2017 ANNUAL REPORT
Where Our Products Go -- 2017 Sales Mix
Mining
9%
Industrial Acids
and Other
47%
Agriculture
44%
Š Agriculture — we manufacture and sell urea ammonium nitrate, high density ammonium nitrate and
ammonia fertilizers for application in crop production for food and biofuel feedstocks and for pasture
land and forage production.
Š
Industrial — we are the leading merchant marketer of nitric acid in the U.S. – offering various acid
concentrations, high-grade mixed acids, and sulfuric acid.
Š Mining — we manufacture and sell low-density ammonium nitrate and ammonium nitrate solution for
use in explosives for the mining industry.
Major Product Lines - Tons Sold
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
-
Nitric Acid & Blends
Ammonia
Ammonium Nitrate
UAN
2015
2016
2017
Dear Shareholders,
In 2017, we strengthened our market position
and sold record product volumes into a market
which had significant new production capacity
expansions. During 2017, we also experienced
significant product price volatility. We expect
further product sales volume growth in 2018 and
improve in
believe average product pricing will
2018.
Key highlights from 2017 include:
Record product sales volumes.
Facing the 2017 headwinds of new capacity
additions in the industry, our product volume
growth across all major product groups met our
expectation and targets. We implemented
aggressive marketing and distribution strategies
to enhance our capabilities and grow our
business. We believe we can continue to make
further advances in volume growth in 2018.
Increased reliability and improved
production of facilities.
We made excellent progress increasing our
production output through better uptime rates at
our Cherokee and El Dorado plants and believe
we have made the necessary mechanical
improvements to our facilities to reach our 2018
goal of operating our ammonia plants at an
aggregate on-stream rate of 94 percent for the
year. During 2017, we incurred significant
unplanned downtime at our Pryor facility. We
used the additional downtime as an opportunity
to make numerous mechanical improvements to
the plant. We expect much improved plant
uptime performance at Pryor in 2018.
Streamlined corporate structure and
business.
We implemented significant changes to our
corporate structure to simplify and streamline
our processes. We were able to further
consolidate our administrative footprint and
LSB Industries 2017 Annual Report
reduce selling, general and administrative
expenses.
In addition, we sold our small
machine tool business and disposed of surplus
buildings and real property that were not core to
our business.
Outlook
This year, LSB increased product sales volumes
in the face of industry capacity expansions. We
anticipate further growth in 2018. We still have
important work to accomplish for increased plant
uptime goals.
As we look to the future, we have the following
six major objectives:
1. Improving the on-stream rates of our
chemical plants. We have several initiatives
underway that we believe will assist us in
improving the reliability of our plants and allow
us to produce more products for sale while
lowering our cost of production. In 2017, we
made the decision to upgrade our existing
maintenance management system through
work
enhancements
technology
processes to improve our predictive and
preventative maintenance programs at our
facilities. We expect
the system will be
implemented by the end of the second quarter
of 2018 and we will begin to see the benefits
in the second half of 2018.
and
2. Focus on the continued improvement of
our safety performance. We believe that
high safety standards are critical to improved
plant performance. With that
in mind, we
implemented enhanced safety programs at
our facilities that focus on reducing risks and
improving our safety culture in 2017. The
implementation
these
programs will continue in 2018 and we expect
these will benefit our on-stream rates.
training
and
of
1
LSB Industries 2017 Annual Report
3. Continue broadening of the distribution of
our AN and Nitric Acid products. We
increased our overall sales volume of HDAN
in 2017 by approximately 60,000 tons or 26%
to approximately 290,000 tons compared to
230,000 tons
for 2016 through various
marketing initiatives which include: (1) storing
and distributing HDAN at our Pryor and
Cherokee Facilities which allows us to sell to
new markets and customers out of
those
facilities; and (2) educating growers on the
additional applications for HDAN. In 2018, we
will continue to focus on those initiatives and
other initiatives to continue to grow our annual
sales volumes. In addition, through increased
marketing efforts, we increased our sales
volumes of Nitric Acid by approximately
18,000 tons from 82,000 tons in 2016 to
100,000 tons in 2017. We will continue to
focus on increasing our marketing efforts to
expand our market for our nitric acid products
in North America.
4. Improving the margins on sales of our
products. Over the last several years, we have
focused on increasing our sales volumes to
produce at optimal on-stream rates and lower
our manufacturing costs per ton of product.
Beginning in 2018, we will undertake a review of
all sales to customers to determine if there are
opportunities to improve the margins on sales to
those customers and to explore if
there are
further product upgrading opportunities.
5. Reducing
our
and
controlling
cost
structure. We have engaged outside experts
to assist us in centralizing and expanding our
efforts. We
procurement
Company-wide
expect this to be implemented by the end of
the second quarter of 2018 and believe that
these efforts will
in a reduction in
result
expenses and capital spend in the aggregate
of between $3 million to $5 million on an
annualized basis. Over the last 18 months, we
have reduced our SG&A and plant expenses
over $12 million annually and believe,
in
initiative
addition
discussed above, there is still an opportunity
to further reduce those expenses.
procurement
the
to
6. Focus on improving our capital structure
and overall cost of capital. We are actively
seeking ways to improve our capital structure
and reduce our overall cost of capital. We
believe that the improving end markets for our
improved
combined with
products
operating performance will be a benefit.
our
At the end of 2017, Jack Golsen retired as our
Executive Chairman and Chairman of the Board.
Jack will continue to serve on our board as
Chairman Emeritus. We thank Jack for his many
years of leadership and service as Chairman of
the Board.
As we continue to execute on our objectives, we
look forward to updating you on our progress
and to what we can achieve in 2018. On behalf
of all of us at LSB, thank you for your investment
and continued support.
Sincerely,
Daniel D. Greenwell
President & Chief Executive Officer
April 20, 2018
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 identifiable by use of the words “may,” “believe,” “expect,” “intend,” “plan to,”
“estimate,” “project” or similar expressions, and include but are not limited to: financial performance improvement; view on sales to
mining customers; estimates of consolidated depreciation and amortization and future turnaround expenses; our expectation of
production consistency and enhanced reliability at our Facilities; our projections of trends in the fertilizer market; improvement of our
financial and operational performance; our planned capital additions for 2018; reduction of SG&A expenses; and volume outlook.
Investors are cautioned that such forward-looking statements are not guarantees of future performance and involve risk and
uncertainties. Though we believe that expectations reflected in such forward-looking statements are reasonable, we can give no
assurance that such expectation will prove to be correct. Actual results may differ materially from the forward-looking statements
as a result of various factors. These and other risk factors are discussed in the Company’s filings with the Securities and
Exchange Commission (SEC), including those set forth under “Risk Factors” and “Special Note Regarding Forward-Looking
Statements” in our Form 10-K for the year ended December 31, 2017 and, if applicable, our Quarterly Reports on Form 10-Q and
our Current Reports on Form 8-K. All forward-looking statements included in this letter are expressly qualified in their entirety by
such cautionary statements. We expressly disclaim any obligation to update, amend or clarify and forward-looking statement to
reflect events, new information or circumstances occurring after the date of this letter except as required by applicable law.
2
2017 FORM 10-K
THIS PAGE INTENTIONALLY LEFT BLANK
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
(cid:134)(cid:134) 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 or other Jurisdiction
Incorporation or Organization)
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
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:134) Yes (cid:95) 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. (cid:134) Yes (cid:95) 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 such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. (cid:95) Yes (cid:134) 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). (cid:95) Yes (cid:134) 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. (cid:134)
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
definition(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:179)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:180)(cid:15)(cid:3)(cid:179)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:86)(cid:80)(cid:68)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:53)(cid:88)(cid:79)(cid:72)(cid:3)(cid:20)(cid:21)(cid:69)-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:134) Yes (cid:95) No
(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:74)(cid:74)(cid:85)(cid:72)(cid:74)(cid:68)(cid:87)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:89)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:81)(cid:82)(cid:81)-affiliates of the Registrant, computed by reference to the price at which the
voting common stock was last sold as of June 30, 2017, was approximately $259 million. As a result, the Registrant is an accelerated filer as of December 31,
(cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:88)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)on 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, 2017. 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 16, 2018, the Registrant had 28,602,954 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of (cid:87)(cid:75)(cid:72)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:82)(cid:73)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)sion within 120
days after the end of its 2017 fiscal year, are incorporated by reference in Part III.
(cid:134)
(cid:134) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
(cid:95)
(cid:134)
(cid:134)(cid:3)
m
a
ff
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART I
PART II
Item 5.
(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:48)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)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
PART III
(Items 10, 11, 12, 13, and 14)
The information required by Part III, shall be incorporated by reference from our definitive proxy statement to
be filed pursuant to Regulation 14A which involves the election of directors that we expect to be filed with the
Securities and Exchange Commission not later than 120 days after the end of its 2017 fiscal year covered by
this report.
Item 15.
Exhibits and Financial Statement Schedules
PART IV
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2
ITEM 1. BUSINESS
Overview
PART I
(cid:36)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:5)(cid:47)(cid:54)(cid:37)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:180)(cid:3)(cid:179)(cid:47)(cid:54)(cid:37)(cid:15)(cid:180)(cid:3)(cid:179)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:15)(cid:180)(cid:3)(cid:179)(cid:90)(cid:72)(cid:15)(cid:180)(cid:3)(cid:179)(cid:88)(cid:86)(cid:15)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:82)(cid:88)(cid:85)(cid:180)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:47)(cid:54)(cid:37)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)aries,
except where the context makes clear that the reference is only to LSB Industries, Inc. itself and not its subsidiaries. Notes referenced
throughout this document refer to consolidated financial statement footnote disclosures that are found in Item 8.
The Company was formed in 1968 as an Oklahoma corporation and became a Delaware corporation in 1977. We manufacture and
market chemical products for the agricultural, industrial and mining markets. We own and operate facilities in El Dorado, Arkansas
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12), Cherokee, Alabama (cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:75)(cid:72)(cid:85)(cid:82)(cid:78)(cid:72)(cid:72)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12), and Pryor, Oklahoma (cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:51)(cid:85)(cid:92)(cid:82)(cid:85)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:15) and we operate a
facility for Covestro AG (cid:11)(cid:179)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:180)(cid:12)(cid:3)in Baytown, Texas (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:37)(cid:68)(cid:92)(cid:87)(cid:82)(cid:90)(cid:81)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:17) Our products are sold through distributors and
directly to end customers throughout the United States.
Our Business
Our business manufactures products for three principal markets:
(cid:120)
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(cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:15)(cid:3) (cid:73)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:3) (cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:88)(cid:80)(cid:3) (cid:81)(cid:76)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3) (cid:11)(cid:179)(cid:36)(cid:49)(cid:180)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:179)(cid:43)(cid:39)(cid:36)(cid:49)(cid:180)(cid:12)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:88)(cid:85)(cid:72)(cid:68)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3) (cid:81)(cid:76)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3) (cid:11)(cid:179)(cid:56)(cid:36)(cid:49)(cid:180)(cid:12) for agricultural
applications;
high purity and commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blen
(cid:80)(cid:76)(cid:91)(cid:72)(cid:71)(cid:3)(cid:81)(cid:76)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:76)(cid:71)(cid:86)(cid:15)(cid:3)(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:71)(cid:76)(cid:82)(cid:91)(cid:76)(cid:71)(cid:72)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:72)(cid:86)(cid:72)(cid:79)(cid:3)(cid:72)(cid:91)(cid:75)(cid:68)(cid:88)(cid:86)(cid:87)(cid:3)(cid:73)(cid:79)(cid:88)(cid:76)(cid:71)(cid:3)(cid:11)(cid:179)(cid:39)(cid:40)(cid:41)(cid:180)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71)
(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3)(cid:36)(cid:49)(cid:3)(cid:11)(cid:179)(cid:47)(cid:39)(cid:36)(cid:49)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:49)(cid:3)(cid:86)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)s for the mining industry.
ded and regular nitric acid,
ff
The products we manufacture are primarily derived from two raw material feedstocks: natural gas and ammonia. Our facilities and
production processes have been designed to produce products that are marketable at nearly each stage of production. This has allowed
us to develop and deploy a business model that optimizes the mix of products to capture the value opportunities in the end markets we
serve with a focus on balancing our production.
The chart below highlights representative products and applications in each of our end markets.
