maximizing the production at our Chemical facilities and emphasizing our marketing
efforts to customers that will accept the volatility risk inherent with natural gas and anhydrous
ammonia, while maintaining a strong presence in the agricultural sector. In addition, see our
discussion above under “Agricultural Products” of this Item 1 concerning the production of
anhydrous ammonia that began at the Pryor Facility in 2010.
Bayer Agreement
During October 2008, subsidiaries within our Chemical Business, El Dorado Nitric Company
(“EDN”) and EDC, entered into a new Nitric Acid Supply Operating and Maintenance
Agreement (the “Bayer Agreement”) with Bayer, replacing a previous agreement between EDN,
EDC and Bayer entered into during 1997. The Bayer Agreement became effective on June 24,
2009, and is for an initial term of five years, with certain renewal options.
Under the terms of the Bayer Agreement, Bayer purchases all of its requirements for nitric acid
for use in Bayer’s chemical manufacturing complex located in Baytown, Texas from EDN at a
price covering EDN’s costs plus a profit, with certain performance obligations on EDN’s part.
EDN purchases from Bayer ammonia, certain utilities, chemical additives and services as
required for production of nitric acid at the Baytown Facility.
On June 23, 2009, Bayer purchased all of the nitric acid production assets comprising the
Baytown Facility (the “Baytown Assets”) from a third party, except certain assets that are owned
by EDN for use in the production process. EDN continues to be responsible for the maintenance
and operation of the Baytown Facility in accordance with the terms of the Bayer Agreement.
Pursuant to the terms of the Bayer Agreement, annual net sales after June 30, 2009 will decrease
by approximately $9.7 million primarily as a result of the elimination of the Baytown Facility’s
lease expense, which was included in our sales price under the original Bayer agreement that was
replaced by the Bayer Agreement. This elimination was the result of Bayer purchasing the
Baytown Assets.
If there is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment of certain fees to EDN. See further discussion of the Bayer Agreement
under “Liquidity and Capital Resources - Bayer Agreement” of Item 7 of Part II of this report.
Introduction of New Product
As part of the Clean Air Act, the United States Environmental Protection Agency (“EPA”)
enacted emissions standards, which became effective beginning in 2010, that require the further
reduction of nitrogen oxide emissions from diesel engines, starting with heavy-duty vehicles.
CNC has developed a diesel exhaust fluid product (“DEF”) under the tradename, EarthPure
DEFTM, specifically for this application. CNC began production of DEF in January 2010.
Seasonality
We believe that the only significant seasonal products are fertilizer and related chemical products
sold by our Chemical Business to the agricultural industry. The selling seasons for those
products are primarily during the spring and fall planting seasons, which typically extend from
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March through June and from September through November in the geographical markets in
which the majority of our agricultural products are distributed. As a result, our Chemical
Business typically increases its inventory of AN and UAN prior to the beginning of each
planting season. In addition, the amount and timing of sales to the agricultural markets depend
upon weather conditions and other circumstances beyond our control.
Regulatory Matters
Our Chemical Business is subject to extensive federal, state and local environmental laws, rules
and regulations as discussed under “Environmental Matters" of this Item 1 and various risk
factors under Item 1A.
Competition
Our Chemical Business competes with several chemical companies in our markets, such as
Agrium, CF Industries, Dyno Nobel North America, Potash Corporation of Saskatchewan, Terra
Industries and Yara North America, Inc., many of whom have greater financial and other
resources than we do. We believe that competition within the markets served by our Chemical
Business is primarily based upon service, price, location of production and distribution sites, and
product quality and performance.
In addition, see discussion concerning potential increase of imported UAN under Item 1A of this
Part 1.
Employees
As of December 31, 2009, we employed 1,749 persons. As of that date, our Climate Control
Business employed 1,222 persons, none of whom was represented by a union, and our Chemical
Business employed 455 persons, with 156 represented by unions under agreements that expire in
July through November of 2010.
Environmental Matters
Our operations are subject to numerous environmental laws (“Environmental Laws”) and to
other federal, state and local laws regarding health and safety matters (“Health Laws”). In
particular, the manufacture and distribution of chemical products are activities which entail
environmental risks and impose obligations under the Environmental Laws and the Health Laws,
many of which provide for certain performance obligations, substantial fines and criminal
sanctions for violations. There can be no assurance that material costs or liabilities will not be
incurred by us in complying with such laws or in paying fines or penalties for violation of such
laws. The Environmental Laws and Health Laws and enforcement policies thereunder relating to
our Chemical Business have in the past resulted, and could in the future result, in compliance
expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use,
emission, discharge or disposal of effluents at or from our facilities or the use or disposal of
certain of its chemical products. Historically, significant expenditures have been incurred by
subsidiaries within our Chemical Business in order to comply with the Environmental Laws and
Health Laws and are reasonably expected to be incurred in the future.
16
We are obligated to monitor certain discharge water outlets at our Chemical Business facilities
should we discontinue the operations of a facility. We also have certain facilities in our Chemical
Business 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.
1. Discharge Water Matters
The El Dorado Facility owned by EDC generates process wastewater, which includes cooling
tower and boiler blowdowns, 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 a state National Pollutant Discharge Elimination System (“NPDES”)
water discharge permit issued by the Arkansas Department of Environmental Quality (“ADEQ”),
which permit is to be renewed every five years. The ADEQ issued to EDC a NPDES water
discharge permit in 2004, and the El Dorado Facility had until June 1, 2007 to meet the
compliance deadline for the more restrictive limits under the 2004 NPDES permit. In order to
meet the El Dorado Facility’s June 2007 limits, the El Dorado Facility has significantly reduced
the contaminant levels of its wastewater.
The El Dorado Facility has demonstrated its ability to comply with the more restrictive permit
limits, and believes that if it is required to meet the more restrictive dissolved minerals permit
levels, it will be able to do so. The El Dorado Facility is currently having discussions with the
ADEQ to modify and reduce the permit levels as to dissolved minerals, but, although the rule is a
state rule, any revisions must also be approved by the EPA before it can become effective. Once
the rule change is complete, the permit limits can be modified to incorporate achievable
dissolved minerals permit levels. The ADEQ and the El Dorado Facility also entered into a
Consent Administrative Order (“CAO”) which authorized the El Dorado Facility to continue
operating through December 31, 2009 without incurring permit violations pending the
modification of the permit to implement the revised rule. In March 2009, the EPA notified the
ADEQ that it disapproved the dissolved mineral rulemaking due to insufficient documentation.
Representatives of EDC, ADEQ and the EPA have met to determine what additional information
was required by the EPA. During January 2010, EDC received an Administrative Order from the
EPA noting certain violations of the permit and requesting EDC to demonstrate compliance with
the permit or provide a plan and schedule for returning to compliance. EDC has provided the
EPA a response which states that the El Dorado Facility is now in compliance with the permit,
that the El Dorado Facility expects to maintain compliance and that all but fifteen of the alleged
violations were resolved through the CAO with the ADEQ. During the meeting with the EPA
prior to the issuance of the Administrative Order, the EPA advised EDC that its primary
objective is to bring the El Dorado Facility into compliance with the permit requirements, but
reserved the right to access penalties for past and continuing violations of the permit. As a result,
it is unknown whether the EPA might elect to pursue civil penalties against EDC. Therefore, no
liability has been established at December 31, 2009.
In addition, EDC has entered into a CAO that recognizes the presence of nitrate contamination in
the shallow groundwater at the El Dorado Facility. EDC is addressing the shallow groundwater
contamination. The CAO requires the El Dorado Facility to continue semi-annual groundwater
17
monitoring, to continue operation of a groundwater recovery system and to submit a human
health and ecological risk assessment to the ADEQ. The final remedy for shallow groundwater
contamination, should any remediation be required, will be selected pursuant to the new CAO
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 and cannot
currently be reasonably estimated. Therefore, no liability has been established at December 31,
2009.
2. Air Matters
The EPA has sent information requests to most, if not all, of the nitric acid plants in the United
States, including to us relating to our El Dorado, Cherokee and Baytown Facilities, requesting
information under Section 114 of the Clean Air Act as to construction and modification activities
at each of these facilities over a period of years to enable the EPA to determine whether these
facilities are in compliance with certain provisions of the Clean Air Act. In connection with a
review by our Chemical Business of these facilities in obtaining information for the EPA
pursuant to the EPA’s request, our Chemical Business management believes, subject to further
review, investigation and discussion with the EPA, that certain changes to its production
equipment may be needed in order to comply with the requirements of the Clean Air Act. If
changes to the production equipment at these facilities are required in order to bring this
equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary
in order to bring the equipment into compliance is unknown at this time but could be substantial.
Further, if it is determined that the equipment at any of our El Dorado, Cherokee and/or Baytown
Facilities have not met the requirements of the Clean Air Act, our Chemical Business could be
subject to penalties in an amount not to exceed $27,500 per day as to each facility not in
compliance and require such facility to be retrofitted with the “best available control
technology.” We believe this technology is already employed at the Baytown Facility. Currently,
we believe that certain facilities within our Chemical Business may be required to pay certain
penalties and may be required to make certain capital improvements to certain emission
equipment as a result of the above described matter; however, at this time we are unable to
determine the amount of any penalties that may be assessed, or the cost of additional capital
improvements that may be required, by the EPA. Therefore no liability has been established at
December 31, 2009.
3. Other Environmental Matters
In December 2002, two of our subsidiaries within our Chemical Business, sold substantially all
of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained
ownership of the real property. At December 31, 2002, even though we continued to own the real
property, we did not assess our continuing involvement with our former Hallowell Facility to be
significant and therefore accounted for the sale as discontinued operations. In connection with
this sale, our subsidiary leased the real property to the buyer under a triple net long-term lease
agreement. However, 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 a corrective action strategy based on the investigation. In
addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these
18
environmental matters. The successor (“Chevron”) of a prior owner of the Hallowell Facility is a
participating responsible party and has agreed, within certain limitations, to pay and has been
paying one-half of the costs relating to this matter as approved by the Kansas Department of
Environmental Quality, subject to reallocation.
Based on additional modeling of the site, our subsidiary and Chevron are pursuing a course with
the state of Kansas of long-term surface and groundwater monitoring to track the natural decline
in contamination, instead of the soil excavation proposed previously. Our subsidiary and
Chevron submitted its final report on the groundwater monitoring and an addendum to the
Mitigation Work Plan to the state of Kansas. The data from the monitoring program is being
evaluated by the state of Kansas and the potential costs of additional monitoring or required
remediation, if any, is unknown.
At December 31, 2009, our estimated allocable portion of the total estimated liability (which is
included in current and noncurrent accrued and other liabilities) in connection with this
remediation matter is approximately $305,000. This amount is not discounted to its present
value. It is reasonably possible that a change in the estimate of our liability will occur in the near
term.
ITEM 1A. RISK FACTORS
Risks Related to Us and Our Business
Cost and the lack of availability of raw materials could materially affect our profitability
and liquidity.
Our sales and profits are heavily affected by the costs and availability of primary raw materials.
These primary raw materials, which are purchased from unrelated third parties, are subject to
considerable price volatility. Historically, when there have been rapid increases in the cost of
these primary raw materials, we have sometimes been unable to timely increase our sales prices
to cover all of the higher costs incurred. While we periodically enter into futures/forward
contracts to economically hedge against price increases in certain of these raw materials, there
can be no assurance that we will effectively manage against price fluctuations in those raw
materials.
Anhydrous ammonia, natural gas and sulfur represent the primary raw material feedstocks in the
production of most of the products of the Chemical Business. Although our Chemical Business
has a program to enter into contracts with certain customers that provide for the pass-through of
raw material costs, we have a substantial amount of sales that do not provide for the pass-through
of raw material costs. In addition, the Climate Control Business depends on raw materials such
as copper and steel, which have shown considerable price volatility. As a result, in the future, we
may not be able to pass along to all of our customers the full amount of any increases in raw
material costs. There can be no assurance that future price fluctuations in our raw materials will
not have an adverse effect on our financial condition, liquidity and results of operations.
19
Additionally, we depend on certain vendors to deliver the primary raw materials and other key
components that are required in the production of our products. Any disruption in the supply of
the primary raw materials and other key components could result in lost production or delayed
shipments. We have suspended in the past, and could suspend in the future, production at our
chemical facilities due to, among other things, the high cost or lack of availability of such
primary raw materials, which could adversely impact our competitiveness in the markets we
serve. Accordingly, our financial condition, liquidity and results of operations could be
materially affected in the future by the lack of availability of primary raw materials and other key
components.
Our Climate Control and Chemical Businesses and their customers are sensitive to adverse
economic cycles.
Our Climate Control Business can be affected by cyclical factors, such as interest rates, inflation
and economic downturns. Our Climate Control Business depends on sales to customers in the
construction and renovation industries, which are particularly sensitive to these factors. Due to
the current recession, we have experienced and expect to continue to experience a decline in both
commercial and residential construction. A decline in the economic activity in the United States
has in the past, and could in the future, have a material adverse effect on us and our customers in
the construction and renovation industries in which our Climate Control Business sells a
substantial amount of its products. Such a decline could result in a decrease in revenues and
profits, and an increase in bad debts, in our Climate Control Business and could have a material
adverse effect on our operating results, financial condition and liquidity.
Our Chemical Business also can be affected by cyclical factors such as inflation, global energy
policy and costs, global market conditions and economic downturns in specific industries.
Certain sales of our Chemical Business are sensitive to the level of activity in the agricultural,
mining, automotive and housing industries. Certain of our industrial and mining customers have
been affected and we expect will continue to be affected by the current economic recession and
could substantially reduce their purchases. A substantial decline in the activity of our Chemical
Business has in the past, and could in the future, have a material adverse effect on the results of
our Chemical Business and on our liquidity and capital resources.
Weather conditions adversely affect our Chemical Business.
The agricultural products produced and sold by our Chemical Business have in the past, and
could in the future, be materially affected by adverse weather conditions (such as excessive rains
or drought) in the primary markets for our fertilizer and related agricultural products. If any of
these unusual weather events occur during the primary seasons for sales of our agricultural
products (March-June and September-November), this could have a material adverse effect on
the agricultural sales of our Chemical Business and our financial condition and results of
operations.
Environmental and regulatory matters entail significant risk for us.
Our Chemical Business is subject to numerous environmental laws and regulations. The
manufacture and distribution of chemical products are activities, which entail environmental
20
risks and impose obligations under environmental laws and regulations, many of which provide
for substantial fines and potential criminal sanctions for violations. Although we have
established processes to monitor, review and manage our businesses to comply with the
numerous environmental laws and regulations, our Chemical Business has in the past, and may
in the future, be subject to fines, penalties and sanctions for violations and substantial
expenditures for cleanup costs and other liabilities relating to the handling, manufacture, use,
emission, discharge or disposal of effluents at or from the Chemical Business’ facilities. Further,
a number of our Chemical Business’ 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.
We may be required to expand our security procedures and install additional security
equipment for our Chemical Business in order to comply with current and possible future
government regulations, including the Homeland Security Act of 2002.
The chemical industry in general, and producers and distributors of anhydrous ammonia and AN
specifically, are scrutinized by the government, industry and public on security issues. Under
current and proposed regulations, including the Homeland Security Act of 2002, we may be
required to incur substantial additional costs relating to security at our chemical facilities and
distribution centers, as well as in the transportation of our products. These costs could have a
material impact on our financial condition, results of operations, and liquidity. The cost of such
regulatory changes, if significant enough, could lead some of our customers to choose alternate
products to anhydrous ammonia and AN, which would have a significant impact on our
Chemical Business.
Proposed governmental laws and regulations relating to greenhouse gas emissions may
subject certain of our Chemical Business’ facilities to significant new costs and restrictions
on their operations.
into
that result, or could result,
in certain greenhouse gas emissions
Certain of the manufacturing facilities within our Chemical Business use significant amounts of
electricity, natural gas and other raw materials necessary for the production of their chemical
products
the
environment. Federal and state courts and administrative agencies are considering the scope and
scale of greenhouse gas emission regulation. There are bills pending in Congress that would
regulate greenhouse gas emissions through a cap-and-trade system under which emitters would
be required to either install abatement systems where feasible or buy allowances for offsets of
emissions of greenhouse gas. In addition, the EPA has announced its determination that
greenhouse gases threaten the public’s health and welfare and thus could make them subject to
regulation under the Clean Air Act. However this determination is being contested. The EPA has
instituted a mandatory greenhouse gas reporting requirement beginning in 2010, which will
impact all of our chemical manufacturing sites. Greenhouse gas regulation could increase the
price of the electricity purchased by these chemical facilities and increase costs for our use of
natural gas, other raw materials (such as anhydrous ammonia), and other energy sources,
potentially restrict access to or the use of natural gas and certain other raw materials necessary to
produce certain of our chemical products and require us to incur substantial expenditures to
retrofit these chemical facilities to comply with the proposed new laws and regulations
21
regulating greenhouse gas emissions, if adopted. Federal, state and local governments may also
pass laws mandating the use of alternative energy sources, such as wind power and solar energy,
which may increase the cost of energy use in certain of our chemical and other manufacturing
operations. While future emission regulations or new laws appear likely, it is too early to predict
how these regulations, if and when adopted, will affect our businesses, operations, liquidity or
financial results.
A substantial portion of our sales is dependent upon a limited number of customers.
During 2009, eight customers of our Chemical Business accounted for approximately 50% of its
net sales and 24% of our consolidated sales, and our Climate Control Business had four
customers (including affiliates and their distributors) that accounted for approximately 27% of its
net sales and 13% of our consolidated sales. The loss of, or a material reduction in purchase
levels by, one or more of these customers could have a material adverse effect on our business
and our results of operations, financial condition and liquidity if we are unable to replace a
customer on substantially similar terms.
There is intense competition in the Climate Control and Chemical industries.
Substantially all of the markets in which we participate are highly competitive with respect to
product quality, price, design innovations, distribution, service, warranties, reliability and
efficiency. We compete with a number of companies that have greater financial, marketing and
other resources. Competitive factors could require us to reduce prices or increase spending on
product development, marketing and sales that would have a material adverse effect on our
business, results of operation and financial condition.
Potential increase of imported ammonium nitrate from Russia.
In 2000, the United States (“U.S.”) and Russia entered into a suspension agreement limiting the
quantity of, and setting the minimum prices for, fertilizer grade AN sold from Russia into the
U.S.
The Russians have requested that the suspension agreement be changed to only require that the
prices of its imported AN reflect the Russian producers full production costs, plus profit. The
Russian producers of AN could benefit from state set prices of natural gas, the principal raw
material for AN, which could be less than what U.S. producers are required to pay for their
natural gas. Other factors, however, such as transportation costs may partially offset natural gas
and production cost advantages. This change, if accepted by the U.S., could result in a substantial
increase in the amount of AN imported into the U.S. from Russia at prices that could be less than
the cost to produce AN by U.S. producers plus a profit. Russia is the world’s largest producer of
fertilizer grade AN, and we are led to believe that it has substantial excess AN production
capacity.
For 2009, net sales of fertilizer grade AN accounted for 24% and 12% of our Chemical Business
net sales and consolidated net sales, respectively. If the suspension agreement is changed, as
discussed above, this change could result in Russia substantially increasing the amount of AN
22
sold in the U.S. at prices less than the U.S. producers are required to charge in order to cover
their cost plus a profit, and could have an adverse effect on our revenues and operating results.
Potential increase of imported urea ammonium nitrate (UAN).
A large percentage of the domestic UAN market is supplied by imports. Significant additional
UAN production in the Caribbean is expected to begin in 2010, and such UAN production is
expected to be marketed in the United States. This increased foreign production of UAN is
expected to have a lower cost of production than UAN produced in the United States, and could
have an adverse impact on the domestic UAN market, and the domestic fertilizer market in
general, including the UAN and fertilizer markets of our Chemical Business, by increasing
supply and possibly reducing prices.
We are effectively controlled by the Golsen Group.
Jack E. Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members of
his immediate family (spouse and children), including Barry H. Golsen, our Vice Chairman and
President, entities owned by them and trusts for which they possess voting or dispositive power
as trustee (collectively, the “Golsen Group”) beneficially owned as of February 28, 2010, an
aggregate of 3,594,843 shares of our common stock and 1,020,000 shares of our voting preferred
stock (1,000,000 of which shares have .875 votes per share, or 875,000 votes), which together
votes as a class and represent approximately 20.3% of the voting power of our issued and
outstanding voting securities as of that date. In addition, the Golsen Group also beneficially
owned options and other convertible securities that allowed its members to acquire an additional
208,500 shares of our common stock within 60 days of February 28, 2010. Thus, the Golsen
Group may be considered to effectively control us. As a result, the ability of other stockholders
to influence our management and policies could be limited.
Loss of key personnel could negatively affect our business.
We believe that our performance has been and will continue to be dependent upon the efforts of
our principal executive officers. We cannot promise you that our principal executive officers will
continue to be available. Jack E. Golsen has an employment agreement with us. No other
principal executive has an employment agreement with us. The loss of some of our principal
executive officers could have a material adverse effect on us. We believe that our future success
will depend in large part on our continued ability to attract and retain highly skilled and qualified
personnel.
We may have inadequate insurance.
liability
insurance,
While we maintain
including certain coverage for environmental
contamination, it is subject to coverage limits and policies may exclude coverage for some types
of damages (which may include warranty and product liability claims). Although there may
currently be sources from which such coverage may be obtained, it may not continue to be
available to us on commercially reasonable terms or the possible types of liabilities that may be
incurred by us may not be covered by our insurance. In addition, our insurance carriers may not
be able to meet their obligations under the policies or the dollar amount of the liabilities may
23
exceed our policy limits. Even a partially uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of operations, financial
condition and liquidity.
Many of our insurance policies are written by Chartis, Inc., a subsidiary of AIG, and AIG
has experienced and is continuing to experience financial difficulties.
It has been publicly reported that American International Group, Inc. (“AIG”) has experienced
significant financial difficulties and
to experience significant financial
is continuing
difficulties. AIG is a holding company for several different subsidiary insurance companies,
which are now known as Chartis, Inc. Chartis provides many of our casualty, workers
compensation and other insurance policies, including, but not limited to, our general liability
policy, which includes certain pollution coverage, excess umbrella policy, and officer and
director liability policy covering us and our officers and directors against certain securities’ law
claims. We are currently involved in certain legal proceedings in which a subsidiary of AIG has
agreed to defend and to indemnify us and our subsidiaries against loss under a reservation of
rights, including one matter involving one of our executive officers. In the event of a failure of
AIG and/or its subsidiaries, it is unknown whether AIG or the applicable subsidiary that is the
insurer under our policies or the applicable regulatory authorities can comply with the insurer’s
obligations under our policies. Further, in the event of a failure by AIG and/or its subsidiaries,
we could be required to replace these policies. If it becomes necessary to replace the policies
written by Chartis, it may be difficult or impossible to replace these policies or, if we can replace
these policies, to replace them on substantially similar terms as our existing insurance policies.
We have not paid dividends on our outstanding common stock in many years.
Although we have paid dividends on our outstanding series of preferred stock (two of the three
outstanding series of preferred stock are owned by the Golsen Group), we have not paid cash
dividends on our outstanding common stock in many years, and we do not currently anticipate
paying cash dividends on our outstanding common stock. However, our board of directors has
not made a decision whether or not to pay such dividends in 2010.
Terrorist attacks and other acts of violence or war, and natural disasters (such as
hurricanes, pandemic health crisis, etc.), have and could negatively impact U.S. and foreign
companies, the financial markets, the industries where we operate, our operations and
profitability.
Terrorist attacks and natural disasters (such as hurricanes) have in the past, and can in the future,
negatively affect our operations. We cannot predict further terrorist attacks and natural disasters
in the U.S. and elsewhere. These attacks or natural disasters have contributed to economic
instability in the U.S. and elsewhere, and further acts of terrorism, violence, war or natural
disasters could further affect the industries where we operate, our ability to purchase raw
materials, our business, results of operations and financial condition. In addition, terrorist attacks
and natural disasters may directly impact our physical facilities, especially our chemical
facilities, or those of our suppliers or customers and could impact our sales, our production
capability and our ability to deliver products to our customers. In the past, hurricanes affecting
24
the Gulf Coast of the U.S. have negatively impacted our operations and those of our customers.
The consequences of any terrorist attacks or hostilities or natural disasters are unpredictable, and
we may not be able to foresee events that could have an adverse effect on our operations.
We are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness.
Because we are a holding company and operations are conducted through our subsidiaries,
principally ThermaClime and its subsidiaries, our ability to make scheduled payments of
principal and interest on our indebtedness depends, in large part, on the operating performance
and cash flows of our subsidiaries and the ability of our subsidiaries to make distributions and
pay dividends to us. Under its loan agreements, ThermaClime and its subsidiaries may only
make distributions and pay dividends to us under limited circumstances and in limited amounts.
Our net operating loss carryforwards are subject to certain limitations and examination.
We had generated significant net operating loss (“NOL”) carryforwards from certain historical
losses. During recent years, we have utilized all of the remaining federal NOL carryforwards and
a portion of our state NOL carryforwards. The utilization of these NOL carryforwards has
reduced our income tax liabilities. The federal tax returns for 1997 through 2005 remain subject
to examination for the purpose of determining the amount of remaining tax NOL and other
carryforwards. With few exceptions, the 2006-2008 years remain open for all purposes of
examination by the Internal Revenue Service (“IRS”) and other major tax jurisdictions.
Future issuance or potential issuance of our common stock could adversely affect the price
of our common stock, our ability to raise funds in new stock offerings and dilute your
percentage interest in our common stock.
Future sales of substantial amounts of our common stock or equity-related securities in the public
market, or the perception that such sales could occur, could adversely affect prevailing trading
prices of our common stock and could impair our ability to raise capital through future offerings
of equity or equity-related securities. No prediction can be made as to the effect, if any, that
future sales of shares of common stock or the availability of shares of common stock for future
sale will have on the trading price of our common stock. Such future sales could also
significantly reduce the percentage ownership of our existing common stockholders.
We are subject to a variety of factors that could discourage other parties from attempting
to acquire us.
Our certificate of incorporation provides for a staggered board of directors and, except in limited
circumstances, a two-thirds vote of outstanding voting shares to approve a merger, consolidation
or sale of all, or substantially all, of our assets. In addition, we have entered into severance
agreements with our executive officers and some of the executive officers of our subsidiaries that
provide, among other things, that if, within a specified period of time after the occurrence of a
change in control of our company, these officers are terminated, other than for cause, or the
officer terminates his employment for good reason, we must pay such officer an amount equal to
2.9 times the officer’s average annual gross salary for the last five years preceding the change in
control.
25
We have authorized and unissued (including shares held in treasury) 53,774,267 shares of
common stock and 4,229,490 shares of preferred stock as of December 31, 2009. These unissued
shares could be used by our management to make it more difficult, and thereby discourage an
attempt to acquire control of us.
We have adopted a preferred share purchase plan, which is designed to protect us against certain
creeping acquisitions, open market purchases and certain mergers and other combinations with
acquiring companies.
The foregoing provisions and agreements are designed to discourage a third party tender offer,
proxy contest, or other attempts to acquire control of us and could have the effect of making it
more difficult to remove incumbent management.
Delaware has adopted an anti-takeover law which, among other things, will delay for three years
business combinations with acquirers of 15% or more of the outstanding voting stock of
publicly-held companies (such as us), unless;
(cid:120) prior to such time the board of directors of the corporation approved the business
(cid:120)
(cid:120)
(cid:120)
combination that results in the stockholder becoming an invested stockholder;
the acquirer owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction;
two-thirds of the stockholders, other than the acquirer, vote to approve the business
combination after approval thereof by the board of directors; or
the stockholders of the corporation amends its articles of incorporation or by-laws
electing not to be governed by this provision.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Climate Control Business
Our Climate Control Business manufactures most of its geothermal and water source heat pump
products in a 270,000 square foot facility in Oklahoma City, Oklahoma. We lease this facility,
with an option to buy, through May 2016, with options to renew for three additional five-year
periods. For 2009, approximately 53% of the productive capacity of this manufacturing facility
was being utilized, based primarily on two ten-hour shifts per day and a four-day workweek. In
addition, we own a 46,000 square foot building subject to a mortgage, which is adjacent to our
existing heat pump manufacturing facility, primarily used for storage of raw material inventory.
In addition, we utilize approximately 110,000 square feet of an existing facility for a distribution
center, which facility is subject to a mortgage. We also have expanded our geothermal and water
source heat pump plant manufacturing facility with a 70,000 square foot addition primarily for
raw material storage.
26
Our Climate Control Business conducts its fan coil manufacturing operation in a facility located
in Oklahoma City, Oklahoma, consisting of approximately 265,000 square feet. We own this
facility subject to a mortgage. For 2009, our fan coil manufacturing operation was using 48% of
the productive capacity, based primarily on two ten-hour shifts per day and a four-day
workweek.
Our Climate Control Business conducts its large air handler manufacturing operation in a facility
located in Oklahoma City, Oklahoma, consisting of approximately 110,000 square feet. We own
this facility subject to a mortgage. For 2009, approximately 69% of the productive capacity of
this manufacturing facility was being utilized, based primarily on a one eight-hour shift on a
five-day workweek and a partial second shift in selected areas.
All of the properties utilized by our Climate Control Business are suitable to meet the current
needs of that business.
Chemical Business
Our Chemical Business primarily conducts manufacturing operations (a) on 150 acres of a 1,400
acre tract of land located at the El Dorado Facility, (b) on 160 acres of a 1,300 acre tract of land
located at the Cherokee Facility and (c) on property within Bayer’s complex in the Baytown,
Texas. In addition, we are in the process of restarting our previously idled Pryor Facility located
on 58 acres in Pryor, Oklahoma. The Company and/or its subsidiaries own all of its
manufacturing facilities except the Baytown Facility. Except for certain assets that are owned by
EDN for use in the production process within the Baytown Facility, the Baytown Facility is
owned by Bayer. EDN operates and maintains the Baytown Facility pursuant to the Bayer
Agreement as discussed under “Bayer Agreement” of Item 1 of this report. Certain real property
and equipment located at the El Dorado and Cherokee Facilities are being used to secure a $50
million term loan. For 2009, the following facilities were utilized based on continuous operation:
Percentage of
Capacity
El Dorado Facility (1)
Cherokee Facility (2)
Baytown Facility
76 %
100 %
61 %
(1) The percentage of capacity for the El Dorado Facility relates to its nitric acid capacity. The El
Dorado Facility has capacity to produce other nitrogen products in excess of its nitric acid
capacity.
(2) The percentage of capacity for the Cherokee Facility relates to its ammonia production
capacity. The Cherokee Facility has additional capacity for nitric acid, AN and UAN in excess of
its ammonia capacity.
In addition to the El Dorado and Cherokee Facilities, our Chemical Business distributes its
agricultural products through 15 wholesale and retail distribution centers, with 13 of the centers
located in Texas (10 of which we own and 3 of which we lease); 1 center located in Tennessee
(owned); and 1 center located in Missouri (owned).
27
See discussion above under “Chemical Business - Agricultural Products” of Item 1 concerning
production of anhydrous ammonia in 2010 from the Pryor Facility.
All of the properties utilized by our Chemical Business are suitable and adequate to meet the
current needs of that business.
ITEM 3. LEGAL PROCEEDINGS
1. Environmental See “Business-Environmental Matters” for a discussion as to:
(cid:120) certain environmental matters relating to air and water issues at our El Dorado Facility;
and
(cid:120) certain environmental remediation matters at our former Hallowell Facility.
2. Other
The Jayhawk Group
In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC,
Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the
manager and sole member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the
Jayhawk Group agreed, among other things, that if we undertook, in our sole discretion, within
one year from the date of agreement a tender offer for our Series 2 $3.25 convertible,
exchangeable Class C preferred stock (“Series 2 Preferred”) or to issue our common stock for a
portion of our Series 2 Preferred pursuant to a private exchange, that it would tender or exchange
an aggregate of no more than 180,450 shares of the 340,900 shares of the Series 2 Preferred
beneficially owned by the Jayhawk Group, subject to, among other things, the entities owned and
controlled by Jack E. Golsen, our Chairman and Chief Executive Officer (“Golsen”), and his
immediate family, that beneficially own Series 2 Preferred only being able to exchange or tender
approximately the same percentage of shares of Series 2 Preferred beneficially owned by them as
the Jayhawk Group is able to tender or exchange under the terms of the agreement. In addition,
under the agreement, the Jayhawk Group agreed to vote its shares of our common stock and
Series 2 Preferred “for” an amendment to the Certificate of Designation covering the Series 2
Preferred to allow us:
(cid:120)
(cid:120)
for a period of five years from the completion of an exchange or tender to repurchase,
redeem or otherwise acquire shares of our common stock, without approval of the
outstanding Series 2 Preferred irrespective that dividends are accrued and unpaid with
respect to the Series 2 Preferred; or
to provide that holders of Series 2 Preferred may not elect two directors to our board of
directors when dividends are unpaid on the Series 2 Preferred if less than 140,000
shares of Series 2 Preferred remain outstanding.
During 2007, we made a tender offer for our outstanding Series 2 Preferred at the rate of 7.4
shares of our common stock for each share of Series 2 Preferred so tendered. In July 2007, we
redeemed the balance of our outstanding shares of Series 2 Preferred. Pursuant to its terms, the
Series 2 Preferred was convertible into 4.329 shares of our common stock for each share of
28
Series 2 Preferred. As a result of the redemption, the Jayhawk Group converted the balance of its
Series 2 Preferred pursuant to the terms of the Series 2 Preferred in lieu of having its shares
redeemed.
During November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit styled
Jayhawk Capital Management, LLC, et al. v. LSB Industries, Inc., et al., in the United States
District Court for the District of Kansas at Kansas City. During March 2009, the Jayhawk Group
amended its complaint alleging that the Jayhawk Group should have been able to tender all of its
Series 2 Preferred pursuant to the tender offer, notwithstanding the above-described agreement,
based on the following claims against us and Golsen:
fraudulent inducement and fraud,
(cid:120)
(cid:120) violation of 10(b) of the Exchange Act and Rule 10b-5,
(cid:120) violation of 17-12A501 of the Kansas Uniform Securities Act, and
(cid:120) breach of contract.
The Jayhawk Group seeks damages in an unspecified amount based on the additional number of
common shares it allegedly would have received on conversion of all of its Series 2 Preferred
through the February 2007 tender offer, plus punitive damages. In addition, the amended
complaint seeks damages of approximately $4,000,000 for accrued and unpaid dividends it
purports are owed as a result of Jayhawk’s July 2007 conversion of its remaining shares of Series
2 Preferred. In May 2008, the General Counsel for the Jayhawk Group offered to settle its claims
against us and Golsen in return for a payment of $100,000, representing the approximate legal
fees it had incurred investigating the claims at that time. Through counsel, we verbally agreed to
the settlement offer and confirmed the agreement by e-mail. Afterward, the Jayhawk Group’s
General Counsel purported to withdraw the settlement offer, and asserted that Jayhawk is not
bound by any settlement agreement. We contend that the settlement agreement is binding on the
Jayhawk Group. Both Golsen and we have filed motions to dismiss the plaintiff’s complaint in
the federal court, and such motions to dismiss are pending. We intend to contest the lawsuit
vigorously, and will assert that Jayhawk is bound by an agreement to settle the claims for
$100,000. Our insurer, Chartis, has agreed to defend this lawsuit on our behalf and on behalf of
Golsen and to indemnify under a reservation of rights to deny liability under certain conditions.
We have incurred expenses associated with this matter up to our insurance deductible of
$250,000. We believe our insurance coverage is adequate to cover any currently foreseeable
losses associated with the Jayhawk claims. As a result, no liability remains outstanding relating
to this matter as of December 31, 2009.
Other Claims and Legal Actions
Wetherall v. Climate Master was a proposed class action filed in the Illinois state district court in
September 2007 alleging that certain evaporator coils sold by one of our subsidiaries in the
Climate Control Business, Climate Master, Inc. (“Climate Master”), in the state of Illinois from
1990 to approximately 2003 were defective. Prior to the hearing on class certification, the trial
court granted Climate Master’s motion for summary judgment and entered judgment in favor of
Climate Master and against the plaintiffs based upon the statute of limitations and further denied
class certification as moot because there were no other class representatives. Prior to the appeal
29
deadline, a settlement agreement was entered into between the plaintiffs and Climate Master
whereby the plaintiffs waived any right to appeal the judgment in favor of Climate Master for an
insignificant amount, which consideration has been paid by Climate Master.
We are also involved in various other claims and legal actions including claims covered by our
general liability insurance, which generally includes a deductible of $250,000 per claim. For any
claims or legal actions that management, after consultation with legal counsel, assessed the
likelihood of our liability as probable, we have recognized an estimated liability up to the
applicable deductible. In the opinion of management, after consultation with legal counsel, if
those claims which we have not recognized were determined adversely to us, it would not have a
material effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our officers serve one-year terms, renewable on an annual basis by the board of directors.
Information regarding the Company's executive officers is as follows:
Jack E. Golsen (1) - Chairman of the Board and Chief Executive Officer. Mr. Golsen, age 81
first became a director in 1969. His term will expire in 2010. Mr. Golsen, founder of the
Company, is our Chairman of the Board of Directors and Chief Executive Officer and has served
in those capacities since our inception in 1969. Mr. Golsen served as our President from 1969
until 2004. During 1996, he was inducted into the Oklahoma Commerce and Industry Hall of
Honor as one of Oklahoma’s leading industrialists. Mr. Golsen has a Bachelor of Science degree
from the University of New Mexico. Mr. Golsen is a Trustee of Oklahoma City University.
During his career, he acquired or started the companies which formed LSB. He has served on the
boards of insurance companies, several banks and was Board Chairman of Equity Bank for
Savings N.A., which was formerly owned by LSB. In 1972, Mr. Golsen was recognized
nationally as the person who prevented a widespread collapse of the Wall Street investment
banking industry. Refer to “The Second Crash” by Charles Ellis, and five additional books about
the Wall Street crisis.
Barry H. Golsen (1) - Vice Chairman of the Board, President, and President of the Climate
Control Business. Mr. Golsen, age 59, first became a director in 1981. His term will expire in
2012. Mr. Golsen was elected President of the Company in 2004. Mr. Golsen has served as our
Vice Chairman of the Board of Directors since August 1994, and has been the President of our
Climate Control Business for more than five years. Mr. Golsen also served as a director of the
Oklahoma branch of the Federal Reserve Bank. Mr. Golsen has both his undergraduate and law
degrees from the University of Oklahoma.
David R. Goss - Executive Vice President of Operations and Director. Mr. Goss, age 69, first
became a director in 1971. His term will expire in 2012. Mr. Goss, a certified public accountant,
is our Executive Vice President of Operations and has served in substantially the same capacity
for more than five years. Mr. Goss is a graduate of Rutgers University.
30
Tony M. Shelby - Executive Vice President of Finance and Director. Mr. Shelby, age 68, first
became a director in 1971. His term will expire in 2011. Mr. Shelby, a certified public
accountant, is our Executive Vice President of Finance and Chief Financial Officer, a position he
has held for more than five years. Prior to becoming our Executive Vice President of Finance
and Chief Financial Officer, he served as Chief Financial Officer of a subsidiary of the Company
and was with the accounting firm of Arthur Young & Co., a predecessor to Ernst & Young LLP.
Mr. Shelby is a graduate of Oklahoma City University.
Jim D. Jones (2) - Senior Vice President and Treasurer. Mr. Jones, age 67, has been Senior Vice
President and Treasurer since July 2003, and has served as an officer of the Company since April
1977. Mr. Jones is a certified public accountant and was with the accounting firm of Arthur
Young & Co., a predecessor to Ernst & Young LLP. Mr. Jones is a graduate of the University of
Central Oklahoma.
David M. Shear (1) - Senior Vice President and General Counsel. Mr. Shear, age 50, has been
Senior Vice President since July 2004 and General Counsel and Secretary since 1990. Mr. Shear
attended Brandeis University, graduating cum laude in 1981. At Brandeis University, Mr. Shear
was the founding Editor-In-Chief of Chronos, the first journal of undergraduate scholarly
articles. Mr. Shear attended the Boston University School of Law, where he was a contributing
Editor of the Annual Review of Banking Law. Mr. Shear acted as a staff attorney at the Bureau
of Competition with the Federal Trade Commission from 1985 to 1986. From 1986 through
1989, Mr. Shear was an associate in the Boston law firm of Weiss, Angoff, Coltin, Koski and
Wolf.
Michael D. Tepper – Senior Vice President of International Operations. Mr. Tepper, age 71, has
served in substantially the same capacity for more than five years. Mr. Tepper is a graduate of
the Wharton School of the University of Pennsylvania.
Michael G. Adams - Vice President and Corporate Controller. Mr. Adams, age 60, was
appointed to this position effective October 16, 2008 and has served as an officer of the
Company since March 1990. Mr. Adams is a certified public accountant and was with the
accounting firm of Arthur Young & Co., a predecessor to Ernst & Young LLP. Mr. Adams is a
graduate of the University of Oklahoma.
Harold L. Rieker Jr. - Vice President and Principal Accounting Officer. Mr. Rieker, age 49,
was appointed to this position effective October 16, 2008 and has served as an officer of the
Company since March 2006. Mr. Rieker is a certified public accountant and was with the
accounting firm of Grant Thornton LLP. Mr. Rieker is a graduate of the University of Central
Oklahoma.
(1) Barry H. Golsen is the son of Jack E. Golsen and David M. Shear is married to the niece of
Jack E. Golsen.
(2) As previously disclosed, the Company and Mr. Jones entered into a settlement order with the
SEC. Under the order, the Company and Mr. Jones agreed, without admitting or denying any
wrongdoing, not to commit violations of certain provisions of the Securities Exchange Act of
1934, as amended. Mr. Jones also consented not to appear before the SEC as an accountant,
but can apply for reinstatement at any time after July 2011.
31
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
On October 28, 2008, our common stock began trading on the New York Stock Exchange under
the symbol “LXU”. Prior to that date, our common stock traded on the American Stock
Exchange under the same symbol. The following table shows, for the periods indicated, the high
and low sales prices.
Year Ended
December 31,
2009
High
$ 10.87
$ 18.16
$ 18.31
$ 15.70
Low
$ 6.62
$ 9.67
$ 14.85
$ 10.62
2008
High
$ 28.80
$ 20.83
$ 24.59
$ 14.67
Low
$ 13.80
$ 13.45
$ 13.11
6.65
$
Quarter
First
Second
Third
Fourth
Stockholders
As of February 28, 2010, we had 665 record holders of our common stock. This number does not
include investors whose ownership is recorded in the name of their brokerage company.
Dividends
We are a holding company and, accordingly, our ability to pay cash dividends on our preferred
stock and our common stock depends in large part on our ability to obtain funds from our
subsidiaries. The ability of ThermaClime (which owns substantially all of the companies
comprising the Climate Control Business and Chemical Business) and its wholly-owned
subsidiaries to pay dividends and to make distributions to us is restricted by certain covenants
contained in the $50 million revolving credit facility (the “Working Capital Revolver Loan”) and
the $50 million loan agreement due 2012 (the “Secured Term Loan”). Under the terms of these
agreements, ThermaClime cannot transfer funds to us in the form of cash dividends or other
distributions or advances, except for:
(cid:120)
the amount of income taxes that ThermaClime would be required to pay if they were
not consolidated with us;
(cid:120) an amount not to exceed fifty percent (50%) of ThermaClime's consolidated net
income during each fiscal year determined in accordance with generally accepted
accounting principles plus amounts paid to us within the first bullet above, provided
that certain other conditions are met;
the amount of direct and indirect costs and expenses incurred by us on behalf of
ThermaClime pursuant to a certain services agreement;
(cid:120)
32
(cid:120) amounts under a certain management agreement between us and ThermaClime,
provided certain conditions are met, and
(cid:120) outstanding loans entered into subsequent to November 2, 2007 in excess of $2.0
million at any time.
In 2001, we issued shares of Series D 6% cumulative, convertible Class C preferred stock
(“Series D Preferred”) and in 1985, we issued shares of Series B 12% convertible, cumulative
preferred stock ("Series B Preferred"). As of December 31, 2009, we have issued and
outstanding 1,000,000 shares of Series D Preferred, 20,000 shares of Series B Preferred, and 511
shares of noncumulative redeemable preferred stock (“Noncumulative Preferred”). Each share of
preferred stock is entitled to receive an annual dividend, only when declared by our board of
directors, payable as follows:
(cid:120) Series D Preferred at the rate of $.06 a share payable on October 9, which dividend is
cumulative;
(cid:120) Series B Preferred at the rate of $12.00 a share payable January 1, which dividend is
cumulative; and
(cid:120) Noncumulative Preferred at the rate of $10.00 a share payable April 1, which is
noncumulative.
On February 18, 2010, our board of directors declared the following dividends:
(cid:120) $0.06 per share on our outstanding Series D Preferred for an aggregate dividend of
$60,000, payable on March 31, 2010;
(cid:120) $12.00 per share on our outstanding Series B Preferred for an aggregate dividend of
$240,000, payable on March 31, 2010; and
(cid:120) $10.00 per share on our outstanding Noncumulative Preferred for an aggregate
dividend of approximately $5,100, payable on April 1, 2010.
All shares of Series D Preferred and Series B Preferred are owned by the Golsen Group.
Holders of our common stock are entitled to receive dividends only when and if declared by our
board of directors. We have not paid cash dividends on our outstanding common stock in many
years, and we do not currently anticipate paying cash dividends on our outstanding common
stock in the near future. However, our board of directors has not made a decision whether or not
to pay such dividends on our common stock in 2010.
Equity Compensation Plans
See discussions relating to our equity compensation plans under Item 12 of Part III contained in
this report.
33
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Common Stock - During the three months ended December 31, 2009, the Company and
affiliated purchasers, as defined, purchased treasury stock as shown in the following table:
(a) Total
number of
shares of
common
stock
acquired (1)
(b) Average
price paid
per share
of common
stock (1)
(c) Total number of
shares of common stock
purchased as
part of publicly
announced plans
or programs (2)
(d) Maximum number
(or approximate
dollar value) of
shares of common
stock that may yet
be purchased under
the plans or programs
-
$
-
-
275,900
$ 11.60
275,900
-
275,900
-
$
$ 11.60
-
275,900
See (2)
Period
October 1, 2009 -
October 31, 2009
November 1, 2009 -
November 30, 2009
December 1, 2009 -
December 31, 2009
Total
(1) During the fourth quarter of 2009, we purchased these shares of common stock at market
prices from unrelated third parties and are being held as treasury stock.
(2) As previously reported, our board of directors enacted a stock repurchase authorization for
an unstipulated number of shares for an indefinite period of time commencing March 12, 2008.
The stock repurchase authorization will remain in effect until such time as of our board of
directors decides to end it.
2007 Debentures - During the three months ended December 31, 2009, the Company and
affiliated purchasers, as defined, purchased its 5.5% Convertible Senior Subordinated Notes due
2012 (“2007 Debentures”) as shown in the following table:
(a) Total
number
of units
acquired (A)
(b) Average
price paid
per unit (A)
(c) Total number of
units purchased as
part of publicly
announced plans
or programs
(d) Maximum number
(or approximate
dollar value) of
units that may yet
be purchased under
the plans or programs
-
-
$
$
-
-
-
-
1,000
1,000
$ 985.00
$ 985.00
1,000
1,000
29,400
Period
October 1, 2009 -
October 31, 2009
November 1, 2009 -
November 30, 2009
December 1, 2009 -
December 31, 2009
Total
(A) One unit represents a $1,000 principal amount of the debenture.