End Market
Agricultural
Products
UAN, HDAN, ammonia
Industrial Acids and Other
Nitric acid, ammonia,
sulfuric acid, diesel
exhaust fluid
Mining
LDAN, AN solutions,
and Specialty HDAN
Applications
Fertilizer and fertilizer blends
for corn and other crops; NPK
fertilizer blends
Semi-conductor and
polyurethane intermediates; Pulp
and paper, alum, water
treatment, metals and vanadium
processing; Power plant
emissions abatement, water
treatment, refrigerants, metals
processing; Exhaust stream
additive
Specialty emulsions for mining
applications, surface mining,
quarries, and construction
3
The following table summarizes net sales information relating to our products:
Percentage of consolidated net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Other products
2017
2016
2015
43 %
46 %
9 %
2 %
100 %
44 %
42 %
12 %
2 %
100 %
48 %
38 %
11 %
3 %
100 %
Prior to July 1, 2016, we manufactured and sold a range of heating, ventilation and air conditioning products and related services (the
(cid:179)(cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3) (cid:90)(cid:72)(cid:85)(cid:72)(cid:3) (cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3) (cid:88)(cid:86)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:15)(cid:3) (cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)al and residential new building
construction and renovations. On July 1, 2016, we sold the Climate Control Business.
For information regarding our net sales, operating income or losses and total assets for the past three fiscal years, see the Consolidated
Financial Statements included in this report.
Our Strategy
We pursue a strategy of balancing the sale of product as fertilizer into the agriculture markets at spot prices or short duration pre-sales
and developing industrial and mining customers that purchase substantial quantities of products, primarily under contractual
obligations and/or pricing arrangements that provide for the pass through of raw material and other manufacturing costs. We believe
that this product and market diversification strategy allows us to have more consistent levels of production then some of our
competitors and helps reduce the volatility risk inherent in the prices of our raw material feedstocks and/or the changes in demand for
our products.
The strategy of developing industrial and mining customers is to moderate the risk inherent in the agricultural markets where spot
sales prices of our agricultural products may not have a correlation to the natural gas feedstock costs but rather reflect market
conditions for like and competing nitrogen sources. This volatility of sales pricing in our agricultural products may, from time to time,
compromise our ability to recover our full cost to produce the product. Additionally, the lack of sufficient non-seasonal agricultural
sales volume to operate our manufacturing facilities at optimum levels can preclude us from balancing production and storage
capabilities. Looking forward, we continually pursue profitable growth and margin enhancement. Our strategy calls for continued
emphasis on the agricultural sector, while remaining committed to further developing industrial customers who assume the volatility
risk associated with the raw material costs and mitigate the effects of seasonality in the agricultural sector.
Our strategy also includes evaluating investment in expansion projects, along with reliability and efficiency improvement projects.
Key Initiatives for 2018
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement
the following key initiatives:
mm
(cid:120)
(cid:120)
Improving the on-stream rates of our chemical plants. We have several initiatives underway that we believe will assist us in
improving the reliability of our plants and allow us to produce more products for sale while lowering our cost of production.
In 2017, we made the decision to upgrade our existing maintenance management system through technology enhancements
and work processes to improve our predictive and preventative maintenance programs at our facilities. At that time, we also
made the decision to engage outside maintenance experts to assist us in expediting its implementation and in its overall use.
We expect that the system will be implemented by the end of the second quarter of 2018 and we will begin to see the benefits
in the second half of 2018.
Additionally, specific to our Pryor Facility, we engaged several outside engineering firms to assist us in an overall plant
reliability study which will be used to enhance our reliability improvement plan for that facility. We expect the study to be
completed during the second quarter of 2018.
Focus on the Continued Improvement of Our Safety Performance. We believe that high safety standards are critical to
improved plant performance. With that in mind, we implemented enhanced safety programs at our facilities that focus on
reducing risks and improving our safety culture in 2017. The implementation and training of these programs will continue in
mm
2018 and we expect these will benefit our on-stream rates.
4
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Continue Broadening of the distribution of our AN and Nitric Acid products. We increased our overall sales volume of
HDAN in 2017 by approximately 60,000 tons or 26% to approximately 290,000 tons compared to 230,000 tons for 2016
through various marketing initiatives which include: (1) storing and distributing HDAN at our Pryor and Cherokee Facilities
which allows us to sell to new markets and customers out of those facilities and; (2) educating growers on the additional
applications for HDAN. In 2018, we will continue to focus on those initiatives and other initiatives in an effort to continue to
grow our annual sales volumes over 2017.
In addition, through increased marketing efforts, we increased our sales volumes of Nitric Acid by approximately 18,000 tons
from 82,000 tons in 2016 to 100,000 tons in 2017. We will continue to focus on increasing our marketing efforts in order to
expand our market for our nitric acid products in North America.
ff
Improving the Margins on Sales of Our Products. Over the last several years, we have focused on increasing our sales
volumes to produce at optimal on-stream rates and lower our manufacturing costs per ton of product. Beginning in 2018, we
will undertake a review of all sales to customers to determine if there are opportunities to improve the margins on sales to
those customers and to explore if there are further product upgrading opportunities.
Reducing and controlling our cost structure. We have engaged outside experts to assist us in centralizing and expanding our
Company-wide procurement efforts. We expect this to be implemented by the end of the second quarter of 2018 and believe
that these efforts will result in a reduction in expenses and capital spend in the aggregate of between $3 million to $5 million
on an annualized basis.
mm
Over the last 18 months, we have reduced our SG&A and plant expenses over $12 million annually and believe, in addition
to the procurement initiative discussed above, there is still an opportunity to further reduce those expenses.
Focus on Improving Our Capital Structure and Overall Cost of Capital. We are actively seeking ways to improve our capital
structure and reduce our overall cost of capital. We believe that the improving end markets for our products combined with
our improved operating performance will be a benefit.
We may not successfully implement any or all these initiatives. Even if we successfully implement the initiatives, they may not
achieve the results that we expect or desire.
Our Competitive Strengths
Strategically Located Chemical Assets and Long-Standing Customer Relationships
Our business benefits from highly advantaged locations with logistical and distribution benefits. We have access to the ammonia
pipeline from the U.S. Gulf at our El Dorado Facility, which provides low cost transportation to distribution points. The El Dorado
Facility also has rail access that is in close proximity to our HDAN customers. Our Cherokee Facility is located east of the
Mississippi River, allowing it to reach customers that are not freight logical for others. Our Cherokee Facility sits adjacent to the
he Southern
Tennessee River, providing barge access, in addition to truck and rail access. Our Pryor Facility is located in the heart of t
Plains with close proximity to the Port of Catoosa along with strategic rail and truck access.
n
t
Advantaged and Improving Raw Material Cost Position
We believe we are able to effectively manage input costs for our primary raw materials, natural gas and ammonia, which allows us to
partially offset the impact of volatility in feedstock costs in our business. We currently produce ammonia at our El Dorado Facility,
our Cherokee Facility and our Pryor Facility, which allows us to take advantage of the spread between producing and purchasing
ammonia at those facilities. Additionally, our Pryor Facility has a natural gas cost advantage as its cost of gas is materially lower than
our El Dorado and Cherokee Facilities. The Baytown Facility does not produce ammonia and therefore purchases between 135,000 to
145,000 tons of ammonia per year. However, under our long-term contract with Covestro, we pass through the full cost of the
ammonia, leaving us with no exposure to ammonia price fluctuations.
Diversified Sources of Revenue
Our business serves a broad range of end markets, which we believe diminishes the cyclicality of our financial performance. Our
business serves the agricultural, industrial and mining markets. The flexible nature of our production process allows us the ability to
shift our product mix based on end market demand.
Operation of Multiple Facilities and High Production Capacity
We operate our business through several facilities. Operating multiple facilities diversifies the risk and impact of operational issues
that may occur at a single plant, which gives us a strategic advantage over competitors that operate their company through a single
facility. Additionally, our competitive production capacity of our combined plants allows us to decrease manufacturing costs,
helping
uu
us to achieve enhanced margins.
5
Market Conditions
As discussed in more detail under (cid:179)(cid:46)(cid:72)(cid:92)(cid:3) (cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3) (cid:41)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:180)(cid:3) (cid:82)(cid:73)(cid:3) (cid:179)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3) (cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)
(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:3)(cid:11)(cid:179)(cid:48)(cid:39)(cid:9)(cid:36)(cid:180)(cid:12)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)in Item 7 of this report, agricultural fertilizer demand is a significant driver of our sales
volumes. This demand is influenced by the number of acres planted of crops, principally corn, that require fertilizer to grow and to
enhance yield. Corn prices affect the number of acres of corn planted in a given year, and the number of acres planted will influence
nitrogen fertilizer consumption, likely affecting ammonia, UAN and urea prices. Weather also has an effect on fertilizer application
and consumption.
T(cid:75)(cid:72)(cid:3)(cid:58)(cid:82)(cid:85)(cid:79)(cid:71)(cid:3)(cid:36)(cid:74)(cid:85)(cid:76)(cid:70)(cid:88)(cid:79)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:54)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:39)(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:11)(cid:179)(cid:58)(cid:36)(cid:54)(cid:39)(cid:40)(cid:180)(cid:12) released February 8, 2018 reports U.S. corn production
(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:18)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:20)(cid:24)(cid:17)(cid:21)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:88)(cid:86)(cid:75)(cid:72)(cid:79)(cid:86)(cid:15)(cid:3)(cid:88)(cid:83)(cid:3)(cid:20)(cid:20)(cid:17)(cid:23)(cid:8)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:18)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:25) C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:15)(cid:3)(cid:85)(cid:72)(cid:73)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
harvested acres. In addition, they estimate yields per acre of 174.6 bushels per acre for the 2017 Crop compared to 168.4 bushels per
acre for the 2016 C(cid:85)(cid:82)(cid:83)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3) (cid:90)(cid:82)(cid:85)(cid:79)(cid:71)(cid:3)(cid:70)(cid:82)(cid:85)(cid:81)(cid:3)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:18)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3) C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:3)(cid:68)(cid:87)(cid:3)(cid:21)(cid:19)(cid:22)(cid:17)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:3)
decrease over the 2017 Crop ending stocks of approximately 11.6% while U.S. corn ending stocks of 59.8 million tons, an increas
e of
approximately 3% over the prior year. This has led the WASDE to estimate that U.S. growers will plant 90.2 million acres of corn in
the 2018 Crop, a decrease of 3.8 million acres over the previous year, with expected yields of 176.6 bushels per acre, a 1% increase in
yield from the previous year.
f
In our industrial markets, our sales volumes are typically driven by changes in general economic conditions, energy prices, and our
contractual arrangements with certain large customers. Our mining products are generally sold into the coal, metals and mineral
mining and aggregates markets with the majority of those sales being sold into the coal markets. As such, U.S. annual coal production
will drive sale volumes of our mining products and over the past several years, U.S. coal production has been negatively impacted by
annual coal production
(cid:79)(cid:82)(cid:90)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:74)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:76)(cid:81)(cid:74)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:40)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3)(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:36)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:40)(cid:44)(cid:36)(cid:180)(cid:12)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)
in the U.S. for the full year 2017 was up 6% from 2016 due to increased export demand. EIA is forecasting a 2% decrease in U.S.
coal production in 2018 and another 2% decrease in 2019. U.S. coal consumption is also expected to decline over the next two years
t demand
due to low natural gas prices reducing demand for coal for coal-fired electricity generation. EIA also expects U.S. coal expor
to decline in 2018 and 2019. We believe that coal production in the U.S. continues to face significant challenges from competition
from natural gas and renewable sources of energy. While we believe our plants are well-located to support the more stable coal-
producing regions in the upcoming years, our current mining sales volumes are being affected by overall lower customer demand for
LDAN. We do not expect a significant increase in our mining business in the near term. In addition, the metals and mineral mining
markets have been and, in certain segments such as iron ore, continue to be negatively impacted by commodity price decreases which
have curtailed their activity and negatively impacted our sales into that market.
d
ff
ff
(cid:73)(cid:73)
Natural gas is the basic feedstock for the production of ammonia and therefore natural gas prices have a significant impact on the
production cost of our ammonia. Given the current relatively low price of natural gas in North America and the expectation that
pricing of natural gas will remain relatively low for the foreseeable future, North American ammonia producers are currently lo
w-cost
a
producers of ammonia that is consumed in North America and the expectation is that will continue.
That low cost of production stimulated investment in brownfield and greenfield nitrogen expansion projects in the U.S. Many of those
projects were cancelled or placed on hold. However, a number of the announced expansion projects have been completed and began
production during 2017. These expansion projects are expected to increase ammonia production in the U.S. by approximately 5
million tons annually in addition to expansion of other upgraded nitrogen products. This add
itional domestic ammonia and other
d
upgraded product production is expected to replace product that is currently being imported into North America. However, the
amount and timing of new nitrogen production could have a negative effect on selling prices of nitrogen-based products in 2018
caused by an imbalance of supply and demand.
f
Agricultural Products
We produce and sell UAN, HDAN and ammonia, all of which are nitrogen-based fertilizers. We sell these agricultural products to
farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the U.S. Our nitrogen-
based fertilizers are used to grow food crops, biofuel feedstock crops, pasture land for grazing livestock and forage production. We
maintain long-term relationships with wholesale agricultural distributors and retailers and also sell directly to agricultural end-users
through our network of wholesale and retail distribution centers.
The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for
nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation
and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of
(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)es and internationals and domestic political and economic developments continue to play an important role in the
global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the
market which can cause price volatility and affect product margins.
ff
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 delivering to distributors on the Tennessee
6
and Ohio rivers by barge, and by delivering to certain Western States by rail. See our discussion above concerning broadening the
(cid:71)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:36)(cid:49)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:46)(cid:72)(cid:92)(cid:3)(cid:44)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:180)(cid:17)
In addition, we have an agreement with a third-party purchaser ((cid:38)(cid:82)(cid:73)(cid:73)(cid:72)(cid:92)(cid:89)(cid:76)(cid:79)(cid:79)(cid:72)(cid:3)(cid:53)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:49)(cid:76)(cid:87)(cid:85)(cid:82)(cid:74)(cid:72)(cid:81)(cid:3)(cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:15)(cid:3)(cid:179)(cid:38)(cid:57)(cid:53)(cid:180)(cid:12) to market
and sell a portion of our UAN. D(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)
The agreement provides the exclusive right (but not the obligation) to purchase, at market prices, substantially all of the UAN
produced at our Pryor Facility. The term of the agreement runs through June 2019 with annual renewal options.
We sell most of our agricultural products at the current spot market price in effect at the time of shipment, although during certain
times of the year, we enter into forward sales commitments for some of these products. Sales of our industrial and mining products
are generally made to customers pursuant to sales contracts or pricing arrangements on terms that include the cost of raw material
feedstock as a pass-through component in the sales price. These contractual sales stabilize the effect of commodity cost changes and
fluctuations in demand for these products due to the cyclicality of the end markets.
dd
Industrial Acids and Other Chemical Products
We manufacture and sell industrial acids and other chemical products primarily to the polyurethane, paper, fibers, emission control,
and electronics industries. In addition, we produce and sell blended and regular nitric acid and industrial and high purity ammonia for
many specialty applications, including the reduction of air emissions from power plants. In addition, one of our subsidiaries, El
(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:38)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:11)(cid:179)(cid:40)(cid:39)(cid:38)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:46)(cid:82)(cid:70)(cid:75)(cid:3)(cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85) which Koch
(cid:81)(cid:81)
(cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:15)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3) (cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3) (cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:76)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3) (cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:17)(cid:3) (cid:3) (cid:58)(cid:72)
began selling ammonia under this agreement during June 2016. The term of the agreement runs until June 2019, with annual renewal
options.
mm
We operate the Baytown Facility on behalf of Covestro and we believe it is one of the largest and most technologically advanced nitric
acid manufacturing units in the U.S. (cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:92)(cid:87)(cid:82)(cid:90)(cid:81)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3) Covestro pursuant to a long-term
(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3) This agreement: (a) allows us to pass-through almost all of the costs of producing the nitric acid
that Covestro purchases, including the cost of ammonia; (b) to receive management fees for managing the operations and for
marketing nitric acid not used by Covestro to third party customers and; (c) to receive a portion of any carbon credits that are sold.
The term of this agreement runs until June 2021 with options for renewal.
d
Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and
paper industries. Our sale prices generally vary with the market price of our feedstock (ammonia or natural gas, as applicable) in our
pricing arrangements with customers.
Our industrial business competes based upon service, price and location of production and distribution sites, product quality andaa
performance and provides inventory management as part of the value-added services offered to certain customers. See our discussion
above concerning (cid:69)(cid:85)(cid:82)(cid:68)(cid:71)(cid:72)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73) (cid:82)(cid:88)(cid:85)(cid:3)(cid:49)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:36)(cid:70)(cid:76)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)
(cid:46)(cid:72)(cid:92)(cid:3)(cid:44)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:180)(cid:17)
(cid:73)
Mining Products
We produce and sell LDAN and AN solution to the mining industry, which are primarily used as AN fuel oil and specialty emulsions
for surface mining of coal, mining of precious metals and for usage in quarries and providing aggregates to the construction industry.
We have signed long-term contracts with customers that provide for the annual sale of LDAN under various natural-gas-cost-plus-a-
fixed-dollar-amount pricing arrangements.
Dependence on Limited Number of Customers
As discussed in various risk factors under Item 1A, historically, we have relied on a limited number of customers. Information
relating to our significant customers for each of the last three years appears in Note 1 to Consolidated Financial Statements included in
this report.
Raw Materials
The products we manufacture are primarily derived from natural gas and ammonia. These raw material feedstocks are commodities
and subject to price fluctuations.
Natural gas is the primary raw material for producing ammonia, UAN and other products at our El Dorado, Cherokee and Pryor
Facilities. When operating at optimum on-stream rates, the El Dorado Facility would purchase approximately 15.6 million MMBtus
of natural gas annually to produce approximately 450,000 tons of ammonia; the Cherokee Facility would purchase approximately 5.8
million MMBtus of natural gas per year in order to produce approximately 180,000 tons of ammonia; and the Pryor Facility would
purchase approximately 6.8 million MMBtus of natural gas annually to produce approximately 235,000 tons of ammonia.
7
(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:182)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:74)(cid:68)(cid:86)(cid:3)(cid:73)(cid:72)(cid:72)(cid:71)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)re generally purchased at spot market price. Periodically, we enter into
volume purchase commitments and/or futures/forward contracts to lock in the cost of certain of the expected natural gas requirements
primarily to match quantities needed to produce product that has been sold forward. As of December 31, 2017, we had volume
purchase commitments with a fixed cost for natural gas of approximately 1.3 million MMBtus at an average cost of $2.42 per MMBtu.
These commitments are for firm purchases during the first quarter of 2018 and represent approximately 17% of our total exposed
natural gas usage required for that period.
tt
The Baytown Facility purchases 135,000 to 145,000 tons of ammonia per year. However, under our long-term contracts for that
business, we pass through the full cost of the ammonia leaving us with no exposure to ammonia price fluctuations.
(cid:54)(cid:72)(cid:72)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:88)(cid:87)(cid:79)(cid:82)(cid:82)(cid:78)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:46)(cid:72)(cid:92)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3)(cid:41)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:48)(cid:39)(cid:9)(cid:36)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)port.
Seasonality
We believe fertilizer products sold to the agricultural industry are seasonal while sales into the industrial and mining sectors generally
are less susceptible. The selling seasons for agricultural products are primarily during the spring and fall planting seasons, which
typically extend from March through June and from September through November in the geographical markets we distribute the
majority of our agricultural products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of
each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the agricultural
markets depend upon weather conditions and other circumstances beyond our control.
tt
Regulatory Matters
We are (cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) (cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3) (cid:73)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:15)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3) (cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:79)(cid:68)(cid:90)(cid:86)(cid:15)(cid:3) (cid:85)(cid:88)(cid:79)(cid:72)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:68)(cid:86)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:15)
Health and Safety Matters" of this Item 1 and various risk factors under Item 1A.
Competition
We operate in a highly competitive market with many other larger chemical companies, such as Austin Powder Company, CF
Industries Holdings, Inc., Chemtrade Logistics Inc., Cytec Industries, OCI Partners LP, Dyno Nobel, a subsidiary of Incitec Pivot
Limited, The Gavilon Group, Helm AG, Koch Industries, Norfalco, Nutrien (formerly known as Agrium and Potash Corporation of
Saskatchewan), Orica Limited, Praxair, Inc., Quad Chemical Corporation, Trammo Inc. and Yara International (some of whom are ouruu
customers), many of whom have greater financial and other resources than we do. We believe that competition within the markets we
serve is primarily based upon service, price, location of production and distribution sites, and product quality and performance.
Additional Foreign and Domestic Operations and Export Sales
p
p
g
For each of the last three years, all of our net sales and long-lived assets relate to domestic operations. In addition, net sales to non-
U.S. customers were minimal.
p y
Employees
As of December 31, 2017, we employed 569 persons, 166 of whom are represented by unions under agreements that expire in July of
2018 through November of 2019.
Environmental, Health and Safety Matters
y
,
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health
(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3) (cid:80)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:47)(cid:68)(cid:90)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)ial
fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint and several
liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or
released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities
of
third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of
others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.
In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities
that could expose us to material losses. In certain instances, citizen groups also have the ability to bring legal proceedings against us if
we are not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to
operate. In addition, claims for damages to persons or property, including natural resources, may result from the environmental,
health and safety effects of our operations.
a
r
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines o
r
penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage if an environmental claim is made against us. The Environmental and Health Laws and enforcement policies thereunder
r
8
have in the past resulted, and could in the future result, in significant compliance expenses, cleanup costs (for our sites or
sites where our wastes were disposed of), penalties or other liabilities relating to the hand
or disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products.
Historically, our subsidiaries have incurred significant expenditures in order to comply with the Environmental and Health Laws and
are reasonably expected to do so in the future. We will also be obligated to manage certain discharge water outlets and monitor
groundwater contaminants at our chemical facilities should we discontinue the operations of a facility.
third-party
ling, manufacture, use, emission, discharge
n
d
r
Available Information
We file or furnish annual, quarterly and current reports and other documents with the U.S. Securities and Exchange Commission
(cid:11)(cid:179)SEC(cid:180)(cid:12) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:28)(cid:22)(cid:23)(cid:3)(cid:11)(cid:68)(cid:86)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:85)(cid:72)(cid:68)(cid:71)(cid:3)(cid:68)nd copy any materials
tain
(cid:87)
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:90)(cid:72)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:182)(cid:86)(cid:3)(cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:53)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:53)(cid:82)(cid:82)(cid:80)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:19)(cid:19)(cid:3)(cid:41)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:15)(cid:3)(cid:49)(cid:17)(cid:40)(cid:15)(cid:3)(cid:58)(cid:68)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:87)(cid:82)(cid:81)(cid:15)(cid:3)(cid:39)(cid:17)(cid:38)(cid:17)(cid:3)(cid:21)(cid:19)(cid:24)(cid:23)(cid:28)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:82)(cid:69)
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. Also, the SEC maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file
electronically with the SEC. The public can obtain any documents we file with the SEC at www.sec.gov.
We also make available free of charge through our Internet website (www.lsbindustries.com) our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition to the reports filed or furnished with the SEC, we publicly disclose material information from time
to time in press releases, at annual meetings of stockholders, in publicly accessible conferences and investor presentations, and
through our website. The information included in our website does not constitute part of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Risks Related to Our Business and Industry y
We may not be able to generate sufficient cash to service our debt and may be required to take other actions to satisfy the
obligations under our debt agreements or to redeem our preferred stock, which may not be successful.
Our ability to make scheduled payments on our debt obligations and on our redemption obligations for the Series E cumulative
redeemable Class C preferred stock (cid:11)(cid:179)Series E (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)
prevailing economic and competitive conditions, and certain financial, business and other factors, some of which may be beyond our
control. We may not be able to maintain a level of cash flows sufficient to pay the principal and interest on our debt, including the
(cid:7)(cid:22)(cid:26)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:73)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)nding
amount of the Working Capital Revolver Loan or to pay the cumulative dividends and redemption payment on the Series E
Redeemable Preferred should the holder choose to redeem it.
If cash flows and capital resources are insufficient to fund our debt, dividend or preferred stock redemption obligations, we could face
substantial liquidity problems and will need to seek additional capital through the issuance of debt, the issuance of equity, asset sales
or a combination of the foregoing. If we are unsuccessful, we will need to reduce or delay investments and capital expenditures, or to
dispose of other assets or operations, seek additional capital, or restructure or refinance debt or redeemable equity. These alternative
measures may not be successful, may not be completed on economically attractive terms, or may not be adequate for us to meet our uu
debt or preferred stock redemption obligations when due. Additionally, our debt agreements and the operating agreements associated
with our Series E Redeemable Preferred limit the use of the proceeds from many dispositions of assets or operations. As a result, we
may not be permitted to use the proceeds from these dispositions to satisfy our debt or preferred stock redemption obligations.
t
Further, if we suffer or appear to suffer from a lack of available liquidity, the evaluation of our creditworthiness by counterparties and
rating agencies and the willingness of third parties to do business with us could be materially and adversely affected. In particular, our
credit ratings could be lowered, suspended or withdrawn entirely at any time by the rating agencies. Downgrades in our long-term
debt ratings generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease and could
trigger liquidity demands pursuant to the terms of contracts, leases or other agreements. Any future transactions by us, including the
issuance of additional debt, the sale of any operating assets, or any other transaction to manage our liquidity, could result in temporary
or permanent downgrades of our credit ratings.
r
9
Our substantial level of indebtedness, including dividend requirements relating to our preferred stock, could limit our
financial and operating activities, and adversely affect our ability to incur additional debt to fund future needs.
ff
We currently have a substantial amount of indebtedness and dividend requirements relating to our preferred stock. As a result, this
level could, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
require us to dedicate a substantial portion of our cash flow to the payment of principal (primarily relating to 2019),
interest and dividends, thereby reducing the funds available for operations and future business opportunities;
make it more difficult for us to satisfy our obligations, including our repurchase obligations;
limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures,
debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;
limit our ability to adjust to changing economic, business and competitive conditions;
place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;
make us more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general
economic conditions; and
make us more susceptible to changes in credit ratings, which could affect our ability to obtain financing in the future and
increase the cost of such financing.