34
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3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's 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-K and our December 31, 2009 Consolidated Financial Statements included
elsewhere in this report. Certain statements contained in this MD&A may be deemed to be
forward-looking statements. See "Special Note Regarding Forward-Looking Statements."
Overview
General
We are a manufacturing, marketing and engineering company, operating through our
subsidiaries. Our wholly-owned subsidiary, ThermaClime, through its subsidiaries, owns a
substantial portion of our following core businesses:
(cid:120) Climate Control Business manufactures and sells a broad range of air conditioning and
heating products in the niche markets we serve consisting of geothermal and water
source heat pumps, hydronic fan coils, large custom air handlers and other related
products used to control the environment in commercial and residential new building
construction, renovation of existing buildings and replacement of existing systems.
For 2009, approximately 50% of our consolidated net sales relates to the Climate
Control Business.
(cid:120) Chemical Business manufactures and sells nitrogen based chemical products produced
from three plants located in Arkansas, Alabama and Texas for the industrial, mining
and agricultural markets. In addition, we are restarting our previously idled Pryor
Facility located in Pryor, Oklahoma. Our products include industrial and fertilizer
grade AN, UAN, anhydrous ammonia, sulfuric acids, nitric acids in various
concentrations, nitrogen solutions and various other products. For 2009,
approximately 49% of our consolidated net sales relates to the Chemical Business.
Certain of our other subsidiaries outside of ThermaClime own facilities and operations, including
the Pryor Facility, within our above described core businesses.
As discussed below under “Chemical Business,” our project to begin production of anhydrous
ammonia and UAN at the Pryor Facility is still underway despite numerous delays. We began
production of anhydrous ammonia, which is the initial feedstock for the production of UAN, in
January 2010 but at production rates lower than our targeted rates.
Economic Conditions
Our two business segments serve several diverse markets. We consider market fundamentals for
each market individually as we evaluate economic conditions.
Climate Control Business - The downturn in commercial and residential construction has had a
significant adverse effect on our Climate Control Business’ product order level and sales in
2009. Based upon published reports of leading indicators, including the Construction Market
Forecasting Service published by McGraw-Hill, and the national architecture billings index
36
published by AIA, the overall commercial construction sector is not expected to recover during
2010. On the other hand, McGraw-Hill has projected an increase in both single-family
residential and multi-family construction during 2010. Another factor that may affect product
order rates going forward is the potential for growth in our highly energy-efficient geothermal
water-source heat pumps, which could benefit significantly from government stimulus programs,
including various tax incentives, although we can not predict the impact these programs will
have on our business.
The Chemical Business - During 2009, our Chemical Business’ industrial and mining sales
volumes, expressed in tons shipped, were down 11% and 24%, respectively. However,
approximately 60% of our 2009 sales were into industrial and mining markets. Approximately
75% of these sales are to customers that have contractual obligations to purchase a minimum
quantity or allow us to recover our cost plus a profit, irrespective of the volume of product sold.
It is unclear to us how these markets will respond in 2010 but it appears that market demand for
these products could be flat to slightly up for the first half of 2010.
The remaining 40% of our Chemical Business’ 2009 sales were made into the agricultural
fertilizer markets to customers that do not purchase pursuant to contractual arrangements. Our
agricultural sales volumes and margins depend upon the supply of and the demand for fertilizer,
which in turn depends on the market fundamentals for crops including corn, wheat and forage.
The current outlook remains uncertain but most market indicators, including reports in Green
Markets, Fertilizer Week and other industry publications, point to positive supply and demand
fundamentals for the types of nitrogen fertilizer products we produce and sell. However, it is
possible that the fertilizer outlook could be adversely affected by lower grain prices,
unanticipated spikes in natural gas prices, or unfavorable weather conditions.
2009 Results
Our consolidated net sales for 2009 were $531.8 million compared to $749.0 million for 2008.
The sales decrease of approximately $217.2 million includes a decrease of $45.2 million in our
Climate Control Business and a decrease of $166.3 million in our Chemical Business. The
Climate Control Business decrease is due primarily to lower customer product orders received
due to the economic downturn. The Chemical Business’ decrease is primarily due to steep
declines in our raw material costs resulting in lower selling prices. This decline is also due to the
reduction in volume at the Baytown Facility, which had minimal impact on our operating results
due to the fixed cost pass-through provisions in the Bayer agreements.
Our consolidated operating income was $40.7 million compared to $59.2 million in 2008. The
decrease in operating income of approximately $18.5 million was primarily the result of a $16.2
million decrease in our Chemical Business operating income as discussed below. In addition, our
Climate Control Business’ operating income declined $1.2 million on lower sales but
experienced an improved gross profit percentage and our general corporate expense and other
business operations increased approximately $1.0 million as discussed below under “Results of
Operations.”
37
The $16.2 million decrease in our Chemical Business’ 2009 operating income includes start-up
expenses associated with the Pryor Facility of approximately $17.2 million compared to $2.4
million for 2008. In addition, we recognized other operating income of $7.6 million from a
litigation judgment during 2008. Eliminating those two factors, our Chemical Business’ 2009
operating income increased $6.2 million primarily as a result of 2008 firm sales commitments
fulfilled in 2009 resulting in higher gross profit compared to then current market prices ($6.6
million), reduced losses on natural gas and ammonia hedge contracts ($6.4 million), and
improved plant efficiencies ($3.9 million), partially offset by lower gross profit on agricultural
products sales ($10.8 million).
In addition, our interest expense was $6.7 million for 2009 compared to $11.4 million for 2008, a
decrease of approximately $4.7 million. This decrease primarily relates to a decrease in losses of
$2.1 million associated with our interest rate contracts, a decrease of $1.6 million as the result of
the acquisitions of the 2007 Debentures and a decrease of $1.1 million due to the decline in the
LIBOR rate associated with the Secured Term Loan.
As discussed further below under “Liquidity and Capital Resources,” during 2009, we continued
to acquire through unsolicited transactions a portion of the 2007 Debentures. As a result, we
recognized a gain on extinguishment of debt of $1.8 million compared to $5.5 million in 2008.
Our resulting effective income tax rate for 2009 was approximately 40.7%, which includes an
additional provision relating to the adjustments reconciling the 2008 federal and state income tax
returns to the 2008 estimated tax provision and the impact of lower taxable income for 2009,
which limited the amount of the manufacturing deduction that can be utilized. For 2008, our
resulting effective income tax rate was approximately 33.9%, which included a net deferred
income tax benefit of $1.6 million as the result of a detailed analysis performed on all our
deferred tax assets and liabilities and the realizability of those deferred tax assets.
Climate Control Business
Our Climate Control sales for 2009 were $266.2 million or 14.5% below 2008. The decrease in
net sales resulted in a 44.4% decline in sales of our fan coil products and a 5.8% decline in our
geothermal and water source heat pump products partially offset by an 8.1% increase in other
HVAC products. Based upon recent customer product order levels and published reports of
leading indicators, including reports by McGraw-Hill and AIA, the overall commercial
construction sector is not expected to recover during 2010. On the other hand, McGraw-Hill has
projected an increase in both single-family residential and multi-family construction during
2010.
We continue to closely follow the contraction and volatility in the credit markets and have
attempted to assess the impact on the commercial and residential construction sectors that we
serve, including but not limited to new construction and/or renovation of facilities in the
following sectors:
(cid:120) Multi-Family Residential (apartments and condominiums)
(cid:120) Single-Family Residential
(cid:120) Lodging
38
(cid:120) Education
(cid:120) Healthcare
(cid:120) Offices
(cid:120) Manufacturing
During 2009, approximately 77% of our Climate Control Business’ sales were to the commercial
and multi-family construction markets, and the remaining 23% were sales of geothermal heat
pumps (“GHPs”) to the single-family residential market.
For 2009, the product order level was $207.2 million as compared to $305.9 million for 2008, a
decrease of $98.7 million or 32.3%. Our product order level consists of confirmed purchase
orders from customers, those that have been accepted and received credit approval. The net
decrease in 2009 product orders includes a decrease of approximately 17.0% in product orders
for residential GHPs and a 36.4% decrease in product orders for commercial products.
Customer product orders received for all Climate Control products in the fourth quarter of 2009
were $48.5 million compared to $59.1 million in the fourth quarter of 2008 and compared to
$49.1 million for the third quarter of 2009. Our backlog was $68.5 million at December 31,
2008, $39.4 million at September 30, 2009 and $32.2 million at December 31, 2009. The
backlog consists of confirmed customer orders for product to be shipped at a future date. At
December 31, 2009, included within our reported backlog is a confirmed order for approximately
the customer pending refinancing
$3.2 million
arrangements. Historically, we have not experienced significant cancellations relating to our
backlog of confirmed customer product orders and we expect to ship substantially all of these
orders within the next twelve months; however, due to the current economic conditions in the
markets we serve, it is possible that some of our customers could cancel a portion of our backlog
or extend the shipment terms beyond twelve months. For 2010, the potential sales level remains
uncertain. For the first two months of 2010, our new orders received were approximately $32.5
million and our backlog was approximately $31.3 million at February 28, 2010.
that has been placed on hold by
Our GHPs, use a form of renewable energy and can reduce energy costs up to 80%, under certain
conditions. The American Recovery and Reinvestment Act of 2009 (“Act”) provides a 30% tax
credit for homeowners who install GHPs. For businesses that install GHPs, the Act includes a
10% tax credit, 50% first year depreciation and five year accelerated depreciation for the balance
of the system cost.
Although we expect to see continued slowness in our Climate Control Business’ results in the
short-term, we have significantly increased our sales and marketing efforts for all of our Climate
Control products. Over time, we believe that the recently enacted federal tax credits for GHPs
should have a positive impact on sales of those highly energy efficient and green products.
Chemical Business
During 2009, our Chemical Business operated three chemical production facilities: the El
Dorado Facility, the Cherokee Facility and the Baytown Facility. The El Dorado and Baytown
Facilities produce nitrogen products from anhydrous ammonia that is delivered by pipeline, and
39
the El Dorado Facility also produces sulfuric acid from recovered elemental sulfur delivered by
truck and rail. The Cherokee Facility produces anhydrous ammonia and nitrogen products
primarily from natural gas that is delivered by pipeline but can also receive supplemental
anhydrous ammonia by truck, rail and barge.
The project to begin production of anhydrous ammonia and UAN at the Pryor Facility is still
underway despite numerous delays. In January 2010, we began production of anhydrous
ammonia, which is the initial feedstock for the production of UAN, but at production rates lower
than our targeted rates. We are continuing to produce and store anhydrous ammonia while we are
activating the Urea plant. The start up of the Urea plant has encountered delays, due to extended
lead times to refurbish certain major equipment items, resulting in significant increases in our
previous estimates of the start up costs. We believe that some of the delays and additional costs
resulted from faulty workmanship performed by certain contractors. We are investigating
potential remedies for recovery of some of the cost of the delays. For 2009, we incurred
approximately $17.2 million of expenses primarily consisting of start up costs. Currently, the
Pryor Facility monthly operating start up costs, prior to production of UAN at sustained targeted
rates, are approximately $1.6 million in addition to variable costs such as natural gas and
electricity. We have funded the start up of the Pryor Facility from our available cash on hand and
working capital. At the Pryor Facility, natural gas is a primary raw material for producing UAN
and anhydrous ammonia.
Our Chemical Business’ primary markets are industrial, mining and agricultural. The sales in all
three sectors for 2010 will continue to be affected by the overall economic conditions.
Our Chemical Business reported net sales for 2009 of $257.8 million compared to $424.1 million
for 2008, a decrease of $166.3 million or 39.2%. The decrease in sales dollars is primarily
attributable to steep declines in commodity prices as discussed below and the impact of the
Bayer Agreement as discussed below under “Liquidity and Capital Resources – Bayer
Agreement.” The decline in commodity prices resulted in the decrease in the selling prices for
the products produced at our facilities as well as steep declines in our raw material feedstock
costs. Sales are also down due to fewer tons sold in our mining and industrial acids markets as
discussed below.
Our primary raw material feedstocks (anhydrous ammonia, natural gas and sulfur) are
commodities subject to significant price fluctuations, and are generally purchased at prices in
effect at the time of purchase. During 2009, the average prices for those commodities compared
to last year were as follows:
Natural gas average price per MMBtu based upon
Tennessee 500 pipeline pricing point
Ammonia average price based upon low Tampa
metric price per ton
Sulfur price based upon Tampa average quarterly price
per long ton
2009
2008
$
$
$
4.38
272
11
$
$
$
9.62
587
368
40
The substantial decline in the cost of the commodities was accompanied by similar declines in
selling prices of our products.
Approximately 60% of our Chemical Business sales for 2009 were in the industrial and mining
markets consisting of:
(cid:120) nitric acid, sulfuric acid and anhydrous ammonia sold to industrial customers; and
(cid:120)
industrial grade AN and nitrogen solutions sold to mining customers.
Most of these sales were pursuant to sales contracts and/or pricing arrangements on terms that
include the cost of raw material feedstock as a pass through component in the sales price.
For 2009, approximately 40% of our Chemical Business sales were agricultural products,
primarily nitrogen fertilizer sold in the agricultural markets including:
(cid:120) AN produced at our El Dorado Facility from purchased anhydrous ammonia,
(cid:120) UAN produced at our Cherokee Facility primarily from natural gas, and
(cid:120) other fertilizer products sold through our agricultural distribution centers.
The agricultural product sales, unlike the majority of our industrial and mining sales, are sold at
the market price in effect at the time of sale or at a negotiated future price.
The percentage change in sales (volume and dollars) for 2009 compared to 2008 is as follows:
Chemical products:
Agricultural
Industrial acids and other
Mining
Total weighted-average change
Percentage Change of
Dollars
Tons
Increase (Decrease)
11 %
(11)%
(24)%
(7)%
(32 )%
(41 )%
(47 )%
(39 )%
The disproportionate percentage change relating to tons sold compared to sales dollars for our
Chemical products is due primarily to declines in prices for most commodities, including natural
gas, anhydrous ammonia and sulfur, as compared to 2008, resulting in lower selling prices per
ton of product sold. The reduction in tons sold to industrial and mining customers is a direct
result of lower customer demand as a result of the economic downturn. However, a significant
amount of the lower tonnage volume was related to customers that were contractually bound to
pay for the fixed costs plus a profit for those tons not taken.
We produce AN and UAN fertilizers for the agricultural markets. For 2009, demand for fertilizer
grade AN was strong resulting in a 36% increase in tons sold. Conversely, the demand for UAN
was relatively weak resulting in an 11% decrease in tons sold as compared to 2008. We believe
that the lower shipments of UAN were due to market conditions, including poor weather
conditions, a reluctance of distributors to build inventory due to pricing concerns and possibly
less nitrogen applied to corn during the spring.
41
We believe that global demand for corn, wheat and other grains will continue to be the
fundamental drivers of nitrogen fertilizer demand.
Liquidity and Capital Resources
The following is our cash and cash equivalents, total interest bearing debt and stockholders’
equity:
Cash and cash equivalents
Short-term investments (1)
Long-term debt:
2007 Debentures due 2012
Secured Term Loan due 2012
Other
Total long-term debt
December 31,
2009
December 31,
2008
(In Millions)
$
$
61.7
10.1
71.8
$
29.4
50.0
22.4
$ 101.8
$ 46.2
-
$ 46.2
$ 40.5
50.0
14.7
$ 105.2
Total stockholders’ equity
$ 150.6
$ 130.0
(1) These investments consist of certificates of deposit with an original maturity of 13 weeks. All
of these investments were held by financial institutions within the United States and none of
these investments were in excess of the federally insured limits.
At December 31, 2009, our cash, cash equivalents and short-term investments totaled $71.8
million and our $50 million Working Capital Revolver Loan was undrawn and available to fund
operations, if needed, subject to the amount of our eligible collateral and outstanding letters of
credit. At December 31, 2009, the ratio between long-term debt, before the use of cash on hand
and short-term investments to pay down debt, and stockholders’ equity was approximately 0.7 to
1 as compared to 0.8 to 1 at December 31, 2008.
For 2010, we expect our primary cash needs will be for working capital and capital expenditures.
We and our subsidiaries plan to rely upon internally generated cash flows, cash and short-term
investments on hand, secured property and equipment financing, and the borrowing availability
under the Working Capital Revolver Loan to fund operations and pay obligations. Also see
discussion below concerning our universal shelf registration statement. Our internally generated
cash flows and our liquidity could be affected by possible declines in sales volumes resulting
from the uncertainty relative to the current economic conditions.
The 2007 Debentures bear interest at the annual rate of 5.5% and mature on July 1, 2012. Interest
is payable in arrears on January 1 and July 1 of each year. As of December 31, 2009, we have
acquired $30.6 million aggregate principal amount of these debentures including $11.1 million
during 2009 as discussed below under “Authorization to Repurchase 2007 Debentures and
Stock.”
42
The Secured Term Loan matures on November 2, 2012 and accrues interest at a defined LIBOR
rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at December
31, 2009 was approximately 3.28%. The Secured Term Loan requires only quarterly interest
payments with the final payment of interest and principal at maturity. The Secured Term Loan is
secured by the real property and equipment located at the El Dorado and Cherokee Facilities.
Since the 2007 Debentures and the Secured Term Loan both mature in 2012, we are currently
reviewing various alternatives for the retirement of these obligations, as they become due.
ThermaClime and certain of its subsidiaries are subject to numerous covenants under the Secured
Term Loan including, but not limited to, limitation on the incurrence of certain additional
indebtedness and liens, limitations on mergers, acquisitions, dissolution and sale of assets, and
limitations on declaration of dividends and distributions to us, all with certain exceptions.
ThermaClime’s Working Capital Revolver Loan is available to fund its working capital
requirements, if necessary, through April 13, 2012. Under the Working Capital Revolver Loan,
ThermaClime and its subsidiaries (the “Borrowers”) may borrow on a revolving basis up to
$50.0 million based on specific percentages of eligible accounts receivable and inventories. At
December 31, 2009, we had approximately $49.2 million of borrowing availability under the
Working Capital Revolver Loan based on eligible collateral and outstanding letters of credit.
The Working Capital Revolver Loan and the Secured Term Loan have financial covenants that
are discussed below under “Subordinated Debentures and Loan Agreements - Terms and
Conditions”. The Borrowers’ ability to maintain borrowing availability under the Working
Capital Revolver Loan depends on their ability to comply with the terms and conditions of the
loan agreements and their ability to generate cash flow from operations. The Borrowers are
restricted under their credit agreements as to the funds they may transfer to the Company and
their non-ThermaClime affiliates and certain ThermaClime subsidiaries. This limitation does not
prohibit payment to the Company of amounts due under a Services Agreement, Management
Agreement and a Tax Sharing Agreement. Based upon our current projections, we believe that
cash, short-term investments and borrowing availability under our Working Capital Revolver
Loan is adequate to fund operations during 2010.
Although we do not have any current plans to offer or sell any securities, in September 2009, we
filed a universal shelf registration statement on Form S-3, with the SEC, which was declared
effective by the SEC on November 20, 2009. The shelf registration statement provides that we
could offer and sell up to $200 million of our securities consisting of equity (common and
preferred), debt (senior and subordinated), warrants and units, or a combination thereof. This
disclosure shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there
be any sale of these securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any such state.
Income Taxes
The utilization of the NOL carryforwards reduced our income tax liabilities in prior years.
However, we utilized our remaining federal NOL carryforwards during 2008. As a result, we are
recognizing and paying federal income taxes at regular corporate tax rates.
43
The federal tax returns for 1997 through 2005 remain subject to examination for the purpose of
determining the amount of tax NOL and other carryforwards. With few exceptions, the 2006-
2008 years remain open for all purposes of examination by the IRS and other major tax
jurisdictions.
Capital Expenditures
Capital Expenditures in 2009
Cash used for capital expenditures during 2009 was $28.9 million, including $5.1 million
primarily for production equipment and other upgrades for additional capacity in our Climate
Control Business and $23.3 million for our Chemical Business, primarily for process and
reliability improvements of our operating facilities, including $8.1 million associated with the
Pryor Facility and approximately $0.5 million to maintain compliance with environmental laws,
regulations and guidelines. These capital expenditures were primarily funded from working
capital and from secured financing totaling $8.5 million obtained by refinancing certain existing
assets.
Committed and Planned Capital Expenditures for 2010
At December 31, 2009, we had committed capital expenditures of approximately $7.9 million for
2010. The expenditures included $6.6 million for process and reliability improvements in our
Chemical Business, including $1.7 million relating to the Pryor Facility and approximately $0.9
million to maintain compliance with environmental laws, regulations and guidelines. In addition,
our commitments included $1.3 million primarily for facilities expansion and upgrades and
production equipment in our Climate Control Business. We plan to fund these expenditures from
working capital, which may include utilizing our Working Capital Revolver Loan, and financing
arrangements.
In addition to committed capital expenditures at December 31, 2009, we had planned capital
expenditures for 2010 in our Chemical Business of approximately $11.0 million and in our
Climate Control Business of approximately $6.0 million. These planned expenditures are subject
to economic conditions and approval by senior management. If these capital expenditures are
approved, most of the Chemical Business’ expenditures will likely be funded from internal cash
flows and the Climate Control’s expenditures will likely be financed.
Advanced Manufacturing Energy Credits
On January 8, 2010, two of our subsidiaries within the Climate Control Business were awarded
Internal Revenue Code § 48C tax credits (also referred to as “Advanced Manufacturing Energy
Credits”) of approximately $9.6 million. The award is based on anticipated capital expenditures
made from February 2009 through February 2013 for machinery that will be used to produce
geothermal heat pumps and green modular chillers. As these subsidiaries invest in the qualifying
machinery, we will be entitled to an income tax credit equal to 30% of the machinery cost, up to
the total credit amount awarded.
44
Information Request from EPA
The EPA has sent information requests to most, if not all, of the nitric acid plants in the United
States, including to us relating to our El Dorado, Cherokee and Baytown Facilities, requesting
information under Section 114 of the Clean Air Act as to construction and modification activities
at each of these facilities over a period of years to enable the EPA to determine whether these
facilities are in compliance with certain provisions of the Clean Air Act. In connection with a
review by our Chemical Business of these facilities in obtaining information for the EPA
pursuant to the EPA’s request, our Chemical Business management believes, subject to further
review, investigation and discussion with the EPA, that certain changes to its production
equipment may be needed in order to comply with the requirements of the Clean Air Act. If
changes to the production equipment at these facilities are required in order to bring this
equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary
in order to bring the equipment into compliance is unknown at this time but could be substantial.
Further, if it is determined that the equipment at any of our El Dorado, Cherokee and/or Baytown
Facilities have not met the requirements of the Clean Air Act, our Chemical Business could be
subject to penalties in an amount not to exceed $27,500 per day as to each facility not in
compliance and require such facility to be retrofitted with the “best available control
technology.” We believe this technology is already employed at the Baytown Facility. Currently,
we believe that certain facilities within our Chemical Business may be required to pay certain
penalties and may be required to make certain capital improvements to certain emission
equipment as a result of the above described matter; however, at this time we are unable to
determine the amount of any penalties that may be assessed, or the cost of additional capital
improvements that may be required, by the EPA. Therefore no liability has been established at
December 31, 2009.
Estimated Plant Turnaround Costs in 2010
Our Chemical Business expenses
the costs of planned major maintenance activities
(“Turnarounds”) as they are incurred. Based on our current plan for Turnarounds to be
performed during 2010, we currently estimate that we will incur approximately $5 million to $6
million of Turnaround costs. However, it is possible that the actual costs could be significantly
different than our estimates.
Expenses Associated with Environmental Regulatory Compliance
Our Chemical Business is subject to specific federal and state environmental compliance laws,
regulations and guidelines. As a result, our Chemical Business incurred expenses of $3.2 million
in 2009 to maintain such regulatory compliance. For 2010, we expect to incur expenses ranging
from $3 million to $4 million to maintain compliance. However, it is possible that the actual
costs could be significantly different than our estimates.
Proposed Legislation and Regulations
Certain of the manufacturing facilities within our Chemical Business use significant amounts of
electricity, natural gas and other raw materials necessary for the production of their chemical
45
into
that result, or could result,
in certain greenhouse gas emissions
products
the
environment. Federal and state courts and administrative agencies are considering the scope and
scale of greenhouse gas emission regulation. There are bills pending in Congress that would
regulate greenhouse gas emissions through a cap-and-trade system under which emitters would
be required to either install abatement systems where feasible or buy allowances for offsets of
emissions of greenhouse gas. In addition, the EPA has announced its determination that
greenhouse gases threaten the public’s health and welfare and thus could make them subject to
regulation under the Clean Air Act. However this determination is being contested. The EPA has
instituted a mandatory greenhouse gas reporting requirement beginning in 2010, which will
impact all of our chemical manufacturing sites. Greenhouse gas regulation could increase the
price of the electricity purchased by these chemical facilities and increase costs for our use of
natural gas, other raw materials (such as anhydrous ammonia), and other energy sources,
potentially restrict access to or the use of natural gas and certain other raw materials necessary to
produce certain of our chemical products and require us to incur substantial expenditures to
retrofit these chemical facilities to comply with the proposed new laws and regulations
regulating greenhouse gas emissions, if adopted. Federal, state and local governments may also
pass laws mandating the use of alternative energy sources, such as wind power and solar energy,
which may increase the cost of energy use in certain of our chemical and other manufacturing
operations. While future emission regulations or new laws appear likely, it is too early to predict
how these regulations, if and when adopted, will affect our businesses, operations, liquidity or
financial results.
Certain Events Relating to Our Chemical Business
Bayer Agreement - EDN is a party to the Bayer Agreement with Bayer, by which EDN operates
the Baytown Facility at Bayer’s chemical manufacturing complex. The Bayer Agreement is for
an initial term of five years, with renewal options.
Under the terms of the Bayer Agreement, Bayer purchases from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex located in
Baytown, Texas at a price covering EDN’s costs plus a profit, with certain performance
obligations on EDN’s part. EDN purchases from Bayer ammonia, certain utilities, chemical
additives and services as required for production of nitric acid at the Baytown Facility.
On June 23, 2009, Bayer purchased the Baytown Assets from a third party, except the EDN
Assets. EDN continues to be responsible for the maintenance and operation of the Baytown
Facility in accordance with the terms of the Bayer Agreement.
Pursuant to the terms of the Bayer Agreement, annual net sales after June 30, 2009, will decrease
by approximately $9.7 million primarily as a result of the elimination of the Baytown Facility’s
lease expense, which was included in our sales price under the original Bayer agreement that was
replaced by the Bayer Agreement. This elimination was the result of Bayer purchasing the
Baytown Assets. For 2009, we had sales to Bayer of approximately 14% and 7% of the Chemical
Business’ and our consolidated net sales, respectively.
46
If there is a change in control of EDN, Bayer has the right to terminate the Bayer Agreement
upon payment to EDN of a termination fee of approximately $6.3 million plus 1.1 times the
current net book value of the EDN Assets.
New DEF Product - As part of the Clean Air Act, the EPA enacted emissions standards, which
became effective beginning in 2010, that require the further reduction of nitrogen oxide
emissions from diesel engines, starting with heavy-duty vehicles. CNC has developed a DEF
product under the tradename, EarthPure DEFTM, specifically for this application. CNC began
production of DEF in January 2010.
Potential Increase of Imported UAN - A large percentage of the domestic UAN market is
supplied by imports. Significant additional UAN production is expected to begin in the
Caribbean during 2010, and we believe this additional UAN production will be marketed in the
United States. Generally, foreign production of UAN is produced at a lower cost of production
than UAN produced in the United States. During 2009, revenues from the sale of UAN by our
Chemical Business was approximately $28 million. Additionally, UAN is the primary product to
be produced and sold by the Pryor Facility. This potential additional import of UAN beginning in
2010 could have an adverse impact on our revenues and profits from the sale of UAN and
fertilizer products.
Authorization to Repurchase 2007 Debentures and Stock
Our board of directors has granted management the authority to repurchase the 2007 Debentures
on terms that management deems favorable to us if an opportunity is presented. Under this
authority, we acquired in unsolicited transactions $30.6 million aggregate principal face amount
of these debentures, including $11.1 million during 2009, at negotiated prices ranging from
72.25% to 98.5% of the face value of the 2007 Debentures. We used $8.9 million of our working
capital to fund the purchases made during 2009. As a result, only $29.4 million remains
outstanding at December 31, 2009.
In addition, our board of directors enacted a stock repurchase authorization for an unstipulated
number of shares for an indefinite period of time. The stock repurchase authorization will remain
in effect until such time as of our board of directors decides to end it. During 2009, we
repurchased 275,900 shares of our common stock at a weighted-average price of $11.60 per
share using funds from our working capital.
Dividends
We are a holding company and, accordingly, our ability to pay cash dividends on our preferred
stock and our common stock depends in large part on our ability to obtain funds from our
subsidiaries. The ability of ThermaClime (which owns substantially all of the companies
comprising the Climate Control Business and Chemical Business) and its wholly-owned
subsidiaries to pay dividends and to make distributions to us is restricted by certain covenants
contained in the $50 million Working Capital Revolver Loan and the $50 million Secured Term
Loan. Under the terms of these agreements, ThermaClime cannot transfer funds to us in the form
of cash dividends or other distributions or advances, except for:
47
(cid:120)
the amount of income taxes that ThermaClime would be required to pay if they were
not consolidated with us;
(cid:120) an amount not to exceed fifty percent (50%) of ThermaClime's consolidated net
income during each fiscal year determined in accordance with generally accepted
accounting principles plus amounts paid to us within the first bullet above, provided
that certain other conditions are met;
the amount of direct and indirect costs and expenses incurred by us on behalf of
ThermaClime pursuant to a certain services agreement;
the amount under a certain management agreement between us and ThermaClime,
provided certain conditions are met, and
(cid:120)
(cid:120)
(cid:120) outstanding loans entered into subsequent to November 2, 2007 not to exceed $2.0
million at any time.
We have not paid cash dividends on our outstanding common stock in many years and we do not
currently anticipate paying cash dividends on our outstanding common stock in the near future.
However, our board of directors has not made a decision whether or not to pay such dividends on
our common stock in 2010.
During 2009, dividends were declared and paid on our preferred stock using funds from our
working capital. Each share of preferred stock is entitled to receive an annual dividend, only
when declared by our board of directors, payable as follows:
(cid:120) Series D Preferred at the rate of $.06 a share payable on October 9, which dividend is
cumulative;
(cid:120) Series B Preferred at the rate of $12.00 a share payable January 1, which dividend is
cumulative; and
(cid:120) Noncumulative Preferred at the rate of $10.00 a share payable April 1, which is
noncumulative.
All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Group. See
“Related Party Transactions” of this MD&A for a discussion as to the amount of dividends paid
to the Golsen Group during 2009.
Compliance with Long - Term Debt Covenants
As discussed below under “Subordinated Debentures and Loan Agreements - Terms and
Conditions”, the Secured Term Loan and Working Capital Revolver Loan, as amended, of
ThermaClime and its subsidiaries require, among other things, that ThermaClime meet certain
financial covenants. Currently, ThermaClime's forecast is that ThermaClime will be able to meet
all financial covenant requirements for 2010.
48
Subordinated Debentures and Loan Agreements - Terms and Conditions
5.5% Convertible Senior Subordinated Debentures - On June 28, 2007, we completed a
private placement to twenty-two qualified institutional buyers, pursuant to which we sold $60.0
million aggregate principal amount of the 2007 Debentures. Only $29.4 million remains
outstanding at December 31 2009, including $5.0 million owned by the Golsen Group.
The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012.
Interest is payable in arrears on January 1 and July 1 of each year, which began on January 1,
2008. In addition, the 2007 Debentures are unsecured obligations and are subordinated in right of
payment to all of our existing and future senior indebtedness, including indebtedness under our
revolving debt facilities. The 2007 Debentures are effectively subordinated to all present and
future liabilities, including trade payables, of our subsidiaries.
The 2007 Debentures are convertible by the holders in whole or in part into shares of our
common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders
electing to convert all or any portion of a debenture is 36.4 shares of our common stock per
$1,000 principal amount of debentures (representing a conversion price of $27.47 per share of
common stock), subject to adjustment under certain conditions as set forth in the Indenture.
Working Capital Revolver Loan - ThermaClime’s Working Capital Revolver Loan is
available to fund its working capital requirements, if necessary, through April 13, 2012. Under
the Working Capital Revolver Loan, ThermaClime and its subsidiaries may borrow on a
revolving basis up to $50.0 million based on specific percentages of eligible accounts receivable
and inventories. At December 31, 2009, there were no outstanding borrowings. In addition, the
net credit available for borrowings under our Working Capital Revolver Loan was approximately
$49.2 million at December 31, 2009, based on our eligible collateral and outstanding letters of
credit as of that date. The Working Capital Revolver Loan requires that ThermaClime meet
certain financial covenants, including an EBITDA requirement of greater than $25 million, a
minimum fixed charge coverage ratio of not less than 1.10 to 1, and a maximum senior leverage
coverage ratio of not greater than 4.50 to 1. These requirements are measured quarterly on a
trailing twelve-month basis and as defined in the agreement. ThermaClime was in compliance
with those covenants for the twelve-month period ended December 31, 2009.
Secured Term Loan - In November 2007, ThermaClime and certain of its subsidiaries
entered into the $50.0 million Secured Term Loan with a certain lender. Proceeds from the
Secured Term Loan were used to repay the previous senior secured loan. The Secured Term
Loan matures on November 2, 2012. The Secured Term Loan accrues interest at a defined
LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The interest rate at
December 31, 2009 was approximately 3.28%. The Secured Term Loan requires only quarterly
interest payments with the final payment of interest and principal at maturity. The Secured Term
Loan is secured by the real property and equipment located at the El Dorado and Cherokee
Facilities. The carrying value of the pledged assets is approximately $63 million at December 31,
2009.
49
The Secured Term Loan borrowers are subject to numerous covenants under the agreement
including, but not limited to, limitation on the incurrence of certain additional indebtedness and
liens, limitations on mergers, acquisitions, dissolution and sale of assets, and limitations on
declaration of dividends and distributions to us, all with certain exceptions. At December 31,
2009, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was
approximately $79 million. As defined in the agreement, the Secured Term Loan borrowers are
also subject to a minimum fixed charge coverage ratio of not less than 1.10 to 1 and a maximum
leverage ratio of not greater than 4.50 to 1. Both of these requirements are measured quarterly on
a trailing twelve-month basis. The Secured Term Loan borrowers were in compliance with these
financial covenants for the twelve-month period ended December 31, 2009. The maturity date of
the Secured Term Loan can be accelerated by the lender upon the occurrence of a continuing
event of default, as defined.
Cross-Default Provisions - The Working Capital Revolver Loan agreement and the Secured
Term Loan contain cross-default provisions. If ThermaClime fails to meet the financial
covenants of either of these agreements, the lenders may declare an event of default.
Seasonality
We believe that our only significant seasonal products are fertilizer and related chemical
products sold by our Chemical Business to the agricultural industry. The selling seasons for
those products are primarily during the spring and fall planting seasons, which typically extend
from March through June and from September through November in the geographical markets in
which the majority of our agricultural products are distributed. As a result, our Chemical
Business increases its inventory of agricultural products prior to the beginning of each planting
season. In addition, the amount and timing of sales to the agricultural markets depend upon
weather conditions and other circumstances beyond our control.
Related Party Transactions
Golsen Group
The Golsen Group has acquired from an unrelated third party $5,000,000 of the 2007
Debentures. During 2009, we incurred interest expense of $275,000 relating to the debentures
held by the Golsen Group, of which $137,500 remains accrued at December 31, 2009. We also
paid interest of $137,500 that was accrued at December 31, 2008.
In March 2009, we paid the dividends totaling approximately $240,000 and $60,000 on our
Series B Preferred and our Series D Preferred, respectively, all of the outstanding shares of
which are owned by the Golsen Group.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of
contingencies. In addition, the more critical areas of financial reporting impacted by
management's judgment, estimates and assumptions include the following:
50
Accounts Receivable and Credit Risk - Our sales to contractors and independent sales
representatives are generally subject to a mechanic’s lien in the Climate Control Business. Our
other sales are generally unsecured. Credit is extended to customers based on an evaluation of
the customer's financial condition and other factors. Credit losses are provided for in the
consolidated financial statements based on historical experience and periodic assessment of
outstanding accounts receivable, particularly those accounts which are past due (determined
based upon how recently payments have been received). Our periodic assessment of accounts
and credit loss provisions are based on our best estimate of amounts that are not recoverable.
Concentrations of credit risk with respect to trade receivables are limited due to the large number
of customers comprising our customer bases and their dispersion across many different industries
and geographic areas, however, eight customers (including their affiliates) account for
approximately 24% of our total net receivables at December 31, 2009. We do not believe this
concentration in these eight customers represents a significant credit risk due to the financial
stability of these customers. At December 31, 2009 and 2008, our allowance for doubtful
accounts of $676,000 and $729,000, respectively, were netted against our accounts receivable.
Inventory Valuations - Inventories are priced at the lower of cost or market, with cost being
determined using the first-in, first-out (“FIFO”) basis. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs. At December 31, 2009 and
2008, the carrying value of certain nitrogen-based inventories produced by our Chemical
Business was reduced to market because cost exceeded the net realizable value by $0.5 million
and $3.6 million, respectively. In addition, the carrying value of certain slow-moving inventory
items (primarily Climate Control products) was reduced to market because cost exceeded the net
realizable value by $1.2 million and $0.5 million at December 31, 2009 and 2008, respectively.
Precious Metals - Precious metals are used as a catalyst in the Chemical Business
manufacturing process. Precious metals are carried at cost, with cost being determined using the
FIFO basis. As of December 31, 2009 and 2008, precious metals were $13.1 million and $14.7
million, respectively, and are included in supplies, prepaid items and other in the consolidated
balance sheets. 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. For 2009, 2008, and 2007, the
amounts expensed for precious metals were approximately $5.9 million, $7.8 million and $6.4
million, respectively. These precious metals expenses are included in cost of sales. 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. For 2009, 2008, and 2007, we recognized recoveries of precious
metals at historical FIFO costs of approximately $2.6 million, $1.5 million and $1.8 million,
respectively. When we accumulate precious metals in excess of our production requirements, we
may sell a portion of the excess metals. We recognized gains of $2.0 million for 2007 (none in
2009 or 2008) from the sale of excess precious metals. These recoveries and gains are reductions
to cost of sales.
Impairment of Long-Lived Assets and Goodwill - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable and goodwill is reviewed for impairment at least annually. If assets to be held
51
and used are considered to be impaired, the impairment to be recognized is the amount by which
the carrying amounts of the assets exceed the fair values of the assets as measured by the present
value of future net cash flows expected to be generated by the assets or their appraised value.
Assets to be disposed are reported at the lower of the carrying amounts of the assets or fair
values less costs to sell. At December 31, 2009, we had no long-lived assets to be classified as
assets held for sale. We have considered impairment of our long-lived assets and goodwill. The
timing of impairments cannot be predicted with reasonable certainty and are primarily dependent
on market conditions outside our control. Should sales prices permanently decline dramatically
without a similar decline in the raw material costs or should other matters, including the
environmental requirements and/or operating requirements set by Federal and State agencies
change substantially from our current expectations, a provision for impairment may be required
based upon such event or events. See Item 1 "Business-Environmental Matters." Based on
estimates obtained from external sources and internal estimates based on inquiry and other
techniques, we recognized impairments relating to certain non-core equipment of $192,000
relating to Corporate assets during 2008 (none in 2009 and 2007) and $250,000 relating to
certain capital spare parts and idle assets in our Chemical Business during 2007 (none in 2009
and 2008). These impairments are included in other expense.
Accrued Insurance Liabilities - We are self-insured up to certain limits for group health,
workers’ compensation and general liability claims. Above these limits, we have commercial
insurance coverage for our contractual exposure on group health claims and statutory limits
under workers’ compensation obligations. We also carry excess umbrella insurance of $50
million for most general liability and auto liability risks. We have a separate $30 million
insurance policy covering pollution liability at our Chemical Business facilities. Additional
pollution liability coverage for our other facilities is provided in our general liability and
umbrella policies. Our accrued insurance liabilities are based on estimates of claims, which
include the incurred claims amounts plus estimates of future claims development calculated by
applying our historical claims development factors to our incurred claims amounts. We also
consider the reserves established by our insurance adjustors and/or estimates provided by
attorneys handling the claims, if any. In addition, our accrued insurance liabilities include
estimates of incurred, but not reported, claims and other insurance-related costs. Potential legal
fees and other directly related costs associated with insurance claims are not accrued but rather
are expensed as incurred. At December 31, 2009 and 2008, our accrued insurance liabilities were
$3.7 million and $3.0 million, respectively, and are included in accrued and other liabilities. It is
possible that the actual development of claims could exceed our estimates.
Product Warranty - Our Climate Control Business sells equipment that has an expected
life, under normal circumstances and use, that extends over several years. As such, we provide
warranties after equipment shipment/start-up covering defects in materials and workmanship.
Generally, the base warranty coverage for most of the manufactured equipment in the Climate
Control Business is limited to eighteen months from the date of shipment or twelve months from
the date of start-up, whichever is shorter, and to ninety days for spare parts. The warranty
provides that most equipment is required to be returned to the factory or an authorized
representative and the warranty is limited to the repair and replacement of the defective product,
with a maximum warranty of the refund of the purchase price. Furthermore, companies within
52
the Climate Control Business generally disclaim and exclude warranties related
to
merchantability or fitness for any particular purpose and disclaim and exclude any liability for
consequential or incidental damages. In some cases, the customer may purchase or a specific
product may be sold with an extended warranty. The above discussion is generally applicable to
such extended warranties, but variations do occur depending upon specific contractual
obligations, certain system components, and local laws.
Our accounting policy and methodology for warranty arrangements is to measure and recognize
the expense and liability for such warranty obligations using a percentage of net sales, based
upon our historical warranty costs. We also recognize the additional warranty expense and
liability to cover atypical costs associated with a specific product, or component thereof, or
project installation, when such costs are probable and reasonably estimable. It is possible that
future warranty costs could exceed our estimates. At December 31, 2009 and 2008, our accrued
product warranty obligations were $3.1 million and $2.8 million, respectively and are included in
current and noncurrent accrued and other liabilities in the consolidated balance sheets.
Executive Benefit Agreements - We have entered into benefit agreements with certain key
executives. Costs associated with these individual benefit agreements are accrued based on the
estimated remaining service period when such benefits become probable they will be paid. Total
costs accrued equal the present value of specified payments to be made after benefits become
payable. In 1992, we entered into individual benefit agreements with certain key executives
(“1992 Agreements”) that provide for annual benefit payments for life (in addition to salary).
The liability for these benefits under the 1992 Agreements is $1,102,000 and $1,111,000 as of
December 31, 2009 and 2008, respectively, and is included in current and noncurrent accrued
and other liabilities in the consolidated balance sheets.
In 1981, we entered into individual death benefit agreements with certain key executives. In
addition, as part of the 1992 Agreements, should the executive die prior to attaining the age of
65, we will pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. In 2005, we entered into a death benefit
agreement with our CEO. As of December 31, 2009, the liability for death benefits is $3.4
million ($2.7 million at December 31, 2008) which is included in current and noncurrent accrued
and noncurrent liabilities in the consolidated balance sheets.
Income Taxes - We recognize deferred tax assets and liabilities for the expected future tax
consequences attributable to NOL carryforwards, tax credit carryforwards, and differences
between the financial statement carrying amounts and the tax basis of our assets and liabilities.
We establish valuation allowances if we believe it is more-likely-than-not that some or all of
deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
In addition, we do not recognize a tax benefit unless we conclude that it is more-likely-than-not
that the benefit will be sustained on audit by the taxing authority based solely on the technical
merits of the associated tax position. If the recognition threshold is met, we recognize a tax
53
benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than
50% likely to be realized. We record interest related to unrecognized tax positions in interest
expense and penalties in operating other expense.
We reduce income tax expense for investment tax credits in the year the credit arises and is
earned.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are
deductible for income tax purposes but do not affect earnings. These benefits are principally
generated from exercises of non-qualified stock options.
Contingencies - We accrue for contingent losses when such losses are probable and
reasonably estimable. Estimates of potential legal fees and other directly related costs associated
with loss contingencies are not accrued but rather are expensed as incurred. In addition, we
recognize contingent gains when such gains are realized or realizable and earned. We are a party
to various litigation and other contingencies, the ultimate outcome of which is not presently
known. Should the ultimate outcome of these contingencies be adverse, such outcome could
create an event of default under ThermaClime's Working Capital Revolver Loan and the Secured
Term Loan and could adversely impact our liquidity and capital resources.
Regulatory Compliance - Our Chemical Business is subject to specific federal and state
regulatory compliance laws and guidelines. We have developed policies and procedures related
to regulatory compliance. We must continually monitor whether we have maintained compliance
with such laws and regulations and the operating implications, if any, and amount of penalties,
fines and assessments that may result from noncompliance. At December 31, 2009, liabilities
totaling $305,000 have been accrued relating to remediation and surface and groundwater
monitoring costs associated with our former Kansas facility. These liabilities are included in
current and noncurrent accrued and other liabilities and are based on current estimates that may
be revised in the near term.
Asset Retirement Obligations - We are obligated to monitor certain discharge water outlets
at our Chemical Business facilities should we discontinue the operations of a facility. We also
have certain facilities in our Chemical Business 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. Since
we currently have no plans to discontinue the use of these facilities and the remaining lives of the
facilities are indeterminable, an asset retirement liability has not been recognized. Currently,
there is insufficient information to estimate the fair value of the asset retirement obligations.
However, we will continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made.
Revenue Recognition - We recognize revenue for substantially all of our operations at the
time title to the goods transfers to the buyer and there remain no significant future performance
obligations by us. Revenue relating to construction contracts is recognized using the percentage-
of-completion method based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses, if any, are
54
recognized in the period in which they are determined. Sales of warranty contracts are
recognized as revenue ratably over the life of the contract. See discussion above under “Product
Warranty” for our accounting policy for recognizing warranty expense.
Recognition of Insurance Recoveries - If an insurance claim relates to a recovery of our
losses, we recognize the recovery when it is probable and reasonably estimable. If our insurance
claim relates to a contingent gain, we recognize the recovery when it is realized or realizable and
earned. Amounts recoverable from our insurance carriers are included in accounts receivable. As
previously reported, in February 2009, a small nitric acid plant located at the Cherokee Facility
suffered damage due to a fire. Our insurance policy provides for replacement cost coverage
relating to property damage with a $1.0 million property loss deductible. Because our
replacement cost coverage for property damages is estimated to exceed our property loss
deductible and the net book value of the damaged property, we did not recognize a loss relating
to property damage from this fire but we recorded a property insurance claim receivable relating
to this event. At December 31, 2009, the balance of the insurance claim receivable relating to
this event was approximately $1.2 million. In January 2010, we received approximately $1.0
million from our insurance carrier as a partial payment on our insurance claim. We used these
funds to pay down the Secured Term Loan.
Derivatives, Hedges and Financial Instruments - Derivatives are recognized in the balance
sheet and are measured at fair value. Changes in fair value of derivatives are recorded in results
of operations unless the normal purchase or sale exceptions apply or hedge accounting is elected.