Any of the foregoing could adversely affect our operating results, financial condition, and liquidity.
Our debt agreements and our preferred stock contain covenants and restrictions that limit flexibility in operating our
businesses. A breach of these covenants or restrictions could result in an event of default under one or more of our debt
agreements or contracts at different entities within our capital structure, including as a result of cross acceleration or default
provisions.
f
Our debt agreements and our preferred stock contain various covenants and other restrictions that, among other things, limit flexibility
in operating our businesses. A breach of any of these covenants or restrictions could result in a significant portion of our debt
becoming due and payable or could result in significant contractual liability. Our ability to comply with certain of our covenants and
restrictions can be affected by events beyond our control. These covenants and other restrictions limit our ability to, among other
things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
incur additional debt or issue preferred shares;
pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments;
make investments;
sell or transfer assets;
create liens on assets to secure debt;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with affiliates;
designate subsidiaries as unrestricted subsidiaries; and
repay, repurchase or modify certain subordinated and other material debt.
We may pursue various transactions and initiatives to address our highly leveraged balance sheet and significant cash flow
requirements.
If our existing financing sources are insufficient for our financing needs, or if we are unable to refinance debt and redemption
obligations as they become due, we may be required to reduce or delay investments and capital expenditures, dispose of assets or
operations, seek additional capital, restructure or refinance debt, or undertake a combination of some or all of these. Any transactions
and initiatives that we may pursue may have significant adverse effects on our business, capital structure, ownership, liquidity, credit
ratings and results of operations. These measures may not be successful, may not produce the desired outcome if completed, may not
be completed on economically attractive terms, and may not be adequate for us to meet our debt or redemption obligations when due.
This could ultimately adversely affect us, our debtholders, and our shareholders in a material manner.
tt
10
There are a number of important limitations and exceptions to the covenants and restrictions contained in our debt
agreements and our preferred stock.
In addition, certain failures to make payments on significant contract obligations when due constitute a cross-default of some of our
(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:74)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:36)(cid:3)(cid:69)(cid:85)(cid:72)(cid:68)(cid:70)h of
any of these covenants or restrictions could result in an event of default under one or more of
our debt agreements at different entities
within our capital structure, including as a result of cross acceleration or default provisions. Upon the occurrence of an event of
default under one of these debt agreements, our lenders or noteholders could elect to declare all amounts outstanding under that debt
agreement to be immediately due and payable and/or terminate all commitments to extend further credit. Such actions by those
lenders or noteholders could cause cross defaults or accelerations under our other debt. If we were unable to repay those amounts, the
lenders or noteholders could proceed against any collateral granted to them to secure such debt. In the case of a default under debt
that is guaranteed, holders of such debt could also seek to enforce the guarantees. If lenders or noteholders accelerate the repayment
of all borrowings, we would likely not have sufficient assets and funds to repay those borrowings. Such occurrence could result in our
or our applicable subsidiary going into bankruptcy, liquidation or insolvency.
f
Despite continuing investment to upgrade and replace equipment on an ongoing basis, the age of our chemical manufacturing
facilities increases the risk for unplanned downtime, which may be significant.
Our business is comprised of operating units of various ages and levels of automated control. While we have continued to make
significant annual capital improvements, potential age or control related issues have occurred in the past and may occur in the future,
which could cause damage to the equipment and ancillary facilities. As a result, we have experienced and may continue to experience
additional downtime at our chemical facilities in the future.
The equipment required for the manufacture of our products is specialized, and the time for replacement of such equipment can be
lengthy, resulting in extended downtime in the affected unit. Although we use various reliability and inspection programs and
maintain a significant inventory of spare equipment, which are intended to mitigate the extent of production losses, unplanned outages
may still occur. As a result, these planned and unplanned downtime events at our chemical facilities have in the past and could in the
future adversely affect our operating results, liquidity and financial condition.
LSB is a holding company and depends, in large part, on receiving funds from its subsidiaries to fund our indebtedness.
bligations
(cid:37)(cid:72)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:3) (cid:47)(cid:54)(cid:37)(cid:3) (cid:76)(cid:86)(cid:3) (cid:68)(cid:3) (cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:70)(cid:82)(cid:81)(cid:71)(cid:88)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3) (cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3) (cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:80)(cid:72)(cid:72)(cid:87)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:82)
depends, in large part, on the operating performance and cash flows of its subsidiaries and the ability of its subsidiaries to make
distributions and pay dividends to LSB.
(cid:87)(cid:87)
We have not paid dividends on our outstanding common stock in many years.
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. Although our Board has not made a decision whether or not to pay
dividends on our common stock in 2018, it is unlikely we will pay dividends on our common stock until we have repaid or refinanced
our debt and our preferred stock. In addition, there are certain limitations contained in our loan and securities purchase agr
eements
n
that may limit our ability to pay dividends on our outstanding common stock.
could adversely affect the price of our
f
Future issuances or potential issuances of our common stock or preferred equity
common stock and our ability to raise funds in new stock offerings and could dilute the percentage ownership or voting power
of our common stockholders.
Future sales of substantial amounts of our common stock, preferred stock or equity-related securities in the public market, or the
issuance of a substantial amount of our common stock as the result of the conversion of our outstanding convertible preferred stocks,
or the perception that such sales or conversions could occur, could adversely affect prevailing trading prices of our common stock and
could dilute the value of common stock held by our existing stockholders. No prediction can be made as to the effect, if any, that
future sales of common stock, preferred stock, or equity-related securities, conversions of our outstanding preferred stocks into 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 or conversions could also significantly reduce the percentage ownership and voting power of our existing
common stockholders.
Deterioration of global market and economic conditions could have a material adverse effect on our business, financial
condition, results of operations and cash flow.
A slowdown of, or persistent weakness in, economic activity caused by a deterioration of global market and economic conditions
could adversely affect our business in the following ways, among others: conditions in the credit markets could impact the ability of
; the failure of our customers to fulfill their
n
our customers and their customers to obtain sufficient credit to support their operations
ff
11
purchase obligations could result in increases in bad debts and affect our working capital; and the failure of certain key suppliers could
increase our exposure to disruptions in supply or to financial losses. We also may experience declining demand and falling pric
es for
(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:85)(cid:72)(cid:79)(cid:88)(cid:70)(cid:87)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:72)(cid:81)(cid:76)(cid:86)(cid:75)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:81)(cid:87)(cid:82)(cid:85)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)ct of a global economic downturn on
us is difficult to predict, and our business could be materially adversely impacted.
uu
In addition, conditions in the international market for nitrogen fertilizer significantly influence our operating results. The
international
n
market for fertilizers is influenced by such factors as the relative value of the U.S. currency and its impact on the importation of
fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign
markets and other regulatory policies of foreign governments, as well as the U.S. laws and policies affecting foreign trade and
investment.
Seasonality can adversely affect our business.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results
of operations will be negatively affected by any related increased storage costs) or liquidated (in which case the selling price may be
below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are
exacerbated by the volatility of natural gas and nitrogen fertilizer prices and the relatively brief periods during which farmers can
apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting
our operating results. If seasonal demand is greater than we expect, we may experience product shortages, and customers of our
s may
y
turn to our competitors for products that they would otherwise have purchased from us.
y
x
Ammonia can be very volatile and extremely hazardous. Any liability for accidents or intentional acts such as terrorism
involving ammonia or other products we produce or transport that cause severe damage to property or injury to the
environment and human health could have a material adverse effect on our results of operations, financial condition and
ability to make cash distributions. In addition, the costs of transporting ammonia could increase significantly in the future.
We manufacture, process, store, handle, distribute and transport ammonia, which can be very volatile and extremely hazardous.
Major
accidents or releases involving ammonia could cause severe damage or injury to property, the environment and human health, as well
as a possible disruption of supplies and markets. Such an event could result in civil lawsuits, fines, penalties and regulatory
enforcement proceedings, all of which could lead to significant liabilities. Any damage to persons, equipment or property or other
disruption of our ability to produce or distribute our products could result in a significant decrease in operating revenues and
significant additional cost to replace or repair and insure our assets, which could have a material adverse effect on our results of
operations and financial condition. We periodically experience minor releases of ammonia related to leaks from our equipment.
Similar events may occur in the future.
rr
A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the production of
ethanol. A decrease in ethanol production, an increase in ethanol imports or a shift away from corn as a principal raw
material used to produce ethanol could have a material adverse effect on our results of operations, financial condition and
ability to make cash distributions.
A major factor underlying the solid level of demand for our nitrogen-based fertilizer products is the production of ethanol in the
United States and the use of corn in ethanol production. Ethanol production in the United States is highly dependent upon a myriad of
federal statutes and regulations and is made significantly more competitive by various federal and state incentives and mandated usage
(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:81)(cid:72)(cid:90)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:88)(cid:72)(cid:79)(cid:86)(cid:3)(cid:83)(cid:88)(cid:85)(cid:86)(cid:88)(cid:68)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:81)(cid:72)(cid:90)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:88)(cid:72)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:11)(cid:179)(cid:53)(cid:41)(cid:54)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:82)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:53)(cid:41)(cid:54)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:86)(cid:68)(cid:87)(cid:76)(cid:86)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:90)ith fuel
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that expanded ethanol usage may increase the level of greenhouse gases in the environment as well as be unsuitable for small engine
use, have resulted in calls to reduce subsidies for ethanol, allow increased ethanol imports and to repeal or waive (in whole o
r in part)
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the current RFS, any of which could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilize
demand. Therefore, ethanol incentive programs may not be renewed, or if renewed, they may be renewed on terms significantly less
favorable to ethanol producers than current incentive programs.
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Furthermore, most ethanol is currently produced from corn and other raw grains, such as milo or sorghum, especially in the Midwest.
omass,
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The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based bi
such as agricultural waste, forest residue, municipal solid waste and energy crops (plants grown for use to make biofuels or directly
exploited for their energy content). If an efficient method of producing ethanol from cellulose-based biomass is developed, th
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demand for corn may decrease significantly, which could reduce demand for nitrogen fertilizer products and have a material adverse
effect on the prices we receive on sales of our ammonia products and our results of operations, financial condition and ability to make
cash distributions.
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Our business and customers are sensitive to adverse economic cycles.
Our business can be affected by cyclical factors such as inflation, currency exchange rates, global energy policy and costs, global
market conditions and economic downturns in specific industries. Certain sales are sensitive to the level of activity in the agricultural,
mining, automotive and housing industries. Therefore, substantial changes could adversely affect our operating results, liquidity,
financial condition and capital resources.
Weather conditions adversely affect our business.
The products (primarily agricultural) produced and sold by us have been in the past, and could be in the future, materially affected by
adverse weather conditions (such as excessive rain or drought) in the primary markets for our fertilizer and related agricultural
products. In addition, weather can cause an interruption to the operations of our chemical facilities. Many scientists have concluded
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physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events. These climate
changes might also occur as the result of other phenomena that human activity is unable to influence, including changes in solar a
activity and volcanic activity. Regardless of the cause, 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 our agricultural
sales and our financial condition and results of operations.
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There is intense competition in the markets we serve.
Substantially all of the markets in which we participate are highly competitive with respect to product quality, price, distrib
ution,
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service, and reliability. We compete with many companies, domestic and foreign, that have greater financial, marketing and other
resources. Specifically, the overall nitrogen market is being affected as a result of the number of announced, started and recently
completed nitrogen expansion projects in the U.S. Competitive factors could require us to reduce prices or increase spending on
product development, marketing and sales, which could have a material adverse effect on our business, results of operation and
financial condition.
We compete with many U.S. producers and producers in other countries, including state-owned and government-subsidized entities.
Some competitors have greater total resources and are less dependent on earnings from chemical sales, which make them less
vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Our competitive
position could suffer to the extent we are not able to expand our own resources sufficiently either through investments in new or
existing operations or through acquisitions, joint ventures or partnerships. An inability to compete successfully could result in the loss
of customers, which could adversely affect our sales and profitability.
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A substantial portion of our sales is dependent upon a limited number of customers.
For 2017, seven customers accounted for approximately 46% of our consolidated net sales. One of these customers is Covestro,
which sales are pursuant to the Covestro Agreement under which one of our subsidiaries operates a nitric plant located within
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Business. This agreement: (a) allows us to pass-through most of the costs of producing the nitr
ic acid that Covestro purchases,
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including the cost of ammonia; (b) to receive management fees for managing the operations and marketing nitric acid at the Baytown
Facility and; (c) to receive a portion of any carbon credits that are sold. The loss of, or a material reduction in purchase levels by, one
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or more of these customers could have a material adverse effect on our business and our results of operations, financial condit
ion and
liquidity if we are unable to replace a customer with other sales on substantially similar terms.
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 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
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be no
assurance that we will effectively manage against price fluctuations in those raw materials.
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Natural gas represents the primary raw material feedstock in the production of most of our chemical products. Although we 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. Also, the spot sales prices of our agricultural products may not correlate to the
cost of natural gas but rather reflect market conditions for similar and competing nitrogen sources. This lack of correlation can
compromise our ability to recover our full cost to produce the products in this market. 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. Future price fluctuations in our raw materials
may have an adverse effect on our financial condition, liquidity and results of operations.
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13
Additionally, we depend on certain vendors to deliver natural gas and other key components that are required in the production
of our
products. Any disruption in the supply of natural gas and other key components could result in lost production or delayed shipments.
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The price of natural gas in North America and worldwide has been volatile in recent years and has declined on average due in part to
the development of significant natural gas reserves, including shale gas, and the rapid improvement in shale gas extraction techniques,
such as hydraulic fracturing and horizontal drilling. Future production of natural gas from shale formations could be reduced by
duction in oil exploration and development
regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by re
prompted by lower oil prices and resulting in production of less associated natural gas. Additionally, increased demand for natural
gas, particularly in the Gulf Coast Region, due to increased industrial demand and increased natural gas exports could result in
increased natural gas prices.
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s, the
We have suspended in the past, and could suspend in the future, production at our chemical facilities due to, among other thing
high cost or lack of availability of natural gas and other key components, which could adversely affect 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 natural gas and other key components and increase costs relating to the purchase of natural gas and other
key components.
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We may have inadequate insurance.
While we maintain liability, property and business interruption insurance, including certain coverage for environmental
contamination, it is subject to coverage limits and policies that may exclude coverage for some types of damages. Although there may
currently be sources from which such coverage may be obtained, the coverage 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 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.
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Furthermore, we are subject to litigation for which we could be obligated to bear legal, settlement and other costs, which may be in
excess of any available insurance coverage. If we are required to incur all or a portion of the costs arising out of any litig
ation or
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investigation as a result of inadequate insurance proceeds, if any, our business, results of operations, financial condition and liquidity
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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 ensure that our principal executive officers will continue to be available. Although we have employment agreements with
certain of our principal executive officers, including Daniel D. Greenwell and Mark T. Behrman, we do not have employment
agreements with all of our key personnel. The loss of some of our principal executive officers could have a material adverse e
ffect 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.
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Terrorist attacks and other acts of violence or war, and natural disasters (such as hurricanes, pandemic health crises, etc.),
have negatively affected and could negatively affect U.S. and foreign companies, the financial markets, the industries where we
operate, our operations and our profitability.
Terrorist attacks in the U.S and elsewhere and natural disasters (such as hurricanes or pandemic health crises) 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 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 affect our
physical facilities, especially our chemical facilities, or those of our suppliers or customers and could affect our sales, our production
capability and our ability to deliver products to our customers. In the past, hurricanes affecting the Gulf Coast of the U.S. have
negatively affected our operations and those of our customers. As previously noted, some scientists have concluded that increasing
(cid:70)(cid:82)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:85)(cid:72)(cid:72)(cid:81)(cid:75)(cid:82)(cid:88)(cid:86)(cid:72)(cid:3)(cid:74)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:68)(cid:85)(cid:87)(cid:75)(cid:182)(cid:86)(cid:3)(cid:68)(cid:87)(cid:80)(cid:82)(cid:86)(cid:83)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:70)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)ficant physical effects, such
as increased frequency and severity of storms, droughts and floods and other climatic events. If any such effects, whether
anthropogenic or otherwise, were to occur in areas where we or our clients operate, they could have an adverse effect on our assets
and operations.
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14
Cyber security risks could adversely affect our business operations.
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As we continue to increase our dependence on information technologies to conduct our operations, the risks associated with cybe
security a(cid:79)(cid:86)(cid:82)(cid:3) (cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:17)(cid:3) (cid:3) (cid:58)(cid:72)(cid:3)(cid:85)(cid:72)(cid:79)(cid:92)(cid:3) (cid:82)(cid:81)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:3) (cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:86)(cid:82)(cid:73)(cid:87)(cid:90)(cid:68)(cid:85)(cid:72)(cid:3) (cid:11)(cid:179)(cid:40)(cid:53)(cid:51)(cid:180)(cid:12)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:15)(cid:3) (cid:68)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)
things, to manage our manufacturing, supply chain, accounting and financial functions. This risk not only applies to us, but also to
third parties on whose systems we place significant reliance for the conduct of our business. We are significantly dependent upon
internet connectivity and a third-party cloud hosting vendor. We have implemented security procedures and measures in order to
protect our information from being vulnerable to theft, loss, damage or interruption from a number of potential sources or events.
Although we believe these measures and procedures are appropriate, we may not have the resources or technical sophistication to
anticipate, prevent, or recover from rapidly evolving types of cyber-attacks. Compromises to our information systems could have an
adverse effect on our results of operations, liquidity and financial condition.
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Our transportation and distribution activities rely on third party providers, which subject us to risks and uncertainties
beyond our control that may adversely affect our operations.
We rely on railroad, trucking, pipeline and other transportation service providers to transport raw materials to our manufacturing
facilities, to coordinate and deliver finished products to our storage and distribution system and our retail centers and to ship finished
products to our customers. These transportation operations, equipment and services are subject to various hazards, including adverse
operating conditions, extreme weather conditions, system failures, work stoppages, equipment and personnel shortages, delays,
accidents such as spills and derailments and other accidents and operating hazards.
In the event of a disruption of existing transportation or terminaling facilities for our products or raw materials, alternative
transportation and terminaling facilities may not have sufficient capacity to fully serve all of our customers or facilities. An extended
interruption in the delivery of our products to our customers or the supply of natural gas, ammonia or sulfur to our production
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facilities
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could adversely affect sales volumes and margins.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to
concerns related to accidents, terrorism or increasing concerns regarding transportation of potentially hazardous substances, local,
provincial, state and federal governments could implement new regulations affecting the transportation of raw materials or our
finished products. If transportation of our products is delayed or we are unable to obtain raw materials as a result of any (cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:182)(cid:86)
failure to operate properly or the other hazards described above, or if new and more stringent regulatory requirements are implemented
affecting transportation operations or equipment, or if there are significant increases in the cost of these services or equipment, our
revenues and cost of operations could be adversely affected. In addition, we may experience increases in our transportation costs, or
changes in such costs relative to transportation costs incurred by our competitors.
Future technological innovation could affect our business.
Future technological innovation, such as the development of seeds that require less crop nutrients, or developments in the application
of crop nutrients, if they occur, could have the potential to adversely affect the demand for our products and results of operations.
We are reliant on a limited number of key facilities.
Our nitrogen production is concentrated in four separate complexes. The suspension of operations at any of these complexes could
adversely affect our ability to produce our products and fulfill our commitments and could have a material adverse effect on our uu
business, financial condition, results of operations and cash flows. Moreover, our facilities may be subject to failure of equipment that
may be difficult to replace and could result in operational disruptions.
Potential increase of imported agricultural products.
Russia and Ukraine both have substantial capacity to produce and export fertilizer grade AN. Producers in these countries also benefit
from below-market prices for natural gas, due to government regulation and other factors. Historically, the U.S. Department of
(cid:38)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:72)(cid:3) (cid:11)(cid:179)(cid:39)(cid:50)(cid:38)(cid:180)(cid:12)(cid:3) (cid:75)(cid:68)(cid:86)(cid:3) (cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:36)(cid:49)(cid:3) (cid:76)(cid:80)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80) Russia and Ukraine with anti-dumping tariffs. However, these tariffs were
resolved by the DOC in 2016 and 2017 respectfully. As a result, we may face more substantial competition from Russian producers of
fertilizer grade AN.
In addition, producers in China have substantial capacity to produce and export urea. Depending on various factors, including
(cid:83)(cid:85)(cid:72)(cid:89)(cid:68)(cid:76)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:72)(cid:91)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:68)(cid:79)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:38)(cid:75)(cid:76)(cid:81)(cid:68)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:87)(cid:68)(cid:85)(cid:76)(cid:73)(cid:73)(cid:15)(cid:3) (cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3) (cid:89)(cid:82)(cid:79)(cid:88)(cid:80)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:85)(cid:72)(cid:68)(cid:3)(cid:73)(cid:85)(cid:82)m China
could be imported into the U.S. at prices that could have an adverse effect on the selling prices of other nitrogen products, including
the nitrogen products we manufacture and sell.
15
Current and future legislative or regulatory requirements affecting our business may result in increased costs and decreased
revenues, cash flows and liquidity or could have other negative effects on our business.
Our business is subject to numerous health, safety, security and environmental laws and regulations. The manufacture and distribution
of chemical products are activities that entail health, safety and environmental risks and impose obligations under health, safety and
environmental laws and regulations, many of which provide for substantial fines and potential criminal sanctions for violations.
Although we believe we have established processes to monitor, review and manage our businesses to comply with the numerous
health, safety and environmental laws and regulations, we previously were, and in the future, may 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 our chemical facilities. Further, a number of our chemical 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 results of operation and financial condition. These operating permits are subject to modification, renewal and
revocation. In addition, third parties may contest our ability to receive or renew certain permits that we need to operate, which can
lengthen the application process or even prevent us from obtaining necessary permits. We regularly monitor and review our
operations, procedures and policies for compliance with permits, laws and regulations. Despite these compliance efforts, risk of
noncompliance or permit interpretation is inherent in the operation of our business.
ff
compliance or remediation, and actual
There can be no assurance as to the amount or timing of future expenditures for environmental
future expenditures may be different from the amounts we currently anticipate. We try to an
ticipate future regulatory requirements
that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to
minimize the costs of compliance.
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Changes to the production equipment at our chemical facilities that are required in order to comply with health, safety and
environmental regulations may require substantial capital expenditures.
Explosions and/or losses at other chemical facilities that we do not own (such as the April 2013 explosion in West, Texas) could also
result in new or additional legislation or regulatory changes, particularly relating to public health, safety or any of the products
manufactured and/or sold by us or the inability on the part of our customers to obtain or maintain insurance as to certain prod
dd
ucts
manufactured and/or sold by us, which could have a negative effect on our revenues, cash flow and liquidity.
f
In summary, new or changed laws and regulations or the inability of our customers to obtain or maintain insurance in connection with
any of our chemical products could have an adverse effect on our operating results, liquidity and financial condition.
n
We may be required to modify or expand our operating, sales and reporting procedures and to install additional equipment in
order to comply with current and possible future government regulations.
The chemical industry in general, and producers and distributors of ammonia and AN specifically, are scrutinized by the governm
ent,
industry and public on security issues. Under current and proposed regulations, 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 product
s. These costs
could have a material effect on our results of operations, financial condition, and liquidity. The cost of such regulatory changes, if
significant, could lead some of our customers to choose other products over ammonia and AN, which may have a significant adverse
effect on our business.
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(cid:55)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:3)(cid:43)(cid:68)(cid:81)(cid:71)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:88)(cid:80)(cid:3)(cid:49)(cid:76)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:19)(cid:26)(cid:180)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:81)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:38)(cid:82)(cid:81)(cid:74)(cid:85)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:72)(cid:84)(cid:88)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
(cid:82)(cid:73)(cid:3) (cid:43)(cid:82)(cid:80)(cid:72)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3) (cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3) (cid:11)(cid:179)(cid:39)(cid:43)(cid:54)(cid:180)(cid:12)(cid:3) (cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3) (cid:68)(cid:3) (cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:83)(cid:85)(cid:82)(cid:83)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3) (cid:85)(cid:88)(cid:79)(cid:72)(cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3) (cid:76)(cid:81)(cid:3) (cid:21)(cid:19)(cid:20)(cid:20)(cid:17) This regulation proposes to require sellers,
buyers, their agents and transporters of solid AN and certain solid mixtures containing AN to possess a valid registration issued by
DHS, keep certain records, report the theft or unexplained loss of regulated materials, and comply with certain other new
requirements. We and others affected by this proposal have submitted appropriate comments to DHS regarding the proposed
regulation. It is possible that DHS could significantly revise the requirements currently being proposed. Depending on the provisions
of the final regulation to be promulgated by DHS and on our ability to pass these costs to our customers, these requirements may have
a negative effect on the profitability of our AN business and may result in fewer distributors who are willing to handle the
product. DHS has not finalized this rule, and has indicated that its next action, and the timing of such an action, is undetermined.