We have three types of contracts that are accounted for on a fair value basis, which are interest
rate contracts, commodities futures/forward contracts and foreign exchange contracts. The
valuation of these contracts was determined based on quoted market prices or, in instances where
market quotes are not available, other valuation techniques or models used to estimate fair
values. The valuations of contracts classified as Level 1 are based on quoted prices in active
markets for identical contracts. 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 December 31, 2009, we did not have any contracts classified
as Level 3, which are contracts that are valued based on unobservable valuation inputs.
Management's judgment and estimates in these areas are based on information available from
internal and external resources at that time. Actual results could differ materially from these
estimates and judgments, as additional information becomes known.
Results of Operations
The following Results of Operations should be read in conjunction with our consolidated
financial statements for the years ended December 31, 2009, 2008, and 2007 and accompanying
notes and the discussions above under “Overview” and “Liquidity and Capital Resources.”
The following information about our results of operations is presented by our two industry
segments, Climate Control Business and Chemical Business. Gross profit by industry segment
represents net sales less cost of sales. In addition, our chief operating decision makers use
operating income by industry segment for purposes of making decisions that include resource
55
allocations and performance evaluations. Operating income by industry segment represents gross
profit by industry segment less selling, general and administrative expense (“SG&A”) incurred
by each industry segment plus other income and other expense earned/incurred by each industry
segment before general corporate expenses and other business operations, net. The business
operation classified as “Other” primarily sells industrial machinery and related components to
machine tool dealers and end users. General corporate expenses and other business operations,
net consist of unallocated portions of gross profit, SG&A, other income and other expense.
The following table contains certain information about our continuing operations in different
industry segments for each of the three years ended December 31:
Net sales:
Climate Control
Chemical
Other
Gross profit:
Climate Control
Chemical
Other
Operating income (loss):
Climate Control
Chemical
General corporate expense and other business
operations, net
Interest expense
Gain on extinguishment of debt
Non-operating income, net:
Climate Control
Chemical
Corporate and other business operations
$
$
$
$
$
2009
266,169
257,832
7,837
531,838
92,409
42,422
2,583
137,414
37,706
15,122
)
(12,118
40,710
(6,746)
1,783
8
31
91
Provisions for income taxes
Equity in earnings of affiliate - Climate Control
Income from continuing operations
(15,024)
996
21,849
$
2008
(In Thousands)
2007
$
$
$
$
$
$
311,380
424,117
13,470
748,967
96,633
37,991
4,256
138,880
$ 286,365
288,840
11,202
$ 586,407
$
83,638
44,946
4,009
$ 132,593
38,944
31,340
$
34,194
35,011
)
(11,129
59,155
(11,381)
5,529
1
27
1,068
(18,776)
937
36,560
)
(10,194
59,011
(12,078)
-
2
109
1,153
(2,540)
877
46,534
$
56
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating
income in our Climate Control segment for 2009 and 2008:
2009
2008
(Dollars In Thousands)
Change
Percentage
Change
Net sales:
Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products
Total Climate Control
$ 179,865
46,381
39,923
$ 266,169
$ 190,960 $ (11,095 )
(37,091 )
2,975
$ 311,380 $ (45,211 )
83,472
36,948
(5.8) %
(44.4) %
8.1 %
(14.5 ) %
Gross profit – Climate Control
$
92,409
$ 96,633 $
(4,224 )
(4.4) %
Gross profit percentage – Climate Control (1)
34.7 %
31.0 %
3.7 %
Operating income – Climate Control
$
37,706
$ 38,944 $
(1,238 )
(3.2 ) %
(1) As a percentage of net sales
Net Sales – Climate Control
(cid:120)(cid:3) (cid:49)et sales of our geothermal and water source heat pump products decreased primarily as a
result of a 9.8% decrease in sales of our commercial products due to the slowdown in the
construction and renovation activities in the markets we serve partially offset by a 4.0%
increase in sales of our residential products. During 2009, we continued to maintain a market
share leadership position of approximately 40%, based on market data supplied by the AHRI;
(cid:120)(cid:3) Net sales of our hydronic fan coils decreased primarily due to a 43.7% decrease in the
number of units sold due to the slowdown in the construction and renovation activities in the
markets we serve and a decline in the average unit sales price due to change in product mix.
During 2009, we continue to have a market share leadership position of approximately 30%
based on market data supplied by the AHRI;
(cid:120)(cid:3) Net sales of our other HVAC products increased primarily as the result of an increase in
engineering and construction services completed on construction contracts entered into
during 2008 as well as an increase in sales of our modular chillers partially offset by a
decline in sales of our large custom air handlers.
Gross Profit – Climate Control
The decrease in gross profit was primarily the result of lower sales volume in our hydronic fan
coil and geothermal and water source heat pump products partially offset by a change in product
mix, primarily a higher content of geothermal and water source heat pump products that have a
higher gross profit percentage, and a decrease in the cost of our raw materials. In addition, our
57
engineering and construction business increased its contribution to gross profit on completed
projects and customer change orders. As a result, our gross profit percentage improved 3.7%
compared to 2008. Competitive pressures on product pricing and recent increases in market
prices of raw materials, especially steel, copper and aluminum, could impact gross margins
negatively going forward, if we are unable to pass these cost increases to our customers in the
form of higher sales prices.
Operating Income – Climate Control
Operating income decreased slightly primarily as a result of the decrease in gross profit as
discussed above partially offset by lower operating expenses. Significant changes in operating
expenses include lower freight and commission expenses due primarily to reduced sales volume
($3.1 million and $2.3 million, respectively) and lower legal and other professional fees ($0.7
million) due primarily to a patent infringement defense in 2008 and other miscellaneous items
($0.5 million) partially offset by an increase in advertising expenses ($3.6 million) as a result of
a marketing program launched by one of our subsidiaries.
Chemical Business
The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2009 and 2008:
2009
2008
(Dollars In Thousands)
Change
Percentage
Change
Net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Total Chemical
$ 104,300
95,997
57,535
$ 257,832
$ 152,802 $ (48,502 )
(66,944 )
(50,839 )
$ 424,117 $ (166,285 )
162,941
108,374
(31.7) %
(41.1) %
(46.9) %
(39.2) %
Gross profit - Chemical
$
42,422
$ 37,991 $
4,431
11.7 %
Gross profit percentage – Chemical (1)
16.5 %
9.0 %
7.5 %
Operating income - Chemical
$
15,122
$ 31,340 $ (16,218 )
(51.7) %
(1) As a percentage of net sales
Net Sales - Chemical
The El Dorado and Cherokee Facilities produce all the chemical products described in the table
above and the Baytown Facility produces only industrial acids products. For 2009, overall sales
prices for the Chemical Business decreased 35% and the volume of tons sold decreased 7%,
compared with 2008, generally as a result of the following:
58
(cid:120)(cid:3) Sales prices for products produced at the El Dorado Facility decreased 33% related, in part,
to the lower cost of raw material, anhydrous ammonia, part of which is passed through to our
customers pursuant to contracts and/or pricing arrangements that include raw material
feedstock as a pass-through component in the sales price. Our industrial grade AN is sold to
one customer pursuant to a multi-year take or pay supply contract in which the customer has
agreed to purchase from our El Dorado Facility a certain minimum volume of industrial
grade AN during the year. This customer ordered less than the contractual minimum quantity
of industrial grade AN product that it was required to purchase during 2009 contributing to
the decline in sales. Pursuant to the terms of the contract, the customer was invoiced and paid
for certain unrecovered fixed costs and profit on the minimum volume not taken in 2009.
Pricing for agricultural grade AN was lower in 2009 due primarily to falling commodity
prices beginning in the later half of 2008. However, fertilizer grade AN volume of tons
shipped at the El Dorado Facility increased 36% compared to 2008 as the result of more
favorable market conditions. Overall volume of all products sold from the El Dorado Facility
increased slightly compared to 2008.
(cid:120)(cid:3) Sales prices and volumes for products produced at the Cherokee Facility decreased 41% and
3%, respectively, primarily related to the lower market-driven demand for UAN in 2009.
This situation was compounded by unfavorable weather conditions in Cherokee’s primary
market resulting in lower fertilizer application. Sales prices also decreased with the pass
through of our lower natural gas costs in 2009 compared to 2008, under pricing arrangements
with certain of our industrial customers.
(cid:120)(cid:3) Sales prices decreased approximately 35% for products produced at the Baytown Facility due
to lower ammonia cost, which is a pass-through component to Bayer. Overall volumes
decreased 24% as the result of a decline in customer demand primarily due to the economic
downturn. Sales are also lower due to the elimination of a pass-through cost component for
lease expense as discussed in ”Liquidity and Capital Resources-Bayer Agreement”. The
lower sales prices and lower volumes had only a minimum impact to gross profit and
operating income due to certain provisions of the Bayer Agreement.
Gross Profit - Chemical
The increase in gross profit of our Chemical Business includes $6.6 million in higher margins on
our chemical products sold in excess of then current market prices due to firm sales
commitments made in 2008 when market prices were higher, and $6.4 million reduction of
losses (both realized and unrealized) on natural gas and ammonia hedging contracts in 2009
compared to 2008. Also contributing to the increase in gross profit was improved production
efficiencies of $3.9 million due, in part, to unplanned downtime incurred at the Cherokee Facility
in 2008, a reduction in our turnaround costs due to the timing of certain turnarounds, and an
increase in recoveries of precious metals. This increase in gross profit was partially offset by
lower agricultural product margins of $10.8 million due primarily to lower margins on UAN
fertilizer. Our UAN margins were lower due to market conditions, including poor weather
conditions, a reluctance of distributors to build inventory, and possibly lower levels of nitrogen
fertilizer applied to crops. In addition, the Pryor Facility incurred a $1.2 million loss on firm
sales commitments entered into during 2009, of which $0.4 million relates to outstanding firm
sales commitments at December 31, 2009. Primarily as a result of these items, our overall gross
profit as a percentage of sales improved for 2009 compared to 2008.
59
Operating Income - Chemical
The decrease of our Chemical Business’ operating income includes start up expenses associated
with the Pryor Facility of approximately $16.0 million (which does not include the $1.2 million
loss on the Pryor Facility’s sales commitments discussed above) compared to $2.4 million for
2008. In addition, we recognized other operating income of $7.6 million from a litigation
judgment during 2008. This decrease was partially offset by the increase in gross profit of $4.4
million as discussed above.
Other
The business operation classified as “Other” primarily sells industrial machinery and related
components to machine tool dealers and end users. General corporate expenses and other
business operations, net consist of unallocated portions of gross profit, SG&A, other income and
other expense. The following table contains certain information about our net sales and gross
profit classified as “Other” and general corporate expenses and other business operations, net, for
2009 and 2008:
Net sales - Other
Gross profit - Other
$
$
2009
2008
(Dollars In Thousands)
$ 13,470 $
7,837
Change
Percentage
Change
(5,633 )
(41.8)%
2,583
$
4,256 $
(1,673 )
(39.3)%
Gross profit percentage – Other (1)
33.0 %
31.6 %
1.4 %
General corporate expense and other business
operations, net
$ (12,118)
$ (11,129)
$
(989
)
8.9
%
(1) As a percentage of net sales
Net Sales - Other
The decrease in net sales classified as “Other” relates primarily to lower demand for new
industrial machinery as a result of the present global economic conditions and downturn in
capital equipment spending.
Gross Profit - Other
The decrease in gross profit classified as “Other” is due primarily to the decrease in sales as
discussed above.
General Corporate Expense and Other Business Operations, Net
Our general corporate expense and other business operations, net increased by approximately
$1.0 million primarily as the result of the decrease in gross profit classified as “Other” as
60
discussed above partially offset by a decrease of $1.1 million of professional fees primarily
relating to a reduction in fees associated with the assistance in our evaluation of internal controls
and procedures and related documentation for Sarbanes-Oxley requirements and to legal fees on
various legal matters.
Interest Expense
Interest expense was $6.7 million for 2009 compared to $11.4 million for 2008, a decrease of
approximately $4.7 million. This decrease primarily relates to a decrease in losses of $2.1
million associated with our interest rate contracts, a decrease of $1.6 million as the result of the
acquisitions of the 2007 Debentures and a decrease of $1.1 million due to the decline in the
LIBOR rate associated with the Secured Term Loan.
Gain on Extinguishment of Debt
During 2009 and 2008, we acquired $11.1 million and $19.5 million, respectively, aggregate
principal amount of the 2007 Debentures for approximately $8.9 million and $13.2 million,
respectively, and recognized a gain on extinguishment of debt of $1.8 million and $5.5 million,
respectively, after expensing the unamortized debt issuance costs associated with the 2007
Debentures acquired.
Non-Operating Other Income, Net
Our non-operating other income, net was $0.1 million for 2009 compared to $1.1 million for
2008. The decrease of $1.0 million relates primarily to higher returns received in 2008 from
highly liquid investments.
Provision For Income Taxes
The provision for income taxes for 2009 was $15.0 million compared to $18.8 million for 2008.
The resulting effective tax rate for 2009 was 40.7% compared to 33.9% for 2008. As discussed
under “Overview - 2009 Results,” during 2009, we incurred an additional provision relating to
adjustments reconciling the 2008 federal and state income tax returns to the 2008 estimated tax
provision. Additionally, the impact of lower taxable income which limited the amount of the
manufacturing deduction that can be utilized also increased our provision for income taxes.
During 2008, we incurred current and deferred federal and state income taxes due, in part, to
increased taxable income and higher effective tax rates partially offset by a net deferred income
tax benefit of $1.6 million as the result of a detailed analysis performed on all our deferred tax
assets and liabilities and the realizability of those deferred tax assets.
61
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Climate Control Business
The following table contains certain information about our net sales, gross profit and operating
income in our Climate Control segment for 2008 and 2007:
2008
2007
(Dollars In Thousands)
Change
Percentage
Change
Net sales:
Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products
Total Climate Control
$ 190,960
83,472
36,948
$ 311,380
$ 165,115 $ 25,845
(2,343 )
1,513
$ 286,365 $ 25,015
85,815
35,435
15.7 %
(2.7) %
4.3 %
8.7 %
Gross profit - Climate Control
$
96,633
$ 83,638 $ 12,995
15.5 %
Gross profit percentage - Climate Control (1)
31.0 %
29.2 %
1.8 %
Operating income - Climate Control
$
38,944
$ 34,194 $
4,750
13.9 %
(1) As a percentage of net sales
Net Sales – Climate Control
(cid:120)(cid:3) Net sales of our geothermal and water source heat pump products increased primarily as a
result of a 19% increase in our average selling price per unit due to a change in product mix,
primarily more residential products that have higher selling prices and more accessories,
partially offset by a 3% decrease in the number of units sold. The number of units sold in
2008 was down slightly due to lower export sales and a decrease in domestic commercial
orders as the result of the weaker construction market. During 2008, we continued to
maintain a market share leadership position of approximately 40%, based on data supplied by
the AHRI;
(cid:120)(cid:3) Net sales of our hydronic fan coils decreased slightly primarily due to a 7% decrease in the
number of units sold partially offset by a 4% increase in our average selling price. During
2008, we continued to maintain a market share leadership position of approximately 37%,
based on data supplied by the AHRI;
(cid:120)(cid:3) Net sales of our other HVAC products increased slightly primarily as the result of an increase
in sales of large custom air handlers.
Gross Profit – Climate Control
The increase in gross profit in our Climate Control Business was primarily the result of the
increase in sales of our geothermal and water source heat pumps as discussed above and the
increase of $1.3 million in gains recognized on our futures contracts for copper partially offset by
the reduction in sales volumes discussed above. In addition, the above changes were also the
primary reasons for the increase in our gross profit percentage.
62
Operating Income – Climate Control
The net increase in operating income of our Climate Control Business resulted primarily from
the net increase of gross profit of $13.0 million as discussed above. This increase in operating
income was partially offset by an increase in variable operating expenses associated with higher
sales. Personnel costs increased by $3.9 million as the result of an increase in the number of
personnel and costs associated with group insurance and other employee benefits, warranty
expenses increased by $2.2 million due to the increase in sales volume and actual costs incurred,
and professional fees increased by $1.1 million primarily relating to legal expenses associated
with patent defense costs relating to potential new product development in the large air-handler
product line.
Chemical Business
The following table contains certain information about our net sales, gross profit and operating
income in our Chemical segment for 2008 and 2007:
2008
2007
(Dollars In Thousands)
Change
Percentage
Change
Net sales:
Industrial acids and other chemical products
Agricultural products
Mining products
Total Chemical
$ 162,941
152,802
108,374
$ 424,117
$ 95,754 $ 67,187
35,644
32,446
$ 288,840 $ 135,277
117,158
75,928
70.2 %
30.4 %
42.7 %
46.8 %
Gross profit - Chemical
$
37,991
$ 44,946 $
(6,955 )
(15.5) %
Gross profit percentage – Chemical (1)
9.0 %
15.6 %
(6.6 ) %
Operating income - Chemical
$
31,340
$ 35,011 $
(3,671 )
(10.5) %
(1) As a percentage of net sales
Net Sales - Chemical
The El Dorado and Cherokee Facilities produce all the chemical products described in the table
above and the Baytown Facility produces only industrial acids products. For 2008, overall sales
prices for the Chemical Business increased 59% while the volume of tons sold decreased 6%,
compared with 2007.
(cid:120)(cid:3) Sales prices at the El Dorado Facility increased 47% related, in part, to the high cost of raw
materials, anhydrous ammonia and sulfur, the majority of which we were able to pass
through to our customers and also to strong global agricultural market demand relative to
supply volumes during this period. Volume at the El Dorado Facility decreased 13% or
86,000 tons. The decrease in tons sold was primarily attributable to (i) 69,000 fewer tons of
agricultural AN and other bulk fertilizers sold primarily in the first half of 2008 compared to
63
the same period of 2007 due to poor weather conditions and lower demand for AN in favor
of urea, a competing product in El Dorado’s market area, as well as reduced forage
application due to poor conditions in the cattle market and (ii) 11,000 fewer tons of sulfuric
acid due primarily to the bi-annual Turnaround of the sulfuric acid plant.
(cid:120)(cid:3) Sales prices and volumes at the Cherokee Facility increased 61% and 9%, respectively,
primarily related to the market-driven demand for UAN and mining products. Sales prices
also increased with the pass through of our higher natural gas costs in 2008 compared to
2007, recoverable under pricing arrangements with certain of our industrial customers. The
increase in volume was partially offset by the unplanned maintenance downtime experienced
during the third quarter of 2008;
(cid:120)(cid:3) Sales prices increased approximately 96% at the Baytown Facility due to higher global
ammonia pricing, which is recoverable under the Original Bayer Agreement but had a
minimum impact to gross profit and operating income. Overall volumes decreased 11% as
the result of a decline in customer demand after Hurricane Ike and following the economic
downturn.
Gross Profit - Chemical
The decrease in gross profit of our Chemical Business relates to several significant items. We
recognized unrealized losses of $5.3 million on our natural gas and ammonia futures/forward
contracts outstanding at December 31, 2008. In addition, we have estimated that the Cherokee
Facility incurred costs of approximately $5.1 million as the result of unplanned maintenance
downtime during 2008 compared to $1.1 million in 2007. Also at December 31, 2008, we
recognized a lower of cost or market provision on inventory of $3.6 million due to declines in
global nitrogen prices as demand fell as the result of buyers’ concerns over volatile commodity
prices and the global economic crisis. In addition during 2008, the amount expensed for precious
metals, net of recoveries and gains, was $6.3 million compared to $2.6 million during 2007. In
general, other non-raw material manufacturing expenses, including steam (produced from natural
gas), maintenance and Turnarounds, electricity and labor, increased during 2008 compared to
2007. Our Chemical Business incurred expenses for Turnarounds of $6.0 million for 2008
compared to $3.4 million for 2007. This decrease in gross profit was partially offset by the
increase in sales prices of products sold by the El Dorado and Cherokee Facilities, as discussed
above, in relation to raw material costs. During 2007, we realized non-recurring insurance
recoveries of $3.8 million relating to a business interruption claim. These recoveries contributed
to an increase in gross profit in 2007. As a result of these changes discussed above, our overall
gross profit percentage declined for 2008 as compared to 2007.
Operating Income - Chemical
The net decrease of our Chemical Business’ operating income includes the net decrease in gross
profit of $7.0 million as discussed above. Also, we incurred an increase in expenses associated
with the Pryor Facility of $1.4 million due to the process of activating this facility. The decrease
in operating income was partially offset by other income recognized by our Chemical Business
of $7.6 million from a litigation judgment during 2008, as previously reported. During 2007, we
recognized income of $3.3 million relating to a litigation settlement.
64
Other
The following table contains certain information about our net sales and gross profit classified as
“Other” and general corporate expenses and other business operations, net, for 2008 and 2007:
Net sales - Other
Gross profit - Other
$
$
2008
2007
(Dollars In Thousands)
$ 11,202 $
13,470
Change
Percentage
Change
2,268
20.2 %
4,256
$
4,009 $
247
6.2 %
Gross profit percentage – Other (1)
31.6 %
35.8 %
(4.2 ) %
General corporate expense and other business
operations, net
$ (11,129)
$ (10,194)
$
(935
)
9.2
%
(1) As a percentage of net sales
Net Sales - Other
The increase in net sales classified as “Other” relates primarily to increased customer demand for
our machine tool products.
Gross Profit - Other
The increase in gross profit classified as “Other” is due primarily to the increase in sales as
discussed above. The decline in our gross profit percentage was primarily due to additional costs
incurred relating to a large customized industrial machine tool, freight costs and the recognition
of losses of $0.2 million on our foreign currency contracts.
General Corporate Expense and Other Business Operations, Net
The net increase in our general corporate expense and other business operations, net relates
primarily to increased personnel costs of $1.1 million resulting from increased compensation and
other employee benefits, professional fees of $0.5 million due, in part, for assistance in our
evaluation of our internal controls and procedures and related documentation for Sarbanes-Oxley
requirements and to legal fees on various litigation matters and other expense of $0.6 million
relating primarily to potential litigation settlements, an impairment of long-lived assets and
income tax related penalties, partially offset by an increase in other income of $0.7 million due,
in part, to litigation settlements.
Interest Expense
Interest expense was $11.4 million for 2008 compared to $12.1 million for 2007, a decrease of
$0.7 million. This net decrease primarily relates to a decrease of $3.4 million as the result of
obtaining a lower interest rate associated with the Secured Term Loan compared to the interest
65
rate associated with the previous senior secured loan and a decrease of $1.0 million due to the
continual pay off of the Working Capital Revolver Loan during 2008, partially offset by the
increase in realized and unrealized losses of $2.5 million relating to our interest rate contracts
and the increase of $1.7 million relating to the 2007 Debentures.
Gain on Extinguishment of Debt
During 2008, we acquired $19.5 million aggregate principal amount of the 2007 Debentures for
$13.2 million and recognized a gain on extinguishment of debt of $5.5 million, after expensing
$0.8 million of the unamortized debt issuance costs associated with the 2007 Debentures
acquired.
Provision For Income Taxes
The provision for income taxes for 2008 was $18.8 million compared to $2.5 million for 2007.
During 2008, we incurred current and deferred federal and state income taxes due, in part, to
increased taxable income and higher effective tax rates partially offset by a net deferred income
tax benefit of $1.6 million as the result of a detailed analysis performed on all our deferred tax
assets and liabilities and the realizability of those deferred tax assets. During 2007, we incurred
federal and state income taxes resulting from increased taxable income and additional prior year
state income taxes recorded pursuant to a then new accounting standard. However, these
provisions were partially offset by the benefit of deferred taxes from the reversal of valuation
allowances.
Cash Flow From Continuing Operating Activities
Historically, our primary cash needs have been for operating expenses, working capital and
capital expenditures. We have financed our cash requirements primarily through internally
generated cash flow, borrowings under our revolving credit facilities, secured asset financing and
the sale of assets. See additional discussions concerning cash flow relating to our Climate
Control and Chemical Businesses under “Overview” and “Liquidity and Capital Resources” of
this MD&A.
For 2009, net cash provided by continuing operating activities was $57.7 million, including net
income plus depreciation and amortization, deferred income taxes, stock-based compensation,
gain on extinguishment of debt, realization of losses on inventory and other adjustments and the
net cash provided by the following significant changes in assets and liabilities.
Accounts receivable decreased $22.1 million including:
(cid:120) a decrease of $13.8 million in the Climate Control Business due, in part, to the decline
in sales relating to our hydronic fan coil and geothermal and water source heat pump
products, reduction in billings associated with construction contracts, and an
improvement in the timing of collections,
(cid:120) a net decrease of $7.7 million in the Chemical Business primarily as the result of lower
sales prices and tons sold from our Cherokee Facility and an improvement in the timing
of collections, and
66
(cid:120) a decrease of $0.6 million in the industrial machinery business due primarily to a
decrease in sales of large machinery.
Inventories decreased $11.9 million including:
(cid:120)(cid:3) a decrease of $9.0 million in the Chemical Business primarily relating to the El Dorado
and Cherokee Facilities due to the decline in costs of our raw material feedstocks and
volume on hand partially offset by the inventory produced as the result of activating our
Pryor Facility and
(cid:120)(cid:3) a decrease of $2.7 million in the Climate Control Business due primarily to the
reduction in the volume on hand associated with our hydronic fan coil and geothermal
and water source heat pump products.
The change in prepaid and accrued income taxes of $2.7 million primarily to payments made to
the taxing authorities partially offset by the recognition of income taxes for 2009.
Other supplies and prepaid items decreased $0.2 million including:
(cid:120) a decrease of $1.6 million relating to lower costs and volume on hand of precious
metals used in the manufacturing process of our Chemical Business, partially offset by
(cid:120) an increase of $0.8 million of prepaid insurance primarily as the result of increased
insurance premiums related to the Pryor Facility and
(cid:120) an increase of $0.6 million of supplies relating to the Chemical Business due primarily
to an increase in the volume on hand including the additions at the Pryor Facility.
Accounts payable decreased $6.2 million relating primarily to a decrease of $5.7 million in the
Climate Control Business primarily as the result of a reduction in raw material purchases and a
decrease in certain raw material costs. Accounts payable relating to our Chemical Business had
a minimal net increase due, in part, to increased start-up costs at the Pryor Facility partially offset
by the decrease in costs of our raw material feedstocks and the timing of maintenance projects
performed at the El Dorado Facility.
Commodities contracts decreased $5.9 million primarily as the result of these contracts being
settled during 2009.
Customer deposits decreased $2.6 million primarily as the result of the shipment of products
associated with these deposits that includes:
(cid:120)(cid:3) a decrease of $1.5 million in the Chemical Business,
(cid:120)(cid:3) a decrease of $0.6 million in the Climate Control Business, and
(cid:120) a decrease of $0.5 million in our industrial machinery business.
Deferred rent expense decreased $1.4 million as the result of the scheduled lease payments
during 2009 exceeding the rent expense recognized on a straight-line basis. The scheduled lease
payments ended in June 2009 when the previous Bayer agreement was replaced by the current
Bayer Agreement.
67
The decrease in other current and noncurrent liabilities of $4.0 million includes primarily:
(cid:120) a decrease in accrued contractual manufacturing obligations of $1.5 million primarily
as the result of our Chemical Business paying a portion of these obligations in
December 2009,
(cid:120) decrease in accrued commissions of $1.4 million due primarily to lower sales volume in
related distribution channels relating to our Climate Control Business, and
(cid:120) a decrease in billings in excess of costs and estimated earnings on uncompleted
contracts of $1.3 million primarily due to costs incurred during 2009 associated with
these construction contracts relating to our Climate Control Business.
Cash Flow from Continuing Investing Activities
Net cash used by continuing investing activities for 2009 was $38.1 million that consisted
primarily of $28.9 million for capital expenditures of which $5.1 million and $23.3 million are
for the benefit of our Climate Control and Chemical Businesses, respectively. The capital
expenditures used by our Chemical Business includes $8.1 million relating to the Pryor Facility.
In addition, we invested $10.1 million in short-term investments consisting of certificates of
deposit with an original maturity of 13 weeks.
Cash Flow from Continuing Financing Activities
Net cash used by continuing financing activities for 2009 was $3.9 million that primarily
consisted of $8.9 million used for the acquisition of $11.1 million aggregate principal amount of
the 2007 Debentures, purchases of treasury stock of $3.2 million, and payments on other long-
term debt totaling $2.3 million partially offset by net proceeds from other long-term debt of $8.6
million.
Performance and Payment Bonds
We are contingently liable to sureties in respect of certain insurance bonds issued by the sureties
in connection with certain contracts entered into by our subsidiaries in the normal course of
business. These insurance bonds primarily represent guarantees of future performance of our
subsidiaries. As of December 31, 2009, we have agreed to indemnify the sureties for payments,
up to $22.9 million, made by them in respect of such bonds. Approximately $21.7 million of
these insurances bonds expire in 2010 while the remaining $1.2 million expire in 2011.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934, as amended, except for the
following:
Cepolk Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has a 50%
equity interest in Cepolk Limited Partnership (“Partnership”) which is accounted for on the
equity method. The Partnership owns an energy savings project located at the Ft. Polk Army
68
base in Louisiana (“Project”). At December 31, 2009, our investment was $3.8 million. For
2009, distributions received from this Partnership were approximately $0.8 million and our
equity in earnings was approximately $1.0 million. As of December 31, 2009, the Partnership
and general partner to the Partnership are indebted to a term lender (“Lender”) of the Project for
approximately $2.1 million with a term extending to December 2010 (“Loan”). CHI has pledged
its limited partnership interest in the Partnership to the Lender as part of the Lender’s collateral
securing all obligations under the Loan. This guarantee and pledge is limited to CHI’s limited
partnership interest and does not expose CHI or the Company to liability in excess of CHI’s
limited partnership interest. In accordance with GAAP, no liability is required to be established
for this pledge since it was entered into prior to January 1, 2003. CHI has no recourse provisions
or available collateral that would enable CHI to recover its partnership interest should the Lender
be required to perform under this pledge.
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Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
General
Our results of operations and operating cash flows are impacted by changes in market prices of
copper, steel, anhydrous ammonia and natural gas, changes in market currency exchange rates,
and changes in market interest rates.
Forward Sales Commitments Risk
Periodically, our Climate Control and Chemical Businesses enter into forward sales
commitments of products for deliveries in future periods. As a result, we could be exposed to
embedded losses should our product costs exceed the firm sales prices. At December 31, 2009,
we had $0.4 million of embedded losses associated with sales commitments with firm sales
prices in our Chemical Business.
Commodity Price Risk
Our Climate Control Business buys substantial quantities of copper and steel for use in
manufacturing processes and our Chemical Business buys substantial quantities of anhydrous
ammonia and natural gas as feedstocks generally at market prices. As part of our raw material
price risk management, periodically, our Climate Control Business enters into futures contracts
for copper and our Chemical Business enters into futures/forward contracts for anhydrous
ammonia and natural gas, which contracts are generally accounted for on a mark-to-market basis.
At December 31, 2009, our purchase commitments under copper contracts were for 750,000
pounds of copper through May 2010 at a weighted-average cost of approximately $3.19 pound
($2,390,000) and a weighted-average market value of approximately $3.35 per pound
($2,512,000). In addition, our Chemical Business had contractual rights under natural gas call
contracts for approximately 150,000 MMBtu of natural gas through February 2010 at a
weighted-average price of $6.00 per MMBtu ($900,000). At December 31, 2009, the weighted-
average market value of these natural gas call contracts (unrealized gain) was approximately
$0.19 per MMBtu ($29,000).
Foreign Currency Risk
One of our business operations purchases industrial machinery and related components from
vendors outside of the United States. As part of our foreign currency risk management, we
periodically entered into foreign currency contracts. At December 31, 2009, our commitments
under these contracts were for the receipt of approximately 336,000 Euros through April 2010 at
a weighted-average contract exchange rate of 1.435, which rate approximated the market
exchange rate.
71
Interest Rate Risk
Our interest rate risk exposure results from our debt portfolio which is impacted by short-term
rates, primarily variable-rate borrowings from commercial banks, and long-term rates, primarily
fixed-rate notes, some of which prohibit prepayment or require a substantial premium payment
with the prepayment.
As part of our interest rate risk management, we periodically purchase and/or enter into various
interest rate contracts. At December 31, 2009, we have an interest rate swap, which sets a fixed
three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. Also, we have an
interest rate swap, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and
matures in April 2012. These contracts are free-standing derivatives and are accounted for on a
mark-to-market basis. At December 31, 2009, the fair value of these contracts (unrealized loss)
was $1.9 million.
72
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7
Our long-term debt agreements are the only financial instruments with fair values significantly
different from their carrying amounts. At December 31, 2009 and 2008, the estimated fair value
of the Secured Term Loan is based on defined LIBOR rates plus 7% and 10%, respectively,
utilizing information obtained from the lender. Fair values for fixed rate borrowings, other than
the 2007 Debentures, are estimated using a discounted cash flow analysis that applies interest
rates currently being offered on borrowings of similar amounts and terms to those currently
outstanding while also taking into consideration our current credit worthiness. At December 31,
2009 and 2008, the estimated fair value of the 2007 Debentures is based on quoted prices
obtained from a broker for these debentures. The following table shows the estimated fair value
and carrying value of our borrowings at:
December 31, 2009
December 31, 2008
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Carrying
Value
Variable Rate:
Secured Term Loan
Working Capital Revolver Loan
Other debt
(In Thousands)
$
27,640 $
50,000 $ 20,939 $
-
2,553
-
2,553
-
8
50,000
-
8
Fixed Rate:
5.5% Convertible Senior Subordinated Notes
Other bank debt and equipment financing
$
40,500
29,106
20,231
14,652
79,530 $ 101,801 $ 63,234 $ 105,160
27,338
14,949
29,400
19,848
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have included the financial statements and supplementary financial information required by
this item immediately following Part IV of this report and hereby incorporate by reference the
relevant portions of those statements and information into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, with the
participation of our Principal Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15 under the Securities Exchange Act of 1934). Based upon that evaluation, we have
concluded, with the participation of our Principal Executive Officer and our Principal Financial
Officer, that our disclosure controls and procedures were effective. There were no changes to our
internal control over financial reporting during the quarter ended December 31, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
75
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance to
our management and board of directors regarding the preparation and fair presentation of
published financial statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework. Based on our assessment, we believe that, as of December 31, 2009, our internal
control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report on our internal
control over financial reporting. This report appears on the following page.
76
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LSB Industries, Inc.
We have audited LSB Industries, Inc.’s internal control over financial reporting as of December
31, 2009 based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LSB
Industries, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, LSB Industries, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of LSB Industries, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2009 of LSB
Industries, Inc. and our report dated March 8, 2010 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 8, 2010
77
ITEM 9B. OTHER INFORMATION
None.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements in this report other than
statements of historical fact are Forward-Looking Statements that are subject to known and
unknown risks, uncertainties and other factors which could cause actual results and performance
of the Company to differ materially from such statements. The words "believe", "expect",
"anticipate", "intend", and similar expressions identify Forward-Looking Statements. Forward-
Looking Statements contained herein relate to, among other things,
(cid:120) a factor that may affect product order rates going forward is the potential for growth in our
highly energy-efficient geothermal water-source heat pumps, which could benefit
significantly from government stimulus programs, including various tax incentives;
(cid:120) for the short term, we do expect to see lower demand for most of our Climate Control
products;
(cid:120) tax credits and incentives, and certain planned direct spending by the federal government
contained in the American Reinvestment and Recovery Act of 2009, could stimulate sales of
our geothermal heat pump products, as well as other products that could be used to
modernize federally owned and operated buildings, military installations, public housing and
hospitals;
(cid:120) the market share for commercial water source heat pumps relative to other types of heating
and air-conditioning systems will continue to grow due to the relative efficiency and
longevity of such systems, as well as due to the emergence of the replacement market for
those systems;
(cid:120) the energy efficiency, longer life, and relatively short payback periods of geothermal
systems, as compared with air-to-air systems, as well as tax incentives that are available to
builders and homeowners when installing geothermal systems, will continue to increase
demand for our geothermal products;
(cid:120) levels of repair, replacement, and new construction activity generally drive demand in the
geothermal and water source heat pumps and hydronic fan coil markets;
(cid:120) our investment in the Climate Control Business will continue if customer product order
intake levels warrant such investment, and our investments will increase our capacity to
produce and distribute our Climate Control products;
(cid:120) to ship substantially all of the customer product orders included in the Climate Control
Business’ backlog within the next twelve months; however, due to the current economic
conditions in the markets we serve, it is possible that some of our customers could cancel a
portion of our backlog or extend the shipment terms beyond twelve months;
(cid:120) no difficulties in obtaining necessary materials for our Climate Control Business;
(cid:120) the ability to pass to our customers the majority of any raw material cost increases in the
form of higher prices, but the timing of these price increases could lag the increases in the
cost of materials, having sufficient sources for materials, and a shortage of raw materials
could impact production of our Climate Control products;
78
(cid:120) to continue to launch new products and product upgrades in an effort to maintain and
increase our current market position and to establish a presence in new markets served by the
Climate Control Business;
(cid:120) the market demand for our industrial acids and mining products will be flat to slightly up, for
the first half of 2010, and the nitrogen fertilizer supply and demand fundamentals appear to
be favorable; however, it is possible that the fertilizer outlook could be adversely affected by
lower grain prices, unanticipated spikes in natural gas prices, or unfavorable weather
conditions;
(cid:120) when producing at a sustained level, we expect the Pryor Facility to produce and sell at an
annualized rate of approximately 325,000 tons of UAN and 35,000 tons of anhydrous
ammonia;
(cid:120) we can obtain anhydrous ammonia from other sources in the event of an interruption of
service under our current supply contract;
(cid:120) the overall commercial construction sector is not expected to recover during 2010,but there is
a projected increase in both single-family residential and multi-family construction during
2010;
(cid:120) for 2010, the potential sales level remains uncertain for the Climate Control Business;
(cid:120) to see continued slowness in our Climate Control Business’ results in the short-term;
(cid:120) that the recently enacted federal tax credits for GHPs should have a positive impact on sales
of those highly energy efficient and green products;
(cid:120) the Pryor Facility monthly operating start up costs, prior to production of UAN at sustained
targeted rates, are approximately $1.6 million in addition to variable costs such as natural gas
and electricity;
(cid:120) our Chemical Business’ sales in the industrial, mining and agricultural sectors for 2010 will
continue to be affected by the overall economic conditions;
(cid:120) our primary cash needs will be for working capital and capital expenditures for 2010;
(cid:120) we and our subsidiaries plan to rely upon internally generated cash flows, cash and short-
term investments on hand, secured property and equipment financing, and the borrowing
availability under the Working Capital Revolver Loan to fund operations and pay
obligations;
(cid:120) the amount of committed and planned capital expenditures for 2010, including the amounts
for the Climate Control and Chemical Businesses;
(cid:120) the amount of Turnaround Costs and expenses associated with environmental regulatory
compliance to be incurred in 2010;
(cid:120) while future emission regulations or new laws appear likely, it is too early to predict how
these regulations, if and when adopted, will affect our businesses, operations, liquidity or
financial results;
(cid:120) the actual development of claims could exceed our estimates as they relate to our accrued
liabilities;
(cid:120) meeting all required covenant tests for all quarters and the year ending in 2010, and
(cid:120) environmental and health laws and enforcement policies thereunder could result, in
compliance expenses, cleanup costs, penalties or other liabilities relating to the handling,
manufacture, use, emission, discharge or disposal of pollutants or other substances at or from
our facilities or the use or disposal of certain of its chemical products.
79
While we believe the expectations reflected in such Forward-Looking Statements are reasonable,
we can give no assurance such expectations will prove to have been correct. There are a variety
of factors which could cause future outcomes to differ materially from those described in this
report, including, but not limited to,
(cid:120) changes in general economic conditions, both domestic and foreign,
(cid:120) material reduction in revenues,
(cid:120) material changes in interest rates,
(cid:120) ability to collect in a timely manner a material amount of receivables,
(cid:120) increased competitive pressures,
(cid:120) changes in federal, state and local laws and regulations, especially environmental regulations,
or in interpretation of such,
(cid:120) additional releases (particularly air emissions) into the environment,
(cid:120) material increases in equipment, maintenance, operating or labor costs not presently
anticipated by us,
(cid:120) the requirement to use internally generated funds for purposes not presently anticipated,
(cid:120) the inability to pay or secure additional financing for planned capital expenditures,
(cid:120) material changes in the cost of certain precious metals, anhydrous ammonia, natural gas,
copper and steel,
(cid:120) changes in competition,
(cid:120) the loss of any significant customer,
(cid:120) changes in operating strategy or development plans,
(cid:120) inability to fund the working capital and expansion of our businesses,
(cid:120) changes in the production efficiency of our facilities,
(cid:120) adverse results in any of our pending litigation,
(cid:120) activating operations at full production rates at the Pryor Facility,
(cid:120) inability to obtain necessary raw materials,
(cid:120) other factors described in the MD&A contained in this report, and
(cid:120) other factors described in “Risk Factors”.
Given these uncertainties, all parties are cautioned not to place undue reliance on such Forward-
Looking Statements. We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of the Forward-Looking Statements contained herein
to reflect future events or developments.
80
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
General
The Certificate of Incorporation and By-laws of the Company provide for the division of the
Board of Directors into three classes, each class consisting as nearly as possible of one-third of
the whole. The term of office of one class of directors expires each year; with each class of
directors elected for a term of three years and until the shareholders elect their qualified
successors.
The Company’s By-laws provide that the Board of Directors, by resolution from time to time,
may fix the number of directors that shall constitute the whole Board of Directors. The By-laws
presently provide that the number of directors may consist of not less than 3 nor more than 14.
The Board of Directors currently has set the number of directors at 14.
Only persons who are nominated in accordance with the procedures set forth in our Bylaws are
eligible for election as directors. Pursuant to the August 20, 2009 amendments to our Bylaws,
nominations of persons for election to the Board of Directors may be made at a meeting of
stockholders at which directors are to be elected only (i) by or at the direction of the Board of
Directors; or (ii) by any stockholder of the Company entitled to vote for the election of directors
at the meeting who complies with the notice procedures set forth in our Bylaws. A director
nomination made by a stockholder must be delivered or mailed to and received at our principal
executive offices not less than 120 nor more than 150 days prior to the date of the meeting;
provided, however, that in the event the date of the annual meeting is more than 30 days before
or more than 60 days after such date, notice by the stockholder to be timely must be so delivered,
or mailed and received not later than the 90th day prior to such annual meeting, or if later, the 10th
day following the date on which the public disclosure of the date of such annual meeting was so
made.
Our Nominating and Governance Committee reviews the composition of the Board to assess the
Board performance, composition, and effectiveness. The Nominating Committee values certain
characteristics to all Board members, including personal and professional integrity, reputation,
outstanding professional achievement, and sound business judgment. The Nominating
Committee evaluates each individual director in the context of the Board as a whole with the
goal of recommending an effective group with a diversity of experience and skills that exercises
sound business judgment in the interest of our business and our shareholders.
Directors
Raymond B. Ackerman, age 87. Mr. Ackerman first became a director in 1993. His term will
expire in 2011. From 1952 until his retirement in 1992, Mr. Ackerman served as Chairman of the
Board and President of Ackerman McQueen, Inc., the largest advertising and public relations
firm headquartered in Oklahoma. He currently serves as Chairman Emeritus of the firm. He
retired as a Rear Admiral in the United States Naval Reserve. He is a graduate of Oklahoma City
University, and in 1996, was awarded an honorary doctorate from the school. He was elected to
the Oklahoma Hall of Fame in 1993 and the Oklahoma Commerce and Industry Hall of Honor in
81
1998. He served as the President of the Oklahoma City Chamber of Commerce, the United Way,
Allied Arts and six other Oklahoma City non-profit organizations. Mr. Ackerman’s advertising
and public relations experience, and his leadership skills and business experience, among other
factors, led the Board to conclude that he should serve as a director.
Robert C. Brown, M.D., age 78. Dr. Brown first became a director in 1969. His term will expire
in 2012. Dr. Brown has practiced medicine for many years and is Vice President and Treasurer
of Plaza Medical Group, P.C. Dr. Brown received both his undergraduate and medical degrees
from Tufts University after which he spent two years as a doctor in the United States Navy and
over three years at the Mayo Clinic. Dr. Brown is also a Clinical Professor at Oklahoma
University Health Science Center. Dr. Brown has experience with and insight into all aspects of
developing and growing a company and as President and Chief Executive Officer oversaw the
launch and sale of a medical claims clearinghouse which was sold, ultimately, to WebMD. Dr.
Brown is currently President and Chief Executive Officer of ClaimLogic L.L.C., a medical
claims clearinghouse specializing in the provision of medical clearinghouse services to
university affiliated hospitals and other medical providers throughout the United States. Dr.
Brown served as President of the Medical Staff of Baptist Medical Center of Oklahoma. He is a
Board member of Integris Physicians Services, Inc. Dr. Brown’s leadership experience,
entrepreneurial business experience and broad range of knowledge of the Company history and
business through his service as a director, among other factors, led the Board to conclude that he
should serve as a director.
Charles A. Burtch, age 74. Mr. Burtch first became a director in 1999. His term will expire in
2010. Mr. Burtch was formerly Executive Vice-President and West Division Manager of
BankAmerica, where he managed BankAmerica’s asset-based lending division for the western
third of the United States. He retired in 1998 and has since been engaged as a private investor.
Mr. Burtch is a graduate of Arizona State University. Mr. Burtch’s financial experience and his
experience as executive vice president of a large commercial bank, among other factors, led the
Board to conclude that he should serve as a director.
Robert A. Butkin, age 57. Mr. Butkin first became a director in August 2007. His term will
expire in 2010. Mr. Butkin is currently a Professor of Law at the University of Tulsa College of
Law. He was Dean of the Tulsa College of Law from 2005 to 2007. Mr. Butkin also serves as
President of BRJN Capital Corporation a private investment company. Mr. Butkin served as
Assistant Attorney General for the State of Oklahoma from 1987 to 1993, and served from 1995
to 2005 as the State Treasurer of Oklahoma. He has served in various organizations, including
holding the presidency of the Southern State Treasurers Association. He chaired the Banking,
Collateral and Cash Management Committee for the National Association of State Treasurers
(“NAST”). In addition, from 1981 to 1995, he served on the Board of Citizens Bank of Velma,
Oklahoma, and he served as Chairman of the Board of that bank from 1991 to 1994. He attended
and received a Bachelor of Arts degree from Yale College. He received his Juris Doctorate from
the University of Pennsylvania Law School in 1978. Mr. Butkin’s leadership skills and financial
experience obtained through serving as State Treasurer of Oklahoma, chairman of the banking
committee of NAST, leading his private investment company, and service as the dean of a major
law school in the State of Oklahoma, among other factors, led the Board to conclude that he
should serve as a director.
82
Barry H. Golsen, J.D., age 59. Mr. Golsen first became a director in 1981. His term will expire
in 2012. Mr. Golsen was elected President of the Company in 2004. Mr. Golsen has served as
our Vice Chairman of the Board of Directors since August 1994, and has been the President of
our Climate Control Business for more than five years. Mr. Golsen served as a director of the
Oklahoma branch of the Federal Reserve Bank. Mr. Golsen has both his undergraduate and law
degrees from the University of Oklahoma. Mr. Golsen’s extensive experience in the climate
control industry, his depth of knowledge and understanding of the business in which the
Company operates, his depth of leadership skills within the Company, among other factors, led
the Board to conclude that he should serve as a director.