On August 1, 2013, U.S. President Obama issued an executive order addressing the safety and security of chemical facilities in
response to recent incidents involving chemicals such as the explosion at West, Texas. The President directed federal agencies to
enhance existing regulations and make recommendations to the U.S. Congress to develop new laws that may affect our business. In
January 2016, the U.S. Chemical Safety (cid:68)(cid:81)(cid:71)(cid:3) (cid:43)(cid:68)(cid:93)(cid:68)(cid:85)(cid:71)(cid:3) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3) (cid:11)(cid:179)(cid:38)(cid:54)(cid:37)(cid:180)(cid:12)(cid:3) (cid:85)(cid:72)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3) (cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:58)(cid:72)(cid:86)(cid:87)(cid:15)(cid:3) (cid:55)(cid:72)(cid:91)(cid:68)(cid:86)
incident. The CSB report identifies several federal and state regulations and standards that could be strengthened to reduce the risk of
a similar incident occurring in the future. While the CSB does not have authority to directly regulate our business, the findings in this
report, and other activities taken in response to the West, Texas incident by federal, state, and local regulators may result in additional
regulation of our processes and products.
(cid:85)(cid:85)
16
(cid:44)(cid:81)(cid:3) (cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) (cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:56)(cid:17)(cid:54)(cid:17)(cid:3) (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:51)(cid:85)(cid:82)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:36)(cid:74)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3) (cid:11)(cid:179)(cid:40)(cid:51)(cid:36)(cid:180)(cid:12)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:85)(cid:72)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:53)(cid:76)(cid:86)(cid:78)(cid:3) (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:51)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:17)(cid:3) (cid:3) The
revisions include new requirements for certain facilities to perform hazard analyses, third-party auditing, incident investigations and
root cause analyses, emergency response exercises, and to publicly share chemical and process information. Compliance with many
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:88)(cid:79)(cid:72)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:21)(cid:20)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:36)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3) (cid:71)(cid:72)(cid:79)(cid:68)(cid:92)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:88)(cid:79)(cid:72)(cid:182)(cid:86)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:88)(cid:81)(cid:87)(cid:76)(cid:79)
ged in
(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:20)(cid:28)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:72)(cid:79)(cid:68)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:88)(cid:79)(cid:72)(cid:182)(cid:86)(cid:3)(cid:76)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:75)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:79)(cid:68)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:70)(cid:75)(cid:68)(cid:79)(cid:79)(cid:72)(cid:81)
(cid:87)
court and certain of those challenges remain pending. These requirements may have a negative effect on the profitability of our ANuu
business. The Occupational Safety and Health Administration (cid:11)(cid:179)(cid:50)(cid:54)(cid:43)(cid:36)(cid:180)(cid:12)(cid:3) (cid:76)(cid:86)(cid:3) (cid:79)(cid:76)(cid:78)(cid:72)(cid:90)(cid:76)(cid:86)(cid:72)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3) (cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:51)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3) (cid:54)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3)
Management standards. In addition, DHS, the EPA, and the Bureau of Alcohol, Tobacco, Firearms and Explosives updated a joint
chemical advisory on the safe storage, handling, and management of AN. While these actions may result in additional regulatory
t
requirements or changes to our operators, it is difficult to predict at this time how these and any other possible regulations, if and when
adopted, will affect our business, operations, liquidity or financial results.
Proposed and existing governmental laws and regulations relating to greenhouse gas and other air emissions may subject
certain of our operations and customers to significant new costs and restrictions on their operations and may reduce sales of
our products.
Our chemical manufacturing facilities use significant amounts of electricity, natural gas and other raw materials necessary for the
production of their chemical products that result, or could result, in certain greenhouse gas emissions into the environment. Federal
and state legislatures and administrative agencies, including the EPA, are considering the scope and scale of greenhouse gas or other
air emission regulation. Legislation and administrative actions have been considered that would regulate greenhouse gas emissions at
some point in the future for our facilities, and existing and possible actions have already affected certain of our customers, leading to
closure or rate reductions of certain facilities.
r
r
In response to findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public
Air Act to reduce greenhouse gas emissions
d
health and the environment, the EPA adopted regulations pursuant to the federal Clean
from various sources. For example, the EPA requires certain large stationary sources to obtain preconstruction and operating permits
for pollutants regulated under the Prevention of Significant Deterioration and Title V programs of the Clean Air Act. Facilities
(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:69)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:83)(cid:82)(cid:79)(cid:79)(cid:88)(cid:87)(cid:68)(cid:81)(cid:87)(cid:86) (cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:3)(cid:179)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:180) standards
that are being established by the states. These regulatory requirements could adversely affect our operations and restrict or delay our
ability to obtain air permits for new or modified sources. The EPA has also instituted a mandatory greenhouse gas reporting
requirement that began in 2010, which affects all of our chemical manufacturing sites.
Although greenhouse gas regulation could: increase the price of the electricity and other energy sources purchased by our chemical
facilities; increase costs for natural gas and other raw materials (such as ammonia); potentially restrict access to or the use of certain
raw materials necessary to produce our chemical products; and require us to incur substantial expenditures to retrofit our chem
ical
facilities to comply with the proposed new laws and regulations regulating greenhouse gas emissions. 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. For instance, the EPA published a rule,
known as the Clean Power Plan, to limit greenhouse gases from electric power plants. The EPA is currently reviewing the Clean
Power Plan however, it could result in increased electricity costs due to increased requirements for use of alternative energy sources,
and a decreased demand for coal-generated electricity.
u
Laws, regulations or other issues related to climate change could have a material adverse effect on us.
If we, or other companies with which we do business become subject to laws or regulations related to climate change, it could h
ave a
u
material adverse effect on us. The United States may enact new laws, regulations and interpretations relating to climate change,
including potential cap-and-trade systems, carbon taxes and other requirements relating to reduction of carbon footprints and/or
greenhouse gas emissions. Other countries have enacted climate change laws and regulations and the United States has been involved
in discussions regarding international climate change treaties. The federal government and some of the states and localities in which
we operate have enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse
gas emissions. Although these laws and regulations have not had any known material adverse effect on us to date, they could result in
substantial costs, including compliance costs, monitoring and reporting costs and capital. Furthermore, our reputation could be
damaged if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or future
interpretations of current laws and regulations, related to climate change will affect our business, results of operations, liquidity and
financial condition. Lastly, the potential physical impacts of climate change on our operations are highly uncertain and would bed
particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and
intensities, water shortages, changing sea levels and changing temperatures. Any of these matters could have a material adverse effect
on us.
17
Certain of our stockholders control a significant amount of our voting stock, and their interests could conflict with interests of
other stockholders.
(cid:47)(cid:54)(cid:37)(cid:3) (cid:41)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:47)(cid:47)(cid:38)(cid:3) (cid:11)(cid:179)(cid:47)(cid:54)(cid:37)(cid:3) (cid:41)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:180)(cid:12)(cid:15)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:86)(cid:87)(cid:3) (cid:89)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:81)(cid:3) (cid:88)(cid:81)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:15)(cid:3) (cid:82)(cid:90)(cid:81)(cid:86)(cid:3) (cid:82)(cid:81)(cid:72)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:41)(cid:3)
redeemable Class C preferred stock (t(cid:75)(cid:72)(cid:3) (cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:41)(cid:3) (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:15)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:75)(cid:68)(cid:86)(cid:3) (cid:89)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:72)(cid:84)(cid:88)(cid:68)(cid:79)(cid:3) (cid:87)(cid:82)(cid:3)
(cid:20)(cid:24)(cid:17)(cid:27)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:89)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)16, 2018.
(cid:85)
(cid:45)(cid:68)(cid:70)(cid:78)(cid:3)(cid:40)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:15)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:40)(cid:80)(cid:72)(cid:85)(cid:76)(cid:87)(cid:88)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:37)(cid:68)(cid:85)(cid:85)(cid:92)(cid:3)(cid:43)(cid:17)(cid:3)(cid:42)(cid:82)lsen, a member of our Board, entities
(cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:80)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:85)(cid:88)(cid:86)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:83)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:3)(cid:89)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:85)(cid:88)(cid:86)(cid:87)(cid:72)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:3)(cid:43)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:180)(cid:12)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3)as of February
16, 2018, an aggregate of 2,185,517 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 vote as a class and represent approximately 10.4% of
the
h
voting power (prior to conversion of the shares of voting preferred) of our issued and outstanding voting securities as of that date. The
series of preferred represented by the 20,000 shares of voting preferred is convertible into an aggregate of 666,666 shares of our
common stock.
t
Pursuant to a Board Representation and Standstill (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:81)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:47)(cid:54)(cid:37)(cid:3)(cid:41)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:182)(cid:86)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)
stock in December 2015, LSB Funding has the right to designate two directors on our Board, and the Golsen Holders have the right to
appoint two directors as amended in October 2017, subject to reduction in each case in certain circumstances. This is in addition to
their ability to vote generally in the election of directors. As a result, each of LSB Funding and the Golsen Holders have significant
influence over the election of directors to our Board.
The interests of LSB Funding and the Golsen Holders may conflict with interests of other stockholders (as well as with each other).
As a result of the voting power and board designation rights of LSB Funding and the Golsen Holders, the ability of other stockholders
to influence our management and policies could be limited.
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 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 ent
ered into
severance agreements with our executive officers and some of the executive officers of certain subsidiaries that provide, among other
nated, other
uu
things, that if, within a specified period of time after the occurrence of a change in control of LSB, these officers are termi
than for cause, or the officer terminates his employment for good reason, the officer would be entitled to certain severance benefits.
Certain of our preferred stock series and debt instruments also provide special rights in a change of control, including in some cases
the ability to be repaid in full or redeemed.
f
We have authorized and unissued (including shares held in treasury) 46,381,342 shares of common stock and 4,090,231 shares of
preferred stock as of December 31, 2017. 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. In addition, LSB
Funding and the Golsen Holders have significant voting power and rights to designate board representatives, all of which may further
discourage a third-party tender offer, proxy contest, or other attempts to acquire control of us.
uu
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:
f
(cid:120)
(cid:120)
(cid:120)
(cid:120)
prior to such time the Board of the corporation approved the business 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; or
the stockholders of the corporation amend its articles of incorporation or by-laws electing not to be governed by this
provision.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
(cid:38)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:69)(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:179)(cid:41)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)-(cid:47)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:21)(cid:26)(cid:36)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:28)(cid:22)(cid:22)(cid:3)(cid:11)(cid:68)(cid:86)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:21)(cid:20)(cid:40)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:17)(cid:3)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) 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
(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:90)(cid:82)(cid:85)(cid:71)(cid:86)(cid:3) (cid:179)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:15)(cid:180)(cid:3) (cid:179)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:15)(cid:180)(cid:3) (cid:179)(cid:68)(cid:81)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:15)(cid:180)(cid:3) (cid:179)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:71)(cid:15)(cid:180)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:86)(cid:76)(cid:80)(cid:76)(cid:79)(cid:68)(cid:85)(cid:3) (cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:73)(cid:92)(cid:3) (cid:41)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)-Looking Statements.
Forward-Looking Statements contained herein include, but are not limited to, the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our ability to invest in projects that will generate best returns for our stockholders;
our future liquidity outlook;
the outlook our chemical products and related markets;
the amount, timing and effect on the nitrogen market from the current nitrogen expansion projects;
the effect from the lack of non-seasonal volume;
our belief that competition is based upon service, price, location of production and distribution sites, and product quality
and performance;
our outlook for the coal industry;
the availability of raw materials;
the result of our product and market diversification strategy
changes in domestic fertilizer production;
the increasing output and capacity of our existing production facilities;
on-stream rates at our production facilities;
our ability to moderate risk inherent in agricultural markets;
the sources to fund our cash needs and how this cash will be used;
the ability to enter into the additional borrowings;
the anticipated cost and timing of our capital projects;
certain costs covered under warranty provisions;
our ability to pass to our customers cost increases in the form of higher prices;
our belief as to whether we have sufficient sources for materials and components;
our ability to obtain ammonia from other sources;
annual natural gas requirements;
compliance by the El Dorado Facility of the terms of its permits;
the costs of compliance with environmental laws, health laws, security regulations and transportation regulations;
our belief as to when Turnarounds will be performed and completed;
anticipated costs of Turnarounds during 2018;
expenses in connection with environmental projects;
the effect of litigation and other contingencies;
the increase in depreciation, depletion and amortization;
the benefits from the El Dorado expansion project;
our ability to comply with debt servicing and covenants;
our ability to meet debt maturities or redemption obligations when due; and
our beliefs as to whether we can meet all required covenant tests for the next twelve months.
19
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, the following:
n
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
changes in general economic conditions, both domestic and foreign;
material reductions in revenues;
material changes in interest rates;
our ability to collect in a timely manner a material amount of receivables;
increased competitive pressures;
adverse effects on increases in prices of raw materials;
changes in federal, state and local laws and regulations, especially environmental regulations or the American
Reinvestment and Recovery Act, or in the interpretation of such;
changes in laws, regulations or other issues related to climate change;
releases of pollutants into the environment exceeding our permitted limits;
material increases in equipment, maintenance, operating or labor costs not presently anticipated by us;
the requirement to use internally generated funds for purposes not presently anticipated;
the inability to secure additional financing for planned capital expenditures or financing obligations due in the near future;
our substantial existing indebtedness;
material changes in the cost of certain precious metals, natural gas, and ammonia;
limitations due to financial covenants;
changes in competition;
the loss of any significant customer;
increases in cost to maintain internal controls over financial reporting;
changes in operating strategy or development plans;
an inability to fund the working capital and expansion of our businesses;
changes in the production efficiency of our facilities;
adverse results in our contingencies including pending litigation;
unplanned downtime at one or more of our chemical facilities;
changes in production rates at any of our chemical plants;
an inability to obtain necessary raw materials and purchased components;
material increases in cost of raw materials;
material changes in our accounting estimates;
significant problems within our production equipment;
fire or natural disasters;
an inability to obtain or retain our insurance coverage;
difficulty obtaining necessary permits;
difficulty obtaining third-party financing;
risks associated with proxy contests initiated by dissident stockholders;
changes in fertilizer production;
reduction in acres planted for crops requiring fertilizer;
20
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
decreases in duties for products we sell resulting in an increase in imported products into the U.S.;
volatility of natural gas prices;
weather conditions;
increases in imported agricultural products;
other factors described in the MD&A contained in this report; and
(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:179)(cid:53)(cid:76)(cid:86)(cid:78)(cid:3)(cid:41)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:180)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)
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.
u
Defined Terms
The following is a list of terms used in this report.
Act
ADEQ
AN
ARO
ASU
BAE
- The Tax Cuts and Jobs Act of 2017.
- The Arkansas Department of Environmental Quality.
- Ammonium nitrate.
- Asset retirement obligation.
- Accounting Standard Update.
- BAE Systems Ordinance Systems, Inc.
Baytown Facility
- The nitric acid production facility located in Baytown, Texas.
BKV
Borrowers
CAO
- BKV Chelsea L.L.C.
- LSB and certain of its subsidiaries that are party to the Working Capital Revolver Loan.
- A consent administrative order.
Cherokee Facility
- Our chemical production facility located in Cherokee, Alabama.
Chevron
- Chevron Environmental Management Company.
Climate Control Business
- Former business conducted through the Climate Control Group.
Climate Control Group
- Climate Control Group, Inc., a former direct, wholly owned subsidiary of Consolidated and an
indirect subsidiary of LSB.
Consent Solicitation
- A consent solicitation initiated in August 2016 to effect certain amendments to the Original
7.75% Indenture.
Consolidated
Covestro
Covestro Agreement
- Consolidated Industries L.L.C., a former direct, wholly owned subsidiary of LSB.
- The party with whom our subsidiary in Baytown has entered into an agreement for supply of
nitric acid through at least June 2021, the Covestro Agreement.
- A long-term contract that (a) allows us to pass-through most of the costs of producing the nitric
acid that Covestro purchases, including the cost of ammonia; (b) to receive management fees for
managing the operations and marketing nitric acid at the Baytown Facility and; (c) to receive a
portion of any carbon credits that are sold. The term of this agreement runs until June 2021 with
options for renewal.
CVR
- Coffeyville Resources Nitrogen Fertilizers, LLC.
CVR Purchase Agreement
- An agreement between PCC and CVR, whereby CVR has agreed to purchase certain volumes of
DD&A
DOJ
DEF
UAN from PCC.
- Depreciation, depletion and amortization.
- The U.S. Department of Justice.
- Diesel Exhaust Fluid.
21
DHS
DOC
EDA
EDC
EDN
EIA
- The U.S. Department of Homeland Security.
- The U.S. Department of Commerce.
- El Dorado Ammonia L.L.C.
- El Dorado Chemical Company.
- El Dorado Nitrogen L.L.C.
- The U.S. Energy Information Administration.
El Dorado Facility
- Our chemical production facility located in El Dorado, Arkansas.
Environmental and Health
Laws
- Numerous federal, state and local environmental, health and safety laws.
ERP
EPA
FASB
- Enterprise Resource Planning Software.
- The U.S. Environmental Protection Agency.
- Financial Accounting Standards Board.
Financial Covenant
- Certain springing financial covenants associated with the working capital revolver loan.
GAAP
Global
Golsen Holders
- U. S. Generally Accepted Accounting Principles.
- Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to LSB and
EDC.
-
Jack E. Golsen, our Executive Chairman of the Board, and Barry H. Golsen, a member of the
Board, entities owned by them and trusts for which they possess voting or dispositive power as
trustee.
Hallowell Facility
- A chemical facility previously owned by two of our subsidiaries located in Kansas.
HDAN
IRS
J. Golsen
KDHE
- High density ammonium nitrate prills used in the agricultural industry.
- U. S. Internal Revenue Service.
-
Jack E. Golsen.
- The Kansas Department of Health and Environment.
Koch Fertilizer
- Koch Fertilizer L.L.C.
Indenture Amendments
- Certain amendments to the Original 7.75% Indenture.
LDAN
Leidos
- Low density ammonium nitrate prills used in the mining industry.
- Leidos Constructors L.L.C.
Liquidation Preference
- The Series E Redeemable Preferred liquidation preference of $1,000 per share plus accrued and
ff
unpaid dividends plus the participation rights value.
Loan Conversion Date
- The date which El Dorado Ammonia L.L.C. received final funding on a loan which was
converted to a seven-year secured term loan requiring equal monthly principal and interest
payments with a final balloon payment due May 2023.
LSB
LSB Funding
MD&A
NIBE
NOL
NPDES
NSO
- LSB Industries, Inc.
- LSB Funding L.L.C.
- (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71) (cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:88)(cid:81)(cid:71)
(cid:71)
in Item 7 of this report.
- NIBE Industrier AB (publ). and NIBE Energy Systems Inc., an indirect wholly owned
subsidiary of NIBE Industrier AB.
- Net Operating Loss.
- National Pollutant Discharge Elimination.
- Non-qualified stock options.
22
ODEQ
- The Oklahoma Department of Environmental Quality.
Original 7.75% Indenture
- The indenture, dated as of August 7, 2013, pursuant to which we issued the $425 million 7.75%
OSHA
PCC
PP&E
Senior Secured Notes due 2019.
- Occupational Safety and Health Administration.
- Pryor Chemical Company.
- Plant, property and equipment.
Properties
- (cid:61)(cid:72)(cid:81)(cid:68)(cid:182)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:15)(cid:3) (cid:87)(cid:76)(cid:87)(cid:79)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:68)(cid:79)(cid:79)(cid:3) (cid:82)(cid:73)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:82)(cid:76)(cid:79)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3) (cid:74)(cid:68)(cid:86)(cid:3) (cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3)
Pryor Facility
Purchaser
Wyoming County, Pennsylvania.
- Our chemical production facility located in Pryor, Oklahoma.
- LSB Funding L.L.C.
Renewed Rights Agreement
- A renewed shareholder rights plan effective January 5, 2009.
Renewed Rights Amendment
- An amendment to a shareholder rights plan effective December 4, 2015.
Retirement Date
- Date of retirement of Jack E. Golsen as Executive Chairman of the Board, December 31, 2017.
RFS
SAR
SEC
- Federal renewable fuel standards.
- Stock appreciation rights.
- The U.S. Securities and Exchange Commission.
Secured Promissory Note due
2019
Secured Promissory Note due
2021
Secured Promissory Note due
2023
- A secured promissory note between EDC and a lender which matures in June 2019.
- A secured promissory note between EDC and a lender which matures in March 2021.
- A secured promissory note between EDA and a lender which matures in May 2023.
S. Golsen
- Steven J. Golsen.
Senior Secured Notes
- The Senior Secured Notes, subsequently amended under the Supplemental Indenture, with a
current interest rate of 8.50%.
Senior Secured Notes Indenture - The Original 7.75% Indenture Agreement, dated as of August 7, 2013, governing the 7.75%
Senior Secured Notes, together with the First Supplemental Indenture to the Original 7.75%
Indenture, dated as of September 7, 2016.
Series B Preferred
- The Series B 12% cumulative convertible Class C Preferred stock.
Series D Preferred
- The Series D 6% cumulative convertible Class C preferred stock.
Series E Redeemable Preferred - The 14% Series E Redeemable Preferred stock with participating rights and liquidating
distributions based on a certain number of shares of our common stock.
Series F Redeemable Preferred - The Series F Redeemable Preferred stock with one share to vote as a single class on all matters
SG&A
Shortfall
with our common stock equal to 456,225 shares of our common stock.
- Selling, general and administrative expense.
- Tax deficiencies recorded in equity to the extent of previous windfalls and then to the income
statement.
Springing Maturity Date
-
90 days prior to the maturity date of the Senior Secured Notes, to the extent the Senior Secured
Notes are not refinanced or repaid prior to 90 days prior to January 17, 2022.
Stock Purchase Agreement
- An agreement between NIBE and Consolidated to purchase all of the outstanding common stock of
the Climate Control Group.
23
Supplemental Indenture
- The First Supplemental Indenture, dated as of September 7, 2016, to the Original 7.75%
Indenture.
Transition Agreement
- An agreement between Jack Golsen and LSB, dated June 30, 2017.
TSA
Turnaround
UAN
UMB
U.S.
- A transition services agreement.
- A planned major maintenance activity.
- Urea ammonium nitrate.
- UMB Bank, n.a.
- United States.
Warrants
- A warrant to purchase 4,103,746 shares of our common stock at a par value $0.10 which was
held by LSB Funding LLC.
WASDE
Wells Fargo
- World Agricultural Supply and Demand Estimates Report.
- Wells Fargo Capital Finance L.L.C.
West Fertilizer
- West Fertilizer Company.
Windfall
Working Capital
Revolver Loan
Working Capital Revolver
Loan Amendment
Zena
1992 Agreement
2005 Agreement
- Tax benefits in excess of compensation costs.
- Our secured revolving credit facility.
- The senior secured revolving credit facility, amended effective January 17, 2016.
- Zena Energy L.L.C., a former subsidiary of the Company.
- An individual benefit agreement with a former executive.
- A death benefit agreement with Jack E. Golsen.
2015 Restricted Stock
- Grants under the 2008 Plan of restricted stock during 2015 to certain executives.
2016 Crop
- Corn crop marketing year (September 1 - August 31), which began in 2015 and ended in 2016.
2016 Restricted Stock
- Grants under the 2016 Plan of restricted stock during 2016.
2017 Crop
- Corn crop marketing year (September 1 - August 31), which began in 2016 and ended in 2017.
2017 Restricted Stock
- Grants under the 2016 Plan of restricted stock during 2017.
2018 Crop
- Corn crop marketing year (September 1 - August 31), which began in 2017 and ending in 2018.
7.75% Senior Secured Notes
-
$425 million aggregate principal amount of 7.75% Senior Secured Notes due August 1, 2019
issued pursuant to the Original 7.75% Indenture, subsequently amended under the Supplemental
Indenture, with a current interest rate of 8.50%
12% Senior Secured Notes
- The $50 million aggregate principal amount of 12% Senior Secured Notes due August 1, 2019.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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5
2
ITEM 3. LEGAL PROCEEDINGS
See Legal Matters under Note 11 of Notes to Consolidated Financial Statements included in this report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. (cid:48)(cid:36)(cid:53)(cid:46)(cid:40)(cid:55)(cid:3)(cid:41)(cid:50)(cid:53)(cid:3)(cid:53)(cid:40)(cid:42)(cid:44)(cid:54)(cid:55)(cid:53)(cid:36)(cid:49)(cid:55)(cid:182)(cid:54)(cid:3)(cid:38)(cid:50)(cid:48)(cid:48)(cid:50)(cid:49)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:15)(cid:3)(cid:53)(cid:40)(cid:47)(cid:36)(cid:55)(cid:40)(cid:39)(cid:3)(cid:54)(cid:55)(cid:50)(cid:38)(cid:46)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:3)(cid:48)(cid:36)(cid:55)(cid:55)(cid:40)(cid:53)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:44)(cid:54)(cid:54)(cid:56)(cid:40)(cid:53)(cid:3)
Q
PURCHASES OF EQUITY SECURITIES
(cid:52)
(cid:15)
Market Information
(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:72)(cid:90)(cid:3)(cid:60)(cid:82)(cid:85)(cid:78)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:179)(cid:47)(cid:59)(cid:56)(cid:180)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:86)(cid:15)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)s
indicated, the high and low intraday sales prices of our common stock.
Quarter
First
Second
Third
Fourth
Stockholders
Year Ended December 31,
2017
2016
High
Low
High
Low
$
$
$
$
11.70 $
11.34 $
11.71 $
9.50 $
7.03
6.82
5.55
6.68
$
$
$
$
14.10 $
15.50 $
13.85 $
9.93 $
3.68
7.73
7.66
4.52
As of February 16, 2018, we had approximately 432 record holders of our common stock.