Jack E. Golsen, age 81. Mr. Golsen first became a director in 1969. His term will expire in
2010. Mr. Golsen, founder of the Company, is our Chairman of the Board of Directors and Chief
Executive Officer and has served in that capacity since our inception in 1969. Mr. Golsen served
as our President from 1969 until 2004. During 1996, he was inducted into the Oklahoma
Commerce and Industry Hall of Honor as one of Oklahoma’s leading industrialists. Mr. Golsen
has a Bachelor of Science degree from the University of New Mexico. Mr. Golsen is a Trustee of
Oklahoma City University. During his career, he acquired or started the companies which
formed the Company. He has served on the boards of insurance companies, several banks and
was Board Chairman of Equity Bank for Savings N.A. which was formerly owned by the
Company. In 1972 he was recognized nationally as the person who prevented a widespread
collapse of the Wall Street investment banking industry. Refer to “The Second Crash” by
Charles Ellis, and five additional books about the Wall Street crisis. Mr. Golsen’s demonstrated
leadership skills and extensive experience and understanding in all industries in which the
Company operates, his financial experience and broad business knowledge, among other factors,
led the Board to conclude that he should serve as a director.
David R. Goss, age 69. Mr. Goss first became a director in 1971. His term will expire in 2012.
Mr. Goss, a certified public accountant, is our Executive Vice President of Operations and has
served in substantially the same capacity for more than five years. Mr. Goss is a graduate of
Rutgers University. Mr. Goss’s accounting and financial experience and extensive knowledge of
the industries in which the Company operates, among other factors, led the Board to conclude
that he should serve as a director.
Bernard G. Ille, age 83. Mr. Ille first became a director in 1971. His term will expire in 2011.
Mr. Ille served as President and Chief Executive Officer of United Founders Life from 1966 to
1988. He served as President and Chief Executive Officer of First Life Assurance Company from
1988, until it was acquired by another company in 1994. During his tenure as President of these
two companies, he served as Chairman of the Oklahoma Guaranty Association for ten years and
was President of the Oklahoma Association of Life Insurance Companies for two terms. He was
a director of Landmark Land Company, Inc., which was the parent company of First Life. He is
also a director for Quail Creek Bank, N.A. Mr. Ille is currently President of BML Consultants
and a private investor. He is a graduate of the University of Oklahoma. Mr. Ille’s leadership of a
major insurance company in Oklahoma, his financial and insurance background, and his
investment experience, among other factors, led the Board to conclude that he should serve as a
director.
83
Gail P. Lapidus, age 58. The Board of Directors appointed Ms. Lapidus as a director in
February 2010 to fill a newly-created vacancy. Her term will expire in 2012. Ms. Lapidus is the
Executive Director and CEO of Family & Children’s Services (“FCS”), a premiere human
services provider in the Tulsa, Oklahoma metro area. Ms. Lapidus has been with the 85 year old
agency for 35 years and has served as its Executive Director since 1986. During her tenure, FCS
has become the largest outpatient community mental health center in the state of Oklahoma for
children, families and individuals without sufficient economic resources or health insurance.
FCS, which has an annual budget of more than $33 million and a staff of over 500, has attracted
national recognition and research grants for the services it provides. Ms. Lapidus received her
undergraduate degree and a Master’s Degree in Social Work from the University of Oklahoma
where she was later named an inaugural inductee into the Hall of Honor for outstanding
leadership in professional practice. Ms. Lapidus’s management and leadership experience as the
executive director of FCS, among other factors, led the Board to conclude that she should serve
as a director.
Donald W. Munson, age 77. Mr. Munson first became a director in 1997. His term will expire
in 2011. From 1988, until his retirement in 1992, Mr. Munson served as President and Chief
Operating Officer of Lennox Industries. Prior to 1998, he served as Executive Vice President of
Lennox Industries’ Division Operations, President of Lennox Canada and Managing Director of
Lennox Industries’ European Operations. Prior to joining Lennox Industries, Mr. Munson served
in various capacities with the Howden Group, a company located in Scotland, and The Trane
Company, including serving as the managing director of various companies within the Howden
Group and Vice President Europe for The Trane Company. He is currently a consultant. Mr.
Munson is a resident of England. He has degrees in mechanical engineering and business
administration from the University of Minnesota. Mr. Munson’s extensive experience in the
climate control industry, and his leadership skills obtained through his service as senior
executive and a managing director of Lennox Industries, among other factors, led the Board to
conclude that he should serve as a director.
Ronald V. Perry, age 60. Mr. Perry first became a director in August 2007. His term will expire
in 2011. Mr. Perry currently serves as President of Prime Time Travel, which he founded in
1979. He also serves on the Alumni Board of Directors for Leadership Oklahoma City and is a
member of the Metro Technology Centers Board of Directors. Mr. Perry has served in various
charitable and civic organizations. Mr. Perry is also a past President of the Oklahoma City Food
Bank and has served as President of the OKC Food Bank Board of Directors. In 2007, the mayor
of Oklahoma City appointed Mr. Perry to serve as a commissioner on the Oklahoma City
Convention and Visitors Bureau. Mr. Perry graduated from Oklahoma State University, with a
Bachelor’s degree in Business Administration. Mr. Perry’s leadership skills, business experience
and promotions experience, among other factors, led the Board to conclude that he should serve
as a director.
Horace G. Rhodes, age 82. Mr. Rhodes first became a director in 1996. His term will expire in
2010. Mr. Rhodes is the Chairman of the law firm of Kerr, Irvine, Rhodes & Ables and has
served in such capacity and has practiced law for many years. From 1972 until 2001, he served
as Executive Vice President and General Counsel for the Association of Oklahoma Life
Insurance Companies and since 1982 served as Executive Vice President and General Counsel
for the Oklahoma Life and Health Insurance Guaranty Association (“OLHIGA”). Mr. Rhodes
received his undergraduate and law degrees from the University of Oklahoma. Mr. Rhodes’
84
experience as a leader of an Oklahoma law firm, his depth of understanding of corporations and
business transactions obtained through 40 years of practice as a corporate lawyer with expertise
in mergers and acquisitions, his financial and investment experience gained through one year as
treasurer and seven years as president of a life insurance company, together with his unique
financial experience as an insurance industry regulator for three years, among other factors, led
the Board to conclude that he should serve as a director.
Tony M. Shelby, age 68. Mr. Shelby first became a director in 1971. His term will expire in
2011. Mr. Shelby, a certified public accountant, is our Executive Vice President of Finance and
Chief Financial Officer, a position he has held for more than five years. Prior to becoming our
Executive Vice President of Finance and Chief Financial Officer, he served as Chief Financial
Officer of a subsidiary of the Company and was with the accounting firm of Arthur Young &
Co., a predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of Oklahoma City
University. Mr. Shelby’s financial and accounting experience, his demonstrated leadership skills
within the Company, and extensive understanding of the industries in which the Company
operates, among other factors, led the Board to conclude that he should serve as a director.
John A. Shelley, age 59. Mr. Shelley first became a director in 2005. His term will expire in
2012. Mr. Shelley is the President and Chief Executive Officer of The Bank of Union (“Bank of
Union”) located in Oklahoma. He has held this position since 1997. Prior to 1997, Mr. Shelley
held various senior level positions in financial institutions in Oklahoma including the position of
President of Equity Bank for Savings, N.A., a savings and loan that was owned by the Company
prior to 1994. Mr. Shelley is a graduate of the University of Oklahoma. Mr. Shelley’s experience
in the banking industry and his financial experience obtained through his service as CEO of the
Bank of Union, among other factors, led the Board to conclude that he should serve as a director.
Executive Officers
Certain information concerning our executive officers is contained in Part I of this annual report
on Form 10-K under the caption “Executive Officers of the Registrant” and is incorporated by
reference herein.
Family Relationships
Jack E. Golsen is the father of Barry H. Golsen and the brother-in-law of Robert C. Brown.
Robert C. Brown is the uncle of Barry H. Golsen. David M. Shear is the nephew by marriage to
Jack E. Golsen and son-in-law of Robert C. Brown. Although not executive officers or directors
of the Company, Steve J. Golsen, the son of Jack E. Golsen, brother of Barry H. Golsen, and the
nephew of Robert C. Brown, is the Chief Operating Officer of our Climate Control Business, and
Heidi Brown Shear, Vice President and Managing Counsel of the Company, is the daughter of
Robert C. Brown and spouse of David M. Shear.
85
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934, as amended (the “Exchange Act”), requires the
Company’s directors, officers, and beneficial owners of more than 10% of the Company’s
common stock to file with the Securities and Exchange Commission reports of holdings and
changes in beneficial ownership of the Company’s stock. Based solely on a review of copies of
the Forms 3, 4 and 5 and amendments thereto furnished to the Company with respect to 2009, or
written representations that no Form 5 was required to be filed, the Company believes that during
2009 all directors and officers of the Company and beneficial owners of more than 10% of the
Company’s common stock filed timely their required Forms 3, 4, or 5, except (a) Robert Butkin
and Mike Tepper each inadvertently filed one late Form 4 to report one transaction, and (b)
Bernie Ille filed one late Form 5 to amend a prior filed Form 4.
Code of Ethics
The Chief Executive Officer, the Chief Financial Officer, the principal accounting officer, and
the controller of the Company and each of the our subsidiaries, or persons performing similar
functions, are subject to our Code of Ethics. We and each of our subsidiary companies have
adopted a Statement of Policy Concerning Business Conduct applicable to our employees.
Our Code of Ethics and Statement of Policy Concerning Business Conduct are available on our
website at www.lsb-okc.com. We will post any amendments to these documents, as well as any
waivers that are required to be disclosed pursuant to the rules of either the Securities and
Exchange Commission or the NYSE Euronext (“NYSE”), on our website.
Audit Committee
We have a separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Messrs.
Bernard Ille (Chairman), Charles Burtch, Horace Rhodes, Ray Ackerman and John Shelley. The
Board has determined that each member of the Audit Committee is independent, as defined in
the listing standards of the NYSE as of the Company’s fiscal year end. During 2009, the Audit
Committee had seven meetings.
Audit Committee Financial Expert
While the Board of Directors endorses the effectiveness of our Audit Committee, its membership
does not presently include a director that qualifies for designation as an “audit committee
financial expert.” However, each of the current members of the Audit Committee is financially
literate and able to read and understand fundamental financial statements and at least one of its
members has financial management expertise. The Board of Directors believes that the
background and experience of each member of the Audit Committee is sufficient to fulfill the
duties of the Audit Committee. For these reasons, although members of our Audit Committee are
not professionally engaged in the practice of accounting or auditing, our Board of Directors has
concluded that the ability of our Audit Committee to perform its duties is not impaired by the
absence of an “audit committee financial expert.”
86
Nominating and Corporate Governance Committee
We have a separately-designated standing Nominating and Corporate Governance Committee
(the “Nominating Committee”). The members of the Nominating Committee are Messrs. Ray
Ackerman, Bernard Ille, Horace Rhodes, and John Shelley (Chairman). The Board has
determined that each member of the Nominating Committee is independent, in accordance with
Section 10A-3 of the Exchange Act and the listing standards of the NYSE. During 2009, the
Nominating Committee had two meetings.
Compensation and Stock Option Committee
The Compensation and Stock Option Committee (the “Compensation Committee”) has three
members and met two times during 2009. The Compensation Committee is comprised of
Messrs. Horace Rhodes (Chairman), Charles Burtch and Bernard Ille, non-employee,
independent directors in accordance with the rules of the NYSE. The Board has adopted a
Compensation and Stock Option Committee Charter, which governs the responsibilities of the
Compensation Committee. This charter is available on the Company’s website at www.lsb-
okc.com, and is also available from the Company upon request.
The Compensation Committee’s responsibilities include, among other duties, the responsibility
to:
(cid:120) establish the base salary, incentive compensation and any other compensation for the
Company’s executive officers;
(cid:120) administer the Company’s management incentive and stock-based compensation plans,
non-qualified death benefits, salary continuation and welfare plans, and discharge the
duties imposed on the Compensation Committee by the terms of those plans; and
(cid:120) perform other functions or duties deemed appropriate by the Board.
Decisions regarding non-equity compensation of non-executive officers of the Company and the
executive officers of the Company named in the Summary Compensation Table (the “named
executive officers”) other than the Chief Executive Officer and the President, are made by the
Company’s Chief Executive Officer and presented for approval or modification by the
Committee.
The agenda for meetings of the Compensation Committee is determined by its Chairman with the
assistance of the Company’s Chief Executive Officer. Committee meetings are regularly
attended by the Chief Executive Officer. At each Compensation Committee meeting, the
Compensation Committee also meets in executive session without the Chief Executive Officer.
The Committee’s Chairman
the Compensation Committee’s
recommendations on compensation for the Chief Executive Officer and the President. The Chief
Executive Officer may be delegated authority to fulfill certain administrative duties regarding the
compensation programs.
the Board
reports
to
The Compensation Committee has authority under its charter to retain, approve fees for, and
terminate advisors, consultants and agents as it deems necessary to assist in the fulfillment of its
responsibilities. If an outside consultant is engaged, the Compensation Committee reviews the
total fees paid to such outside consultant by the Company to ensure that the consultant maintains
its objectivity and independence when rendering advice to the Compensation Committee. For
2009, no outside consultants were engaged by the Compensation Committee.
87
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
Our long-term success depends on our ability to efficiently operate our facilities, to continue to
develop our product lines and technologies, and to focus on developing our product markets. To
achieve these goals, it is important that we be able to attract, motivate, and retain highly talented
individuals who are committed to our values and goals.
The Compensation Committee has responsibility for the establishment in consultation with
management, of our compensation philosophy for our senior executive officers and the
implementation and oversight of a compensation program consistent with the philosophy. This
group of senior executive officers includes the named executive officers, as well as our other
executives.
A primary objective of the Compensation Committee is to ensure that the compensation paid to
the senior executive officers is fair, reasonable, competitive, and provides incentives for superior
performance. The Compensation Committee is responsible for approval of all decisions for the
direct compensation, including the base salary and bonuses, stock options and other benefit
programs for the Company’s senior executive officers, including the named executive officers.
In general, the day-to-day administration of savings, health and welfare plans and policies are
handled by a team of our legal and finance department employees. The Compensation
Committee (or Board) remains responsible for key policy changes outside of the day to day
requirements necessary to maintain these plans and policies.
Compensation Philosophy and Objectives
The Compensation Committee believes that the most effective executive compensation program
rewards the executive’s achievements and contribution towards the Company achieving its long-
term strategic goals. However, the Compensation Committee does not believe that executive
compensation should be tied to specific numeric or formulaic financial goals or stock price
achievement by the Company. The Compensation Committee recognizes that, given the
volatility of the markets in which we do business, our economic performance in any given time
frame may not be an accurate measurement of our senior executive officer’s performance.
The Compensation Committee values both personal contribution and teamwork as factors to be
rewarded. The Compensation Committee believes that it is important to align executives’
interests with those of stockholders through the use of stock option incentive programs. When
granted, stock options are granted with an exercise price equal to their grant date value, in
accordance with our stock option incentive programs. The Compensation Committee evaluates
both performance and compensation and considers previously granted options to ensure that we
maintain our ability to attract and retain highly talented employees in key positions, and that
compensation provided to key employees will remain competitive relative to our other senior
executive officers. The Compensation Committee believes that executive compensation packages
should include both cash and stock-based compensation, as well as other benefit programs to
88
encourage senior executive officers to remain with the Company and have interests aligned with
those of the Company. As a result, the Compensation Committee reviews the number of stock
options exercised by senior executive officers during recent periods, if any, as well as stock
options currently held by the senior executive officers. This analysis enables the Compensation
Committee to determine whether the grant of additional stock based compensation may be
advisable to ensure that our senior executive officers’ interests are aligned with those of the
Company. Based on the foregoing, the Compensation Committee bases it executive
compensation program on the following criteria:
(cid:120) Compensation should be based on the level of job responsibility, executive performance,
and Company performance.
(cid:120) Compensation should enable us to attract and retain key talent.
(cid:120) Compensation should be competitive with compensation offered by other companies that
compete with us for talented individuals in our geographic area.
(cid:120) Compensation should reward performance.
(cid:120) Compensation should motivate executives to achieve our strategic and operational goals.
Setting Executive Compensation
The Compensation Committee sets annual cash and non-cash executive compensation to reward
the named executive officers for achievement and to motivate the named executive officers to
achieve long-term business objectives. The Compensation Committee is unable to use peer group
comparisons in determining the compensation package because of the diverse nature of our lines
of business. Although the Compensation Committee has not engaged outside consultants to assist
in conducting its annual review of the total compensation program, it may do so in the future.
The Compensation Committee reviewed some generally available compensation information for
companies of our size. The Compensation Committee considered base salary and current bonus
awards in determining overall compensation. The Compensation Committee does not have a
policy allocating long term and currently paid compensation. The Compensation Committee also
considered the allocation between cash and non-cash compensation amounts, but does not have a
specific formula or required allocation between such compensation amounts. The Compensation
Committee compares the Chief Executive Officer’s total compensation to the total compensation
of our other named executive officers over time. However, the Compensation Committee has not
established a target ratio between total compensation of the Chief Executive Officer and the
median total compensation level for the next lower tier of management. The Compensation
Committee also considers internal pay equity among the named executive officers and in relation
to next lower tier of management in order to maintain compensation levels that are consistent
with the individual contributions and responsibilities of those executive officers. The
Compensation Committee does not consider amounts payable under severance agreements when
setting the annual compensation of the named executive officers.
Role of Executive Officers in Compensation Decisions
Our Chief Executive Officer annually reviews the performance of each of our named executive
officers (other than the Chief Executive Officer and the President) and presents to the
Compensation Committee recommendations with respect to salary, bonuses and other benefit
items. The Compensation Committee considers and reviews such recommendations in light of
the Compensation Committee’s philosophy and objections and exercises its discretion in
89
accepting or modifying the recommended compensation. In determining compensation for the
Chief Executive Officer and the President, the Compensation Committee reviews the
responsibilities and performance of each of them. Such review includes interviewing both the
Chief Executive Officer and the President and consideration of the Compensation Committee’s
observations of the Chief Executive Officer and the President during the applicable year.
2009 Executive Compensation Components
For the fiscal year ended December 31, 2009, the principal components of compensation for the
named executive officers were:
(cid:120) base salary;
(cid:120) cash bonus;
(cid:120) death benefit and salary continuation programs; and
(cid:120) perquisites and other personal benefits.
The Compensation Committee did not award equity-based compensation, such as stock options,
to the named executive officers in 2009. As discussed below, the Compensation Committee
awarded salary increases and bonuses to the named executive officers for 2009. Those awards
were considered sufficient to provide competitively based incentives to our executives to
advance company performance, without granting equity based compensation as well.
Base Salary
We provide the named executive officers and other senior executive officers with base salary to
compensate them for services rendered during the year. We do not have a defined benefit or
qualified retirement plan for our executives. This factor is considered when setting the base
compensation for senior executive officers.
Base salaries are determined for the named executive officers in the discretion of the
Compensation Committee based upon the recommendations of the Chief Executive Officer’s
assessment of the executive’s compensation, both individually and relative to the other senior
executive officers, and based upon an assessment of the individual performance of the executive
during the preceding year. In determining the base salary for the Chief Executive Officer and the
President, the Compensation Committee exercises its judgment based on its observations of such
senior executive officers and the Compensation Committee’s assessment of such officers’
contribution to the Company’s performance and other leadership achievements. Although the
Compensation Committee does not use specific performance targets to set base salaries or
bonuses, the Compensation Committee awarded salary increases in 2009 based on the above
criteria and with consideration of the overall performance of the Company during challenging
economic conditions.
Bonuses
The Compensation Committee may award cash bonuses to the named executive officers to
reward outstanding performance. The Compensation Committee awarded bonuses to the named
executive officers in 2009 based upon the Compensation Committee’s review of the performance
and the recommendation of the Chief Executive Officer. No bonus is guaranteed, and there is no
defined range of bonus amounts that the Compensation Committee may award. Bonus awards
90
are made at the Compensation Committee’s discretion based upon an assessment of an
individual’s overall contribution to the Company.
Death Benefit and Salary Continuation Plans
The Company sponsors non-qualified arrangements to provide a death benefit to the designated
beneficiary of certain key employees (including certain of the named executive officers) in the
event of such executive’s death (the “Death Benefit Plans”). We also have a non-qualified
arrangement with certain key employees (including certain of the named executive officers) of
the Company and its subsidiaries to provide compensation to such individuals in the event that
they are employed by the Company at age 65 (the “Salary Continuation Plans”).
Attributed costs of the personal benefits described above for the named executive officers for the
fiscal year ended December 31, 2009, are discussed in footnote (1) and included in column (i) of
the “Summary Compensation Table.”
The Compensation Committee believes that the Death Benefit and Salary Continuation Plans are
significant factors in:
(cid:120) enabling the Company to retain its named executive officers;
(cid:120) encouraging our named executive officers to render outstanding service; and
(cid:120) maintaining competitive levels of total compensation.
Perquisites and Other Personal Benefits
The Company and the Compensation Committee believe that perquisites are necessary and
appropriate parts of total compensation that contribute to our ability to attract and retain superior
executives. Accordingly, the Company and the Compensation Committee provided our named
executive officers and certain other executive officers a limited number of perquisites that are
reasonable and consistent with our overall compensation program.
We currently provide the named executive officers with the use of our automobiles, provide cell
phones that are used primarily for business purposes, and pay the country club dues for certain of
the executive officers. The executive officers are expected to use the country club in large part
for business purposes.
The Compensation Committee periodically reviews the levels of perquisites provided to the
named executive officers.
Severance Agreements
We have entered into change of control severance agreements with certain key employees,
including the named executive officers. The severance agreements are designed to promote
stability and continuity of senior management. The severance agreements provide generally that
if a executive officer who is a party to a severance agreement is terminated, other than for cause,
within 24 months after the occurrence of a change-in-control of the Company or the executive
officer terminates his employment for good reason following a change in control, the Company
must pay the executive officer an amount equal to 2.9 times the officer’s average annual gross
91
salary for the last five years preceding the change in control. The Compensation Committee
believes that the severance agreements are an important element in retaining our senior
management. These severance agreements are described under “Severance Agreements” below.
Information regarding applicable payments under such agreements for the named executive
officers is provided under the heading “Potential Payments Upon Termination or Change-In-
Control.”
Employment Agreement
We have no employment agreements with our named executive officers, except with Jack E.
Golsen, our Chief Executive Officer. The terms of Mr. Golsen’s employment agreement are
described below under “Employment Agreement.” We believe that Mr. Golsen’s employment
agreement promotes stability in our senior management and encourages Mr. Golsen to provide
superior service to us. The current term of the Employment Agreement expires March 21, 2011,
but will automatically renew for up to three additional three-year periods, unless earlier
terminated by either party with one years’ notice.
Ownership Guidelines
At this time, we have not established any guidelines which require our executive officers to
acquire and hold our common stock. However, our named executive officers have historically
acquired and maintained a significant ownership position in our common stock.
Tax and Accounting Implications
Deductibility of Executive Compensation - Section 162(m) of the Internal Revenue Code,
provides that the Company may not deduct compensation of more than $1,000,000 of employee
remuneration for named executive officers. However,
the statute exempts qualifying
performance-based compensation from the deduction limit when specified requirements are met.
In the past, the Company has granted non-qualifying stock options to the named executive
officers that do not meet the performance-based compensation criteria and are subject to the
Section 162(m) limitation.
As a result of the exercise of non-qualifying stock options, the Company’s aggregate reported
compensation, for tax purposes, to Jack E. Golsen, Barry H. Golsen, and David M. Shear
exceeded the Section 162(m) deductibility limits in 2008 and 2007 by $350,000 and $3,418,000,
respectively (none in 2009). For 2008, Barry H. Golsen’s compensation exceeded the
deductibility limit by $350,000, which represents a cost to the company of $137,000 as a result
of the lost tax deduction. For 2007, Jack E. Golsen’s compensation exceeded the deductibility
limit by $3,349,000, which represents a cost to the company of $1,306,000 as a result of the lost
tax deduction and David M. Shear’s compensation exceeded the deductibility limit by $69,000
which represents a cost to the company of $27,000 as a result of the lost tax deductions. The
Company’s compensation deduction was not limited by Section 162(m) in 2009.
Accounting for Stock-Based Compensation - The Company accounts for stock-based payments,
including its incentive and nonqualified stock options, in accordance with United States
generally accepted accounting principles.
92
Compensation and Stock Option Committee Report
The Compensation and Stock Option Committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis with management and, based on such review and
discussions, the Compensation and Stock Option Committee recommended to the Board that the
Compensation Discussion and Analysis be included herein.
Submitted by the Compensation and Stock Option Committee of the Company’s Board of
Directors.
Horace G. Rhodes, Chairman
Charles A. Burtch
Bernard G. Ille
The following table summarizes the total compensation paid or earned by each of the named
executive officers for each of the three fiscal years in the period ended December 31, 2009. The
Company did not grant equity-based awards to the named executive officers during 2009, 2008 or
2007.
Summary Compensation Table
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($) (1)
Total
($)
Jack E. Golsen,
Chairman of the Board
of Directors and
Chief Executive Officer
Tony M. Shelby,
Executive Vice President
of Finance and Chief
Financial Officer
Barry H. Golsen,
Vice Chairman of the Board of
Directors, President, and
President of the Climate Control
Business
David R. Goss,
Executive Vice President of
Operations
David M. Shear,
Senior Vice President and
General Counsel
2009
2008
2007
636,323
575,554
523,400
200,000
200,000
50,000
2009
2008
2007
275,000
268,654
255,000
125,000
125,000
90,000
2009
2008
2007
2009
2008
2007
2009
2008
2007
527,523
479,446
433,100
200,000
175,000
100,000
270,500
259,923
240,500
100,000
85,000
55,000
275,000
264,423
240,000
100,000
100,000
75,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
713,556
682,646
645,010
1,549,879
1,458,200
1,218,410
16,824
15,574
22,773
416,824
409,228
367,773
16,887
27,546
22,191
4,195
14,440
12,361
9,068
17,149
9,961
744,410
681,992
555,291
374,695
359,363
307,861
384,068
381,572
324,961
93
(1) As discussed below under “1981 Agreements” and “2005 Agreement,” the Company entered
into individual death benefit agreements in 1981 (amended in 2008 to comply with Section 409A
of the Internal Revenue Code (“Section 409A”)) and a death benefit agreement in 2005.
Reported compensation for the death benefit under these agreements is the greater of:
(cid:120)
(cid:120)
the expense incurred associated with our accrued death benefit liability; or
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit.
Amounts accrued under these agreements are not paid until the death of the named executive
officer.
As discussed below under “1992 Agreements”, the Company entered into benefit agreements in
1992 (and amended in 2008 to comply with Section 409A), which include a death benefit until
the employee reaches age 65 or benefits for life commencing when the employee reaches age 65.
Compensation reported for these benefits is the greater of:
(cid:120)
(cid:120)
the expense incurred associated with our accrued benefit liability or
the pro rata portion of life insurance premium expense to fund the undiscounted death
benefit.
The amounts set forth under “All Other Compensation” are comprised of compensation relating
to these agreements and perquisites for 2009, as follows:
1981
Agreements
1992
Agreements
2005
Agreement
Other (A)
Total
Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear
$
$
$
$
$
215,229 $
- $
490,157 $
8,170 $
713,556
7,250 $
- $
- $
9,574 $
16,824
517 $
10,287 $
- $
6,083 $
16,887
1,132 $
- $
- $
3,063 $
$
4,946 $
- $
4,122 $
4,195
9,068
(A) Amount relates to the personal use of automobiles, cell phones and country club dues.
The Company did not grant equity-based awards to the named executive officers during 2009,
2008 or 2007.
Employment Agreement
We have an employment agreement with Jack E. Golsen, which requires the Company to employ
Mr. Golsen as an executive officer of the Company. The employment agreement was amended in
2008 to comply with Section 409A. The employment agreement may be terminated by either
party by written notice at least one year prior to the expiration of the then current term. The
current term of the employment agreement expires March 21, 2011, but will be automatically
renewed for up to three additional three-year periods. Under the terms of such employment
agreement, Mr. Golsen shall:
94
(cid:120) be paid an annual base salary at his 1995 base rate, as adjusted from time to time by the
Compensation Committee, but such shall never be adjusted to an amount less than Mr.
Golsen’s 1995 base salary,
(cid:120) be paid an annual bonus in an amount as determined by the Compensation Committee,
(cid:120)
and
receive from the Company certain other fringe benefits (vacation; health and disability
insurance).
The employment agreement provides that Mr. Golsen’s employment may not be terminated,
except:
(cid:120) upon conviction of a felony involving moral turpitude after all appeals have been
exhausted (“Conviction”),
(cid:120) Mr. Golsen’s serious, willful, gross misconduct or willful, gross negligence of duties
resulting in material damage to the Company and its subsidiaries, taken as a whole,
unless Mr. Golsen believed, in good faith, that such action or failure to act was in the
Company’s or its subsidiaries’ best interest (“Misconduct”), and
(cid:120) Mr. Golsen’s death.
However, no termination for a Conviction or Misconduct may occur unless and until the
Company has delivered to Mr. Golsen a resolution duly adopted by an affirmative vote of three-
fourths of the entire membership of the Board of Directors at a meeting called for such purpose
after reasonable notice given to Mr. Golsen finding, in good faith, that Mr. Golsen violated such
item.
If Mr. Golsen’s employment is terminated for reasons other than due to a Conviction or
Misconduct, then he shall, pursuant to the employment agreement, in addition to his other rights
and remedies, receive and the Company shall pay to Mr. Golsen:
(cid:120) a cash payment, on the date of termination, a sum equal to the amount of Mr. Golsen’s
annual base salary at the time of such termination and the amount of the last bonus paid
to Mr. Golsen prior to such termination times the number of years remaining under the
then current term of the employment agreement, and
(cid:120) provide to Mr. Golsen all of the fringe benefits that the Company was obligated to
provide during his employment under the employment agreement for the remainder of the
term of the employment agreement.
If there is a change in control (as defined in the severance agreement between Mr. Golsen and
the Company as discussed below under “Severance Agreements”) and within 24 months after
such change in control Mr. Golsen is terminated, other than for Cause (as defined in the
severance agreement), then in such event, the severance agreement between Mr. Golsen and the
Company shall be controlling.
In the event Mr. Golsen becomes disabled and is not able to perform his duties under the
employment agreement as a result thereof for a period of 12 consecutive months within any two-
year period, the Company shall pay Mr. Golsen his full salary for the remainder of the term of
the employment agreement and thereafter 60% of such salary until Mr. Golsen’s death.
95
1981 Agreements
During 1981, the Company entered into individual death benefit agreements (the “1981
Agreements”) with certain key employees (including certain of the named executive officers).
Each named executive officer will receive a monthly benefit for a period of 10 years if the
officer dies while in the employment of the Company or a wholly-owned subsidiary of the
Company. The 1981 Agreements provide that the Company may terminate the agreement as to
any officer at anytime prior to the officer’s death. The Company has purchased life insurance on
the life of each officer covered under the 1981 Agreements to provide a source of funds for the
Company’s obligations under the 1981 Agreements. The Company is the owner and sole
beneficiary of each of the insurance policies and the proceeds are payable to the Company upon
the death of the officer.
The following table sets forth the amounts of annual benefits payable to the designated
beneficiary or beneficiaries of the named executive officer’s under the 1981 Agreements.
Name of Individual
Amount of Annual
Payment
Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear
$ 175,000
$ 35,000
$ 30,000
$ 35,000
N/A
1992 Agreements
During 1992, the Company entered into individual benefit agreements with certain key
employees of the Company and its subsidiaries (including certain of the named executive
officers) to provide compensation to such individuals in the event that they are employed by the
Company or a subsidiary of the Company at age 65 (the “1992 Agreements”). The 1992
Agreements were amended in 2008 to comply with Section 409A. As relating to the named
executive officers, under the 1992 Agreements, the officer is eligible to receive a designated
benefit (“Benefit”) as set forth in the 1992 Agreements. The officer will receive the Benefit
beginning at the age 65 for the remainder of the officer’s life. If prior to attaining the age 65, the
officer dies while in the employment of the Company or a subsidiary of the Company, the
designated beneficiary of the officer will receive a monthly benefit (“Death Benefit”) for a
period of ten years. The 1992 Agreements provide that the Company may terminate the
agreement as to any officer at any time and for any reason prior to the death of the officer. The
Company has purchased insurance on the life of each officer covered under the 1992
Agreements. The Company is the owner and sole beneficiary of each insurance policy, and the
proceeds are payable to the Company to provide a source of funds for the Company’s obligations
under the 1992 Agreements. Under the terms of the 1992 Agreements, if the officer becomes
incapacitated prior to retirement or prior to reaching age 65, the officer may request the
Company to cash-in any life insurance on the life of such officer purchased to fund the
Company’s obligations under the 1992 Agreements. Jack E. Golsen does not participate in the
1992 Agreements.
96
The following table sets forth the amounts of annual benefits payable to the named executive
officers under the 1992 Agreements and the net cash surrender value of the associated life
insurance policies at December 31, 2009.
Amount
of Annual
Benefit
Amount
of Annual
Death Benefit
N/A
$ 15,605
$ 17,480
$ 17,403
$ 17,822
N/A
N/A
$ 11,596
N/A
7,957
$
Amount of
Net Cash
Surrender
Value
N/A
$
-
$ 41,847
$ 61,113
-
$
Name of Individual
Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear
2005 Agreement
During 2005, the Company entered into a death benefit agreement (“2005 Agreement”) with
Jack E. Golsen. This agreement replaced existing benefits that were payable to Mr. Golsen. The
2005 Agreement provides that, upon Mr. Golsen’s death, the Company will pay to Mr. Golsen’s
family or designated beneficiary $2.5 million to be funded from the net proceeds received by the
Company under certain life insurance policies on Mr. Golsen’s life that were purchased and are
owned by the Company. The 2005 Agreement requires that the Company is obligated to keep in
existence no less than $2.5 million of the stated death benefit. The life insurance policies in force
provide an aggregate stated death benefit to the Company, as beneficiary, of $7 million.
401(k) Plan
We maintain The LSB Industries, Inc. Savings Incentive Plan (the “401(k) Plan”) for the
employees (including the named executive officers) of the Company and its subsidiaries,
excluding employees covered under union agreements and certain other employees. As relating
to the named executive officers, the 401(k) Plan is funded by the officer’s contributions. The
Company and its subsidiaries make no contributions to the 401(k) Plan for any of the named
executive officers. The amount that an officer may contribute to the 401(k) Plan equals a certain
percentage of the employee’s compensation, with the percentage based on the officer’s income
and certain other criteria as required under Section 401(k) of the Internal Revenue Code. The
Company or subsidiary deducts the amounts contributed to the 401(k) Plan from the officer’s
compensation each pay period, in accordance with the officer’s instructions, and pays the amount
into the 401(k) Plan pursuant to the officer’s election. The salary and bonus set forth in the
Summary Compensation Table above include any amounts contributed by the named executive
officers during the 2009, 2008 and 2007 fiscal years pursuant to the 401(k) Plan.
97
Outstanding Equity Awards At December 31, 2009
(a)
(b)
(c)
(d)
(e)
(f)
Options Awards (1)
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(2)
-
15,000
11,250
-
-
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
-
-
-
-
-
Name
Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
-
-
-
-
-
Option
Exercise
Price
($)
-
2.73
2.73
-
-
Option
Expiration
Date(2)
-
11/29/2011
11/29/2011
-
-
(1) There were no unvested stock awards at December 31, 2009.
(2) Options expiring on November 29, 2011, were granted on November 29, 2001 and were fully
vested on November 28, 2005.
Options Exercised in 2009 (1)
(a)
Option Awards
(b)
(c)
Number of
Shares
Acquired on
Exercise
(#)
-
Value
Realized
on Exercise(2)
($)
-
100,000
1,283,000
-
80,000
-
-
1,005,800
-
Name
Jack E. Golsen
Tony M. Shelby
Barry H. Golsen
David R. Goss
David M. Shear
(1) There were no stock awards that vested in 2009.
(2) Value realized was determined using the difference between the exercise price of the options and
the closing price of our common stock on the date of exercise.
98
Severance Agreements
We have entered into severance agreements with each of the named executive officers and
certain other officers, which were amended in 2008 to comply with Section 409A. Each
severance agreement provides (among other things) that if, within 24 months after the occurrence
of a change in control (as defined) of the Company, the Company terminates the officer’s
employment other than for cause (as defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an amount equal to 2.9 times the officer’s
base amount (as defined). The phrase “base amount” means the average annual gross
compensation paid by the Company to the officer and includable in the officer’s gross income
during the most recent five-year period immediately preceding the change in control. If the
officer has been employed by the Company for less than five years, the base amount is calculated
with respect to the most recent number of taxable years ending before the change in control that
the officer worked for the Company.
The severance agreements provide that a “change in control” means a change in control of the
Company of a nature that would require the filing of a Form 8-K with the SEC and, in any event,
would mean when:
(cid:120) any individual, firm, corporation, entity, or group (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) becomes the beneficial owner, directly or
indirectly, of 30% or more of the combined voting power of the Company’s outstanding
voting securities having the right to vote for the election of directors, except acquisitions
by:
(cid:120) any person, firm, corporation, entity, or group which, as of the date of the severance
agreement, has that ownership, or
(cid:120) Jack E. Golsen, his wife; his children and the spouses of his children; his estate;
executor or administrator of any estate, guardian or custodian for Jack E. Golsen, his
wife, his children, or the spouses of his children, any corporation, trust, partnership,
or other entity of which Jack E. Golsen, his wife, children, or the spouses of his
children own at least 80% of the outstanding beneficial voting or equity interests,
directly or indirectly, either by any one or more of the above-described persons,
entities, or estates; and certain affiliates and associates of any of the above-described
persons, entities, or estates;
individuals who, as of the date of the severance agreement, constitute the Board of
Directors of the Company (the “Incumbent Board”) and who cease for any reason to
constitute a majority of the Board of Directors except that any person becoming a director
subsequent to the date of the severance agreement, whose election or nomination for
election is approved by a majority of the Incumbent Board (with certain limited
exceptions), will constitute a member of the Incumbent Board; or
the sale by the Company of all or substantially all of its assets.
(cid:120)
(cid:120)
Except for the severance agreement with Jack E. Golsen, the termination of an officer’s
employment with the Company “for cause” means termination because of:
(cid:120)
the mental or physical disability from performing the officer’s duties for a period of 120
consecutive days or one hundred eighty days (even though not consecutive) within a 360
day period;
99
(cid:120)
(cid:120)
(cid:120)
the conviction of a felony;
the embezzlement by the officer of Company assets resulting in substantial personal
enrichment of the officer at the expense of the Company; or
the willful failure (when not mentally or physically disabled) to follow a direct written
order from the Company’s Board of Directors within the reasonable scope of the officer’s
duties performed during the 60 day period prior to the change in control.
The definition of “Cause” contained in the severance agreement with Jack E. Golsen means
termination because of:
(cid:120)
(cid:120)
the conviction of Mr. Golsen of a felony involving moral turpitude after all appeals have
been completed; or
if due to Mr. Golsen’s serious, willful, gross misconduct or willful, gross neglect of his
duties has resulted in material damages to the Company and its subsidiaries, taken as a
whole, provided that:
(cid:120) no action or failure to act by Mr. Golsen will constitute a reason for termination if he
believed, in good faith, that such action or failure to act was in the Company’s or its
subsidiaries’ best interest, and
failure of Mr. Golsen to perform his duties hereunder due to disability shall not be
considered willful, gross misconduct or willful, gross negligence of his duties for any
purpose.
(cid:120)
The termination of an officer’s employment with the Company for “good reason” means
termination because of:
(cid:120)
the assignment to the officer of duties inconsistent with the officer’s position, authority,
duties, or responsibilities during the 60 day period immediately preceding the change in
control of the Company or any other action which results in the diminishment of those
duties, position, authority, or responsibilities;
the relocation of the officer;
(cid:120)
(cid:120) any purported termination by the Company of the officer’s employment with the
(cid:120)
Company otherwise than as permitted by the severance agreement; or
in the event of a change in control of the Company, the failure of the successor or parent
company to agree, in form and substance satisfactory to the officer, to assume (as to a
successor) or guarantee (as to a parent) the severance agreement as if no change in
control had occurred.
Except for the severance agreement with Jack E. Golsen, each severance agreement expires on
the earlier of: (a) three years after the date of the severance agreement, or (b) the date of
retirement from the Company; however, beginning on the first anniversary of the severance
agreement and on each annual anniversary thereafter, the term of the severance agreement
automatically extends for an additional one-year period, unless the Company gives notice
otherwise at least 60 days prior to the anniversary date. The severance agreement with Jack E.
Golsen is effective for a period of three years from the date of the severance agreement; except
that, commencing on the date one year after the date of such severance agreement and on each
anniversary thereafter, the term of such severance agreement shall be automatically extended so
as to terminate three years from such renewal date, unless the Company gives notices otherwise
at least one year prior to the renewal date.
100
Potential Payments Upon Termination or Change-In-Control
The following table reflects the amount that would have been payable to each of the named
executive officers under the applicable agreement if the respective trigger event had occurred on
December 31, 2009. (1)
Severance Pay Trigger Event
Name and
Executive Benefit
and Payments
Upon Separation
Involuntary
Other Than
For Cause
Termination
($)
Involuntary
For Cause
Termination
($)
Voluntary
Termination
($)
Jack E. Golsen: (2)(3)(6)
Salary
Bonus
Death Benefits
Other
795,404
250,000
-
-
-
-
-
Tony M. Shelby: (3)(4)(5)
Salary
Death Benefits
Other
-
-
230,225
Barry H. Golsen: (3)(4)(5)
Salary
Death Benefits
-
-
David R. Goss: (3)(4)(5)
Salary
Death Benefits
Other
David M. Shear: (3)(5)
Salary
Death Benefits
-
-
245,233
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Involuntary
Other Than
For Cause
Termination
- Change of
Control
($)
Voluntary
For Good
Reason
Termination
- Change of
Control
($)
Disability/
Incapacitation
($)
Death
($)
1,849,489
-
-
-
1,849,489
-
-
-
3,143,436
-
-
-
-
4,250,000
57,135
996,624
-
-
996,624
-
-
1,645,541
-
1,645,541
-
923,367
-
-
923,367
-
-
912,495
-
912,495
-
-
-
-
-
-
-
-
-
-
-
-
350,000
-
-
415,962
-
350,000
-
-
79,567
(1) This amount does not include the amount realizable under outstanding stock options
granted to the named executive officers, all of which are fully vested. See “Outstanding
Equity Awards at December 31, 2009.”
(2) See, “Employment Agreement,” above for a description of the terms of Mr. Golsen’s
employment agreement.
(3) See, “Severance Agreements,” above for a description of the terms of our severance
agreements.
(4) See, “1981 Agreements” for a discussion of the terms of our death benefit agreements.
(5) See, “1992 Agreements” for a description of the terms of our retention and death benefit
agreements.
(6) See, “2005 Agreement” for a description of the terms of Mr. Golsen’s death benefit
agreement.
101
Our Compensation Policies May Discourage Other Parties From Attempting to Acquire Us
We have entered into severance agreements with our executive officers and some of the
executive officers of our subsidiaries that provide, among other things, that if, within a specified
period of time after the occurrence of a change in control of our Company, these officers are
terminated, other than for cause, or the officer terminates his employment for good reason, we
must pay such officer an amount equal to 2.9 times the officer’s average annual gross salary for
the last five years preceding the change in control. See “Severance Agreements” and
“Employment Agreement,” above. These agreements may discourage a third party tender offer,
proxy contest, or other attempts to acquire control of us and could have the effect of making it
more difficult to remove incumbent management.
Compensation of Directors
In 2009, we compensated our non-employee directors for their services as directors on our
Board. Our Directors were not awarded stock options or other equity based compensation in
2009. Directors who are employees of the Company receive no compensation for their services
as directors.
The following table summarizes the compensation paid by us to our non-employee directors
during the year ended December 31, 2009.
Director Compensation Table
(a)
(b)
(h)
Fees
Earned
or Paid
in Cash
($) (1)
Total
($)
Name
Raymond B. Ackerman
40,500
40,500
Robert C. Brown, M.D.
40,000
40,000
Charles A. Burtch
40,000
40,000
Robert A. Butkin
39,500
39,500
Bernard G. Ille
40,500
40,500
Donald W. Munson
40,500
40,500
Ronald V. Perry
40,500
40,500
Horace G. Rhodes
40,500
40,500
John A. Shelley
40,500
40,500
(1) This amount includes as to each director, an annual fee of $13,000 for services as a director
and $500 for each Board meeting attended during 2009. In addition, each director that serves on
one or more committees of the Board receives an additional $25,000 for such service. As noted
below, each of our directors served on at least one committee during 2009:
102
(cid:120) Mr. Ackerman is a member of the Audit Committee, Nominating and Corporate
Governance Committee and Public Relations and Marketing Committee.
(cid:120) Dr. Brown is a member of the Benefits and Programs Committee. The amount shown
above does not include amounts paid by the Company to Dr. Brown for consulting
services rendered by him or his affiliated medical group, which amounts are described
under “Item 13 - Certain Relationships and Related Party Transactions, and Director
Independence - Related Party Transactions.”
(cid:120) Mr. Burtch is a member of the Audit Committee and Compensation Committee.
(cid:120) Mr. Butkin is a member of the Business Development Committee.
(cid:120) Mr. Ille is a member of the Audit Committee, Compensation Committee, Nominating and
Corporate Governance Committee and Public Relations and Marketing Committee.
(cid:120) Mr. Munson is a member of the Business Development Committee.
(cid:120) Mr. Perry is a member of the Public Relations and Marketing Committee.
(cid:120) Mr. Rhodes is a member of the Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee.
(cid:120) Mr. Shelley is a member of the Audit Committee, Public Relations and Marketing
Committee and Nominating and Corporate Governance Committee.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee has the authority to set the compensation of all of our officers.
This Compensation Committee considers the recommendations of the Chief Executive Officer
when setting the compensation of our officers. The Chief Executive Officer does not make a
recommendation regarding his own salary, and does not make any recommendation as to the
President’s salary. The members of the Compensation Committee are the following non-
employee directors: Horace G. Rhodes (Chairman), Charles A. Burtch, and Bernard G. Ille.
Neither Mr. Rhodes, Mr. Burtch nor Mr. Ille is, or ever has been, an officer or employee of the
Company or any of its subsidiaries. None of our executive officers or members of the
Compensation Committee had any relationship requiring disclosure under Item 404 of
Regulation S-K during 2009.
103
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the information as of December 31, 2009, with respect to our
equity compensation plans.
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
Plan Category
Equity compensation plans approved by
stockholders
Equity compensation plan not approved by
stockholders (1)
Total
848,775
22,500
871,275
$
$
8.23
2.73
$ 8.09
870,000
-
870,000
(1) Non-Stockholder Approved Plan From time to time, the Compensation Committee and/or the
Board of Directors has approved the grants of certain nonqualified stock options as the Board has
determined to be in our best interest to compensate directors, officers, or employees for service
to the Company. The exercise price of each such option is equal to the market value of our
common stock at the date of grant and each option expires ten years from the grant date. All
outstanding options under this plan were exercisable at December 31, 2009.
On November 29, 2001, we granted to certain employees of the Company nonqualified stock
options to acquire 102,500 shares of common stock in consideration of services to the Company.
As of December 31, 2009, 22,500 shares remain issuable under the nonqualified stock options at
an exercise price of $2.73 per share. The nonqualified stock options were not approved by our
stockholders.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of February 28, 2010, regarding the
ownership of our voting common stock and voting preferred stock by each person (including any
“group” as used in Section 13(d)(3) of the Securities Act of 1934, as amended) that we know to
be beneficial owner of more than 5% of our voting common stock and voting preferred stock. A
person is deemed to be the beneficial owner of shares of the Company which he or she could
acquire within 60 days of February 28, 2010.
104
Name and Address
of
Beneficial Owner
Title
of
Class
Amounts
of Shares
Beneficially
owned (1)
Percent
of
Class+
Jack E. Golsen and certain
members of his family (2)
Common
Voting Preferred
4,720,009
1,020,000
(3) (4)
(5)
21.1%
99.9%
+ Because of the requirements of the SEC as to the method of determining the amount of shares
an individual or entity may own beneficially, the amount shown for an individual may include
shares also considered beneficially owned by others. Any shares of stock which a person does
not own, but which he or she has the right to acquire within 60 days of February 28, 2010 are
deemed to be outstanding for the purpose of computing the percentage of outstanding stock of
the class owned by such person but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
(1) We based the information with respect to beneficial ownership on information furnished by
the above-named individuals or entities or contained in filings made with the Securities and
Exchange Commission or the Company’s records.
(2) Includes Jack E. Golsen (“J. Golsen”) and the following members of his family: wife, Sylvia
H. Golsen; son, Barry H. Golsen (“B. Golsen”) (a director, Vice Chairman of the Board of
Directors, and President of the Company and its climate control business); son, Steven J. Golsen
(“S. Golsen”) (executive officer of several subsidiaries of the Company), Golsen Family LLC
(“LLC”) which is wholly-owned by J. Golsen (43.516% owner), Sylvia H. Golsen (43.516%
owner), B. Golsen (4.323% owner), S. Golsen (4.323% owner), and Linda F. Rappaport (4.323%
owner and daughter of J. Golsen (“L. Rappaport”)), and SBL LLC (“SBL”) which is wholly-
owned by the LLC (49% owner), B. Golsen (17% owner), S. Golsen (17% owner), and L.
Rappaport (17% owner). J Golsen and Sylvia H. Golsen are the managers of the LLC and share
voting and dispositive power over the shares beneficially owned by the LLC. J. Golsen and B.
Golsen, as the only directors and officers of SBL, share the voting and dispositive power of the
shares beneficially owned by SBL and its wholly owned subsidiary, Golsen Petroleum Corp
(“GPC”). The address of Jack E. Golsen, Sylvia H. Golsen, and Barry H. Golsen is 16 South
Pennsylvania Avenue, Oklahoma City, Oklahoma 73107; and Steven J. Golsen’s address is 7300
SW 44th Street, Oklahoma City, Oklahoma 73179. SBL’s address is 16 South Pennsylvania
Avenue, Oklahoma City, Oklahoma 73107.
(3) Includes (a) the following shares over which J. Golsen has the sole voting and dispositive
power: (i) 4,000 shares that he has the right to acquire upon conversion of a promissory note;
(ii) 263,320 shares of common stock owned of record by certain trusts for the benefit of B.
Golsen, S. Golsen and L. Rappaport over which J. Golsen is the trustee of each of these trusts;
and (iii) 200,406 shares held in certain trusts for the benefit of grandchildren and great
grandchildren of J. Golsen and Sylvia H. Golsen over which J. Golsen is the trustee; (b) 653,976
shares owned of record by the LLC and 133,333 shares that the LLC has the right to acquire
upon the conversion of 4,000 shares of the Series B Preferred owned of record by the LLC;
(c) 296,639 shares over which B. Golsen has the sole voting and dispositive power, 533 shares
owned of record by B. Golsen’s wife, over which he shares the voting and dispositive power, and
105
11,250 shares that he has the right to acquire within the next 60 days under the Company’s stock
option plans; (d) 263,915 shares over which S. Golsen has the sole voting and dispositive power
and 11,250 shares that he has the right to acquire within the next 60 days under the Company’s
stock option plans; (e) 30,000 shares over which L. Rappaport has the sole voting and dispositive
power and 36,400 shares that she has the right to acquire upon conversion of $1 million principal
amount of the 2007 Debentures; (f) 1,602,099 shares owned of record by SBL, 400,000 shares
that SBL has the right to acquire upon conversion of 12,000 shares of Series B Preferred owned
of record by SBL, 250,000 shares that SBL has to right to acquire upon conversion of 1,000,000
shares of the Series D Preferred owned of record by SBL and 145,600 shares issuable shares
upon the conversion of $4 million principal amount of the 2007 Debentures owned of record by
SBL, and (g) 283,955 shares owned of record by GPC, which is a wholly-owned subsidiary of
SBL, and 133,333 shares that GPC has the right to acquire upon conversion of 4,000 shares of
Series B Preferred owned of record by GPC. See “Certain Relationships and Related
Transactions”.
(4) J. Golsen and Sylvia H. Golsen disclaim beneficial ownership of the shares over which B.
Golsen, S. Golsen and L. Rappaport each have sole voting and investment power. Sylvia H.
Golsen, B. Golsen, S. Golsen and L. Rappaport disclaim beneficial ownership of the shares that
J. Golsen has sole voting and investment power over as noted in footnote (3)(a) above. B.
Golsen, S. Golsen and L. Rappaport disclaim beneficial ownership of the shares owned of record
by the LLC, except to the extent of their respective pecuniary interest therein. S. Golsen and L.
Rappaport disclaims beneficial ownership of the shares owned of record by SBL and GPC and
all shares beneficially owned by SBL through the LLC, except to the extent of his pecuniary
interest therein. L. Rappaport disclaims beneficial ownership of the shares over which her spouse
has sole voting and investment power over.
(5) Includes: (a) 4,000 shares of Series B Preferred owned of record by the LLC; (b) 12,000
shares of Series B Preferred owned of record by SBL; (c) 4,000 shares Series B Preferred owned
of record by SBL’s wholly-owned subsidiary, GPC, over which SBL, J. Golsen, and B. Golsen
share the voting and dispositive power and (d) 1,000,000 shares of Series D Preferred owned of
record by SBL.
106
Security Ownership of Management
The following table sets forth certain information obtained from our directors and executive
officers as a group as to their beneficial ownership of our voting common stock and voting
preferred stock as of February 28, 2010.
Name of
Beneficial Owner
Title of Class
Amount of Shares
Beneficially Owned (1)
Percent of
Class+
Raymond B. Ackerman
Michael G. Adams
Robert C. Brown, M.D.
Charles A. Burtch
Robert A. Butkin
Barry H. Golsen
Jack E. Golsen
David R. Goss
Bernard G. Ille
Jim D. Jones
Gail P. Lapidus
Donald W. Munson
Ronald V. Perry
Horace G. Rhodes
Harold L. Rieker, Jr.
Paul H. Rydlund
David M. Shear
Tony M. Shelby
John A. Shelley
Michael D. Tepper
Directors and Executive
Officers as a group number
(20 persons)
* Less than 1%.
Common
Common
Common
Common
Common
Common
Voting Preferred
Common
Voting Preferred
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
Common
15,875 (2)
22,475 (3)
131,154 (4)
1,825 (5)
1,825 (6)
3,197,395
1,016,173
(7)
(7)
4,070,022
1,020,000
(8)
(8)
222,321 (9)
15,825 (10)
80,000 (11)
-
7,565 (12)
825 (13)
17,325 (14)
5,575 (15)
18,000 (16)
90,581 (17)
180,889 (18)
3,655 (19)
59,455 (20)
*
*
*
*
*
14.4
99.9
%
%
18.3
99.9
%
%
1.0 %
*
*
-
*
*
*
*
*
*
*
*
*
Common
Voting Preferred
5,253,614
1,020,000
(21)
23.5
99.9
%
%
107
+ See footnote “+” to the table under “Security Ownership of Certain Beneficial Owners.”
(1) We based the information, with respect to beneficial ownership, on information furnished
by each director or officer, contained in filings made with the SEC, or contained in our records.
(2) This amount includes (a) 1,450 shares held by Mr. Ackerman’s trust and 825 shares of
common stock that Mr. Ackerman may purchase pursuant to currently exercisable non-qualified
stock options, over which Mr. Ackerman possesses sole voting and dispositive power and (b)
13,600 shares are held in a trust owned by Mrs. Ackerman, of which Mrs. Ackerman is trustee.
(3) This amount includes 10,000 shares held by Mr. Adams’ trust over which Mr. Adams
possesses sole voting and dispositive power, and 12,475 shares that Mr. Adams may acquire
pursuant to currently exercisable stock options.
(4) This amount includes 61,160 shares held in a joint account owned by a trust, of which
Dr. Brown’s wife is the trustee, and by a trust, of which Dr. Brown is the trustee. As trustees,
Dr. Brown and his wife share voting and dispositive power over these shares. The amount also
includes (a) 825 shares of common stock that Dr. Brown may purchase pursuant to currently
exercisable non-qualified stock options, (b) 18,442 shares held in a profit sharing plan of which
Dr. Brown is the trustee and holds voting and dispositive power over the shares and (c) 50,727
shares owned by Robert C. Brown, MD, Inc. over which Dr. Brown has voting and dispositive
power. The amount shown does not include shares owned directly, or through trusts, by the
children of Dr. Brown and the son-in-law of Dr. Brown, David M. Shear, all of which Dr. Brown
disclaims beneficial ownership.
(5) Mr. Burtch has the sole voting and dispositive power over these shares, which include 825
shares of common stock that Mr. Burtch may purchase pursuant to currently exercisable non-
qualified stock options.
(6) This amount includes (a) 1,000 shares that are held in certain trusts and (b) 825 shares of
common stock that Mr. Butkin may purchase pursuant to currently exercisable non-qualified
stock options over which Mr. Butkin has voting and dispositive power.
(7) See footnotes (2), (3), (4), and (5) of the table under “Security Ownership of Certain
Beneficial Owners” for a description of the amount and nature of the shares beneficially owned
by B. Golsen.
(8) See footnotes (2), (3), (4), and (5) of the table under “Security Ownership of Certain
Beneficial Owners” for a description of the amount and nature of the shares beneficially owned
by J. Golsen.
(9) Mr. Goss has the sole voting and dispositive power over these shares.
(10) The amount includes 15,000 shares held by Mr. Ille’s trust and 825 shares of common
stock that Mr. Ille may purchase pursuant to currently exercisable non-qualified stock options,
over which Mr. Ille possesses sole voting and dispositive power.
(11) Mr. Jones and his wife share voting and dispositive power over these shares, which include
15,000 shares that Mr. Jones may acquire pursuant to currently exercisable stock options, over
which Mr. Jones has sole voting and dispositive power.
108
(12) Mr. Munson has the sole voting and dispositive power over these shares, which include 825
shares that Mr. Munson may acquire pursuant to currently exercisable non-qualified stock
options.
(13) This amount represents shares that Mr. Perry may acquire pursuant to currently exercisable
stock options, over which Mr. Perry has sole dispositive power.
(14) The amount includes (a) 16,000 shares of common stock, including 15,000 shares held by a
trust, and (b) 825 shares of common stock that Mr. Rhodes may purchase pursuant to currently
exercisable non-qualified stock options, over which Mr. Rhodes has the sole voting and
dispositive power, and (c) 500 shares held by a revocable trust over which Mr. Rhodes’ wife has
voting and dispositive power.
(15) This amount represents shares that Mr. Rieker may acquire pursuant to currently
exercisable stock options, over which Mr. Rieker has sole dispositive power.
(16) Mr. Rydlund has the sole voting and dispositive power over these shares, which include
11,500 shares that Mr. Rydlund may acquire pursuant to currently exercisable stock options
plans.
(17) These shares are held in a joint account owned by Mr. Shear’s revocable trust of which Mr.
Shear is the trustee and by Mr. Shear’s spouse’s revocable trust of which his spouse is the
trustee. As trustees, Mr. Shear and his wife share voting and dispositive power over these shares.
This amount does not include, and Mr. Shear disclaims beneficial ownership of the shares
beneficially owned by Mr. Shear’s wife, which consist of 8,988 shares, the beneficial ownership
of which is disclaimed by her, that are held by trusts of which she is the trustee.
(18) Mr. Shelby has the sole voting and dispositive power over these shares, which include
15,000 shares that Mr. Shelby may acquire pursuant to currently exercisable stock options plans.
(19) Mr. Shelley has the sole voting and dispositive power over these shares which include 825
shares that Mr. Shelley may acquire pursuant to currently exercisable non-qualified stock
options.
(20) The amount includes 2,000 shares of common stock, including 57,455 shares held by a
trust, over which Mr. Tepper has the sole voting and dispositive power.
(21) The shares of common stock include 78,225 shares of common stock that executive
officers and directors have the right to acquire within 60 days under our stock option plans and
1,066,266 shares of common stock that executive officers, directors, or entities controlled by our
executive officers and directors, have the right to acquire within 60 days under other convertible
securities.
109
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Policy as to Related Party Transaction
Pursuant to the Audit Committee Charter, our Audit Committee reviews any related party
transactions involving any of our directors and executive officers. The following related party
transactions were reviewed by the Audit Committee or the Board of Directors as a whole.
Related Party Transactions
Golsen Group
The Golsen Group has acquired from an unrelated third party $5,000,000 of the 2007
Debentures. During 2009, we incurred interest expense of $275,000 relating to the debentures
held by the Golsen Group, of which $137,500 remains accrued at December 31, 2009. We also
paid interest of $137,500 that was accrued at December 31, 2008.
In March 2009, we paid dividends totaling approximately $240,000 and $60,000 on our Series B
Preferred and our Series D Preferred, respectively. In February 2010, we declared dividends
totaling approximately $240,000 and $60,000 on our Series B Preferred and our Series D
Preferred, respectively. All of the outstanding shares of Series B Preferred and Series D
Preferred are owned by the Golsen Group.
During 2009, the Company incurred costs of approximately $1,400 for office improvements
from a company owned by Linda Golsen Rappaport, the daughter of Jack E. Golsen, our
Chairman and Chief Executive Officer, and sister of Barry H. Golsen, our President.
During 2009, the Golsen Group occupied approximately 1,500 square feet of office space in our
corporate offices for which the annual rent is $12,000.
Steven J. Golsen, Chief Operating Officer of our Climate Control Business, 2009 compensation
was approximately $483,000, which included $150,000 bonus and $6,100 automobile allowance.
Heidi Brown Shear, Vice President and Managing Counsel to the Company, 2009 compensation
was approximately $164,000, which included $35,000 bonus and $4,000 automobile allowance.
Northwest
Northwest Internal Medicine Associates (“Northwest”), a division of Plaza Medical Group, P.C.,
has an agreement with the Company to perform medical examinations of the management and
supervisory personnel of the Company and its subsidiaries. Each year, we pay Northwest $2,000
a month to perform such examinations, under the agreement. Dr. Robert C. Brown (a director of
the Company) is Vice President and Treasurer of Plaza Medical Group, P.C. In addition, Dr.
Brown receives a fee of $2,000 per month to perform medical director consulting services for the
Company in connection with the Company’s self-insured health plan and workmen’s
compensation benefits.
110
Board Independence
The Board of Directors has determined that each of Messrs. Ackerman, Burtch, Butkin, Ille,
Munson, Rhodes, Perry, Shelley and Ms. Lapidus is an “independent director” in accordance
with the current listing standards of the NYSE.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Ernst & Young LLP for professional services rendered for the audit
of the Company’s annual financial statements for the fiscal years ended December 31, 2009 and
2008, for the reviews of the financial statements included in the Company’s Quarterly Reports
on Form 10-Q for those fiscal years, and for review of documents filed with the SEC for those
fiscal years were approximately $1,321,000 and $1,397,000, respectively.
Audit-Related Fees
Ernst & Young LLP billed the Company $32,700 and $25,000 during 2009 and 2008,
respectively, for audit-related services relating to benefit plan audits.
Tax Fees
Ernst & Young LLP billed $664,559 and $538,095 during 2009 and 2008, respectively, for tax
services to the Company, and included tax return review and preparation and tax consultations
and planning.
All Other Fees
The Company did not engage its accountants to provide any other services for the fiscal years
ended December 31, 2009 and 2008.
Engagement of the Independent Registered Public Accounting Firm
The Audit Committee is responsible for approving all engagements with Ernst & Young LLP to
perform audit or non-audit services for us prior to us engaging Ernst & Young LLP to provide
those services. All of the services under the headings Audit Related, Tax Services, and All Other
Fees were approved by the Audit Committee in accordance with paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X of the Exchange Act. The Audit Committee of the Company’s Board of
Directors has considered whether Ernst & Young LLP’s provision of the services described
above for the fiscal years ended December 31, 2009 and 2008 is compatible with maintaining its
independence.
111
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The following consolidated financial statements of the Company appear immediately following
this Part IV:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2009 and 2008
Consolidated Statements of Income for each of the three years in the period ended
December 31, 2009
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 2009
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2009
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
(a) (2) Financial Statement Schedules
The Company has included the following schedules in this report:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts
Page
F-2
F-3
F-5
F-6
F-8
F-11
F-67
F-70
F-75
We have omitted all other schedules because the conditions requiring their filing do not exist or
because the required information appears in our Consolidated Financial Statements, including the
notes to those statements.
112
(a)(3) Exhibits
3(i).1 Restated Certificate of Incorporation, as amended, which the Company hereby
incorporates by reference from Exhibit 3.1 to the Company’s Form 10-K for the fiscal
year ended December 31, 2008.
3(ii).1 Amended and Restated Bylaws of LSB Industries, Inc. dated August 20, 2009, as
amended February 18, 2010.
4.1 Specimen Certificate for the Company's Noncumulative Preferred Stock, having a par
value of $100 per share, which the Company incorporates by reference from Exhibit 4.1
to the Company’s Form 10-K for the fiscal year ended December 31, 2005.
4.2 Specimen Certificate for the Company's Series B Preferred Stock, having a par value of
$100 per share, which the Company hereby incorporates by reference from Exhibit 4.27
to the Company's Registration Statement No. 33-9848.
4.3 Specimen of Certificate of Series D 6% Cumulative, Convertible Class C Preferred
Stock, which the Company hereby incorporates by reference from Exhibit 4.1 to the
Company's Form 10-Q for the fiscal quarter ended September 30, 2001.
4.4 Specimen Certificate for the Company's Common Stock, which the Company
incorporates by reference from Exhibit 4.4 to the Company's Registration Statement No.
33-61640.
4.5 Renewed Rights Agreement, dated as of December 2, 2008, between the Company and
UMB Bank, n.a., which the Company hereby incorporates by reference from Exhibit 4.1
to the Company’s Form 8-K, dated December 5, 2008.
4.6 First Amendment to Renewed Rights Agreement, dated December 3, 2008, between LSB
Industries, Inc. and UMB Bank, n.a., which the Company hereby incorporates by
reference from Exhibit 4.3 to the Company’s Form 8-K, dated December 5, 2008.
4.7 Redemption Notice, dated July 12, 2007, for the LSB Industries, Inc.’s $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, which the Company hereby incorporates
by reference from Exhibit 99.1 to the Company’s Form 8-K, dated July 11, 2007.
4.8 Amended and Restated Loan and Security Agreement by and among LSB Industries,
Inc., ThermaClime, Inc. and each of its subsidiaries that are Signatories, the lenders and
Wells Fargo Foothill, Inc., which the Company hereby incorporates by reference from
Exhibit 4.2 to the Company’s Form 10-Q for the fiscal quarter ended September 30,
2007.
4.9 First Amendment to the Amended and Restated Loan and Security Agreement, dated as
of November 24, 2009, by and among LSB Industries, Inc., ThermaClime, Inc. and each
of its subsidiaries that are Signatories, the lenders and Wells Fargo Foothill, Inc.
113
4.10 Loan Agreement, dated September 15, 2004 between ThermaClime, Inc. and certain
subsidiaries of ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital
Markets, L.L.C. and LSB Industries, Inc. (“Loan Agreement”), which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company’s Form 8-K, dated
September 16, 2004. The Loan Agreement lists numerous Exhibits and Schedules that are
attached thereto, which will be provided to the Commission upon the Commission’s
request.
4.11 First Amendment, dated February 18, 2005 to Loan Agreement, dated as of September
15, 2004, among ThermaClime, Inc., and certain subsidiaries of ThermaClime, Cherokee
Nitrogen Holdings, Inc., and Orix Capital Markets, L.L.C., which the Company hereby
incorporates by reference from Exhibit 4.21 to the Company’s Form 10-K for the fiscal
year ended December 31, 2004.
4.12 Waiver and Consent, dated as of January 1, 2006 to the Loan Agreement dated as of
September 15, 2004 among ThermaClime, Inc., and certain subsidiaries of ThermaClime,
Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital Markets, L.L.C. and LSB Industries,
Inc., which the Company hereby incorporates by reference from Exhibit 4.23 to the
Company’s Form 10-K for the fiscal year ended December 31, 2005.
4.13 Consent of Orix Capital Markets, LLC and the Lenders of the Senior Credit Agreement,
dated May 12, 2006, to the interest rate of a loan between LSB and ThermaClime and the
utilization of the loan proceeds by ThermaClime and the waiver of related covenants,
which the Company hereby incorporates by reference from Exhibit 4.2 to the Company’s
Form 10-Q for the fiscal quarter ended June 30, 2006.
4.14 Term Loan Agreement, dated as of November 2, 2007, among LSB Industries, Inc.,
ThermaClime, Inc. and certain subsidiaries of ThermaClime, Inc., Cherokee Nitrogen
Holdings, Inc., the Lenders, the Administrative and Collateral Agent and the Payment
Agent, which the Company hereby incorporates by reference from Exhibit 4.1 to the
Company’s Form 10-Q for the fiscal quarter ended September 30, 2007.
4.15 Certificate of 5.5% Senior Subordinated Convertible Debentures due 2012, which the
Company hereby incorporates by reference from Exhibit 4.1 to the Company’s Form 8-K,
dated June 28, 2007.
4.16 Indenture, dated June 28, 2007, by and among the Company and UMB Bank, n.a., which
the Company hereby incorporates by reference from Exhibit 4.2 to the Company’s Form
8-K, dated June 28, 2007
4.17 Registration Rights Agreement, dated June 28, 2007, by and among the Company and the
Purchasers set forth in the signature pages thereto, which the Company hereby
incorporates by reference from Exhibit 4.3 to the Company’s Form 8-K, dated June 28,
2007.
4.18 Business Loan Agreement, dated effective June 30, 2009, between Prime Financial
Corporation and INTRUST Bank, N.A., which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 2009.
114
4. 19 Promissory Note, dated July 6, 2009, between Prime Financial Corporation and
INTRUST Bank, N.A., which the Company hereby incorporates by reference from
Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended June 30, 2009.
10.1 Limited Partnership Agreement dated as of May 4, 1995 between the general partner, and
LSB Holdings, Inc., an Oklahoma Corporation, as limited partner, which the Company
hereby incorporates by reference from Exhibit 10.11 to the Company's Form 10-K for the
fiscal year ended December 31, 1995. See SEC file number 001-07677.
10.2 Form of Death Benefit Plan Agreement between the Company and the employees
covered under the plan, which the Company incorporates by reference from Exhibit 10.2
to the Company’s Form 10-K for the fiscal year ended December 31, 2005.
10.3 Amendment to Non-Qualified Benefit Plan Agreement, dated December 17, 2008,
between Barry H. Golsen and the Company, which the Company hereby incorporates by
reference from Exhibit 99.3 to the Company’s Form 8-K, dated December 23, 2008.
Each Amendment to Non-Qualified Benefit Plan Agreement with David R. Goss and
Steven J. Golsen is substantially the same as this exhibit and will be provided to the
Commission upon request.
10.4 The Company's 1993 Stock Option and Incentive Plan, which the Company incorporates
by reference from Exhibit 10.3 to the Company’s Form 10-K for the fiscal year ended
December 31, 2005.
10.5 The Company's 1998 Stock Option and Incentive Plan, which the Company hereby
incorporates by reference from Exhibit 10.44 to the Company's Form 10-K for the fiscal
year ended December 31, 1998. See SEC file number 001-07677.
10.6 LSB Industries, Inc. Outside Directors Stock Option Plan, which the Company hereby
incorporates by reference from Exhibit "C" to the Company’s Proxy Statement, dated
May 24, 1999 for its 1999 Annual Meeting of Stockholders. See SEC file number 001-
07677.
10.7 Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries,
Inc. and Dan Ellis, which the Company hereby incorporates by reference from Exhibit
99.1 to the Company’s Form S-8, dated September 10, 2007.
10.8 Nonqualified Stock Option Agreement, dated June 19, 2006, between LSB Industries,
Inc. and John Bailey, which the Company hereby incorporates by reference from Exhibit
99.2 to the Company’s Form S-8, dated September 10, 2007.
10.9 LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5, 2008, which the
Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-
K, dated June 6, 2008.
115
10.10 Severance Agreement, dated January 17, 1989 between the Company and Jack E. Golsen,
which the Company hereby incorporates by reference from Exhibit 10.13 to the
Company’s Form 10-K for the fiscal year ended December 31, 2005. The Company also
entered into identical agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen,
David M. Shear, and Jim D. Jones and the Company will provide copies thereof to the
Commission upon request.
10.11 Amendment to Severance Agreement, dated December 17, 2008, between Barry H.
Golsen and the Company, which the Company hereby incorporates by reference from
Exhibit 99.2 to the Company’s Form 8-K, dated December 23, 2008. Each Amendment
to Severance Agreement with Jack E. Golsen, Tony M. Shelby, David R. Goss and David
M. Shear is substantially the same as this exhibit and will be provided to the Commission
upon request.
10.12 Employment Agreement and Amendment to Severance Agreement dated January 12,
1989 between the Company and Jack E. Golsen, dated March 21, 1996, which the
Company hereby incorporates by reference from Exhibit 10.15 to the Company's Form
10-K for fiscal year ended December 31, 1995. See SEC file number 001-07677.
10.13 First Amendment to Employment Agreement, dated April 29, 2003 between the
Company and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 10.52 to the Company's Form 10-K/A Amendment No.1 for the fiscal year ended
December 31, 2002.
10.14 Third Amendment to Employment Agreement, dated December 17, 2008, between the
Company and Jack E. Golsen, which the Company hereby incorporates by reference from
Exhibit 99.1 to the Company’s Form 8-K, dated December 23, 2008.
10.15 Nitric Acid Supply Operating and Maintenance Agreement, dated October 23, 2008,
between El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience, LLC, which the Company hereby incorporates by reference from Exhibit
10.1 to the Company's Form 10-Q for the fiscal quarter ended September 30, 2008.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF A COMMISSION ORDER CF #22844, DATED NOVEMBER 24, 2008,
GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
10.16 Intentionally left blank
116
10.17 Intentionally left blank
10.18 Omnibus Termination Agreement, dated June 23, 2009, by and among Bayer
MaterialScience LLC (as successor in interest to Bayer Corporation); El Dorado
Nitrogen, L.P. (as successor in interest to El Dorado Nitrogen Company); El Dorado
Chemical Company; Wells Fargo Bank Northwest, N.A. (as successor in interest to
Boatmen’s Trust Company of Texas); Bal Investment & Advisory, Inc. (as successor in
interest to Security Pacific Leasing Corporation); Wilmington Trust Company; and
Bayerische Landesbank, New York Branch, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company's Form 8-K, filed June 29, 2009.
10.19 Assignment of Fixed Price Purchase Option, dated June 23, 2009, between El Dorado
Nitrogen, L.P. and Bayer MaterialScience LLC., which the Company hereby incorporates
by reference from Exhibit 99.2 to the Company's Form 8-K, filed June 29, 2009.
10.20 Loan Agreement dated December 23, 1999 between Climate Craft, Inc. and the City of
Oklahoma City, which the Company hereby incorporates by reference from Exhibit 10.49
to the Company's Amendment No. 2 to its 1999 Form 10-K. See SEC file number 001-
07677.
10.21 Assignment, dated May 8, 2001 between Climate Master, Inc. and Prime Financial
Corporation, which the Company hereby incorporates by reference from Exhibit 10.2 to
the Company's Form 10-Q for the fiscal quarter ended March 31, 2001.
10.22 Agreement for Purchase and Sale, dated April 10, 2001 by and between Prime Financial
Corporation and Raptor Master, L.L.C., which the Company hereby incorporates by
reference from Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter ended
March 31, 2001.
10.23 Amended and Restated Lease Agreement, dated May 8, 2001 between Raptor Master,
L.L.C. and Climate Master, Inc., which the Company hereby incorporates by reference
from Exhibit 10.4 to the Company's Form 10-Q for the fiscal quarter ended March 31,
2001.
10.24 Option Agreement, dated May 8, 2001 between Raptor Master, L.L.C. and Climate
Master, Inc., which the Company hereby incorporates by reference from Exhibit 10.5 to
the Company's Form 10-Q for the fiscal quarter ended March 31, 2001.
10.25 First Amendment to Amended and Restated Lease Agreement, dated April 1, 2007,
between Raptor Master, L.L.C. and Climate Master, Inc., which the Company hereby
incorporates by reference from Exhibit 10.30 to the Company’s Form 10-K for the fiscal
year ended December 31, 2007.
117
10.26 Asset Purchase Agreement, dated October 22, 2001 between Orica USA, Inc. and El
Dorado Chemical Company and Northwest Financial Corporation, which the Company
hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K dated
December 28, 2001. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #12179, DATED
MAY 24, 2006, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.
10.27 AN Supply Agreement, dated effective January 1, 2010, between El Dorado Chemical
Company and Orica International Pte Ltd. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR THE PURPOSES OF THIS
REQUEST.
10.28 First Amendment to AN Supply Agreement, dated effective March 1, 2010, between El
Dorado Chemical Company and Orica International Pte Ltd.
10.29 Agreement, dated August 1, 2007, between El Dorado Chemical Company and United
Steelworkers of America International Union AFL-CIO and its Local 13-434, which the
Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form
8-K, dated July 29, 2008.
10.30 Agreement, dated October 17, 2007, between El Dorado Chemical Company and
International Association of Machinists and Aerospace Workers, AFL-CIO Local No.
224, which the Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated May 14, 2008.
10.31 Agreement, dated November 12, 2007, between United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International
Union, AFL-CIO, CLC, on behalf of Local No. 00417 and Cherokee Nitrogen Company,
which the Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated March 27, 2008.
10.32 Asset Purchase Agreement, dated as of December 6, 2002 by and among Energetic
Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC, DetaCorp Inc.
LLC, Energetic Properties, LLC, Slurry Explosive Corporation, Universal Tech
Corporation, El Dorado Chemical Company, LSB Chemical Corp., LSB Industries, Inc.
and Slurry Explosive Manufacturing Corporation, LLC, which the Company hereby
incorporates by reference from Exhibit 2.1 to the Company's Form 8-K, dated December
12, 2002. The asset purchase agreement contains a brief list identifying all schedules and
exhibits to the asset purchase agreement. Such schedules and exhibits are not filed, and
the Registrant agrees to furnish supplementally a copy of the omitted schedules and
exhibits to the Commission upon request.
118
10.33 Purchase Confirmation, dated July 1, 2006, between Koch Nitrogen Company and
Cherokee Nitrogen Company, which the Company hereby incorporates by reference from
Exhibit 10.40 to the Company’s Form 10-K for the fiscal year ended December 31, 2006.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
THE SUBJECT OF COMMISSION ORDER CF #20082, DATED NOVEMBER 16, 2007,
GRANTING CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT, AS AMENDED.
10.34 Anhydrous Ammonia Sales Agreement, dated effective January 1, 2009 between Koch
Nitrogen International Sarl and El Dorado Chemical Company, which the Company
hereby incorporates by reference from Exhibit 10.49 to the Company’s Form 10-K for the
fiscal year ended December 31, 2008. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER
CF #23318, DATED APRIL 24, 2009, GRANTING REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.35 Second Amendment to Anhydrous Ammonia Sales Agreement, dated February 23, 2010,
between Koch Nitrogen International Sarl and El Dorado Chemical Company. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE
FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. THE OMITTED
INFORMATION HAS BEEN FILED
SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE
COMMISSION FOR THE PURPOSES OF THIS REQUEST.
10.36 Urea Ammonium Nitrate Purchase and Sale Agreement, dated May 7, 2009, between
Pryor Chemical Company and Koch Nitrogen Company, LLC., which the Company
hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K, filed May
13, 2009. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED
AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #23659, DATED JUNE 9, 2009,
GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
10.37 Amendment No. 1 to Urea Ammonium Nitrate Purchase and Sale Agreement, dated
October 29, 2009, between Pryor Chemical Company and Koch Nitrogen Company, LLC,
which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s
Form 8-K, filed November 4, 2009. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF
#24284, DATED NOVEMBER 19, 2009, GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.
10.38 Railcar Management Agreement, dated May 7, 2009, between Pryor Chemical Company
and Koch Nitrogen Company, LLC, which the Company hereby incorporates by
reference from Exhibit 99.2 to the Company's Form 8-K, filed May 13, 2009.
119
10.39 Purchase Agreement, dated June 28, 2007, by and among the Company and the investors
identified on the Schedule of Purchasers attached thereto, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company’s Form 8-K, dated June 28,
2007.
10.40 Agreement, dated November 10, 2006 by and among LSB Industries, Inc., Kent C.
McCarthy, Jayhawk Capital Management, L.L.C., Jayhawk Institutional Partners, L.P.
and Jayhawk Investments, L.P., which the Company hereby incorporates by reference
from Exhibit 99(d)(1) to the Company’s Schedule TO-I, filed February 9, 2007.
12.1 Calculation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends.
14.1 Code of Ethics for CEO and Senior Financial Officers of Subsidiaries of LSB Industries,
Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Jack E. Golsen, Chief Executive Officer, pursuant to Sarbanes-Oxley Act
of 2002, Section 302.
31.2 Certification of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley Act
of 2002, Section 302.
32.1 Certification of Jack E. Golsen, Chief Executive Officer, furnished pursuant to Sarbanes-
Oxley Act of 2002, Section 906.
32.2 Certification of Tony M. Shelby, Chief Financial Officer, furnished pursuant to Sarbanes-
Oxley Act of 2002, Section 906.
120
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
LSB INDUSTRIES, INC.
By: /s/ Jack E. Golsen
Jack E. Golsen
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Tony M. Shelby
Tony M. Shelby
Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Harold L. Rieker Jr.
Harold L. Rieker Jr.
Vice President and Principal Accounting Officer
121
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
Dated:
March 8, 2010
By: /s/ Jack E. Golsen
Jack E. Golsen, Director
By: /s/ Tony M. Shelby
Tony M. Shelby, Director
By: /s/ Barry H. Golsen
Barry H. Golsen, Director
By: /s/ David R. Goss
David R. Goss, Director
By: /s/ Raymond B. Ackerman
Raymond B. Ackerman, Director
By: /s/ Robert C. Brown MD
Robert C. Brown MD, Director
By: /s/ Charles A. Burtch
Charles A. Burtch, Director
By: /s/ Robert A. Butkin
Robert A. Butkin, Director
By: /s/ Bernard G. Ille
Bernard G. Ille, Director
By:
Gail P. Lapidus, Director
By: /s/ Donald W. Munson
Donald W. Munson, Director
By: /s/ Ronald V. Perry
Ronald V. Perry, Director
By: /s/ Horace G. Rhodes
Horace G. Rhodes, Director
By: /s/ John A. Shelley
John A. Shelley, Director
122
LSB Industries, Inc.
Consolidated Financial Statements
And Schedules for Inclusion in Form 10-K
For the Fiscal Year ended December 31, 2009
TABLE OF CONTENTS
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
Financial Statement Schedules
Schedule I – Condensed Financial Information of Registrant
Schedule II – Valuation and Qualifying Accounts
Page
F – 2
F – 3
F – 5
F – 6
F – 8
F – 11
F – 68
F – 71
F – 76
F-1
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders of LSB Industries, Inc.
We have audited the accompanying consolidated balance sheets of LSB Industries, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These
financial statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of LSB Industries, Inc. at December 31, 2009 and 2008, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 14 to the consolidated financial statements, in 2007, the Company adopted
a new accounting principle related to uncertain income tax provisions.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LSB Industries, Inc.’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 8, 2010 expressed an unqualified opinion thereon.
Oklahoma City, Oklahoma
March 8, 2010
ERNST & YOUNG LLP
F-2
LSB Industries, Inc.
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable, net
Inventories
Supplies, prepaid items and other:
Prepaid insurance
Prepaid income taxes
Precious metals
Supplies
Other
Total supplies, prepaid items and other
Deferred income taxes
Total current assets
December 31,
2009
2008
(In Thousands)
$
61,739
30
10,051
57,762
51,013
4,136
1,642
13,083
4,886
1,626
25,373
5,527
211,495
$ 46,204
893
-
78,846
60,810
3,373
-
14,691
4,301
1,378
23,743
11,417
221,913
Property, plant and equipment, net
117,962
104,292
Other assets:
Debt issuance costs, net
Investment in affiliate
Goodwill
Other, net
Total other assets
1,652
3,838
1,724
1,962
9,176
$ 338,633
2,607
3,628
1,724
1,603
9,562
$ 335,767
(Continued on following page)
F-3
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Short-term financing
Accrued and other liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Noncurrent accrued and other liabilities
Deferred income taxes
Commitments and contingencies (Note 15)
Stockholders’ equity:
December 31,
2009
2008
(In Thousands)
$
37,553
3,017
23,054
3,205
66,829
$ 43,014
2,228
39,236
1,560
86,038
98,596
103,600
10,626
11,975
9,631
6,454
Series B 12% cumulative, convertible preferred stock, $100 par value;
20,000 shares issued and outstanding
Series D 6% cumulative, convertible Class C preferred stock, no par
value; 1,000,000 shares issued and outstanding
Common stock, $.10 par value; 75,000,000 shares authorized,
25,369,095 shares issued (24,958,330 at December 31, 2008)
Capital in excess of par value
Accumulated other comprehensive loss
Retained earnings
Less treasury stock, at cost:
Common stock, 4,143,362 shares (3,848,518 at December 31, 2008)
Total stockholders’ equity
2,000
1,000
2,000
1,000
2,537
129,941
-
41,082
176,560
2,496
127,337
(120)
19,804
152,517
25,953
150,607
22,473
130,044
$ 335,767
See accompanying notes.
$ 338,633
F-4
LSB Industries, Inc.
Consolidated Statements of Income
Net sales
Cost of sales
Gross profit
2009
Year ended December 31,
2007
2008
(In Thousands, Except Per Share Amounts)
$ 531,838
394,424
137,414
$ 748,967
610,087
138,880
$ 586,407
453,814
132,593
Selling, general and administrative expense
Provisions for losses on accounts receivable
Other expense
Other income
Operating income
Interest expense
Gains on extinguishment of debt
Non-operating other income, net
Income from continuing operations before provisions
for income taxes and equity in earnings of affiliate
Provisions for income taxes
Equity in earnings of affiliate
Income from continuing operations
Net loss (income) from discontinued operations
Net income
Dividends, dividend requirements and stock dividends
on preferred stocks
Net income applicable to common stock
Income (loss) per common share:
Basic:
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Diluted:
Income from continuing operations
Net income (loss) from discontinued operations
Net income
$
$
$
$
$
96,374
90
527
(287)
40,710
6,746
(1,783)
(130)
35,877
15,024
(996)
21,849
265
21,584
306
21,278
1.01
(.01)
1.00
.97
(.01)
.96
$
$
$
$
$
86,646
371
1,184
(8,476 )
59,155
11,381
(5,529 )
(1,096 )
54,399
18,776
(937 )
36,560
13
36,547
306
36,241
1.71
-
1.71
1.58
-
1.58
$
$
$
$
$
75,033
858
1,186
(3,495)
59,011
12,078
-
(1,264)
48,197
2,540
(877)
46,534
(348)
46,882
5,608
41,274
2.09
.02
2.11
1.82
.02
1.84
See accompanying notes.
F-5
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-
F
LSB Industries, Inc.
Consolidated Statements of Cash Flows
2009
Year ended December 31,
2008
(In Thousands)
2007
Cash flows from continuing operating activities
Net income
Adjustments to reconcile net income to net cash provided by
continuing operating activities:
Net loss (income) from discontinued operations
Deferred income taxes
Gains on extinguishment of debt
Losses on sales and disposals of property and equipment
Gain on litigation judgment associated with property, plant
and equipment
Depreciation of property, plant and equipment
Amortization
Stock-based compensation
Provisions for losses on accounts receivable
Provision for (realization of) losses on inventory
Provision for (realization of) losses on firm sales commitments
Provisions for impairment on long-lived assets
Equity in earnings of affiliate
Distributions received from affiliate
Changes in fair value of commodities contracts
Changes in fair value of interest rate contracts
Cash provided (used) by changes in assets and liabilities
(net of effects of discontinued operations):
Accounts receivable
Inventories
Prepaid and accrued income taxes
Other supplies and prepaid items
Accounts payable
Commodities contracts
Customer deposits
Deferred rent expense
Other current and noncurrent liabilities
Net cash provided by continuing operating activities
$ 21,584
$ 36,547
$ 46,882
265
11,231
(1,783)
378
-
15,601
757
1,021
90
(2,404)
371
-
(996)
786
(138)
(508)
22,118
11,880
(2,738)
230
(6,154)
(5,922)
(2,607)
(1,424)
(3,965)
57,673
13
(263 )
(5,529 )
158
)
(3,943
13,830
1,186
811
371
3,824
-
192
(937 )
735
5,910
2,863
(8,776 )
(7,758 )
(2,836 )
(4,145 )
2,214
(172 )
(6,283 )
(2,876 )
6,879
32,015
(348)
(4,700)
-
378
-
12,271
2,082
421
858
(384)
(328)
250
(877)
765
172
580
(4,392)
(11,044)
3,909
(4,857)
(5,110)
(408)
6,587
(931)
5,023
46,799
(Continued on following page)
F-8
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
.
Cash flows from continuing investing activities
Capital expenditures
Proceeds from property insurance recovery associated with
property, plant and equipment
Proceeds from litigation judgment associated with property,
plant and equipment
Payment of legal costs relating to litigation judgment
associated with property, plant and equipment
Proceeds from sales of property and equipment
Purchase of short-term investments
Proceeds from (deposits of) current and noncurrent restricted
cash
Purchase of interest rate cap contracts
Other assets
Net cash used by continuing investing activities
Cash flows from continuing financing activities
Proceeds from revolving debt facilities
Payments on revolving debt facilities
Proceeds from 5.5% convertible debentures, net of fees
Proceeds from Secured Term Loan
Proceeds from other long-term debt, net of fees
Payments on Senior Secured Loan
Acquisitions of 5.5% convertible debentures
Payments on other long-term debt
Payments of debt issuance costs
Proceeds from short-term financing and drafts payable
Payments on short-term financing and drafts payable
Proceeds from exercises of stock options
Proceeds from exercise of warrant
Purchases of treasury stock
Excess income tax benefit associated with stock-based
compensation
Dividends paid on preferred stocks
Acquisition of non-redeemable preferred stock
Net cash provided (used) by continuing financing activities
Cash flows of discontinued operations:
Operating cash flows
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2009
Year ended December 31,
2008
(In Thousands)
2007
$ (28,891)
$
(32,108)
$ (14,341)
-
5,948
(1,884)
74
-
(690
)
-
(379)
(29,039)
662,402
(662,402)
-
-
-
-
(13,207)
(1,047)
-
3,178
(1,869)
846
-
(4,821)
364
-
-
15
(10,051)
863
-
(360)
(38,060)
519,296
(519,296)
-
-
8,566
-
(8,938)
(2,327)
(26)
3,866
(3,077)
609
-
(3,200)
911
(306)
-
(3,922)
2,390
(306)
-
(14,836)
(160)
(12,020)
58,224
46,204
$
(156)
15,535
46,204
61,739
$
$
-
-
-
271
-
3,478
(621)
(168)
(11,381)
529,766
(556,173)
56,985
50,000
2,424
(50,000)
-
(8,248)
(1,403)
1,456
(3,523)
1,522
393
-
1,740
(2,934)
(1,292)
20,713
(162)
55,969
2,255
58,224
(Continued on following page)
F-9
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Supplemental cash flow information:
Cash payments for:
Interest on long-term debt and other
Income taxes, net of refunds
Noncash investing and financing activities:
Receivables associated with property insurance claims
Debt issuance costs
Current and noncurrent other assets, accounts payable,
other liabilities, and long-term debt associated with
additions of property, plant and equipment
Debt issuance costs associated with the acquisitions of
the 5.5% convertible debentures
Debt issuance costs associated with 7% convertible
debentures converted to common stock
7% convertible debentures converted to common stock
Series 2 preferred stock converted to common stock of
which $12,303,000 was charged to accumulated deficit
in 2007
2009
Year ended December 31,
2008
(In Thousands)
2007
$
$
$
$
$
$
$
$
$
6,908
5,559
$
6,562
$ 19,469
$
$
9,162
1,646
846
34
5,023
379
-
-
-
$
$
$
$
$
$
$
-
-
$
$
-
3,026
7,975
764
$
$
1,937
-
-
-
-
$
$
266
4,000
$
27,593
See accompanying notes.
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of LSB Industries, Inc.
(the “Company”, “We”, “Us”, or “Our”) and its subsidiaries. We are a manufacturing, marketing
and engineering company. Primarily through our wholly-owned subsidiary ThermaClime, Inc.
(“ThermaClime”) and its subsidiaries, we are principally engaged in the manufacture and sale of
geothermal and water source heat pumps and air handling products (the "Climate Control
Business") and the manufacture and sale of chemical products (the "Chemical Business"). The
Company and ThermaClime are holding companies with no significant assets or operations other
than cash, cash equivalents, short-term investments, and our investments in our subsidiaries.
Entities that are 20% to 50% owned and for which we have significant influence are accounted
for on the equity method. All material intercompany accounts and transactions have been
eliminated.
Certain reclassifications have been made in our consolidated financial statements for 2008 and
2007 to conform to our consolidated financial statement presentation for 2009, including the
change in our classification of principal payments under capital lease obligations from “capital
expenditures” that are included in net cash used by continuing investing activities to “payments
on other long-term debt” that are included in net cash used by continuing financing activities.
This change in classification is consistent with the underlying principles of United States
generally accepted accounting principles (“GAAP”). This change resulted in a decrease in net
cash used by continuing investing activities and an increase in net cash used by financing
activities of $448,000 for 2008 and a decrease in net cash provided by financing activities of
$467,000 for 2007.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of 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.
Cash and Cash Equivalents - Investments, which consist of highly liquid investments with
original maturities of three months or less, are considered cash equivalents.
Restricted Cash - Restricted cash consists of cash balances that are legally restricted or
designated by the Company for specific purposes.
Short-Term Investments - Investments, which consist of certificates of deposit with an original
maturity of 13 weeks, are considered short-term investments. These investments are carried at
cost which approximates fair value. All of these investments were held by financial institutions
within the United States and none of these investments were in excess of the federally insured
limits.
Final LSB 10KF 2009 wo footers.doc
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Accounts Receivable and Credit Risk - Our sales to contractors and independent sales
representatives are generally subject to a mechanic’s lien in the Climate Control Business. Our
other sales are generally unsecured. Credit is extended to customers based on an evaluation of
the customer’s financial condition and other factors. Credit losses are provided for in the
consolidated financial statements based on historical experience and periodic assessment of
outstanding accounts receivable, particularly those accounts which are past due (determined
based upon how recently payments have been received). Our periodic assessment of accounts
and credit loss provisions are based on our best estimate of amounts that are not recoverable.
Inventories - Inventories are priced at the lower of cost or market, with cost being determined
using the first-in, first-out (“FIFO”) basis. Finished goods and work-in-process inventories
include material, labor, and manufacturing overhead costs. At December 31, 2009 and 2008, we
had inventory reserves for certain slow-moving inventory items (primarily Climate Control
products) and inventory reserves for certain nitrogen-based inventories produced by our
Chemical Business because cost exceeded the net realizable value.
Precious Metals - Precious metals are used as a catalyst in the Chemical Business
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.
Property, Plant and Equipment - Property, plant and equipment are carried at cost. For
financial reporting purposes, depreciation is primarily computed using the straight-line method
over the estimated useful lives of the assets. Leases meeting capital lease criteria have been
capitalized and included in property, plant and equipment. Amortization of assets under capital
leases is included in depreciation expense. No provision for depreciation is made on construction
in progress or capital spare parts until such time as the relevant assets are put into service.
Maintenance, repairs and minor renewals are charged to operations while major renewals and
improvements are capitalized in property, plant and equipment.
Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts may not be recoverable. If
assets to be held and used are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amounts of the assets exceed the fair values of the assets as
measured by the present value of future net cash flows expected to be generated by the assets or
their appraised value. Assets to be disposed are reported at the lower of the carrying amounts of
the assets or fair values less costs to sell. At December 31, 2009, we had no long-lived assets to
be classified as assets held for sale.
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
For 2008 and 2007, we obtained estimates from external sources and made internal estimates
based on inquiry and other techniques of the fair values of certain capital spare parts and idle
assets in our Chemical Business and certain non-core equipment included in our Corporate assets
in order to determine recoverability of the carrying amounts of such assets.
Debt Issuance Costs - Debt issuance costs are amortized over the term of the associated debt
instrument. In general, if debt is extinguished prior to maturity, the associated debt issuance
costs, if any, are written off and included in the gain or loss on extinguishment of debt.
Goodwill - Goodwill is reviewed for impairment at least annually. As of December 31, 2009 and
2008, goodwill was $1,724,000 of which $103,000 and $1,621,000 relates to business
acquisitions in prior periods in the Climate Control and Chemical Businesses, respectively.
Accrued Insurance Liabilities - We are self-insured up to certain limits for group health,
workers’ compensation and general liability claims. Above these limits, we have commercial
insurance coverage for our contractual exposure on group health claims and statutory limits
under workers’ compensation obligations. We also carry excess umbrella insurance of $50
million for most general liability and auto liability risks. We have a separate $30 million
insurance policy covering pollution liability at our Chemical Business facilities. Additional
pollution liability coverage for our other facilities is provided in our general liability and
umbrella policies. Our accrued insurance liabilities are based on estimates of claims, which
include the incurred claims amounts plus estimates of future claims development calculated by
applying our historical claims development factors to our incurred claims amounts. We also
consider the reserves established by our insurance adjustors and/or estimates provided by
attorneys handling the claims, if any. In addition, our accrued insurance liabilities include
estimates of incurred, but not reported, claims and other insurance-related costs. Potential legal
fees and other directly related costs associated with insurance claims are not accrued but rather
are expensed as incurred. Accrued insurance liabilities are included in accrued and other
liabilities. It is possible that the actual development of claims could exceed our estimates.
Product Warranty - Our Climate Control Business sells equipment that has an expected life,
under normal circumstances and use, that extends over several years. As such, we provide
warranties after equipment shipment/start-up covering defects in materials and workmanship.
Generally, the base warranty coverage for most of the manufactured equipment in the Climate
Control Business is limited to eighteen months from the date of shipment or twelve months from
the date of start-up, whichever is shorter, and to ninety days for spare parts. The warranty
provides that most equipment is required to be returned to the factory or an authorized
representative and the warranty is limited to the repair and replacement of the defective product,
with a maximum warranty of the refund of the purchase price. Furthermore, companies within
the Climate Control Business generally disclaim and exclude warranties related
to
merchantability or fitness for any particular purpose and disclaim and exclude any liability for
consequential or incidental damages. In some cases, the customer may purchase or a specific
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
product may be sold with an extended warranty. The above discussion is generally applicable to
such extended warranties, but variations do occur depending upon specific contractual
obligations, certain system components, and local laws.
Our accounting policy and methodology for warranty arrangements is to measure and recognize
the expense and liability for such warranty obligations using a percentage of net sales, based
upon our historical warranty costs. We also recognize the additional warranty expense and
liability to cover atypical costs associated with a specific product, or component thereof, or
project installation, when such costs are probable and reasonably estimable. It is possible that
future warranty costs could exceed our estimates.
Plant Turnaround Costs - We expense the costs relating to planned major maintenance
activities (“Turnarounds”) as they are incurred by our Chemical Business.
Executive Benefit Agreements - We have entered into benefit agreements with certain key
executives. Costs associated with these individual benefit agreements are accrued based on the
estimated remaining service period when such benefits become probable they will be paid. Total
costs accrued equal the present value of specified payments to be made after benefits become
payable.
Income Taxes - We recognize deferred tax assets and liabilities for the expected future tax
consequences attributable to tax net operating loss (“NOL”) carryforwards, tax credit
carryforwards, and differences between the financial statement carrying amounts and the tax
basis of our assets and liabilities. We establish valuation allowances if we believe it is more-
likely-than-not that some or all of deferred tax assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
In addition, we do not recognize a tax benefit unless we conclude that it is more-likely-than-not
that the benefit will be sustained on audit by the taxing authority based solely on the technical
merits of the associated tax position. If the recognition threshold is met, we recognize a tax
benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than
50% likely to be realized. We also record interest related to unrecognized tax positions in interest
expense and penalties in operating other expense.
We reduce income tax expense for investment tax credits in the year the credit arises and is
earned.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are
deductible for income tax purposes but do not affect earnings. These benefits are principally
generated from exercises of non-qualified stock options.
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Contingencies - We accrue for contingent losses when such losses are probable and reasonably
estimable. Estimates of potential legal fees and other directly related costs associated with loss
contingencies are not accrued but rather are expensed as incurred. In addition, we recognize
contingent gains when such gains are realized or realizable and earned. Our Chemical Business
is subject to specific federal and state regulatory compliance laws and guidelines. We have
developed policies and procedures related to regulatory compliance. We must continually
monitor whether we have maintained compliance with such laws and regulations and the
operating implications, if any, and amount of penalties, fines and assessments that may result
from noncompliance. Loss contingency liabilities are included in current and noncurrent accrued
and other liabilities and are based on current estimates that may be revised in the near term.
Asset Retirement Obligations - We are obligated to monitor certain discharge water outlets at
our Chemical Business facilities should we discontinue the operations of a facility. We also have
certain facilities in our Chemical Business 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. Since
we currently have no plans to discontinue the use of these facilities and the remaining lives of the
facilities are indeterminable, an asset retirement liability has not been recognized. Currently,
there is insufficient information to estimate the fair value of the asset retirement obligations.
However, we will continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made.
Stock Options - Equity award transactions with employees are measured based on the estimated
fair value of the equity awards issued. For equity awards with only service conditions that have a
graded vesting period, we recognize compensation cost on a straight-line basis over the requisite
service period for the entire award. In addition, we issue new shares of common stock upon the
exercise of stock options.
Revenue Recognition - We recognize revenue for substantially all of our operations at the time
title to the goods transfers to the buyer and there remain no significant future performance
obligations by us. Revenue relating to construction contracts is recognized using the percentage-
of-completion method based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Sales of warranty contracts are
recognized as revenue ratably over the life of the contract. See discussion above under “Product
Warranty” for our accounting policy for recognizing warranty expense.
Recognition of Insurance Recoveries - If an insurance claim relates to a recovery of our losses,
we recognize the recovery when it is probable and reasonably estimable. If our insurance claim
relates to a contingent gain, we recognize the recovery when it is realized or realizable and
earned. Amounts recoverable from our insurance carriers are included in accounts receivable.
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Cost of Sales - Cost of sales includes materials, labor and overhead costs to manufacture the
products sold plus inbound freight, purchasing and receiving costs, inspection costs, internal
transfer costs and warehousing costs (excluding certain handling costs directly related to loading
product being shipped to customers in our Chemical Business which are included in selling,
general and administrative expense). In addition, recoveries and gains from precious metals
(Chemical Business), sales of material scrap (Climate Control Business), and business
interruption insurance claims are reductions to cost of sales. Also gains and losses (realized and
unrealized) from our commodities and foreign currency futures/forward contracts are included in
cost of sales. In addition, provision for losses, if any, on firm sales commitments are included in
cost of sales.
Selling, General and Administrative Expense - Selling, general and administrative expense
(“SG&A”) includes costs associated with the sales, marketing and administrative functions. Such
costs include personnel costs, including benefits, advertising costs, commission expenses,
warranty costs, office and occupancy costs associated with the sales, marketing and
administrative functions. SG&A also includes outbound freight in our Climate Control Business
and certain handling costs directly related to product being shipped to customers in our Chemical
Business. These handling costs primarily consist of personnel costs for loading product into
transportation equipment, rent and maintenance costs related to the transportation equipment,
and certain indirect costs. Also, SG&A includes expenses associated with the start up of our
previously idled chemical facility located in Pryor, Oklahoma (the “Pryor Facility”) that we are
in the process of activating.
Shipping and Handling Costs - For the Chemical Business in 2009, 2008, and 2007, shipping
costs of $15,897,000, $16,333,000, and $15,209,000, respectively, are included in net sales as
these costs relate to amounts billed to our customers. In addition, in 2009, 2008, and 2007,
handling costs of $5,691,000, $5,432,000, and $5,249,000, respectively, are included in SG&A
as discussed above under “Selling, General and Administrative Expense.” For the Climate
Control Business, shipping and handling costs of $7,910,000, $11,047,000, and $11,057,000 are
included in SG&A for 2009, 2008, and 2007, respectively.
Advertising Costs - Costs in connection with advertising and promotion of our products are
expensed as incurred. For 2009, 2008, and 2007 such costs amounted to $5,915,000, $2,180,000,
and $1,791,000, respectively.
Derivatives, Hedges and Financial Instruments - Derivatives are recognized in the balance
sheet and are measured at fair value. Changes in fair value of derivatives are recorded in results
of operations unless the normal purchase or sale exceptions apply or hedge accounting is elected.
Income per Common Share - Net income applicable to common stock is computed by
adjusting net income by the amount of preferred stock dividends, dividend requirements and
stock dividends. Basic income per common share is based upon net income applicable to
common stock and the weighted-average number of common shares outstanding during each
F-16
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
year. Diluted income per share is based on net income applicable to common stock plus preferred
stock dividends and dividend requirements on preferred stock assumed to be converted, if
dilutive, and interest expense including amortization of debt issuance cost, net of income taxes,
on convertible debt assumed to be converted, if dilutive, and the weighted-average number of
common shares and dilutive common equivalent shares outstanding, and the assumed conversion
of dilutive convertible securities outstanding.
Recently Issued Accounting Pronouncements - In March 2008, the Financial Accounting
Standards Board (“FASB”) issued new accounting standards requiring enhanced disclosures
about an entity’s derivative and hedging activities for the purpose of improving the transparency
of financial reporting. The new disclosure requirements became effective for the Company on
January 1, 2009 and were applied prospectively. See Note 16 - Derivatives, Hedges and
Financial Instruments.
3. Income Per Share
The following is a summary of certain transactions which affected basic income per share or
diluted income per share, if dilutive:
During 2009,
(cid:120) we purchased 275,900 shares of treasury stock;
(cid:120) we issued 409,325 shares of our common stock as the result of the exercise of stock
options;
(cid:120) we acquired $11,100,000 aggregate principal amount of our 5.5% Convertible Senior
Subordinated Notes due 2012 (the “2007 Debentures”); and
(cid:120) we paid cash dividends on our Series B 12% cumulative, convertible preferred stock
(“Series B Preferred”), Series D 6% cumulative, convertible Class C preferred stock
(“Series D Preferred”) and noncumulative redeemable preferred stock (“Noncumulative
Preferred”) totaling approximately $240,000, $60,000 and $6,000, respectively.
During 2008,
(cid:120) we purchased 400,000 shares of treasury stock;
(cid:120) we issued 490,304 shares of our common stock as the result of the exercise of stock
options;
(cid:120) we granted 417,000 shares of stock options;
(cid:120) we acquired $19,500,000 aggregate principal amount of our 2007 Debentures; and
(cid:120) we paid cash dividends on our Series B Preferred, Series D Preferred and Noncumulative
Preferred totaling approximately $240,000, $60,000 and $6,000, respectively.
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income Per Share (continued)
During 2007,
(cid:120) we sold $60,000,000 of the 2007 Debentures;
(cid:120)
the remaining $4,000,000 of the 7% Convertible Senior Subordinated Debentures due
2011 (the “2006 Debentures”) was converted into 564,789 shares of common stock;
(cid:120) we issued 2,262,965 shares of common stock for 305,807 shares of our Series 2 $3.25
convertible, exchangeable Class C preferred stock (“Series 2 Preferred”) that were
tendered pursuant to a tender offer;
(cid:120) we redeemed 25,820 shares of our Series 2 Preferred and issued 724,993 shares of
common stock for 167,475 shares of our Series 2 Preferred;
(cid:120) we received shareholders’ approval in granting 450,000 shares of non-qualified stock
options on June 14, 2007;
(cid:120) we issued 582,000 and 112,500 shares of our common stock as the result of the exercise
of stock options and a warrant, respectively;
(cid:120) we paid cash dividends of approximately $678,000 on the shares of Series 2 Preferred
which we redeemed as discussed above; and
(cid:120) we paid cash dividends on the Series B Preferred, Series D Preferred and Noncumulative
Preferred totaling approximately $1,890,000, $360,000 and $6,000, respectively.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income Per Share (continued)
The following table sets forth the computation of basic and diluted net income per share:
2008
2009
(Dollars In Thousands, Except Per Share Amounts)
2007
Numerator:
Net income
Dividends and dividend requirements on Series B Preferred
Dividends and dividend requirements on Series D Preferred
Dividends on Noncumulative Preferred
Dividend requirements on shares of Series 2 Preferred which
did not exchange pursuant to tender offer or redemption in
2007 or exchange agreements in 2006
Dividends and dividend requirements on shares of Series 2
Preferred which were redeemed in 2007
Dividend requirements and stock dividend on shares of
Series 2 Preferred pursuant to tender offer in 2007 (1)
Total dividends, dividend requirements and stock
$
$
21,584
(240)
(60)
(6)
$
36,547
(240 )
(60 )
(6 )
-
-
-
-
-
-
dividends on preferred stocks
(306
)
(306
)
Numerator for basic net income per share - net income
applicable to common stock
Dividends and dividend requirements on preferred stock
assumed to be converted, if dilutive
Interest expense including amortization of debt issuance
costs, net of income taxes, on convertible debt assumed to
be converted, if dilutive
21,278
306
-
Numerator for diluted net income per common share
$
21,584
$
36,241
306
46,882
(240)
(60)
(6)
(272
)
(59
)
(4,971
)
(5,608
)
41,274
637
1,624
38,171
$
1,276
43,187
Denominator:
Denominator for basic net income per common share -
weighted-average shares
Effect of dilutive securities:
Convertible preferred stock
Stock options
Convertible notes payable
Warrant
Dilutive potential common shares
Denominator for dilutive net income per common share – adjusted
21,294,780
21,170,418
19,579,664
938,006
255,660
4,000
-
1,197,666
939,126
544,994
1,478,200
-
2,962,320
1,478,012
1,160,100
1,200,044
77,824
3,915,980
weighted-average shares and assumed conversions
22,492,446
24,132,738
23,495,644
Basic net income per common share
Diluted net income per common share
$
$
1.00
.96
$
$
1.71
1.58
$
$
2.11
1.84
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income Per Share (continued)
(1) As discussed in Note 18 - Non-Redeemable Preferred Stock, in February 2007 we began a
tender offer to exchange shares of our common stock for up to 309,807 of the 499,102
outstanding shares of the Series 2 Preferred. The tender offer expired on March 12, 2007 and our
board of directors accepted the shares tendered on March 13, 2007. Because the exchanges under
the tender offer were pursuant to terms other than the original terms, the transactions were
considered extinguishments of the preferred stock. In addition, the transactions qualified as
induced conversions. The excess of the fair value of the common stock issued over the fair value
of the securities issuable pursuant to the original conversion terms was subtracted from net
income in computing net income per share. Because our Series 2 Preferred are cumulative and
the dividend requirements have been included in computing net income per share in previous
periods and as an element of the exchange transactions, we effectively settled the dividends in
arrears, the amount subtracted from net income in 2007 represents the excess of the fair value of
the common stock issued over the fair value of the securities issuable pursuant to the original
conversion terms less the dividends in arrears as March 13, 2007.
The following weighted-average shares of securities were not included in the computation of
diluted net income per common share as their effect would have been antidilutive:
Convertible notes payable
Stock options
Series 2 Preferred pursuant to tender offer in 2007 (A)
2009
2008
2007
1,070,160
398,699
-
1,468,859
-
506,142
-
506,142
-
240,068
261,090
501,158
(A) The shares associated with the tender offer in 2007 were considered separately from other convertible
shares of securities in computing net income per common share for 2007.
4. Accounts Receivable, net
Trade receivables
Insurance claims
Other
Allowance for doubtful accounts
December 31,
2009
2008
(In Thousands)
$ 55,318
1,517
1,603
58,438
(676)
$ 57,762
$ 78,092
252
1,231
79,575
(729 )
$ 78,846
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. Accounts Receivable, net (continued)
Concentrations of credit risk with respect to trade receivables are limited due to the large number
of customers comprising our customer bases and their dispersion across many different industries
and geographic areas, however, eight customers (including their affiliates) account for
approximately 24% of our total net receivables at December 31, 2009.
5. Inventories
December 31, 2009:
Climate Control products
Chemical products
Industrial machinery and components
December 31, 2008:
Climate Control products
Chemical products
Industrial machinery and components
Finished
Goods
Work-in-
Process
Raw
Materials
Total
(In Thousands)
$
6,680
14,734
4,339
$ 25,753
$
7,550
18,638
4,491
$ 30,679
$
$
$
$
2,466
-
-
2,466
$ 19,410
3,384
-
$ 22,794
$ 28,556
18,118
4,339
$ 51,013
2,954
-
-
2,954
$ 21,521
5,656
-
$ 27,177
$ 32,025
24,294
4,491
$ 60,810
At December 31, 2009 and 2008, inventory reserves for certain slow-moving inventory items
(Climate Control products) were $1,198,000 and $514,000, respectively. In addition, inventory
reserves for certain nitrogen-based inventories provided by our Chemical Business were
$478,000 and $3,627,000 at December 31, 2009 and 2008, respectively, because cost exceeded
the net realizable value.
Changes in our inventory reserves are as follows:
Balance at
Beginning
of Year
Additions-
Provision for
(realization of)
losses
Deductions-
Write-offs/
disposals
Balance at
End
of Year
(In Thousands)
2009
$ 4,141
$ (2,404)
2008
$
473
2007
$ 1,255
$
$
3,824
(384)
$
$
$
61
$ 1,676
156
$ 4,141
398
$
473
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
5. Inventories (continued)
The provision for (realization of) losses is included in cost of sales in the accompanying
consolidated statements of income.
6. Precious Metals
At December 31, 2009 and 2008, precious metals were $13,083,000 and $14,691,000,
respectively, and are included in supplies, prepaid items and other in the accompanying
consolidated balance sheets.
Precious metals expense, net, consists of the following:
Precious metals expense
Recoveries of precious metals
Gains on sales of precious metals
Precious metals expense, net
2009
2008
(In Thousands)
2007
$
$
5,879
(2,578)
-
3,301
$
$
7,786
(1,458)
-
6,328
$ 6,352
(1,783 )
(2,011 )
$ 2,558
Precious metals expense, net is included in cost of sales in the accompanying consolidated
statements of income.
7. Property, Plant and Equipment
Machinery, equipment and automotive
Buildings and improvements
Furniture, fixtures and store equipment
Assets under capital leases
Land improvements
Construction in progress
Capital spare parts
Land
Less accumulated depreciation
Useful lives
in years
3-20
7-30
3
10
10
N/A
N/A
N/A
December 31,
2009
2008
(In Thousands)
$ 186,822
29,403
5,986
2,544
677
17,223
3,253
4,082
249,990
132,028
$ 117,962
$ 173,678
28,457
6,716
1,076
-
8,514
2,344
4,082
224,867
120,575
$ 104,292
Machinery, equipment and automotive primarily includes the categories of property and
equipment and estimated useful lives as follows: chemical processing plants and plant
infrastructure (15-20 years); production, fabrication, and assembly equipment (7-15 years);
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Property, Plant and Equipment (continued)
certain processing plant components (3-10 years); and trucks, automobiles, trailers, and other
rolling stock (3-7 years). At December 31, 2009 and 2008, assets capitalized under capital leases
consist of machinery, equipment and automotive. Accumulated depreciation for assets capitalized
under capital leases were $428,000 and $193,000 at December 31, 2009 and 2008, respectively.
8. Debt Issuance Costs, net
Debt issuance costs of $1,652,000 and $2,607,000 are net of accumulated amortization of
$3,368,000 and $2,980,000 as of December 31, 2009 and 2008, respectively.
During 2009, we acquired a portion of the 2007 Debentures. As a result, approximately $379,000
of the unamortized debt issuance costs associated with the 2007 Debentures acquired was
charged against the gain on extinguishment of debt in 2009.
During 2008, we acquired a portion of the 2007 Debentures. As a result, approximately $764,000
of the unamortized debt issuance costs associated with the 2007 Debentures acquired was
charged against the gain on extinguishment of debt in 2008.
During 2007, we incurred debt issuance costs of $4,429,000 which included $3,224,000 relating
to the 2007 Debentures and $1,139,000 relating to the $50 million loan agreement (“Secured
Term Loan”). In addition, the remaining portion of the 2006 Debentures was converted into our
common stock. As a result of the conversions, approximately $266,000 of the remaining
unamortized debt issuance costs associated with the 2006 Debentures were charged against
capital in excess of par value in 2007. Also, the senior secured loan due in 2009 was repaid with
the proceeds from the Secured Term Loan. As a result, approximately $1,331,000 of the
remaining unamortized debt issuance and other debt-related costs associated with the senior
secured loan was charged to interest expense in 2007.
9. Investment in Affiliate
Cepolk Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has a 50%
equity interest in Cepolk Limited Partnership (“Partnership”) which is accounted for on the
equity method. The Partnership owns an energy savings project located at the Ft. Polk Army base
in Louisiana (“Project”). At December 31, 2009 and 2008, our investment was $3,838,000 and
$3,628,000, respectively. As of December 31, 2009, the Partnership and general partner to the
Partnership is indebted to a term lender (“Lender”) of the Project for approximately $2,083,000
with a term extending to December 2010. CHI has pledged its limited partnership interest in the
Partnership to the Lender as part of the Lender’s collateral securing all obligations under the
loan. This guarantee and pledge is limited to CHI’s limited partnership interest and does not
expose CHI or the Company to liability in excess of CHI’s limited partnership interest. No
liability has been established for this pledge since it was entered into prior to January 1, 2003.
CHI has no recourse provisions or available collateral that would enable CHI to recover its
partnership interest should the Lender be required to perform under this pledge.
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Current and Noncurrent Accrued and Other Liabilities
Accrued payroll and benefits
Deferred revenue on extended warranty contracts
Accrued insurance
Accrued death benefits
Accrued warranty costs
Fair value of derivatives
Accrued interest
Accrued executive benefits
Accrued commissions
Accrued precious metals costs
Accrued contractual manufacturing obligations
Customer deposits
Billings in excess of costs and estimated earnings on
uncompleted contracts
Accrued income taxes
Deferred rent expense
Other
Less noncurrent portion
Current portion of accrued and other liabilities
11. Accrued Warranty Costs
December 31,
2009
2008
(In Thousands)
$
5,900
4,884
3,667
3,356
3,138
1,929
1,593
1,102
1,035
782
732
635
6,422
4,028
2,971
2,687
2,820
8,347
2,003
1,111
2,433
1,298
2,230
3,242
616
608
-
3,703
33,680
10,626
23,054
1,882
1,704
1,424
4,265
48,867
9,631
$ 39,236
$
$
Changes in our product warranty obligation (accrued warranty costs) are as follows:
Balance at
Beginning
of Year
Additions-
Charged to
Costs and
Expenses
Deductions-
Costs
Incurred
Balance at
End
of Year
(In Thousands)
$ 2,820
$ 5,252
$ 4,934
$ 3,138
$ 1,944
$ 5,514
$ 4,638
$ 2,820
$ 1,251
$ 3,325
$ 2,632
$ 1,944
2009
2008
2007
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Redeemable Preferred Stock
At December 31, 2009 and 2008, we had 511 shares and 547 shares, respectively, outstanding of
Noncumulative Preferred. Each share of Noncumulative Preferred, $100 par value, is convertible
into 40 shares of our common stock at the option of the holder at any time and entitles the holder
to one vote. The Noncumulative Preferred is redeemable at par at the option of the holder or the
Company. The Noncumulative Preferred provides for a noncumulative annual dividend of 10%,
payable when and as declared. During 2009, 2008, and 2007, our board of directors declared and
we paid dividends totaling $6,000 ($10.00 per share), in each of the respective years on the then
outstanding Noncumulative Preferred. At December 31, 2009 and 2008, the Noncumulative
Preferred was $48,000 and $52,000, respectively, and is classified as accrued and other liabilities
in the accompanying consolidated balance sheets.
13. Long-Term Debt
Working Capital Revolver Loan due 2012 (A)
5.5% Convertible Senior Subordinated Notes due 2012 (B)
Secured Term Loan due 2012 (C)
Other, with a current weighted-average interest rate of 6.30%,
most of which is secured by machinery, equipment and real
estate (D)
Less current portion of long-term debt (E)
Long-term debt due after one year (E)
December 31,
2009
2008
(In Thousands)
$
-
29,400
50,000
-
40,500
50,000
22,401
101,801
3,205
$ 98,596
14,660
105,160
1,560
$ 103,600
(A) ThermaClime and its subsidiaries (the “Borrowers”) are parties to a $50 million revolving
credit facility (the “Working Capital Revolver Loan”) that provides for advances based on
specified percentages of eligible accounts receivable and inventories for ThermaClime, and its
subsidiaries. The Working Capital Revolver Loan, as amended, accrues interest at a base rate
(generally equivalent to the prime rate) plus .50% or LIBOR plus 1.75% and matures on April
13, 2012. The interest rate at December 31, 2009 was 3.75%. Interest is paid monthly, if
applicable. The facility provides for up to $8.5 million of letters of credit. All letters of credit
outstanding reduce availability under the facility. As of December 31, 2009, amounts available
for borrowing under the Working Capital Revolver Loan were approximately $49.2 million.
Under the Working Capital Revolver Loan, as amended, the lender also requires the Borrowers
to pay a letter of credit fee equal to 1% per annum of the undrawn amount of all outstanding
letters of credit, an unused line fee equal to .375% per annum for the excess amount available
under the facility not drawn and various other audit, appraisal and valuation charges.
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Long-Term Debt (continued)
The lender may, upon an event of default, as defined, terminate the Working Capital Revolver
Loan and make the balance outstanding, if any, due and payable in full. The Working Capital
Revolver Loan is secured by the assets of all the ThermaClime entities other than El Dorado
Nitric Company and its subsidiaries (“EDN”) but excluding the assets securing the Secured Term
Loan discussed in (C) below and certain distribution-related assets of El Dorado Chemical
Company (“EDC”). EDN is neither a borrower nor guarantor of the Working Capital Revolver
Loan. The carrying value of the pledged assets is approximately $194 million at December 31,
2009.
The Working Capital Revolver Loan, as amended, requires ThermaClime to meet certain
financial covenants, including an EBITDA requirement of greater than $25 million, a minimum
fixed charge coverage ratio of not less than 1.10 to 1, and a maximum senior leverage coverage
ratio of not greater than 4.50 to 1. These requirements are measured quarterly on a trailing
twelve-month basis and as defined in the agreement. ThermaClime was in compliance with those
covenants during 2009. The Working Capital Revolver Loan also contains covenants that, among
other things, limit the Borrowers’ (which does not include the Company) ability, without consent
of the lender and with certain exceptions, to:
incur additional indebtedness,
incur liens,
(cid:120)
(cid:120)
(cid:120) make restricted payments or loans to affiliates who are not Borrowers,
(cid:120) engage in mergers, consolidations or other forms of recapitalization, or
(cid:120) dispose assets.
The Working Capital Revolver Loan also requires all collections on accounts receivable be made
through a bank account in the name of the lender or their agent.
(B) On June 28, 2007, we entered into a purchase agreement with each of twenty two qualified
institutional buyers (“QIBs”), pursuant to which we sold $60 million aggregate principal amount
of the 2007 Debentures in a private placement to the QIBs pursuant to the exemptions from the
registration requirements of the Securities Act of 1933, as amended (the “Act”), afforded by
Section 4(2) of the Act and Regulation D promulgated under the Act. We received net proceeds
of approximately $57 million, after discounts and commissions. In connection with the closing,
we entered into an indenture (the “Indenture”) with UMB Bank, as trustee, governing the 2007
Debentures. UMB Bank receives customary compensation from us for such services.
The 2007 Debentures bear interest at the rate of 5.5% per year and mature on July 1, 2012.
Interest is payable in arrears on January 1 and July 1 of each year, which began on January 1,
2008.
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Long-Term Debt (continued)
The 2007 Debentures are unsecured obligations and are subordinated in right of payment to all of
our existing and future senior indebtedness, including indebtedness under our revolving debt
facilities. The 2007 Debentures are effectively subordinated to all present and future liabilities,
including trade payables, of our subsidiaries.
During 2009 and 2008, we acquired $11.1 million and $19.5 million, respectively, aggregate
principal amount of the 2007 Debentures for approximately $8.9 million and $13.2 million,
respectively, with each purchase being negotiated. As a result, we recognized a gain on
extinguishment of debt of approximately $1.8 million and $5.5 million, respectively, after
writing off the unamortized debt issuance costs associated with the 2007 Debentures acquired.
As the result of these acquisitions, only $29.4 million of the 2007 Debentures remain outstanding
at December 31, 2009. In addition, see discussion concerning $5.0 million of the 2007
Debentures being held by Jack E. Golsen, our Chairman of the Board and Chief Executive
Officer (“CEO”), members of his immediate family (spouse and children), entities owned by
them and trusts for which they possess voting or dispositive power as trustee (collectively, the
“Golsen Group”) in Note 23 - Related Party Transactions.
The 2007 Debentures are convertible by the holders in whole or in part into shares of our
common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders
electing to convert all or any portion of a debenture is 36.4 shares of our common stock per
$1,000 principal amount of debentures (representing a conversion price of $27.47 per share of
common stock), subject to adjustment under certain conditions as set forth in the Indenture.
We may redeem some or all of the 2007 Debentures at any time on or after July 2, 2010, at a
price equal to 100% of the principal amount of the 2007 Debentures, plus accrued and unpaid
interest, all as set forth in the Indenture. The redemption price will be payable at our option in
cash or, subject to certain conditions, shares of our common stock (valued at 95% of the
weighted average of the closing sale prices of the common stock for the 20 consecutive trading
days ending on the fifth trading day prior to the redemption date), subject to certain conditions
being met on the date we mail the notice of redemption.
If a designated event (as defined in the Indenture) occurs prior to maturity, holders of the 2007
Debentures may require us to repurchase all or a portion of their 2007 Debentures for cash at a
repurchase price equal to 101% of the principal amount of the 2007 Debentures plus any accrued
and unpaid interest, as set forth in the Indenture. If a fundamental change (as defined in the
Indenture) occurs on or prior to June 30, 2010, under certain circumstances, we will pay, in
addition to the repurchase price, a make-whole premium on the 2007 Debentures converted in
connection with, or tendered for repurchase upon, the fundamental change. The make-whole
premium will be payable in our common stock or the same form of consideration into which our
common stock has been exchanged or converted in the fundamental change. The amount of the
make-whole premium, if any, will be based on our stock price on the effective date of the
fundamental change. No make-whole premium will be paid if our stock price in connection with
the fundamental change is less than or equal to $23.00 per share.
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Long-Term Debt (continued)
At maturity, we may elect, subject to certain conditions as set forth in the Indenture, to pay up to
50% of the principal amount of the outstanding 2007 Debentures, plus all accrued and unpaid
interest thereon to, but excluding, the maturity date, in shares of our common stock (valued at
95% of the weighted average of the closing sale prices of the common stock for the 20
consecutive trading days ending on the fifth trading day prior to the maturity date), if the
common stock is then listed on an eligible market, the shares used to pay the 2007 Debentures
and any interest thereon are freely tradable, and certain required opinions of counsel are
received.
In 2007, we used a portion of the net proceeds to redeem our remaining outstanding shares of
Series 2 Preferred; to repay certain outstanding mortgages and equipment loans; to pay dividends
in arrears on our outstanding shares of Series B Preferred and Series D Preferred, all of which
were owned by an affiliate; to reduce the outstanding borrowings under the Working Capital
Revolver Loan; and to invest in highly liquid investments to be available for working capital.
In connection with using a portion of the net proceeds of the 2007 Debentures to initially reduce
the outstanding borrowings under the Working Capital Revolver Loan, ThermaClime entered
into a $25 million demand promissory note (“Demand Note”) with the Company. During 2009,
ThermaClime made principal payments totaling $15 million on the Demand Note.
(C) In November 2007, ThermaClime and certain of its subsidiaries entered into a $50 million
Secured Term Loan with a certain lender. Proceeds from the Secured Term Loan were used to
repay the previous senior secured loan. The Secured Term Loan matures on November 2, 2012.
The Secured Term Loan accrues interest at a defined LIBOR rate plus 3%, which LIBOR rate is
adjusted on a quarterly basis. The interest rate at December 31, 2009 was approximately 3.28%.
The Secured Term Loan requires only quarterly interest payments with the final payment of
interest and principal at maturity.
The Secured Term Loan is secured by the real property and equipment located at our El Dorado
and Cherokee Facilities. The carrying value of the pledged assets is approximately $63 million at
December 31, 2009.
The Secured Term Loan borrowers are subject to numerous covenants under the agreement
including, but not limited to, limitation on the incurrence of certain additional indebtedness and
liens, limitations on mergers, acquisitions, dissolution and sale of assets, and limitations on
declaration of dividends and distributions to us, all with certain exceptions. At December 31,
2009, the carrying value of the restricted net assets of ThermaClime and its subsidiaries was
approximately $79 million. As defined in the agreement, the Secured Term Loan borrowers are
also subject to a minimum fixed charge coverage ratio of not less than 1.10 to 1 and a maximum
leverage ratio of not greater than 4.50 to 1. Both of these requirements are measured quarterly on
a trailing twelve-month basis. The Secured Term Loan borrowers were in compliance with these
financial covenants for the year ended December 31, 2009.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Long-Term Debt (continued)
The maturity date of the Secured Term Loan can be accelerated by the lender upon the
occurrence of a continuing event of default, as defined.
The Working Capital Revolver Loan agreement (discussed in (A) above) and the Secured Term
Loan contain cross-default provisions. If ThermaClime fails to meet the financial covenants of
either of these agreements, the lenders may declare an event of default.
(D) Amounts include capital lease obligations of $1,742,000 and $716,000 at December 31,
2009 and 2008, respectively.
(E) Maturities of long-term debt for each of the five years after December 31, 2009 are as
follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
$
3,205
3,283
82,766
3,499
2,630
6,418
$ 101,801
14. Income Taxes
Provisions (benefits) for income taxes are as follows:
Current:
Federal
State
Total Current
Deferred:
Federal
State
Total Deferred
Provisions for income taxes
2009
2008
(In Thousands)
2007
$
$
2,456
1,337
3,793
$ 17,388
1,651
$ 19,039
$ 5,260
1,980
$ 7,240
$
9,611
1,620
$ 11,231
$ 15,024
$
595
(858 )
$
(263 )
$ 18,776
$ (4,095)
(605)
$ (4,700)
$ 2,540
For 2009, the current provision for federal income taxes of approximately $2.5 million includes
regular federal income tax after the consideration of permanent and temporary differences
between income for GAAP and tax purposes. The current provision for state income taxes of
approximately $1.3 million in 2009 includes regular state income tax and provisions for
uncertain state income tax positions as discussed below. In addition to the income tax provision
from continuing operations, we allocated an income tax benefit of approximately $0.2 million to
discontinued operations.
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
The 2009 deferred tax provision of $11.2 million results from the recognition of changes in our
prior year deferred tax assets and liabilities, and the utilization of state NOL carryforwards and
other temporary differences. We reduce income tax expense for investment tax credits in the year
they arise and are earned. The gross amount of the investment tax credits available to offset state
income taxes is approximately $0.5 million and includes credits for the tax years 2004-2009.
The investment tax credits do not expire and carryforward indefinitely.
During 2009, we utilized approximately $2.2 million of state NOL carryforwards to reduce the
tax liability. We have remaining state tax NOL carryforwards of approximately $12.9 million
that begin expiring in 2010.
During 2009, we determined it was more-likely-than-not that approximately $7.1 million of the
state NOL carryforwards would not be able to be utilized before expiration and a valuation
allowance for the deferred tax assets associated with these state NOL carryforwards, net of
federal benefit, of approximately $0.4 million was maintained. We considered both positive and
negative evidence in our determination. The negative evidence considered primarily included our
history of losses by certain entities and jurisdictions, both as to amount and trend and
uncertainties surrounding our ability to generate sufficient taxable income in the individual states
to utilize these state NOL carryforwards.
Our overall effective tax rate of 40.7% in 2009 was primarily impacted by tax return to provision
adjustments, permanent tax differences and tax credits.
For 2008, the current provision for federal income taxes of approximately $17.4 million includes
regular federal income tax after the consideration of permanent and temporary differences
between income for GAAP and tax purposes. The current provision for state income taxes of
approximately $1.7 million in 2008 includes regular state income tax and provisions for
uncertain state income tax positions as discussed below. At December 31, 2007, we had federal
and state NOL carryforwards and we utilized all of the federal NOL carryforwards during 2008
and a significant portion of the state NOL carryforwards.
The 2008 deferred tax benefit of $0.3 million results from the recognition of changes in our prior
year deferred tax assets and liabilities, and the utilization of state NOL carryforwards and other
temporary differences.
During 2008, we performed a detailed analysis of all our deferred tax assets and liabilities and
determined that our state net NOL carryforwards were understated by approximately $34.2
million. The addition of the tax benefits of these state NOL carryforwards increased our deferred
tax assets and decreased our deferred tax expense by approximately $1.1 million, net of the
valuation allowance discussed below. During 2008, we utilized the remaining federal NOL
carryforwards of approximately $0.7 million and approximately $32.8 million of state NOL
carryforwards to reduce tax expense.
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
During 2008, we determined it was more-likely-than-not that approximately $6.7 million of the
state NOL carryforwards would not be able to be utilized before expiration and a valuation
allowance for the deferred tax assets associated with these state NOL carryforwards, net of
federal benefit, of approximately $0.3 million was established. We considered both positive and
negative evidence in our determination. The negative evidence considered primarily included our
history of losses by certain entities and jurisdictions, both as to amount and trend and
uncertainties surrounding our ability to generate sufficient taxable income in the individual states
to utilize these state NOL carryforwards.
Our overall effective tax rate in 2008 is reduced by permanent tax differences, the effect of the
change to prior year deferred items and the provision for uncertain tax positions.
The current provision for federal income taxes of $5.3 million for 2007 includes regular federal
income tax and alternative minimum income tax (“AMT”). The current provision of state income
taxes of $2.0 million for 2007 includes the provision for 2007 state income taxes, as well as $1.0
million for uncertain state income tax positions recognized as discussed below.
The 2007 benefit for deferred taxes of $4.7 million results from the reversal of valuation
allowance on deferred tax assets, the benefit of AMT credits, and other temporary differences. At
December 31, 2006, we had regular NOL carryforwards of approximately $49.9 million. Our
future tax benefits (NOL carryforwards and other temporary differences) are subject to a
valuation allowance if it is determined that it is more-likely-than-not that such asset will not be
realized. In determining whether it is more-likely-than-not that we will not realize such tax asset,
we consider all negative and positive evidence (with more weight given to evidence that is
“objective and verifiable”) in making the determination. Prior to 2007, we had valuation
allowances in place against the net deferred tax assets arising from the NOL carryforwards and
other temporary differences. Prior to 2007, management considered certain negative evidence in
determining that it was “more-likely-than-not” that the net deferred tax assets would not be
utilized in the foreseeable future, thus a valuation allowance was required.
The negative evidence considered primarily included our history of losses, both as to amount and
trend and uncertainties surrounding our ability to generate sufficient taxable income to utilize
these NOL carryforwards.
As the result of improving financial results during 2007 including some unusual transactions
(settlement of pending litigation and insurance recovery of business interruption claim) and our
expectation of generating taxable income in the future, we determined in the third quarter of
2007 that there was sufficient objective and verifiable evidence to conclude that it was more-
likely-than-not that we would be able to realize the net deferred tax assets. As a result, we
reversed the valuation allowances as a benefit for income taxes and recognized deferred tax
assets and deferred tax liabilities.
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
When non-qualified stock options (“NSOs”) are exercised, the grantor of the options is permitted
to deduct the spread between the fair market value of the stock issued and the exercise price of
the NSOs as compensation expense in determining taxable income. Income tax benefits related
to stock-based compensation deductions in excess of the compensation expense recorded for
financial reporting purposes are not recognized in earnings as a reduction of income tax expense
for financial reporting purposes. As a result, the stock-based compensation deduction recognized
in our income tax return will exceed the stock-based compensation expense recognized in
earnings. The excess tax benefit realized (i.e., the resulting reduction in the current tax liability)
related to the excess stock-based compensation tax deduction of $0.9 million, $2.4 million and
$1.7 million in 2009, 2008, and 2007, respectively, is accounted for as an increase in capital in
excess of par value rather than a decrease in the provision for income taxes.
In addition, if the grantor of NSOs will not currently reduce its tax liability from the excess tax
benefit deduction taken at the time of the taxable event (option exercised) because it has a NOL
carryforward that is increased by the excess tax benefit, then the tax benefit should not be
recognized until the deduction actually reduces current taxes payable. At December 31, 2009 and
2008, we had approximately $0.2 million and $0.6 million, respectively, in unrecognized federal
and state tax benefits resulting from the exercise of NSOs. We estimate that the remaining
portion of the benefit at December 31, 2009 will be realized in 2010 when our current tax
liability is reduced by these items.
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at
December 31, 2009 and 2008 include:
2009
2008
(In Thousands)
Deferred tax assets
Amounts not deductible for tax purposes:
Allowance for doubtful accounts
Asset impairment
Inventory reserves
Deferred compensation
Other accrued liabilities
Uncertain income tax positions
Hedging
Other
Capitalization of certain costs as inventory for tax purposes
Net operating loss carryforwards
State tax credits
Total deferred tax assets
Less valuation allowance on deferred tax assets
$
747
735
691
3,718
4,204
242
853
681
1,152
644
523
14,190
(358 )
$
775
683
1,614
3,445
3,260
411
3,610
452
1,123
865
392
16,630
(268)
$ 16,362
Net deferred tax assets
$
13,832
Deferred tax liabilities
Accelerated depreciation used for tax purposes
Excess of book gain over tax gain resulting from sale of assets
Prepaid and other insurance reserves
Debt purchased at a discount
Investment in unconsolidated affiliate
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Consolidated balance sheet classification:
Net current deferred tax assets
Net non-current deferred tax liabilities
Net deferred tax assets (liabilities)
Net deferred tax assets (liabilities) by tax jurisdiction:
Federal
State
Net deferred tax assets (liabilities)
$
$
$
$
$
$
$
16,488
356
1,690
713
1,033
20,280
$ 9,860
340
-
-
1,199
$ 11,399
(6,448 ) $ 4,963
$ 11,417
5,527
(6,454)
(11,975 )
(6,448 ) $ 4,963
(6,525 ) $ 3,609
1,354
(6,448 ) $ 4,963
77
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
All of our income before taxes relates to domestic operations. Detailed below are the differences
between the amount of the provision for income taxes and the amount which would result from
the application of the federal statutory rate to “Income from continuing operations before
provision for income taxes” for the year ended December 31:
Provisions for income taxes at federal statutory rate
Federal credits
State current and deferred income taxes
Provision (benefit) for uncertain tax positions
Other permanent differences
Domestic production activities deduction
Effect of change to prior year deferred items (A)
Changes in the valuation allowance (A)
Effect of tax return to tax provision reconciliation
State tax credits
Other
Provisions for income taxes
2009
$ 12,906
(211)
1,832
(87)
299
(282)
-
90
676
(108)
(91)
$ 15,024
2008
(In Thousands)
$ 19,363
-
2,213
(74 )
327
(820 )
(1,827 )
268
-
(392 )
(282 )
$ 18,776
2007
$ 17,176
-
1,939
1,047
451
-
-
(18,476)
-
-
403
$ 2,540
(A) During 2008, we performed a detailed analysis of all our deferred tax assets and liabilities
and determined that our deferred tax assets were understated by approximately $1,827,000. As a
part of our analysis, we reviewed the realizability of these deferred tax assets and determined that
a valuation allowance of approximately $268,000 was required. Accordingly, the addition of the
deferred tax assets and the associated valuation allowance resulted in a tax benefit of $1,559,000
in our income tax provision for 2008.
As of December 31, 2006, we had $300,000 accrued for an uncertain tax position related to state
income taxes. As the result of new accounting principles becoming effective January 1, 2007, we
recognized a $120,000 increase in the liability for uncertain tax positions related to state income
taxes, which was accounted for as an increase to the January 1, 2007 accumulated deficit
balance. In 2007, we commissioned a nexus study by an independent public accounting firm to
determine if we and our subsidiaries had any activities that would create nexus and to calculate
the potential additional state income tax liability. As a result of this nexus study, we recognized
additional current state income tax expense in 2007, which was partially offset by a deferred tax
benefit from additional state NOL carryforwards.
F-34
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
During 2008, we entered into multiple voluntary disclosure agreements with various states and
resolved many of our outstanding state tax liabilities for payments of approximately $606,000.
The settlement of many of these liabilities was for less than the amounts previously estimated
and accrued. As a result, we reduced the uncertain tax position liability and state tax provision by
$504,000. Additionally during 2008, we evaluated if we and our subsidiaries had any new nexus
creating activities in any state taxing jurisdictions that had not previously been considered. As a
result, we recognized additional state income tax expense of $391,000 in 2008.
During 2009, we continued to negotiate voluntary disclosure agreements with various states and
resolved some of our outstanding state tax liabilities for payments of approximately $65,000. We
evaluated if we and our subsidiaries had any new nexus creating activities in any state taxing
jurisdiction that had not previously been considered and if all prior identifications of nexus
creating activities were still warranted. As a result, we reduced our state income tax expense by
$225,000 in 2009.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (uncertain tax
position liability) is as follows:
Balance at beginning of year
$
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of year
$
2007
2009
2008
(In Thousands)
898 $ 1,617
-
48
391
82
(504)
(355)
(606)
(65)
898
608 $
$
420
192
1,031
(26)
-
$ 1,617
If the tax benefit of these uncertain tax positions were recognized in the financial statements, the
tax benefit would decrease the annual effective tax rate by reducing the total state tax provision
by approximately $400,000, $300,000 and $700,000, net of federal expense, in 2009, 2008, and
2007, respectively.
During 2009, 2008, and 2007, we recognized $150,000, $181,000 and $253,000, respectively, in
interest and penalties associated with unrecognized tax benefits. We had approximately $150,000
and $288,000 accrued for interest and penalties at December 31, 2009 and 2008, respectively.
We plan to continue to negotiate voluntary disclosure agreements and file prior year tax returns
with various taxing authorities in 2010. Therefore, we anticipate that the total amount of
unrecognized tax benefits will decrease by approximately $20,000 by December 31, 2010 as a
result of state tax payments made as part of the voluntary disclosure agreement process or other
resolutions.
F-35
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
We and certain of our subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The federal tax returns for 1997 through 2005 remain subject to
examination for the purpose of determining the amount of remaining tax NOL and other
carryforwards. With few exceptions, the 2006-2008 years remain open for all purposes of
examination by the IRS and other major tax jurisdictions.
15. Commitments and Contingencies
Capital and Operating Leases - We and our subsidiaries lease certain property, plant and
equipment under capital leases and non-cancelable operating leases. Leased assets meeting
capital lease criteria have been capitalized and the present value of the related lease payments is
included in long-term debt. Future minimum payments on leases with initial or remaining terms
of one year or more at December 31, 2009, are as follows:
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
Less amounts representing interest
Present value of minimum lease
$
Capital
Leases
631
527
413
349
35
-
1,955
213
Operating
Leases
(In Thousands)
$
4,606
3,949
3,374
2,446
2,150
934
$ 17,459
Total
5,237
4,476
3,787
2,795
2,185
934
19,414
$
$
payments included in long-term debt $
1,742
Expenses associated with our operating lease agreements, including month-to-month leases, was
$8,584,000 in 2009, $13,801,000 in 2008 and $13,793,000 in 2007. Renewal options are
available under certain of the lease agreements for various periods at approximately the existing
annual rental amounts.
Purchase and Sales Commitments - We have the following significant purchase and sales
commitments.
Bayer Agreement - During October 2008, subsidiaries within our Chemical Business, EDN and
EDC, entered into a new Nitric Acid Supply, Operating and Maintenance Agreement (the “Bayer
Agreement”) with Bayer replacing a previous agreement between EDN, EDC and Bayer entered
into during 1997. EDN operates Bayer’s nitric acid plant (the “Baytown Facility”) located within
Bayer’s chemical manufacturing complex. The Bayer Agreement became effective on June 24,
2009, and is for an initial term of five years, with certain renewal options.
F-36
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
Under the terms of the Bayer Agreement, Bayer purchases from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex located in
Baytown, Texas at a price covering EDN’s costs plus a profit, with certain performance
obligations on EDN’s part. EDN purchases from Bayer ammonia, certain utilities, chemical
additives and services as required for production of nitric acid at the Baytown Facility.
On June 23, 2009, Bayer purchased all of the nitric acid production assets comprising the
Baytown Facility from a third party, except certain assets that are owned by EDN for use in the
production process. EDN continues to be responsible for the maintenance and operation of the
Baytown Facility in accordance with the terms of the Bayer Agreement.
If there is a change in control of EDN, Bayer has the right to terminate the Bayer Agreement
upon payment of certain fees to EDN.
Anhydrous ammonia purchase agreement - Effective January 1, 2009, under an agreement with
its principal supplier of anhydrous ammonia, Koch Nitrogen Company (“Koch”), EDC purchases
a majority of its anhydrous ammonia requirements for its chemical production facility located in
El Dorado, Arkansas (the “El Dorado Facility”) through at least December 2010. See discussion
concerning an extension of this agreement in Note 24 - Subsequent Events.
Ammonium nitrate supply agreement - In 2001, EDC entered into a long-term cost-plus
industrial grade ammonium nitrate supply agreement (“Supply Agreement”) with Orica USA,
Inc. (“Orica”). Under the Supply Agreement, as amended, EDC will supply from the El Dorado
Facility approximately 210,000 tons of industrial grade ammonium nitrate per year, which is
approximately 81% of the plant’s manufacturing capacity for that product, for a term through
June 2011. See discussion concerning a new supply agreement in Note 24 - Subsequent Events.
UAN supply agreement - In 2009, one of our subsidiaries, Pryor Chemical Company (“PCC”),
entered into a contract with Koch under which Koch agreed to purchase and distribute
substantially all of the UAN produced at the Pryor Facility through June 30, 2014, but Koch has
an option to terminate the agreement after November 1, 2010. Pursuant to the terms of the
contract, the UAN will be priced at market prices less a distribution fee and certain shipping
costs. As of December 31, 2009, the Pryor Facility was still in the process of being activated. As
a result, sales of UAN by PCC did not occur in 2009 but are expected to commence in 2010.
Other purchase and sales commitments - See Note 16 - Derivatives, Hedges and Financial
Instruments for our commitments relating to derivative contracts at December 31, 2009. In
addition, we also had standby letters of credit outstanding of approximately $1.4 million at
December 31, 2009. We also had deposits from customers of $0.6 million for forward sales
commitments including $0.3 million relating to our Climate Control Business and $0.3 million
relating to our Chemical Business at December 31, 2009.
F-37
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
Performance and Payment Bonds – We are contingently liable to sureties in respect of certain
insurance bonds issued by the sureties in connection with certain contracts entered into by our
subsidiaries in the normal course of business. These insurance bonds primarily represent
guarantees of future performance of our subsidiaries. As of December 31, 2009, we have agreed
to indemnify the sureties for payments, up to $22.9 million, made by them in respect of such
bonds. Approximately $21.7 million of these insurances bonds expire in 2010 while the
remaining $1.2 million expire in 2011.
Universal Shelf Registration Statement - During 2009, our board of directors granted
management the authority to file a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission (“SEC”). The shelf registration statement and related
amendments have been filed and declared effective by the SEC.
Although we do not have any current plans to offer or sell any securities under the shelf
registration statement, the shelf registration statement give us the ability to offer and sell up to
$200 million of our securities consisting of common stock, preferred stock, debt (senior and
subordinated), warrants, units or a combination thereof. We may offer and sell such securities
from time to time and through one or more methods of distribution, subject to market conditions
and our capital needs. The terms of any offering under the shelf registration statement would be
established at the time of such offering and will be described in a prospectus supplement filed
with the SEC prior to completion of the offering.
Employment and Severance Agreements - We have an employment agreement and severance
agreements with several of our officers. The agreements, as amended, provide for annual base
salaries, bonuses and other benefits commonly found in such agreements. In the event of
termination of employment due to a change in control (as defined in the agreements), the
agreements provide for payments aggregating $10.8 million at December 31, 2009.
Legal Matters - Following is a summary of certain legal matters involving the Company.
A. Environmental Matters
Our operations are subject to numerous environmental laws (“Environmental Laws”) and to
other federal, state and local laws regarding health and safety matters (“Health Laws”). In
particular, the manufacture and distribution of chemical products are activities which entail
environmental risks and impose obligations under the Environmental Laws and the Health Laws,
many of which provide for certain performance obligations, substantial fines and criminal
sanctions for violations. There can be no assurance that material costs or liabilities will not be
incurred by us in complying with such laws or in paying fines or penalties for violation of such
laws. The Environmental Laws and Health Laws and enforcement policies thereunder relating to
our Chemical Business have in the past resulted, and could in the future result, in compliance
expenses, cleanup costs, penalties or other liabilities relating to the handling, manufacture, use,
emission, discharge or disposal of effluents at or from our facilities or the use or disposal of
F-38
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
certain of its chemical products. Historically, significant expenditures have been incurred by
subsidiaries within our Chemical Business in order to comply with the Environmental Laws and
Health Laws and are reasonably expected to be incurred in the future.
We will recognize a liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. We are obligated to monitor certain
discharge water outlets at our Chemical Business facilities should we discontinue the operations
of a facility. We also have certain facilities in our Chemical Business 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. Since we currently have no plans to discontinue the use of these facilities
and the remaining life of the facilities is indeterminable, an asset retirement liability has not been
recognized. Currently, there is insufficient information to estimate the fair value of the asset
retirement obligations. However, we will continue to review these obligations and record a
liability when a reasonable estimate of the fair value can be made.
1. Discharge Water Matters
The El Dorado Facility owned by EDC generates process wastewater, which includes cooling
tower and boiler blowdowns, 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 a state National Pollutant Discharge Elimination System (“NPDES”)
water discharge permit issued by the Arkansas Department of Environmental Quality (“ADEQ”),
which permit is to be renewed every five years. The ADEQ issued to EDC a NPDES water
discharge permit in 2004, and the El Dorado Facility had until June 1, 2007 to meet the
compliance deadline for the more restrictive limits under the 2004 NPDES permit. In order to
meet the El Dorado Facility’s June 2007 limits, the El Dorado Facility has significantly reduced
the contaminant levels of its wastewater.
The El Dorado Facility has demonstrated its ability to comply with the more restrictive permit
limits, and believes that if it is required to meet the more restrictive dissolved minerals permit
levels, it will be able to do so. The El Dorado Facility is currently having discussions with the
ADEQ to modify and reduce the permit levels as to dissolved minerals, but, although the rule is a
state rule, any revisions must also be approved by the United States Environmental Protection
Agency (“EPA”) before it can become effective. Once the rule change is complete, the permit
limits can be modified to incorporate achievable dissolved minerals permit levels. The ADEQ
and the El Dorado Facility also entered into a Consent Administrative Order (“CAO”) which
authorized the El Dorado Facility to continue operating through December 31, 2009 without
incurring permit violations pending the modification of the permit to implement the revised rule.
In March 2009, the EPA notified the ADEQ that it disapproved the dissolved mineral rulemaking
due to insufficient documentation. Representatives of EDC, ADEQ and the EPA have met to
determine what additional information was required by the EPA. During January 2010, EDC
F-39
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
received an Administrative Order from the EPA noting certain violations of the permit and
requesting EDC to demonstrate compliance with the permit or provide a plan and schedule for
returning to compliance. EDC has provided the EPA a response which states that the El Dorado
Facility is now in compliance with the permit that the El Dorado Facility expects to maintain
compliance and that all but fifteen of the alleged violations were resolved through the CAO with
the ADEQ. During the meeting with the EPA prior to the issuance of the Administrative Order,
the EPA advised EDC that its primary objective is to bring the El Dorado Facility into
compliance with the permit requirements, but reserved the right to access penalties for past and
continuing violations of the permit. As a result, it is unknown whether the EPA might elect to
pursue civil penalties against EDC. Therefore, no liability has been established at December 31,
2009.
In addition, EDC has entered into a CAO that recognizes the presence of nitrate contamination in
the shallow groundwater at the El Dorado Facility. EDC is addressing the shallow groundwater
contamination. The CAO requires the El Dorado Facility to continue semi-annual groundwater
monitoring, to continue operation of a groundwater recovery system and to submit a human
health and ecological risk assessment to the ADEQ. The final remedy for shallow groundwater
contamination, should any remediation be required, will be selected pursuant to the new CAO
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 and cannot
currently be reasonably estimated. Therefore, no liability has been established at December 31,
2009.
2. Air Matters
The EPA has sent information requests to most, if not all, of the nitric acid plants in the United
States, including to us relating to our El Dorado, Cherokee and Baytown Facilities, requesting
information under Section 114 of the Clean Air Act as to construction and modification activities
at each of these facilities over a period of years to enable the EPA to determine whether these
facilities are in compliance with certain provisions of the Clean Air Act. In connection with a
review by our Chemical Business of these facilities in obtaining information for the EPA
pursuant to the EPA’s request, our Chemical Business management believes, subject to further
review, investigation and discussion with the EPA, that certain changes to its production
equipment may be needed in order to comply with the requirements of the Clean Air Act. If
changes to the production equipment at these facilities are required in order to bring this
equipment into compliance with the Clean Air Act, the amount of capital expenditures necessary
in order to bring the equipment into compliance is unknown at this time but could be substantial.
Further, if it is determined that the equipment at any of our El Dorado, Cherokee and/or Baytown
Facilities have not met the requirements of the Clean Air Act, our Chemical Business could be
subject to penalties in an amount not to exceed $27,500 per day as to each facility not in
compliance and require such facility to be retrofitted with the “best available control
technology.” We believe this technology is already employed at the Baytown Facility. Currently,
F-40
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
we believe that certain facilities within our Chemical Business may be required to pay certain
penalties and may be required to make certain capital improvements to certain emission
equipment as a result of the above described matter; however, at this time we are unable to
determine the amount of any penalties that may be assessed, or the cost of additional capital
improvements that may be required, by the EPA. Therefore no liability has been established at
December 31, 2009.
3. Other Environmental Matters
In December 2002, two of our subsidiaries within our Chemical Business, sold substantially all
of their operating assets relating to a Kansas chemical facility (“Hallowell Facility”) but retained
ownership of the real property. At December 31, 2002, even though we continued to own the real
property, we did not assess our continuing involvement with our former Hallowell Facility to be
significant and therefore accounted for the sale as discontinued operations. In connection with
this sale, our subsidiary leased the real property to the buyer under a triple net long-term lease
agreement. However, 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 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. The successor (“Chevron”) of a prior owner of the Hallowell Facility is a
participating responsible party and has agreed, within certain limitations, to pay and has been
paying one-half of the costs relating to this matter as approved by the Kansas Department of
Environmental Quality, subject to reallocation.
Based on additional modeling of the site, our subsidiary and Chevron are pursuing a course with
the state of Kansas of long-term surface and groundwater monitoring to track the natural decline
in contamination, instead of the soil excavation proposed previously. Our subsidiary and
Chevron submitted its final report on the groundwater monitoring and an addendum to the
Mitigation Work Plan to the state of Kansas. The data from the monitoring program is being
evaluated by the state of Kansas and the potential costs of additional monitoring or required
remediation, if any, is unknown.
At December 31, 2009, our estimated allocable portion of the total estimated liability (which is
included in current and noncurrent accrued and other liabilities) in connection with this
remediation matter is approximately $305,000. This amount is not discounted to its present
value. It is reasonably possible that a change in the estimate of our liability will occur in the near
term.
F-41
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
B. Other Pending, Threatened or Settled Litigation
1. Climate Control Business
Wetherall v. Climate Master was a proposed class action filed in the Illinois state district court in
September 2007 alleging that certain evaporator coils sold by one of our subsidiaries in the
Climate Control Business, Climate Master, Inc. (“Climate Master”), in the state of Illinois from
1990 to approximately 2003 were defective. Prior to the hearing on class certification, the trial
court granted Climate Master’s motion for summary judgment and entered judgment in favor of
Climate Master and against the plaintiffs based upon the statute of limitations and further denied
class certification as moot because there were no other class representatives. Prior to the appeal
deadline, a settlement agreement was entered into between the plaintiffs and Climate Master
whereby the plaintiffs waived any right to appeal the judgment in favor of Climate Master for an
insignificant amount, which consideration has been paid by Climate Master.
2. Other
The Jayhawk Group
In November 2006, we entered into an agreement with Jayhawk Capital Management, LLC,
Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent McCarthy, the
manager and sole member of Jayhawk Capital, (collectively, the “Jayhawk Group”), in which the
Jayhawk Group agreed, among other things, that if we undertook, in our sole discretion, within
one year from the date of agreement a tender offer for our Series 2 Preferred or to issue our
common stock for a portion of our Series 2 Preferred pursuant to a private exchange, that it
would tender or exchange an aggregate of no more than 180,450 shares of the 340,900 shares of
the Series 2 Preferred beneficially owned by the Jayhawk Group, subject to, among other things,
the entities owned and controlled by Jack E. Golsen, our Chairman and Chief Executive Officer
(“Golsen”), and his immediate family, that beneficially own Series 2 Preferred only being able to
exchange or tender approximately the same percentage of shares of Series 2 Preferred
beneficially owned by them as the Jayhawk Group is able to tender or exchange under the terms
of the agreement. In addition, under the agreement, the Jayhawk Group agreed to vote its shares
of our common stock and Series 2 Preferred “for” an amendment to the Certificate of
Designation covering the Series 2 Preferred to allow us:
(cid:120)
(cid:120)
for a period of five years from the completion of an exchange or tender to repurchase,
redeem or otherwise acquire shares of our common stock, without approval of the
outstanding Series 2 Preferred irrespective that dividends are accrued and unpaid with
respect to the Series 2 Preferred; or
to provide that holders of Series 2 Preferred may not elect two directors to our board of
directors when dividends are unpaid on the Series 2 Preferred if less than 140,000
shares of Series 2 Preferred remain outstanding.
F-42
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
During 2007, we made a tender offer for our outstanding Series 2 Preferred at the rate of 7.4
shares of our common stock for each share of Series 2 Preferred so tendered. In July 2007, we
redeemed the balance of our outstanding shares of Series 2 Preferred. Pursuant to its terms, the
Series 2 Preferred was convertible into 4.329 shares of our common stock for each share of
Series 2 Preferred. As a result of the redemption, the Jayhawk Group converted the balance of its
Series 2 Preferred pursuant to the terms of the Series 2 Preferred in lieu of having its shares
redeemed.
During November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit styled
Jayhawk Capital Management, LLC, et al. v. LSB Industries, Inc., et al., in the United States
District Court for the District of Kansas at Kansas City. During March 2009, the Jayhawk Group
amended its complaint alleging that the Jayhawk Group should have been able to tender all of its
Series 2 Preferred pursuant to the tender offer, notwithstanding the above-described agreement,
based on the following claims against us and Golsen:
fraudulent inducement and fraud,
(cid:120)
(cid:120) violation of 10(b) of the Exchange Act and Rule 10b-5,
(cid:120) violation of 17-12A501 of the Kansas Uniform Securities Act, and
(cid:120) breach of contract.
The Jayhawk Group seeks damages in an unspecified amount based on the additional number of
common shares it allegedly would have received on conversion of all of its Series 2 Preferred
through the February 2007 tender offer, plus punitive damages. In addition, the amended
complaint seeks damages of approximately $4,000,000 for accrued and unpaid dividends it
purports are owed as a result of Jayhawk’s July 2007 conversion of its remaining shares of Series
2 Preferred. In May 2008, the General Counsel for the Jayhawk Group offered to settle its claims
against us and Golsen in return for a payment of $100,000, representing the approximate legal
fees it had incurred investigating the claims at that time. Through counsel, we verbally agreed to
the settlement offer and confirmed the agreement by e-mail. Afterward, the Jayhawk Group’s
General Counsel purported to withdraw the settlement offer, and asserted that Jayhawk is not
bound by any settlement agreement. We contend that the settlement agreement is binding on the
Jayhawk Group. Both Golsen and we have filed motions to dismiss the plaintiff’s complaint in
the federal court, and such motions to dismiss are pending. We intend to contest the lawsuit
vigorously, and will assert that Jayhawk is bound by an agreement to settle the claims for
$100,000. Our insurer, Chartis, has agreed to defend this lawsuit on our behalf and on behalf of
Golsen and to indemnify under a reservation of rights to deny liability under certain conditions.
We have incurred expenses associated with this matter up to our insurance deductible of
$250,000. We believe our insurance coverage is adequate to cover any currently foreseeable
losses associated with the Jayhawk claims. As a result, no liability remains outstanding relating
to this matter as of December 31, 2009.
F-43
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies (continued)
Other Claims and Legal Actions
We are also involved in various other claims and legal actions including claims for damages
resulting from water leaks and other product liability occurrences. Most of the product liability
claims are covered by our general liability insurance which generally includes a deductible of
$250,000 per claim. For any claims or legal actions that we have assessed the likelihood of our
liability as probable, we have recognized our estimated liability up to the applicable deductible.
In the opinion of management, after consultation with legal counsel, if those claims which we
have not recognized were determined adversely to us, it would not have a material effect on our
business, financial condition or results of operations.
16. Derivatives, Hedges and Financial Instruments
We have three types of contracts that are accounted for on a fair value basis, which are interest
rate contracts, commodities futures/forward contracts (“commodities contracts”) and foreign
exchange contracts as discussed below. All of these contracts are used as economic hedges for
risk management purposes but are not designated as hedging instruments. The valuation of these
contracts was determined based on quoted market prices or, in instances where market quotes are
not available, other valuation techniques or models used to estimate fair values. The valuations
of contracts classified as Level 1 are based on quoted prices in active markets for identical
contracts. 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
December 31, 2008, the valuations of contracts classified as Level 3 were based on the average
ask/bid prices obtained from a broker relating to a low volume market.
Interest Rate Contracts
As part of our interest rate risk management, we periodically purchase and/or enter into various
interest rate contracts. In March 2005, we purchased two interest rate cap contracts for a cost of
$590,000, which matured in March 2009. In April 2007, we purchased two interest rate cap
contracts for a cost of $621,000, which set a maximum three-month LIBOR base rate of 5.35%
on $50 million. In April 2008, we exchanged the two interest rate cap contracts purchased in
2007 for an interest rate cap contract (“2008 Interest Rate Cap Contract”), which sets a
maximum three-month LIBOR base rate of 4.56% on $25 million. The cost basis of the 2008
Interest Rate Cap Contract was $239,000 based on the estimated fair value of the two contracts
surrendered (which was also the carrying value at the time of the exchange). In April 2008, we
also entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of
3.24% on $25 million and matures in April 2012. In September 2008, we exchanged the 2008
Interest Rate Cap Contract for an interest rate swap, which sets a fixed three-month LIBOR rate
of 3.595% on $25 million and matures in April 2012. The cost basis of the new interest rate swap
is $354,000 based on the estimated fair value of the 2008 Interest Rate Cap Contract surrendered
(which was also the carrying value at the time of the exchange).
F-44
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Derivatives, Hedges and Financial Instruments (continued)
These contracts are free-standing derivatives and are accounted for on a mark-to-market basis.
For 2009, 2008, and 2007, we recognized losses of $729,000, $2,871,000 and $355,000,
respectively. In addition, the cash flows relating to the purchase of interest rate contracts are
included in cash flows from continuing investing activities. Also the cash flows associated with
the interest rate swap payments are included in cash flows from continuing operating activities.
Commodities Contracts
Raw materials for use in our manufacturing processes include copper used by our Climate
Control Business and anhydrous ammonia and natural gas used by our Chemical Business. As
part of our raw material price risk management, we periodically enter into futures/forward
contracts for these materials, which contracts are generally accounted for on a mark-to-market
basis. At December 31, 2009, our futures/forward copper contracts were for 750,000 pounds of
copper through May 2010 at a weighted-average cost of $3.19 per pound. In addition, we had
contractual rights under natural gas call contracts for approximately 150,000 MMBtu of natural
gas through February 2010 at a weighted-average price of $6.00 per MMBtu. For 2009, 2008 and
2007, we recognized losses of $1,312,000, $7,717,000 and $1,317,000, respectively, on such
contracts. In addition, the cash flows relating to these contracts are included in cash flows from
continuing operating activities.
Foreign Exchange Contracts
One of our business operations purchases industrial machinery and related components from
vendors outside of the United States. As part of our foreign currency risk management, we
periodically enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange
rates. These contracts are free-standing derivatives and are accounted for on a mark-to-market
basis. At December 31, 2009, our foreign exchange contracts were for the receipt of
approximately 336,000 Euros through April 2010 at a weighted-average contract exchange rate
of 1.435. For 2009 and 2008, we recognized losses of $32,000 and $187,000, respectively, on
such contracts (none in 2007). In addition, the cash flows relating to these contracts are included
in cash flows from continuing operating activities.
F-45
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Derivatives, Hedges and Financial Instruments (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis
at December 31, 2009 and 2008:
Fair Value Measurements at
December 31, 2009 Using
Total Fair
Value at
December 31,
2009
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(In Thousands)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value at
December 31,
2008
$
$
$
$
150
-
150
-
1,929
1,929
$
$
$
$
121
-
121
$
$
29
-
29
-
-
-
$
$
-
1,929
1,929
$
$
$
$
-
-
-
-
-
-
$
$
$
$
-
35
35
5,910
2,437
8,347
Description
Assets - Supplies, prepaid
items and other:
Commodities contracts
Foreign exchange contracts
Total
Liabilities - Current and
noncurrent accrued and
other liabilities:
Commodities contracts
Interest rate contracts
Total
The following is a reconciliation of the beginning and ending balances for liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3), which related to
commodities contracts:
2009
2008
(In Thousands)
Beginning balance
Total realized and unrealized gain (loss) included in earnings
Purchases, issuances, and settlements
Transfers in and/or out of Level 3
Ending balance
$
$
(1,388 )
493
895
-
-
$
$
-
(1,388)
-
-
(1,388)
F-46
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Derivatives, Hedges and Financial Instruments (continued)
Realized and unrealized gains (losses) included in earnings and the income statement
classifications are as follows:
Total gains (losses) included in earnings:
Cost of sales - Commodities contracts
Cost of sales - Foreign exchange contracts
Interest expense - Interest rate contracts
Change in unrealized gains and losses relating to contracts still held
at year end:
Cost of sales - Commodities contracts
Cost of sales - Foreign exchange contracts
Interest expense - Interest rate contracts
2009
2008
(In Thousands)
$
$
$
$
(1,312 )
(32 )
(729 )
(2,073 )
138
-
508
646
$
$
$
$
(7,717)
(187)
(2,871)
(10,775)
(5,910)
35
(2,825)
(8,700)
The following discussion of fair values is not indicative of the overall fair value of our assets and
liabilities since it does not include all assets, including intangibles.
Our long-term debt agreements are the only financial instruments with fair values significantly
different from their carrying amounts. At December 31, 2009 and 2008, the fair value for
variable debt, excluding the Secured Term Loan, was believed to approximate their carrying
value. At December 31, 2009 and 2008, the estimated fair value of the Secured Term Loan is
based on defined LIBOR rates plus 7% and 10%, respectively, utilizing information obtained
from the lender. The fair values of fixed rate borrowings, other than the 2007 Debentures, are
estimated using a discounted cash flow analysis that applies interest rates currently being offered
on borrowings of similar amounts and terms to those currently outstanding while also taking into
consideration our current credit worthiness. At December 31, 2009 and 2008, the estimated fair
value of the 2007 Debentures is based on quoted prices obtained from a broker for these
debentures. The estimated fair value and carrying value of our long-term debt are as follows:
F-47
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Derivatives, Hedges and Financial Instruments (continued)
December 31, 2009
December 31, 2008
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Carrying
Value
(In Thousands)
$ 27,640 $ 50,000
-
2,553
-
2,553
$ 20,939
-
8
$ 50,000
-
8
29,106
20,231
29,400
19,848
$ 79,530 $ 101,801
27,338
14,949
$ 63,234
40,500
14,652
$ 105,160
Variable Rate:
Secured Term Loan
Working Capital Revolver Loan
Other debt
Fixed Rate:
5.5% Convertible Senior Subordinated Notes
Other bank debt and equipment financing
Other
In 1997, we entered into an interest rate forward agreement to effectively fix the interest rate of a
long-term lease commitment (not for trading purposes). In 1999, we executed a long-term lease
agreement (initial lease term of ten years) and terminated the forward agreement at a net cost of
$2.8 million. We historically accounted for this cash flow hedge under the deferral method (as an
adjustment of the initial term lease rentals). As the result of accounting principles becoming
effective in 2001, the remaining deferred cost amount was reclassified from other assets to
accumulated other comprehensive loss and was being amortized to operations over the term of
the lease arrangement, which expired in 2009. At December 31, 2008, accumulated other
comprehensive loss consisted of the remaining deferred cost of $120,000 (none at December 31,
2009). The amount amortized to operations was $120,000, $291,000 and $290,000 for 2009,
2008, and 2007, respectively. The associated income tax benefits were minimal in 2009 and
2008 and there were no income tax benefits allocated to these expenses in 2007.
17. Stockholders’ Equity
Approval of Stock Incentive Plan in 2008 - During the second quarter of 2008, our board of
directors adopted our 2008 Incentive Stock Plan (the “2008 Plan”), which plan was approved by
our shareholders at our annual meeting of shareholders held on June 5, 2008. The number of
shares of our common stock available for issuance under the 2008 Plan is 1,000,000 shares,
subject to adjustment. Under the 2008 Plan, awards may be made to any employee, officer or
director of the Company and its affiliated companies. An award may also be granted to any
consultant, agent, advisor or independent contractor for bona fide services rendered to the
Company or any affiliate (as defined in the 2008 Plan), subject to certain conditions. The 2008
Plan will be administered by the compensation and stock option committee (the “Committee”) of
our board of directors.
F-48
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
Our board of directors or the Committee may amend the 2008 Plan, except that if any applicable
statute, rule or regulation requires shareholder approval with respect to any amendment of the
2008 Plan, then to the extent so required, shareholder approval will be obtained. Shareholder
approval will also be obtained for any amendment that would increase the number of shares
stated as available for issuance under the 2008 Plan. Unless sooner terminated by our board of
directors, the 2008 Plan expires on June 5, 2018.
The following may be granted by the Committee under the 2008 Plan:
Stock Options - The Committee may grant either incentive stock options or non-qualified
stock options. The Committee sets option exercise prices and terms, except that the exercise
price of a stock option may be no less than 100% of the fair market value, as defined in the 2008
Plan, of the shares on the date of grant. At the time of grant, the Committee will have sole
discretion in determining when stock options are exercisable and when they expire, except that
the term of a stock option cannot exceed 10 years.
Stock Appreciation Rights (“SARs”) - The Committee may grant SARs as a right in tandem
with the number of shares underlying stock options granted under the 2008 Plan or on a stand-
alone basis. SARs are the right to receive payment per share of the SAR exercised in stock or in
cash equal to the excess of the share’s fair market value, as defined in the 2008 Plan, on the date
of exercise over its fair market value on the date the SAR was granted. Exercise of an SAR
issued in tandem with stock options will result in the reduction of the number of shares
underlying the related stock option to the extent of the SAR exercise.
Stock Awards, Restricted Stock, Restricted Stock Units, and Other Awards - The Committee
may grant awards of restricted stock, restricted stock units, and other stock and cash-based
awards, which may include the payment of stock in lieu of cash (including cash payable under
other incentive or bonus programs) or the payment of cash (which may or may not be based on
the price of our common stock).
Stock-Based Compensation - During 2009, the Committee did not grant any awards under the
2008 Plan. During 2008, the Committee approved the grants under the 2008 Plan of 372,000
shares of qualified stock options (the “2008 Qualified Options”) to certain employees and our
board of directors (with each recipient abstaining as to himself) approved the grants of 45,000
shares of non-qualified stock options (“2008 Non-Qualified Options”) to our outside directors.
The exercise price of the 2008 Qualified and Non-Qualified Options was equal to the market
value of our common stock at the date of grant. The 2008 Qualified and Non-Qualified Options
vest at the end of each one-year period at the rate of 16.5% per year for the first five years and
the remaining unvested options will vest at the end of the sixth year. Pursuant to the terms of the
2008 Non-Qualified Options, if a termination event occurs, as defined, the non-vested 2008 Non-
Qualified Options will become fully vested and exercisable for a period of one year from the date
of the termination event. Excluding the non-qualified stock options relating to a termination
event, the 2008 Qualified and Non-Qualified Options expire in 2018. The fair value for the
F-49
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
2008 Qualified and Non-Qualified Options was estimated, using an option pricing model, as of
the date of the grant, which date was also the service inception date.
On June 19, 2006, the Committee granted 450,000 shares of non-qualified stock options (the
“2006 Options”) to certain Climate Control Business employees, which were subject to
shareholders’ approval. The exercise price of the 2006 Options is $8.01 per share, which is based
on the market value of our common stock at the date the board of directors granted the shares
(June 19, 2006). The 2006 Options vest over a ten-year period at a rate of 10% per year and
expire on September 16, 2016 with certain restrictions. The fair value for the 2006 Options was
estimated, using an option pricing model, as of the date we received shareholders’ approval
which occurred during our 2007 annual shareholders’ meeting on June 14, 2007. For accounting
purposes, the grant date and service inception date is June 14, 2007.
The fair values for the 2008 Qualified and Non-Qualified Options and the 2006 Options were
estimated using a Black-Scholes-Merton option pricing model with the following assumptions:
(cid:120)
risk-free interest rate based on an U.S. Treasury zero-coupon issue with a term
approximating the estimated expected life as of the grant date;
(cid:120) a dividend yield based on historical data;
(cid:120) volatility factors of the expected market price of our common stock based on historical
volatility of our common stock since it has been traded on the American Stock Exchange
(and subsequently, the New York Stock Exchange), and;
(cid:120) a weighted-average expected life of the options based on the historical exercise behavior
of these employees and outside directors, if applicable.
The following table summarizes information about these granted stock options:
Weighted-average risk-free interest rate
Dividend yield
Weighted-average expected volatility
Weighted-average expected forfeiture rate
Weighted-average expected life (years)
Total weighted-average remaining vesting
period (years)
Total fair value of options granted
Total stock-based compensation expense (1)
Income tax benefit
2009
N/A
N/A
N/A
N/A
N/A
2008
2007
2.91 %
-
35.4 %
1.86 %
5.98
5.16%
-
24.7%
0%
5.76
5.60
N/A
$ 1,021,000
$ (408,000)
6.64
8.46
$ 1,503,000
$ 6,924,000
$ 421,000
$ 811,000
$ (316,000 ) $ (164,000)
(1) For 2009 and 2008, $977,000 and $803,000, respectively, is included in SG&A and $44,000,
$8,000, respectively, is included in cost of sales. For 2007, the total amount is included in
SG&A.
F-50
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
For the 2008 Qualified and Non-Qualified Options and the 2006 Options, we will be amortizing
the respective total estimated fair value (adjusted for forfeitures) through 2014 and 2016,
respectively. At December 31, 2009, the total stock-based compensation expense not yet
recognized is $6,145,000 relating to the non-vested stock options.
Qualified Stock Option Plans - At December 31, 2009, we have options outstanding under a
1993 Stock Option and Incentive Plan (“1993 Plan”), a 1998 Stock Option Plan (“1998 Plan”)
and the 2008 Plan as discussed above. The 1993 and 1998 Plans have expired, and accordingly,
no additional options may be granted from these plans. Options granted prior to the expiration of
these plans continue to remain valid thereafter in accordance with their terms. As discussed
above, under the 2008 Plan, we are authorized to grant awards (including options) to purchase up
to 1,000,000 shares of our common stock. At December 31, 2009, there are 590,000 awards
available to be granted under the 2008 Plan. At December 31, 2009, there were 3,500 options
outstanding related to the 1993 Plan and 61,100 options outstanding relating to the 1998 Plan, all
of which were exercisable, and 364,175 options outstanding relating to the 2008 Plan, of which
59,400 were exercisable. The exercise price of the outstanding options granted under these plans
was equal to the market value of our common stock at the date of grant.
The following information relates to our qualified stock option plans:
Outstanding at beginning of year
Granted
Exercised
Cancelled, forfeited or expired
Outstanding at end of year
2009
Weighted-Average
Exercise Price
6.09
-
1.42
9.69
8.47
Shares
660,100 $
- $
(224,325) $
(7,000) $
428,775 $
Exercisable at end of year
124,000
$
6.30
2009
2008
Weighted-average fair value of options granted during year
N/A
$
3.58
2007
N/A
Total intrinsic value of options exercised during the year
$ 3,051,000
$ 3,140,000
$ 1,108,000
Total fair value of options vested during the year
$
220,000
$
-
$
-
F-51
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
The following table summarizes information about qualified stock options outstanding and
exercisable at December 31, 2009:
Exercise Prices
$ 2.73
$ 5.10
$ 7.86 - $ 8.17
$ 9.69 - $ 9.97
$ 2.73 - $ 9.97
Exercise Prices
$ 2.73
$ 5.10
$ 7.86 - $ 8.17
$ 9.69 - $ 9.97
$ 2.73 - $ 9.97
Shares
Outstanding
43,500
21,100
69,000
295,175
428,775
Shares
Exercisable
43,500
21,100
11,385
48,015
124,000
Stock Options Outstanding
Weighted-
Average
Remaining
Contractual
Life in Years
1.92
5.92
8.92
8.83
8.00
Weighted-
Average
Exercise
Price
$
$
$
$
$
2.73
5.10
7.87
9.69
8.47
Intrinsic
Value of
Shares
Outstanding
$
494,000
190,000
430,000
1,301,000
$ 2,415,000
Stock Options Exercisable
Weighted-
Average
Remaining
Contractual
Life in Years
1.92
5.92
8.92
8.83
5.92
Weighted-
Average
Exercise
Price
$
$
$
$
$
2.73
5.10
7.87
9.69
6.30
Intrinsic
Value of
Shares
Exercisable
$
$
494,000
190,000
71,000
212,000
967,000
Non-Qualified Stock Option Plans - Our board of directors approved the grants of non-
qualified stock options to our outside directors, our Chief Executive Officer, Chief Financial
Officer and certain key employees, included in the tables below. The exercise prices are
generally based on the market value of our common stock at the dates of grants.
In addition to the 2008 Plan as discussed above, we have an Outside Directors Stock Option Plan
(the “Outside Director Plan”). The Outside Director Plan authorizes the grant of non-qualified
stock options to each member of our board of directors who is not an officer or employee of the
Company or its subsidiaries. The maximum number of options that may be issued under the
Outside Director Plan is 400,000 of which 280,000 are available to be granted at December 31,
2009. At December 31, 2009, there are 45,000 options outstanding related to the 2008 Plan and
no options outstanding related to the Outside Director Plan.
F-52
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
The following information relates to our non-qualified stock option plans:
Outstanding at beginning of year
Granted
Exercised
Surrendered, forfeited, or expired
Outstanding at end of year
2009
Weighted-Average
Exercise Price
Shares
627,500 $ 6.36
-
- $
(185,000) $ 3.08
-
- $
442,500 $ 7.73
Exercisable at end of year
89,925
$ 6.68
2009
2008
2007
Weighted-average fair value of options granted during year
N/A
$
3.80
$
15.39
Total intrinsic value of options exercised during the year
$ 2,201,000
$ 4,357,000
$ 10,042,000
Total fair value of options vested during the year
$
721,000
$
692,000
$
692,000
The following tables summarize information about non-qualified stock options outstanding and
exercisable at December 31, 2009:
Exercise Prices
$ 2.73
$ 7.86
$ 8.01
$ 2.73 - $ 8.01
Shares
Outstanding
22,500
45,000
375,000
442,500
Exercise Prices
$ 2.73
$ 7.86
$ 8.01
$ 2.73 - $ 8.01
Shares
Exercisable
22,500
7,425
60,000
89,925
Stock Options Outstanding
Weighted-
Average
Remaining
Contractual
Life in Years
1.92
8.92
6.75
6.72
Weighted-
Average
Exercise
Price
$
$
$
$
2.73
7.86
8.01
7.73
Intrinsic
Value of
Shares
Outstanding
$
256,000
281,000
2,283,000
$ 2,820,000
Stock Options Exercisable
Weighted-
Average
Remaining
Contractual
Life in Years
1.92
8.92
6.75
5.72
Weighted-
Average
Exercise
Price
$
$
$
$
2.73
7.86
8.01
6.68
Intrinsic
Value of
Shares
Exercisable
$
$
256,000
46,000
366,000
668,000
F-53
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Stockholders’ Equity (continued)
Preferred Share Rights Plan - On January 5, 2009, a renewed shareholder rights plan became
effective upon the expiration of our previous shareholder rights plan. The rights plan will impact
a potential acquirer unless the acquirer negotiates with our board of directors and the board of
directors approves the transaction. Pursuant to the renewed plan, one preferred share purchase
right (a “Right”) is attached to each currently outstanding or subsequently issued share of our
common stock. Prior to becoming exercisable, the Rights trade together with our common stock.
In general, the Rights will become exercisable if a person or group (other than the acquirer)
acquires or announces a tender or exchange offer for 15% or more of our common stock. Each
Right entitles the holder to purchase from us one one-hundredth of a share of Series 4 Junior
Participating Preferred Stock, no par value (the “Preferred Stock”), at an exercise price of $47.75
per one one-hundredth of a share, subject to adjustment. If a person or group acquires 15% or
more of our common stock, each Right will entitle the holder (other than the acquirer) to
purchase shares of our common stock (or, in certain circumstances, cash or other securities)
having a market value of twice the exercise price of a Right at such time. Under certain
circumstances, each Right will entitle the holder (other than the acquirer) to purchase the
common stock of the acquirer having a market value of twice the exercise price of a Right at
such time. In addition, under certain circumstances, our board of directors may exchange each
Right (other than those held by the acquirer) for one share of our common stock, subject to
adjustment. If the Rights become exercisable, holders of our common stock (other than the
acquirer), will receive the number of Rights they would have received if their units had been
redeemed and the purchase price paid in our common stock. Our board of directors may redeem
the Rights at a price of $0.01 per Right generally at any time before 10 days after the Rights
become exercisable.
Other - In November 2007, the Jayhawk Group exercised a warrant to purchase 112,500 shares
of our common stock for $3.49 per share.
During 2009 and 2008, we purchased 275,900 and 400,000 shares of treasury stock for the
average price of $11.60 and $12.05 per share, respectively.
As of December 31, 2009, we have reserved 2.9 million shares of common stock issuable upon
potential conversion of convertible debt, preferred stocks and stock options pursuant to their
respective terms.
18. Non-Redeemable Preferred Stock
Series B Preferred - The 20,000 shares of Series B Preferred, $100 par value, are convertible, in
whole or in part, into 666,666 shares of our common stock (33.3333 shares of common stock for
each share of preferred stock) at any time at the option of the holder and entitle the holder to one
vote per share. The Series B Preferred provides for annual cumulative dividends of 12% from
date of issue, payable when and as declared. All of the outstanding shares of the Series B
Preferred are owned by the Golsen Group.
F-54
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
18. Non-Redeemable Preferred Stock (continued)
Series 2 Preferred - The Series 2 Preferred had no par value and had a liquidation preference of
$50.00 per share plus dividends in arrears and was convertible at the option of the holder at any
time, unless previously redeemed, into our common stock at an initial conversion price of $11.55
per share (equivalent to a conversion rate of approximately 4.329 shares of common stock for
each share of Series 2 Preferred), subject to adjustment under certain conditions. As discussed
below, upon the mailing of notice of certain corporate actions, holders had special conversion
rights relating to a trade offer in 2007. The Series 2 Preferred was redeemable at our option, in
whole or in part, at $50.00 per share, plus dividends in arrears to the redemption date. Dividends
on the Series 2 Preferred were cumulative and payable quarterly in arrears. As the result of the
transactions discussed below, no shares of Series 2 Preferred were issued and outstanding at
December 31, 2009 and 2008.
Jayhawk Agreement in 2006
During November 2006, the Company entered into the Jayhawk Agreement with the Jayhawk
Group. Under the Jayhawk Agreement, the Jayhawk Group agreed to tender (discussed below)
180,450 shares of the 346,662 shares of the Series 2 Preferred, if the Company made an
exchange or tender offer for the Series 2 Preferred. In addition, as a condition to the Jayhawk
Group’s obligation to tender such shares of Series 2 Preferred in an exchange/tender offer, the
Jayhawk Agreement further provided that the Golsen Group would exchange only 26,467 of the
49,550 shares of Series 2 Preferred beneficially owned by them. As a result, only 309,807 of the
499,102 shares of Series 2 Preferred outstanding would be eligible to participate in an
exchange/tender offer, with the remaining 189,295 being held by the Jayhawk Group and the
Golsen Group.
Completion of Tender Offer in 2007
On January 26, 2007, our board of directors approved and on February 9, 2007, we began a
tender offer to exchange shares of our common stock for up to 309,807 of the 499,102
outstanding shares of the Series 2 Preferred. The tender offer expired on March 12, 2007 and our
board of directors accepted the shares tendered on March 13, 2007. The terms of the tender offer
provided for the issuance by the Company of 7.4 shares of common stock in exchange for each
share of Series 2 Preferred tendered in the tender offer and the waiver of all rights to the
dividends in arrears on the Series 2 Preferred tendered. As a result of this tender offer, we issued
2,262,965 shares of our common stock for 305,807 shares of Series 2 Preferred that were
tendered. As a result, we effectively settled the dividends in arrears on the Series 2 Preferred
tendered totaling approximately $7.3 million ($23.975 per share).
Because the exchanges under the tender offer were pursuant to terms other than the original
terms, the transactions were considered extinguishments of the preferred stock. Also the
transactions qualified as induced conversions. Accordingly, we recorded a charge (stock
dividend) to accumulated deficit of approximately $12.3 million which equaled the excess of the
fair value of the common stock issued over the fair value of the common stock issuable pursuant
F-55
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
18. Non-Redeemable Preferred Stock (continued)
to the original conversion terms. To measure fair value, we used the closing price of our common
stock on March 13, 2007.
Included in the amounts discussed above and pursuant to the Jayhawk Agreement and the terms
of the tender offer, the Jayhawk Group and the Golsen Group tendered 180,450 and 26,467
shares, respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares, respectively, of our
common stock. As a result, we effectively settled the dividends in arrears on these shares of
Series 2 Preferred tendered totaling approximately $4.96 million with $4.33 million relating to
the Jayhawk Group and $0.63 million relating to the Golsen Group.
No fractional shares were issued so cash was paid in lieu of any additional shares in an amount
equal to the fraction of a share times the closing price per share of our common stock on the last
business day immediately preceding the expiration date of the tender offer.
Completion of Redemption in 2007
On July 11, 2007, our board of directors approved the redemption of all of our remaining
outstanding Series 2 Preferred. We mailed a notice of redemption to all holders of record of our
Series 2 Preferred on July 12, 2007. The redemption date was August 27, 2007, and each share
of Series 2 Preferred that was redeemed received a redemption price of $50.00 plus $26.25 per
share in dividends in arrears pro-rata to the date of redemption.
The holders of shares of Series 2 Preferred had the right to convert each share into 4.329 shares
of our common stock, which right to convert terminated 10 days prior to the redemption date. If
a holder converted its shares of Series 2 Preferred, the holder was not entitled to any dividends in
arrears as to the shares of Series 2 Preferred converted. As a result, 167,475 shares of Series 2
Preferred were converted (of which 155,012 shares were converted by the Jayhawk Group) into
724,993 shares of our common stock (of which 671,046 shares were issued to the Jayhawk
Group).
As a result of the conversions, only 25,820 shares of Series 2 Preferred were redeemed (of which
23,083 shares were held by the Golsen Group) for a total redemption price of $1,291,000 (of
which approximately $1,154,000 was paid to the Golsen Group). In addition, we paid
approximately $678,000 in dividends in arrears (of which approximately $606,000 was paid to
the Golsen Group). The shares of the Series 2 Preferred were redeemed using a portion of the
net proceeds of the 2007 Debentures.
No fractional shares were issued so cash was paid in lieu of any additional shares in an amount
equal to the fraction of a share times the closing price per share of our common stock on the day
the respective shares were converted.
F-56
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
18. Non-Redeemable Preferred Stock (continued)
Other Series 2 Preferred Transactions
During 2007, we cancelled 18,300 shares of Series 2 Preferred previously held as treasury stock.
Series D Preferred - The Series D Preferred have no par value and are convertible, in whole or
in part, into 250,000 shares of our common stock (1 share of common stock for 4 shares of
preferred stock) at any time at the option of the holder. Dividends on the Series D Preferred are
cumulative and payable annually in arrears at the rate of 6% per annum of the liquidation
preference of $1.00 per share. Each holder of the Series D Preferred shall be entitled to .875
votes per share. All of the outstanding shares of Series D Preferred are owned by the Golsen
Group.
Cash Dividends Paid - During 2009 and 2008, we paid the following cash dividends on our
non-redeemable preferred stock in each of the respective year:
(cid:120) $240,000 on the Series B Preferred ($12.00 per share); and
(cid:120) $60,000 on the Series D Preferred ($0.06 per share).
In addition to the settlement of the dividends in arrears relating to the tender offer in 2007 as
discussed above, during 2007, we paid the following cash dividends on our non-redeemable
preferred stock:
(cid:120) $1,890,000 on the Series B Preferred ($94.52 per share);
(cid:120) $678,000 on the Series 2 Preferred ($26.25 per share); and
(cid:120) $360,000 on the Series D Preferred ($0.36 per share).
At December 31, 2009, there were no dividends in arrears.
Other - At December 31, 2009, we are authorized to issue an additional 229,490 shares of $100
par value preferred stock and an additional 4,000,000 shares of no par value preferred stock.
Upon issuance, our board of directors will determine the specific terms and conditions of such
preferred stock.
19. Executive Benefit Agreements and Employee Savings Plans
In 1981, we entered into individual death benefit agreements with certain key executives (“1981
Agreements”). Under the 1981 Agreements, should the executive die while employed, we are
required to pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. At December 31, 2009, the monthly
installments specified in the 1981 Agreements total $34,000 and the aggregate undiscounted
death benefits are $4,100,000. The benefits under the 1981 Agreements are forfeited if the
respective executive’s employment is terminated for any reason prior to death. The 1981
Agreements may be terminated by the Company at any time and for any reason prior to the death
of the employee.
F-57
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
19. Executive Benefit Agreements and Employee Savings Plans (continued)
In 1992, we entered into individual benefit agreements with certain key executives (“1992
Agreements”) that provide for annual benefit payments for life (in addition to salary) ranging
from $16,000 to $18,000 payable in monthly installments when the employee reaches age 65. As
of December 31, 2009 and 2008, the liability for benefits under the 1992 Agreements is
$1,102,000 and $1,111,000, respectively, which is included in current and noncurrent accrued
and other liabilities in the accompanying consolidated balance sheets. The liability reflects the
present value of the remaining estimated payments at discount rates of 5.06% and 4.97% as of
December 31, 2009 and 2008, respectively. Future estimated undiscounted payments aggregate
to $2.0 million as of December 31, 2009. For 2009, 2008, and 2007, charges to SG&A for these
benefits were $75,000, $166,000 and $106,000, respectively. As part of the 1992 Agreements,
should the executive die prior to attaining the age of 65, we will pay the beneficiary named in the
agreement in 120 equal monthly installments aggregating to an amount specified in the
agreement. This amount is in addition to any amount payable under the 1981 Agreement should
that executive have both a 1981 and 1992 agreement. At December 31, 2009, the aggregate
undiscounted death benefit payments specified in the 1992 Agreements are $302,000. The
benefits under the 1992 Agreements are forfeited if the respective executive’s employment is
terminated prior to age 65 for any reason other than death. The 1992 Agreements may be
terminated by the Company at any time and for any reason prior to the death of the employee.
In 2005, we entered into a death benefit agreement (“2005 Agreement”) with our CEO. The
Death Benefit Agreement provides that, upon our CEO’s death, we will pay to our CEO’s
designated beneficiary, a lump-sum payment of $2,500,000 to be funded from the net proceeds
received by us under certain life insurance policies on our CEO’s life that are owned by us. We
are obligated to keep in existence life insurance policies with a total face amount of no less than
$2,500,000 of the stated death benefit. As of December 31, 2009, the life insurance policies
owned by us on the life of our CEO have a total face amount of $7,000,000. The benefit under
the 2005 Agreement is not contingent upon continued employment and may be amended at any
time by written agreement executed by the CEO and the Company.
As of December 31, 2009, the liability for death benefits under the 1981, 1992 and 2005
Agreements is $3,356,000 ($2,687,000 at December 31, 2008), which is included in current and
noncurrent accrued and other liabilities. We accrue for such liabilities when they become
probable and discount the liabilities to their present value.
To assist us in funding the benefit agreements discussed above and for other business reasons,
we purchased life insurance contracts on various individuals in which we are the beneficiary. As
of December 31, 2009, the total face amount of these policies is $20,672,000 of which
$2,500,000 of the proceeds is required to be paid under the 2005 Agreement as discussed above.
Some of these life insurance policies have cash surrender values that we have borrowed against.
The cash surrender values are included in other assets in the amounts of $1,866,000 and
$1,504,000, net of borrowings of $2,100,000 and $1,967,000 at December 31, 2009 and 2008,
respectively. Increases in cash surrender values of $494,000, $461,000 and $548,000 are netted
against the premiums paid for life insurance policies of $842,000, $832,000 and $836,000 in
2009, 2008, and 2007 respectively, and are included in SG&A.
F-58
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
19. Executive Benefit Agreements and Employee Savings Plans (continued)
We sponsor a savings plan under Section 401(k) of the Internal Revenue Code under which
participation is available to substantially all full-time employees. We do not presently contribute
to this plan except for EDC and Cherokee Nitrogen Company’s (“CNC”) union employees and
EDN employees, which amounts were not material for each of the three years ended December
31, 2009.
20. Property and Business Interruption Insurance Claims and Recoveries
Cherokee Facility - As a result of damage caused by Hurricane Katrina in August 2005, the
natural gas pipeline servicing the chemical production facility located in Cherokee, Alabama (the
“Cherokee Facility”) suffered damage and the owner of the pipeline declared an event of Force
Majeure. This event of Force Majeure caused curtailments and interruption in the delivery of
natural gas to the Cherokee Facility through the first quarter of 2006. CNC’s insurer was
promptly put on notice of a claim and during 2006, CNC filed a business interruption claim
relating to this incident. In 2007, we realized insurance recoveries of $3,750,000 relating to this
business interruption claim, which were recorded as a reduction to cost of sales.
On February 5, 2009, a small nitric acid plant located at the Cherokee Facility suffered damage
due to a fire. The fire was immediately extinguished and there were no injuries. The extent of the
damage to the nitric acid plant has been determined; however, the final repair option has not yet
been determined. The nitric acid plant that suffered the fire, with a current 182 ton per day
capacity, is the smaller of the two nitric acid plants at the Cherokee Facility. The Cherokee
Facility continues production with the larger of the nitric acid plants. Our insurance provides for
replacement cost coverage relating to property damage with a $1,000,000 property loss
deductible. Because our replacement cost coverage for property damages is estimated to exceed
our property loss deductible and the net book value of the damaged property, we did not
recognize a loss relating to property damage from this fire but we recorded a property insurance
claim receivable relating to this event. At December 31, 2009, the balance of the insurance claim
receivable relating to this event was $1,175,000.
Bryan Distribution Center - On July 30, 2009, one of our fifteen agricultural distribution centers
operated by our Chemical Business was destroyed by fire, resulting in the cessation of operations
at this center, which is located in Bryan, Texas (“Bryan Center”). The Bryan Center stored and
sold agricultural chemical products, including fertilizer grade ammonium nitrate, potash and
certain other fertilizer products. Our Chemical Business is in the process of rebuilding the Bryan
Center. Our insurance provides for general liability coverage with a $250,000 loss deductible and
for business interruption coverage and for replacement cost coverage relating to property damage
with a total $100,000 loss deductible. As of December 31, 2009, a recovery, if any, from our
business interruption coverage has not been recognized. Because our replacement cost coverage
for property damages is estimated to exceed our property loss deductible and the net book value
of the damaged property, we did not recognize a loss relating to property damage from this fire
but we recorded an insurance claim receivable relating to this event. During 2009, we received
$545,000 from our insurance carrier as a partial payment on our insurance claim, which amount
was applied against our insurance claim receivable. At December 31, 2009, the balance of the
insurance claim receivable relating to this event was $35,000.
F-59
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
21. Other Expense, Other Income and Non-Operating Other Income, net
2009
Year ended December 31,
2008
(In Thousands)
2007
Other expense:
Losses on sales and disposals of property and
equipment
$
378
$
158
$
378
Settlements and potential settlements of litigation
and potential litigation (1)
Income tax related penalties
Impairments of long-lived assets (2)
Other miscellaneous expense (3)
Total other expense
Other income:
Litigation judgment, settlements and potential
settlements (4)
Other miscellaneous income (3)
Total other income
Non-operating other income, net:
Interest income
Miscellaneous income (3)
Miscellaneous expense (3)
Total non-operating other income, net
75
35
-
39
527
592
152
192
90
$ 1,184
350
34
250
174
$ 1,186
50
237
287
$
8,235
241
$ 8,476
$ 3,272
223
$ 3,495
216
1
(87)
130
$ 1,270
-
(174 )
$ 1,096
$ 1,291
73
(100)
$ 1,264
$
$
$
$
$
(1) For 2008, $325,000 related to settlements recognized associated with various asserted claims,
of which $225,000 related to the Climate Control Business. In addition, $267,000 related to
various settlements reached, of which $67,000 related to the Chemical Business. During
2007, a settlement was reached relating to alleged damages claimed by a customer of our
Climate Control Business.
(2) Based on estimates of the fair values obtained from external sources and estimates made
internally based on inquiry and other techniques, we recognized the following impairments:
2009
Year ended December 31,
2008
(In Thousands)
2007
Corporate assets
Chemical Business assets
$
$
- $
-
- $
192 $
-
192 $
-
250
250
F-60
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
21. Other Expense, Other Income and Non-Operating Other Income, net (continued)
(3) Amounts represent numerous unrelated transactions, none of which are individually
significant requiring separate disclosure.
(4) For 2008, income from litigation judgment and settlements includes approximately $7.6
million, net of attorneys’ fees, relating to a litigation judgment involving a subsidiary within
our Chemical Business. In June 2008, we received proceeds of approximately $11.2 million
for this litigation judgment, which includes interest of approximately $1.4 million and from
which we paid attorneys’ fees of approximately $3.6 million. The payment of attorneys’ fees
of 31.67% of our recovery was contingent upon the cash receipt of the litigation judgment.
Cash flows relating to this litigation judgment are included in cash flows from continuing
operating activities, except for the portion of the judgment associated with the recovery of
damages relating to property, plant and equipment and its pro-rata portion of the attorneys’
fees. These cash flows are included in cash flows from continuing investing activities. In
addition, a settlement was reached for $0.4 million for the recovery of certain environmental-
related costs incurred in previous periods relating to property used by Corporate and other
business operations. During 2007, our Chemical Business reached a settlement with Dynegy,
Inc. and one of its subsidiaries, relating to a previously reported lawsuit. This settlement
reflects the net proceeds of approximately $2.7 million received by the Cherokee Facility and
the retention by the Cherokee Facility of a disputed accounts payable amount of
approximately $0.6 million.
22. Segment Information
Factors Used by Management to Identify the Enterprise’s Reportable Segments and
Measurement of Segment Income or Loss and Segment Assets
We have two reportable segments: the Climate Control Business and the Chemical Business. Our
reportable segments are based on business units that offer similar products and services. The
reportable segments are each managed separately because they manufacture and distribute
distinct products with different production processes.
We evaluate performance and allocate resources based on operating income or loss. The
accounting policies of the reportable segments are the same as those described in the summary of
significant accounting policies.
F-61
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
22. Segment Information (continued)
Description of Each Reportable Segment
Climate Control - The Climate Control Business segment manufactures and sells the
following variety of heating, ventilation, and air conditioning (“HVAC”) products:
(cid:120) geothermal and water source heat pumps,
(cid:120) hydronic fan coils, and
(cid:120) other HVAC products including large custom air handlers, modular chiller systems
and other products and services.
These HVAC products are primarily for use in commercial and residential new building
construction, renovation of existing buildings and replacement of existing systems. Our various
facilities located in Oklahoma City comprise substantially all of the Climate Control segment’s
operations. Sales to customers of this segment primarily include original equipment
manufacturers, contractors and independent sales representatives located throughout the world.
Chemical -The Chemical Business segment manufactures and sells:
(cid:120) anhydrous ammonia, ammonium nitrate, urea ammonium nitrate, and ammonium
nitrate ammonia solution for agricultural applications,
(cid:120) concentrated, blended and regular nitric acid, mixed nitrating acids, metallurgical and
commercial grade anhydrous ammonia, sulfuric acid, and high purity ammonium
nitrate for industrial applications, and
industrial grade ammonium nitrate and solutions for the mining industry.
(cid:120)
Our primary chemical production facilities are located in El Dorado, Arkansas, Cherokee,
Alabama and Baytown, Texas. Sales to customers of this segment primarily include industrial
users of acids throughout the United States and parts of Canada; farmers, ranchers, fertilizer
dealers and distributors located in the Central and Southeastern United States; and explosive
manufacturers in the United States. During 2009, we proceeded to activate a portion of our
previously idled Pryor Facility. We plan to produce and sell urea ammonium nitrate and
anhydrous ammonia from this facility primarily to one customer pursuant to a purchase and sale
agreement.
As of December 31, 2009, our Chemical Business employed 455 persons, with 156 represented
by unions under agreements, which will expire in July through November of 2010.
Other - The business operation classified as “Other” primarily sells industrial machinery and
related components to machine tool dealers and end users located primarily in North America.
F-62
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
22. Segment Information (continued)
Segment Financial Information
Information about our continuing operations in different industry segments for each of the three
years in the period ended December 31, 2009 is detailed below.
2009
2008
(In Thousands)
2007
Net sales:
Climate Control:
Geothermal and water source heat pumps
Hydronic fan coils
Other HVAC products
Total Climate Control
$ 179,865
46,381
39,923
266,169
$ 190,960
83,472
36,948
311,380
$ 165,115
85,815
35,435
286,365
Chemical:
Agricultural products
Industrial acids and other chemical products
Mining products
Total Chemical
Other
Gross profit:
Climate Control
Chemical
Other
Operating income (loss):
Climate Control
Chemical
General corporate expenses and other business
operations, net (1)
Interest expense
Gains on extinguishment of debt
Non-operating income, net:
104,300
95,997
57,535
257,832
7,837
$ 531,838
$
92,409
42,422
2,583
$ 137,414
152,802
162,941
108,374
424,117
13,470
$ 748,967
$ 96,633
37,991
4,256
$ 138,880
117,158
95,754
75,928
288,840
11,202
$ 586,407
$ 83,638
44,946
4,009
$ 132,593
$
37,706
15,122
$ 38,944
31,340
$ 34,194
35,011
(12,118
)
40,710
(6,746)
1,783
(11,129
)
59,155
(11,381)
5,529
Climate Control
Chemical
Corporate and other business operations
8
31
91
Provisions for income taxes
Equity in earnings of affiliate - Climate Control
Income from continuing operations
(15,024)
996
21,849
$
1
27
1,068
(18,776)
937
$ 36,560
F-63
(10,194
)
59,011
(12,078)
-
2
109
1,153
(2,540)
877
$ 46,534
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
22. Segment Information (continued)
(1) General corporate expenses and other business operations, net consist of the following:
Gross profit-Other
Selling, general and administrative:
Personnel costs
Professional fees
Office overhead
Property, franchise and other taxes
Advertising
Shareholders relations
All other
Total selling, general and administrative
Other income
Other expense
Total general corporate expenses and other business
2009
2008
(In Thousands)
2007
$
2,583 $
4,256
$
4,009
(8,083)
(3,687)
(657)
(350)
(258)
(35)
(1,617)
(14,687)
192
(206)
(7,937 )
(4,759 )
(650 )
(313 )
(269 )
(74 )
(1,498 )
(15,500 )
766
(651 )
(6,879)
(4,299)
(646)
(314)
(244)
(154)
(1,626)
(14,162)
53
(94)
operations, net
$ (12,118
)
$
(11,129
)
$ (10,194
)
Information about our property, plant and equipment and total assets by industry segment is
detailed below:
Depreciation of property, plant and equipment:
Climate Control
Chemical
Corporate assets and other
$
Total depreciation of property, plant and equipment $
2009
2008
(In Thousands)
2007
4,077
11,291
233
15,601
$
$
3,433
10,232
165
13,830
$
3,195
8,929
147
$ 12,271
Additions to property, plant and equipment:
Climate Control
Chemical
Corporate assets and other
Total additions to property, plant and equipment
$
$
6,438
24,627
271
31,336
$
$
12,111
25,130
457
37,698
$
6,778
9,151
294
$ 16,223
Total assets at December 31:
Climate Control
Chemical
Corporate assets and other
Total assets
$ 102,029
143,800
92,804
$ 338,633
$ 117,260
145,518
72,989
$ 335,767
$ 102,737
121,864
82,953
$ 307,554
F-64
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
22. Segment Information (continued)
Net sales by industry segment include net sales to unaffiliated customers as reported in the
consolidated financial statements. Net sales classified as “Other” consist of sales of industrial
machinery and related components. Intersegment net sales are not significant.
Gross profit by industry segment represents net sales less cost of sales. Gross profit classified as
“Other” relates to the sales of industrial machinery and related components.
Our chief operating decision makers use operating income (loss) by industry segment for
purposes of making decisions that include resource allocations and performance evaluations.
Operating income (loss) by industry segment represents gross profit by industry segment less
SG&A incurred by each industry segment plus other income and other expense earned/incurred
by each industry segment before general corporate expenses and other business operations, net.
General corporate expenses and other business operations, net consist of unallocated portions of
gross profit, SG&A, other income and other expense.
Identifiable assets by industry segment are those assets used in the operations of each industry.
Corporate assets and other are those principally owned by the parent company or by subsidiaries
not involved in the two identified industries.
All net sales and long-lived assets relate to domestic operations for the periods presented.
Net sales to unaffiliated customers include foreign export sales as follows:
Geographic Area
2009
Canada
Middle East
Mexico, Central and South America
Europe
South and East Asia
Caribbean
Other
$ 20,224
4,440
2,154
1,114
1,124
443
400
$ 29,899
2008
(In Thousands)
$ 24,749
4,994
2,954
2,119
1,645
491
148
$ 37,100
2007
$ 14,206
9,523
2,053
3,069
2,218
1,119
129
$ 32,317
Major Customers
Net sales to one customer, Bayer, of our Chemical Business segment represented approximately
7%, 11% and 7% of our total net sales for 2009, 2008 and 2007, respectively. See discussion
concerning the Bayer Agreement in Note 15 – Commitments and Contingencies.
Net sales to one customer, Orica, of our Chemical Business segment represented approximately
7%, 11% and 9% of our total net sales for 2009, 2008 and 2007, respectively. See discussion
concerning the supply agreement in Note 24 – Subsequent Events.
F-65
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
22. Segment Information (continued)
Unplanned Maintenance Downtime at the Cherokee Facility in 2008
During the third quarter of 2008, the Cherokee Facility experienced repeated unplanned
maintenance downtime, which downtime reduced production and sales by our Chemical
Business. As a result, interim repairs were made at the Cherokee Facility during this period. Due
to this repeated downtime, the Cherokee Facility lost approximately 20 days of operation that
negatively impacted our Chemical Business’ operating results in 2008.
23. Related Party Transactions
Golsen Group
In connection with the completion of our March 2007 tender offer for our outstanding shares of
our Series 2 Preferred, members of the Golsen Group tendered 26,467 shares of Series 2
Preferred in exchange for our issuance to them of 195,855 shares of our common stock. As a
result, we effectively settled approximately $635,000 in dividends in arrears on the shares of
Series 2 Preferred tendered. The tender by the Golsen Group was a condition of the Jayhawk
Group’s agreement to tender shares of Series 2 Preferred in the tender offer as discussed in Note
18.
After the completion of our March 2007 tender offer relating to the Series 2 Preferred, the
Golsen Group held 23,083 shares of Series 2 Preferred. Pursuant to our redemption of the
remaining outstanding Series 2 Preferred during August 2007, the Golsen Group redeemed
23,083 shares of Series 2 Preferred and received the cash redemption amount of approximately
$1,760,000 pursuant to the terms of our redemption of all of our outstanding Series 2 Preferred.
The redemption price was $50.00 per share of Series 2 Preferred, plus $26.25 per share in
dividends in arrears pro-rata to the date of redemption.
In September 2007, we utilized a portion of the net proceeds of the sale of the 2007 Debentures
and working capital to pay approximately $2,250,000 of dividends in arrears on our Series B
Preferred and our Series D Preferred, all of the outstanding shares of which are owned by the
Golsen Group.
In March 2008, we paid dividends totaling $300,000 on our Series B Preferred and our Series D
Preferred, all of the outstanding shares of which are owned by the Golsen Group.
During November 2008, the Golsen Group acquired from an unrelated third party $5,000,000 of
the 2007 Debentures.
In January 2009, we paid interest of $137,500 relating to the debentures held by the Golsen
Group that was accrued at December 31, 2008.
F-66
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
23. Related Party Transactions (continued)
In March 2009, we paid dividends totaling $300,000 on our Series B Preferred and our Series D
Preferred, all of the outstanding shares of which are owned by the Golsen Group.
During 2009, we incurred interest expense of $275,000 relating to the debentures held by the
Golsen Group, of which $137,500 remains accrued at December 31, 2009.
Quail Creek Bank
Bernard Ille, a member of our board of directors, is a director of Quail Creek Bank, N.A. (the
“Bank”). The Bank was a lender to one of our subsidiaries. During 2007, the subsidiary made
interest and principal payments on outstanding debt owed to the Bank in the respective amount
of $.1 million and $3.3 million in 2007 (none in 2009 or 2008). The debt accrued interest at an
annual interest rate of 8.25%. The loan was secured by certain of the subsidiary’s property, plant
and equipment. This loan was paid in full in June 2007 utilizing a portion of the net proceeds of
our sale of the 2007 Debentures.
24. Subsequent Events (Unaudited)
During February 2010, EDC signed an extension of EDC’s anhydrous ammonia purchase
agreement with Koch Nitrogen International Sarl (“Koch”). Under the extension, Koch agrees to
supply certain of EDC’s requirements of anhydrous ammonia through December 31, 2012.
During February 2010, EDC entered into a cost-plus supply agreement with Orica International
Pte Ltd. (“Orica International”) to supply Orica International with 250,000 tons per year of
industrial grade ammonium nitrate through December 2014. This new agreement, which became
effective January 1, 2010, replaced EDC’s previous agreement to supply 210,000 tons per year
of industrial grade ammonium nitrate to Orica USA, Inc.
F-67
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
March 31
Three months ended
June 30
September 30 December 31
2009
Net sales
Gross profit (1)
Income from continuing operations (1) (2)
Net income (loss) from discontinued operations
Net income
Net income applicable to common stock
$ 150,197 $ 138,563
40,728 $ 37,827
$
8,743
11,745 $
$
(13)
(2)
8,730
11,743 $
8,730
$
11,437
$
$
$ 127,778
$ 30,653
1,103
$
(30 )
1,073
1,073
$
$
$ 115,300
$ 28,206
258
$
(220)
38
38
$
$
Income per common share:
Basic:
Income from continuing operations
Income (loss) from discontinued operations, net
Net income
Diluted:
Income from continuing operations
Income (loss) from discontinued operations, net
Net income
2008
Net sales
Gross profit (1)
Income from continuing operations (1) (2)
Net income (loss) from discontinued operations
Net income
Net income applicable to common stock
Income per common share:
Basic:
Diluted:
$
$
$
$
.54 $
-
.54 $
.51 $
-
.51 $
.41
-
.41
.38
-
.38
$
$
$
$
.05
-
.05
.05
-
.05
$
$
$
$
.01
(.01)
-
.01
(.01)
-
$ 160,455 $ 198,052
37,757 $ 43,741
$
10,907 $ 17,924
$
(17)
10,907 $ 17,907
10,601
$ 17,907
-
$
$
$ 210,920
$ 31,169
4,157
$
4
4,161
4,161
$
$
$ 179,540
$ 26,213
3,572
$
-
3,572
3,572
$
$
$
$
.50 $
.85
.46 $
.75
$
$
.20
.18
$
$
.17
.16
F-68
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited) (continued)
(1) The following items increased (decreased) gross profit and income from continuing operations:
Changes in unrealized gains (losses) relating to
commodities contracts still held at period end:
2009
2008
Turnaround costs:
2009
2008
Precious metals, net of recoveries:
2009
2008
Changes in inventory reserves:
2009
2008
Unplanned maintenance downtime - Cherokee
Facility:
2008
March 31
June 30
September 30 December 31
Three months ended
(In Thousands)
$ (1,498)
53
$
$
$
(120)
(247)
$
$
$
$
30
808
385
$
$ (5,391 )
138
$
$ (3,576)
(484)
(366)
$ (2,078 )
(881 )
$
(731)
$
$ (4,461)
486
$
$ (2,460)
$ (1,543)
$ (1,102)
(841 )
$
$ (1,304 )
$ (1,403)
$ (1,462)
3,032
(169)
$
$
(8)
(15)
$
$
162
(216 )
$
(782)
$ (3,424)
-
$
-
$ (5,100 )
$
-
$
$
$
F-69
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited) (continued)
(2) The following items increased (decreased) income from continuing operations:
Three months ended
March 31
June 30
September 30 December 31
(In Thousands)
Expenses associated with the Pryor Facility:
2009
2008
$ (1,996) $
(421) $
$
(3,217) $
(498) $
(7,058 )
(425 )
Gain (loss) on extinguishment of debt:
2009
2008
Judgment, settlements and potential settlements of
litigation and potential litigation:
2009
2008
$
$
$
$
1,322 $
- $
421
-
$
$
53
-
50 $
350 $
(75) $
$
7,518
-
-
Benefit (provision) for income taxes:
2009 (A)
2008 (B)
$ (7,349) $
(5,451) $
$ (6,720) $ (10,709) $
(1,310 )
(2,388 )
$
$
$
$
$
$
$
$
(4,965)
(1,047)
(13)
5,529
-
(225)
(914)
1,041
(A) For the three months ended December 31, 2009, the provision for income taxes includes the
impact of additional provisions totaling $538,000 relating to the adjustments necessary to
reconcile the 2008 state income tax returns to the 2008 estimated tax provision.
(B) During the three months ended December 31, 2008, we performed a detailed analysis of all our
deferred tax assets and liabilities and determined that our deferred tax assets were understated by
approximately $1,827,000. As a part of our analysis, we reviewed the realizability of these deferred tax
assets and determined that a valuation allowance of approximately $268,000 was required. Accordingly,
the addition of the deferred tax assets and the associated valuation allowance resulted in a tax benefit of
$1,559,000 in our income taxes for the three months ended December 31, 2008. In addition, the net effect
of these adjustments increased basic and diluted net income per share by $0.07 and $0.06, respectively,
for the year ended December 31, 2008.
F-70
LSB Industries, Inc.
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets
The following condensed financial statements in this Schedule I are of the parent company only,
LSB Industries, Inc.
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Supplies, prepaid items and other
Due from subsidiaries
Notes receivable from a subsidiary
Total current assets
Property, plant and equipment, net
Investments in and due from subsidiaries
Other assets, net
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued and other liabilities
Redeemable, noncumulative, convertible preferred stock
Current portion of long-term debt
Total current liabilities
Long-term debt
Due to subsidiaries
Noncurrent accrued and other liabilities
Stockholders’ equity:
Preferred stock
Common stock
Capital in excess of par value
Retained earnings
Less treasury stock
Total stockholders’ equity
See accompanying notes.
F-71
December 31,
2009
2008
(In Thousands)
$ 23,071
12
93
17,544
10,000
50,720
258
146,402
2,017
$ 199,397
$ 25,720
46
85
32,235
31,400
89,486
186
100,179
2,468
$ 192,319
$
257
1,186
$
432
3,816
52
9
4,309
40,500
2,558
3,947
3,000
2,496
127,337
19,804
152,637
11,632
141,005
$ 192,319
48
8
1,499
29,400
2,558
4,492
3,000
2,537
129,941
41,082
176,560
15,112
161,448
$ 199,397
LSB Industries, Inc.
Schedule I - Condensed Financial Information of Registrant
Condensed Statements of Income
2009
Year ended December 31,
2008
(In Thousands)
2007
Fees under service, tax sharing and management
agreements with subsidiaries
$ 3,531
$
3,501
$ 2,801
Selling, general and administrative expense
Litigation judgment
Gain on sale of precious metals
Other expense (income), net
5,321
-
-
82
6,108
(7,560 )
-
65
5,361
-
(4,259)
(402)
Operating income (loss)
(1,872)
4,888
2,101
Interest expense
Gains on extinguishment of debt
Interest and other non-operating income, net
3,513
(1,783)
(2,328)
5,988
(5,529 )
(3,342 )
5,142
-
(3,309)
Income (loss) from continuing operations
(1,274)
7,771
268
Equity in earnings of subsidiaries
Net income (loss) from discontinued operations
23,123
28,789
(265)
(13 )
46,266
348
Net income
$ 21,584
$ 36,547
$ 46,882
See accompanying notes.
F-72
LSB Industries, Inc.
Schedule I - Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
2009
Year ended December 31,
2008
(In Thousands)
2007
Net cash flows provided (used) by operating activities
$
(4,899) $
1,140
$
5,953
Cash flows from investing activities:
Capital expenditures
Proceeds from litigation judgment associated with
property, plant and equipment of a subsidiary
Payment of legal costs relating to litigation judgment
associated with property, plant and equipment of a
subsidiary
Proceeds from sales of property and equipment
Notes receivable from a subsidiary
Payments received on notes receivable from a
(99)
(71)
(71)
-
-
-
-
5,948
-
)
(1,884
-
-
-
2
(29,886)
subsidiary
Payment of senior unsecured notes of a subsidiary
Other assets
Net cash provided (used) by investing activities
21,400
(283)
21,018
4,886
-
(274)
8,605
-
6,950
(147)
(23,152)
Cash flows from financing activities:
Acquisition of 5.5% convertible debentures
Payments on other long-term debt
Payments of debt issuance costs
Proceeds from 5.5% convertible debentures, net of fees
Net change in due to/from subsidiaries
Purchase of treasury stock
Proceeds from exercise of stock options
Proceeds from exercise of warrant
Excess income tax benefit associated with stock-based
compensation
Dividends paid on preferred stocks
Acquisition of non-redeemable preferred stock
(8,938)
(1)
-
-
(7,738)
(3,200)
609
-
806
(306)
-
(13,207)
(6)
-
-
(3,972)
(4,821)
846
-
2,390
(306)
-
Net cash provided (used) by financing activities
Net increase (decrease) in cash
(18,768)
(2,649)
(19,076)
(9,331)
-
(4)
(209)
56,985
(4,832)
-
1,522
393
1,740
(2,934)
(1,292)
51,369
34,170
Cash and cash equivalents at the beginning of year
25,720
35,051
881
Cash and cash equivalents at the end of year
$
23,071
$ 25,720
$ 35,051
See accompanying notes.
F-73
LSB Industries, Inc.
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
1. Basis of Presentation - The accompanying condensed financial statements of the parent
company include the accounts of LSB Industries, Inc. (the “Company”) only. The Company’s
investments in subsidiaries are stated at cost plus equity in undistributed earnings (losses) of
subsidiaries since date of acquisition. These condensed financial statements should be read in
conjunction with the Company’s consolidated financial statements.
2. Debt Issuance Costs - During 2009, we acquired a portion of the 2007 Debentures. As a
result, approximately $379,000 of the unamortized debt issuance costs associated with the 2007
Debentures acquired was charged against the gain on extinguishment of debt in 2009.
During 2008, we acquired a portion of the 2007 Debentures. As a result, approximately $764,000
of the unamortized debt issuance costs associated with the 2007 Debentures acquired was
charged against the gain on extinguishment of debt in 2008.
During 2007, we incurred debt issuance costs of $3,224,000 relating to the 2007 Debentures. In
addition, the remaining portion of the 2006 Debentures was converted into our common stock.
As a result of the conversions, approximately $266,000 of the remaining debt issuance costs, net
of amortization, associated with the 2006 Debentures were charged against capital in excess of
par value in 2007.
3. Commitments and Contingencies - The Company has guaranteed the payment of principal
and interest under the terms of various debt agreements of its subsidiaries. Subsidiaries’ long-
term debt outstanding at December 31, 2009, which is guaranteed by the Company, is as follows
(in thousands):
Secured Term Loan due 2012
Other, most of which is collateralized by machinery, equipment and real estate
$ 50,000
16,541
$ 66,541
In addition, the Company has guaranteed approximately $34.1 million of our subsidiaries’ credit
terms with vendors (primarily relating to purchases of natural gas) and approximately $22.9
million of our subsidiaries’ insurance bonds.
See Notes 13 and 15 of the notes to the Company’s consolidated financial statements for
discussion of the long-term debt and commitments and contingencies.
4. Preferred Stock and Stockholders’ Equity - At December 31, 2009 and 2008, a subsidiary
of the Company owns 2,451,527 shares of the Company’s common stock, which shares have
been considered as issued and outstanding in the accompanying Condensed Balance Sheets
included in this Schedule I - Condensed Financial Information of Registrant. See Notes 3, 12, 17
and 18 of notes to the Company’s consolidated financial statements for discussion of matters
relating to the Company’s preferred stock and other stockholders’ equity matters.
F-74
LSB Industries, Inc.
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements (continued)
5. Litigation Judgment - See Note 21 of the notes to the Company’s consolidated financial
statements for the discussion of the income from a litigation judgment in 2008.
6. Precious Metals - The Company had owned a specified quantity of precious metals used in
the production process at one of its subsidiaries. Precious metals are carried at cost, with cost
being determined using a FIFO basis. During 2007, the Company sold metals the subsidiary had
accumulated in excess of their production requirements. As a result, the Company recognized
gains of $4,259,000 for 2007 (none in 2009 and 2008) from the sale of these precious metals.
These gains included an intercompany profit of $2,248,000, which are eliminated in the
accompanying condensed statement of income through equity in earnings of subsidiaries. The
intercompany profit resulted from differences in the FIFO cost basis of these metals in relation to
the consolidated FIFO cost basis.
7. Gains on Extinguishment of Debt - During 2009 and 2008, we acquired $11.1 million and
$19.5 million, respectively, aggregate principal amount of
the 2007 Debentures for
approximately $8.9 million and $13.2 million, respectively, with each purchase being negotiated.
As a result, we recognized a gain on extinguishment of debt of approximately $1.8 million and
$5.5 million, respectively, after writing off the unamortized debt issuance costs associated with
the 2007 Debentures acquired.
8. Interest Income - During 2007, the Company earned interest of $685,000 relating to
$6,950,000 of senior unsecured notes due 2007 (the “Notes”) of one of its subsidiaries,
ThermaClime, which amount was being held as an investment. During 2007, ThermaClime
repaid the Notes. In 2006, the Company entered into a $6,400,000 term loan due 2009 with
ThermaClime. During 2009, 2008, and 2007, the Company earned interest of $698,000,
$699,000 and $698,000, respectively, relating to this term loan. During 2009, ThermaClime
repaid this term loan. During 2007, the Company entered into two demand notes totaling
$29,886,000 with ThermaClime of which $15,000,000 and $4,886,000 was repaid in 2009 and
2008, respectively. During 2009, 2008, and 2007, the Company earned interest of $1,394,000,
$1,671,000 and $801,000, respectively, relating to these demand notes. In addition, the Company
has invested a portion of its cash (including a portion of the net proceeds of the 2007
Debentures) in highly liquid investments. During 2009, 2008, and 2007, the Company earned
interest of $11,000, $651,000 and $752,000, respectively, relating to these investments.
F-75
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2009, 2008, and 2007
(In Thousands)
Balance at
Beginning of
Year
Additions-
Charges to
(Recoveries)
Costs and
Expenses
Deductions-
Write-offs/
Costs
Incurred
Balance at
End of
Year
$
$
$
$
$
$
$
$
$
$
$
729
1,308
2,269
514
460
829
970
970
970
268
-
$
$
$
$
$
$
$
$
$
$
$
90
371
858
745
210
29
-
-
-
90
268
$ 18,932
$ (18,932)
$
$
$
$
$
$
$
$
$
$
$
$
143
950
1,819
61
156
398
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
676
729
1,308
1,198
514
460
970
970
970
358
268
-
Description
Accounts receivable - allowance for
doubtful accounts (1):
2009
2008
2007
Inventory-reserve for slow-moving
items (1):
2009
2008
2007
Notes receivable - allowance for
doubtful accounts (1):
2009
2008
2007
Deferred tax assets - valuation (1):
2009
2008
2007
(1) Deducted in the consolidated balance sheet from the related assets to which the reserve applies.
Other valuation and qualifying accounts are detailed in our notes to consolidated financial statements.
F-76
(cid:22)(cid:20)(cid:20)(cid:29)(cid:3)(cid:52)(cid:73)(cid:86)(cid:74)(cid:83)(cid:86)(cid:81)(cid:69)(cid:82)(cid:71)(cid:73)(cid:3)(cid:43)(cid:86)(cid:69)(cid:84)(cid:76)(cid:3)(cid:10)
(cid:52)(cid:73)(cid:73)(cid:86)(cid:3)(cid:43)(cid:86)(cid:83)(cid:89)(cid:84)(cid:3)(cid:48)(cid:77)(cid:87)(cid:88)
Performance Graph
The following table compares the yearly percentage change in the cumulative total stockholder return of (a) the
Company, (b) a peer group of entities (“Peer Group”) from two distinct industries which represent the Company's
two primary lines of business (Climate Control and Chemical), (c) the NYSE Composite Stock Index (“NYSE
Index”), and (d) the American Stock Exchange Composite Stock Index (“AMEX Index”). Both the NYSE and
Amex Indices are presented below because we moved our listing from the American Stock Exchange to the New
York Stock Exchange in October 2008. The table set forth below covers the period from year-end 2004 through
year-end 2009.
FISCAL YEAR ENDING
LSB Industries, Inc.
Peer Group
NYSE Index
AMEX Index
2004
100.00
100.00
100.00
100.00
2005
77.36
106.27
109.36
126.19
2006
145.66
122.70
131.75
151.26
2007
354.97
129.78
143.43
181.82
2008
104.65
80.99
87.12
108.33
2009
177.36
104.01
111.76
146.70
Assumes $100 invested at year-end 2004 in the Company, the Peer Group, the NYSE Index, and the AMEX
Index, and the investment of dividends, if any.
The Peer Group was developed for the Company by Morningstar, Inc. (Hemscott Data) and is comprised of all
companies that have specified Hemscott Data Group General Index Groups codes, which the company believes
correspond to the Company’s primary lines of business. The Peer Group is comprised of (a) climate control
companies having Hemscott Data Group code 634 (general building materials) and (b) chemical companies having a
Hemscott Data Group codes 112 (agricultural chemicals) and 113 (specialty chemicals), and is provided for
comparison to the company’s two primary lines of business, Climate Control and Chemical. The companies which
comprise the Peer Group are listed below. The Company has been advised that the cumulative total return of each
component company in the Peer Group has been weighted according to the respective company’s stock market
capitalization as of the beginning of each yearly period. In light of the Company’s unique industry diversification
and current market capitalization, the Company believes that the Peer Group is appropriate for comparison to the
Company. The AMEX Index line is provided because the Company moved its listing from the American Stock
Exchange to the New York Stock Exchange in October 2008. The above Performance Graph shall not be deemed
incorporated by reference by any general statement incorporating by reference this Annual Report into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934 (collectively, the “Acts”), except to the
extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed
to be soliciting material or to be filed under such Acts.
PEER GROUP
RPM INTERNATIONAL INC DE
SCOTTS MIRACLE GROW CO
SENSIENT TECHNOLOGIES CP
SHENGDATECH INC
SIGMA-ALDRICH CORP
SINOCUBATE INC
PACIFIC ETHANOL INC
PANDA ETHANOL INC
PENFORD CORP
PGT INC
PURE BIOFUELS CORP
QEP CO INC
QUAKER CHEMICAL CORP
RENEWAL FUELS INC
FERRO CORP
FLEXIBLE SOLUTIONS INTL
FLOTEK INDUSTRIES INC
FOUR RIVERS BIOENERGY
FUDA FAUCET WORKS INC
GREEN PLAINS RENEWABLE
GRIFFON CORP
GULF RESOURCES INC
GUSHAN ENVIRON ENGY ADR RONSON CORP
H.B. FULLER CO
HEADWATERS INC
HELIX BIOMEDIX
IMPERIAL INDUSTRIES INC
INNOSPEC INC
INTERNAT BARRIER TECHNL
INTREPID TECHNOLOGY&RESR SOIL BIOGENICS LTD
ISONICS CORP
ITRONICS INC
KMG CHEMICALS INC.
KOLORFUSION INTERNATIONL SYNTHESIS ENERGY SYS INC
KREIDO BIOFUELS INC
KRONOS WORLDWIDE INC
LAPOLLA INDUSTRIES
LUBRIZOL CORP THE
MACE SECURITY INTERNAT
MARTIN MARIETTA MATERIAL UNITED ENERGY CORP
MDU RESOURCES GROUP INC USG CORP
METHANEX CORPORATION
METWOOD INC
MOMENTUM BIOFUELS INC
MONSANTO CO
MOSAIC CO THE
NCI BUILDING SYSTEMS INC
NCOAT INC
NEW GENERATION BIOFUELS WD-40 CO
NEW ORIENTAL ENER & CHEM WESTLAKE CHEMICAL CORP
AAON INC
ADA-ES INC
ADM TRONICS UNLIMITED
AE BIOFUELS INC
AGRIUM INC
ALL FUELS & ENERGY CO
ALLEGRO BIODIESEL CORP
ALTAIR NANOTECHNOLOGIES
ALTERNATIVE CNSTR TECH
AMCOL INTERNATIONAL CORP
AMERICAN PACIFIC CORP
AMERICAN VANGUARD CORP
AMERON INTERNAT CORP
ARMSTRONG WORLD IND INC
AVENTINE RENEWABLE ENRGY
BIOFUEL ENERGY CORP
BLASTGUARD INTERNAT INC
BLUEFIRE ETHANOL FUEL IN
BRASKEM PFD CL A ADR
CABOT CORP
CALCITECH LTD
CF INDUSTRIES HOLDINGS
CHEMTURA CORP
CHINA AGRI-BUSINESS INC
CHINA CLEAN ENERGY INC
CHINA HUAREN ORGANIC PRD
CHINA JIANYE FUEL INC
CHINA YINGXIA INTERNAT
COMPASS MINERALS INTL
CONTINENTAL MATERIALS CP
CONVERTED ORGANICS INC
CYANOTECH CORP
CYTEC INDUSTRIES INC
DIATECT INTERNAT CORP
DREW INDUSTRIES INC
DUPONT FABROS TECH
DYNAMOTIVE ENERGY SYSTMS NEWMARKET CORP
ECOLOGY COATINGS INC
EDEN BIOSCIENCE CORP
ETHANEX ENERGY INC
ETHOS ENVIRONMENTAL INC
FASTENAL COMPANY
VALSPAR CORP THE
VERASUN ENERGY CORP
VERENIUM CORP
VERIDIEN CORP
VIOSOLAR INC
VULCAN MATERIALS CO
W.R. GRACE & CO
OIL-DRI CORP OF AMERICA
OM GROUP INC
OMNOVA SOLUTIONS INC
ORION ETHANOL INC
OWENS CORNING INC
TAT TECHNOL LTD
TECUMSEH PRODUCTS CO A
TECUMSEH PRODUCTS CO B
TERRA INDUSTRIES INC
U.S. LIME & MINERALS INC
SOLUTIA INC
STRATOS RENEWABLES CORP
SYNGENTA AD FOR NVS
WILLIAMS PARTNERS LP
Directors and Offi cers:
LSB Directors
LSB Offi cers
Subsidiary
Executive Offi cers
RAYMOND B. ACKERMAN
Chairman Emeritus of
Ackerman McQueen, Inc.
MICHAEL G. ADAMS, C.P.A.
Vice President,
Corporate Controller
JOSEPH A. CAPPELLO
President,
ClimateCraft, Inc.
HEIDI L. BROWN, J.D., L.L.M.
Vice President,
Managing Counsel
DAN ELLIS
President,
Climate Master, Inc.
STEVEN J. GOLSEN
Co-Chairman, CEO
Climate Master, Inc. and
COO, Climate Control Business
PHIL GOUGH
Senior Vice President,
Agrochemical Group
BRIAN HAGGART
President,
Trison Construction, Inc.
LARRY L. JEWELL
President,
International Environmental
Corporation
BRIAN LEWIS, C.P.A.
Executive Vice President,
LSB Chemical Corp.
ROSS MIGLIO
President,
ClimaCool Corp.
ANNE RENDON
President,
El Dorado Nitric Company
BRUCE SMITH
President,
Summit Machine Tool
Manufacturing Corp.
JUDI BURNETT
Assistant Vice President,
Risk Management
JOHN CARVER
Vice President,
Environmental and Safety
Compliance
KRISTY CARVER, C.P.A.
Vice President,
Corporate Taxation
JIM D. JONES, C.P.A.
Senior Vice President,
Treasurer
ANN MUISE-MILLER, J.D.
Assistant Vice President,
Associate General Counsel
JAMES WM. MURRAY, III, J.D.
Vice President, Senior
Associate General Counsel
PAUL RYDLUND
Senior Vice President,
Business Development
HAROLD RIEKER, C.P.A.
Vice President,
Principal Accounting Offi cer
DAVID M. SHEAR, J.D.
Senior Vice President,
General Counsel and Secretary
MIKE TEPPER
Senior Vice President,
International Operations
ROBERT C. BROWN, M.D.
Vice President
Plaza Medical Group, P.C.
President and CEO ClaimLogic, LLC
CHARLES (CHUCK) A. BURTCH
Former Executive Vice President
and West Division Manager
of BankAmerica
ROBERT BUTKIN, J.D.
Professor of Law and former Dean,
University of Tulsa, College of Law
Former Oklahoma State Treasurer
JACK E. GOLSEN
Board Chairman and CEO
BARRY H. GOLSEN, J.D.
Board Vice Chairman, COO and
President, LSB Industries and
President, 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
GAIL P. LAPIDUS
Executive Director and CEO
Family and Children’s Services
DONALD W. MUNSON
Former President of Lennox Corp
President Ducane Europe
RONALD V. PERRY
President, Prime Time Travel
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. SHELLEY
President, CEO and Chairman,
The Bank of Union
HEADQUARTERS
LSB Industries, Inc.
16 South Pennsylvania Ave.
Oklahoma City, OK 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, OK
SECURITY LISTING
Common Stock listed on the
New York Stock Exchange
NYSE Ticker Symbol: LXU
TRANSFER AGENT &
REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Tel: (800) 884-4225 (US & Canada)
(781) 575-4706 (outside US & Canada)
WEBSITE
www.lsb-okc.com
Visit our website for details
about our plants, products,
operations and policies.