Dividends
We have not paid cash dividends on our outstanding shares of common stock or convertible preferred stocks during the two most
recent fiscal years. In 2017, we did not pay cash dividends on our outstanding series of redeemable preferred stocks but did pay cash
dividends during 2016. See discussion concerning dividends and restrictions in payment of dividends (cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:47)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3) (cid:68)(cid:81)(cid:71)
Capital Resources - (cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)- (cid:47)(cid:82)(cid:68)(cid:81)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:48)(cid:39)(cid:9)(cid:36)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71) in Item 7 of this report.
Equity Compensation Plans
p
q
y
Discussions relating to our equity compensation plans under Item 12 of Part III are incorporated by reference to our definitive proxy
statement which we intend to file with the SEC on or before April 30, 2018.
Sale of Unregistered Securities
g
There were no unregistered sales of equity securities in 2017 that have not been previously reported in a Quarterly Report on Form 10-
Q or Current Report on Form 8-K.
Preferred Share Rights Plan
g
See discussions relating to our preferred share rights plan under Preferred Share Rights Plan of Note 14 to Consolidated Financial
Statements contained in this report.
26
( )
ITEM 6. SELECTED FINANCIAL DATA (1)
Selected Statement of Operations Data in Dollars:
2017
Year ended December 31,
2016
2014
2015
(In Thousands, Except Per Share Data)
2013
Net sales
Operating income (loss)
Interest expense, net
Provisions (benefit) for income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Net income (loss) income attributable to common stockholders $ (59,447 )
Income (loss) per common share attributable to
common stockholders:
$ 427,504
(34,091 )
37,267
(40,759 )
(30,293 )
$ 374,585
(90,223)
30,945
(41,956)
(88,133)
1,076 200,301
(29,217 ) 112,168
64,760
$
$ 437,695 $ 495,888 $ 416,223
73,739
13,301
23,955
35,600
19,362
54,962
54,662
(71,166 )
7,371
(32,520 )
(46,146 )
11,381
(34,765 )
$ (38,038 ) $
30,577
21,599
4,251
5,087
14,547
19,634
19,334 $
Basic:
Income (loss) from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Diluted:
Income (loss) from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
$
$
$
$
$
$
(2.22)
0.04
(2.18)
$
$
$
(2.22)
0.04
(2.18)
$
$
$
(5.28)
7.82
2.54
$
$
$
(5.28)
7.82
2.54
$
$
$
(2.17 ) $
0.50 $
(1.67 ) $
(2.17 ) $
0.50 $
(1.67 ) $
0.21 $
0.65 $
0.86 $
0.21 $
0.64 $
0.85 $
1.57
0.86
2.43
1.51
0.82
2.33
Selected Balance Sheet Data in Dollars:
Total assets
Long-term debt, including current portion, net
Redeemable preferred stocks
Stockholders' equity
Selected Other Data in Dollars:
$1,189,182
$ 409,399
$ 174,959
$ 438,196
$1,270,420
$ 420,220
$ 145,029
$ 492,513
$1,361,827 $ 1,130,572 $ 1,075,218
$ 520,422 $ 450,885 $ 455,054
(cid:178)
$ 177,272 $
$ 421,580 $ 434,048 $ 411,715
(cid:178) $
Cash dividends declared per common share
$
(cid:178)(cid:178)
$
(cid:178)(cid:178)
$
(cid:178) $
(cid:178) $
(cid:178)
(1)
The following selected consolidated financial data were derived from our audited consolidated financial statements and should
be read in conjunction with, and are qualified by reference, to the MD&A contained in Item 7 of Part II of this report. The
financial information presented may not be indicative of our future performance.
27
ITEM 7. (cid:48)(cid:36)(cid:49)(cid:36)(cid:42)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:182)S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following MD&A should be read in conjunction with a review of the other Items included in this Form 10-K and our December
31, 2017 Consolidated Financial Statements included elsewhere in this report. Certain statements contained in this MD&A may be
deemed to be forward-(cid:79)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:179)(cid:54)(cid:83)(cid:72)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:53)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:41)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)-(cid:47)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:180)
f
Overview
General
LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the
agricultural, mining, and industrial markets. We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor,
Oklahoma, and operate a facility for Covestro in Baytown, Texas. Our products are sold through distributors and directly to end
customers throughout the U.S.
Key Initiatives for 2018
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement
the following key initiatives:
mm
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Improving the on-stream rates of our chemical plants. We have several initiatives underway that we believe will assist us in
improving the reliability of our plants and allow us to produce more products for sale while lowering our cost of production.
In 2017, we made the decision to upgrade our existing maintenance management system through technology enhancements
and work processes to improve our predictive and preventative maintenance programs at our facilities. At that time, we also
made the decision to engage outside maintenance experts to assist us in expediting its implementation and in its overall use.
We expect that the system will be implemented by the end of the second quarter of 2018 and we will begin to see the benefits
in the second half of 2018.
Additionally, specific to our Pryor Facility, we engaged several outside engineering firms to assist us in an overall plant
reliability study which will be used to enhance our reliability improvement plan for that facility. We expect the study to be
completed during the second quarter of 2018.
Focus on the Continued Improvement of Our Safety Performance. We believe that high safety standards are critical to
improved plant performance. With that in mind, we implemented enhanced safety programs at our facilities that focus on
reducing risks and improving our safety culture in 2017. The implementation and training of these programs will continue in
mm
2018 and we expect these will benefit our on-stream rates.
Continue Broadening of the distribution of our AN and Nitric Acid products. We increased our overall sales volume of
HDAN in 2017 by approximately 60,000 tons or 26% to approximately 290,000 tons compared to 230,000 tons for 2016
through various marketing initiatives which include: (1) storing and distributing HDAN at our Pryor and Cherokee Facilities
which allows us to sell to new markets and customers out of those facilities and; (2) educating growers on the additional
applications for HDAN. In 2018, we will continue to focus on those initiatives and other initiatives in an effort to continue to
grow our annual sales volumes over 2017.
In addition, through increased marketing efforts, we increased our sales volumes of Nitric Acid by approximately 18,000 tons
ff
from 82,000 tons in 2016 to 100,000 tons in 2017. We will continue to focus on increasing our marketing efforts in order to
expand our market for our nitric acid products in North America.
Improving the Margins on Sales of Our Products. Over the last several years, we have focused on increasing our sales
volumes to produce at optimal on-stream rates and lower our manufacturing costs per ton of product. Beginning in 2018, we
will undertake a review of all sales to customers to determine if there are opportunities to improve the margins on sales to
those customers and to explore if there are further product upgrading opportunities.
Reducing and controlling our cost structure. We have engaged outside experts to assist us in centralizing and expanding our
Company-wide procurement efforts. We expect this to be implemented by the end of the second quarter of 2018 and believe
that these efforts will result in a reduction in expenses and capital spend in the aggregate of between $3 million to $5 million
on an annualized basis.
Over the last 18 months, we have reduced our SG&A and plant expenses over $12 million annually and believe, in addition
to the procurement initiative discussed above, there is still an opportunity to further reduce those expenses.
mm
Focus on Improving Our Capital Structure and Overall Cost of Capital. We are actively seeking ways to improve our capital
structure and reduce our overall cost of capital. We believe that the improving end markets for our products combined with
our improved operating performance will be a benefit.
We may not successfully implement any or all of these initiatives. Even if we successfully implement the initiatives, they may not
achieve the results that we expect or desire.
y
28
Business Developments - 2017
Sale of Working Interests in Natural Gas Properties and Other Non-Core Assets
g
p
f
At the end of 2016, we identified certain assets that were no longer necessary in the operations of our business. During 2017, we sold
assets totaling approximately $23.8 million. We sold (cid:68)(cid:79)(cid:79)(cid:3) (cid:82)(cid:73)(cid:3) (cid:61)(cid:72)(cid:81)(cid:68)(cid:3) (cid:40)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3) (cid:47)(cid:17)(cid:47)(cid:17)(cid:38)(cid:17)(cid:3) (cid:11)(cid:179)(cid:61)(cid:72)(cid:81)(cid:68)(cid:180)(cid:12)(cid:3) (cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:61)(cid:72)(cid:81)(cid:68)(cid:182)(cid:86)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:15)(cid:3) (cid:87)(cid:76)(cid:87)(cid:79)(cid:72)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:76)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:74)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:51)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:180)(cid:12)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:58)(cid:92)(cid:82)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:82)(cid:88)(cid:81)(cid:87)(cid:92)(cid:15)(cid:3)(cid:51)(cid:72)(cid:81)(cid:81)(cid:86)(cid:92)(cid:79)(cid:89)(cid:68)(cid:81)(cid:76)(cid:68)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)se price of
approximately $16.3 million, which sale was completed on June 26, 2017. Concurrently with the closing of the purchase and sale
agreement, a portion of the net proceeds (approximately $3.5 million) was used to repay the remaining outstanding balance of a
promissory note, which was secured by the Properties. As a result of the sale, we no longer own any working interest in oil and
natural gas properties. During 2017, we also sold our engineered products business (industrial machinery and related components)
and other various non-core assets for approximately $7.5 million of net proceeds. We continue to evaluate our assets in order to
determine if there are additional non-core assets that we should monetize.
Approval of Arkansas Incentive Tax Credit
pp
f
During 2017, we received notification from the State of Arkansas that incentive tax credits had been approved associated with certain
(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:87)(cid:75)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85) of 2015 and
the second quarter of 2016. As a result, we recognized a current and noncurrent receivable totaling approximately $8.1 million
associated with these incentive tax credits with the offset reducing (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:15)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:179)PP&E(cid:180)(cid:12) (covered by the tax credit)
by approximately $7.4 million and the remaining balance of $0.7 million as a reduction to cost of sales (recovery of previously
incurred depreciation expense related to the PP&E). As of December 31, 2017, our current and noncurrent incentive tax credits
receivable totaled $7.4 million.
t
Planned and Unplanned Downtime at our Pryor and El Dorado Facilities
p
y
During 2017, we experienced an aggregate of 158 days of unplanned downtime that contributed to approximately $21 million in lost
improvement to our operating results. The following were the main unplanned downtime events:
In May 2017, the ammonia plant at our Pryor Facility experienced a lightning strike causing a loss of power to the facility and 16 days
of unplanned downtime.
d
In June 2017, the ammonia plant at our El Dorado Facility was taken out of service to perform proactive adjustments and heat
exchanger cleaning and repairs to enable the plant to operate closer to the higher end of its operating envelope on a sustained basis.
Total downtime relating to this event was 12 days.
d
In July 2017, the Pryor Facility experienced an electrical outage shutting the facility down. As the facility was already down and
considering the low selling price environment for our agricultural products, and other maintenance needing to be completed, the
election was made to move forward the Turnaround previously scheduled for the fourth quarter of 2017 to the third quarter of 2017.
Total downtime for the Turnaround was 17 days.
On September 23, 2017, the ammonia plant at the Pryor Facility experienced a minor fire and was taken out of service to repair
(cid:71)(cid:68)(cid:80)(cid:68)(cid:74)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:85)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:15)(cid:3)(cid:90)(cid:76)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:76)(cid:83)(cid:76)(cid:81)(cid:74)(cid:17)(cid:3) As these repairs were being performed, we decided to replace the
process gas preheat system that was originally scheduled to be included in the 2018 Turnaround. The plant resumed production on
December 4, 2017. Total downtime days during 2017 relating to this event was 72 days.
On October 3, 2017, the ammonia plant at our El Dorado Facility was taken out of service to make mechanical repairs to the burner
refractory system on the boiler, which were completed on October 8, 2017. Following the work on the boiler, we determined that
repairs on a process heat exchanger were necessary, which repairs to the heat exchanger were completed and ammonia production
resumed on October 22, 2017. Total downtime of the ammonia plant related to these two events in October was 21 days.
Update on Strategic Alternatives Review
g
p
In July 2017, our Board of Directors terminated the formal sales process portion of its strategic review as they were not presented with
a sale transaction that was in the best interest of our shareholders. Our
continues to work with its
outside advisors on evaluating other strategic, financial and operational options on an ongoing basis.
Management and Board of Directors
d
t
El Dorado Nitric Acid Plant
During 2016(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3) (cid:81)(cid:72)(cid:90)(cid:3) (cid:81)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:68)(cid:70)(cid:76)(cid:71)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:86)(cid:72)(cid:89)(cid:72)ral warranty repairs. After attempts to repair leaks in the
(cid:81)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3) (cid:68)(cid:70)(cid:76)(cid:71)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3) (cid:81)(cid:76)(cid:87)(cid:85)(cid:82)(cid:88)(cid:86)(cid:3) (cid:82)(cid:91)(cid:76)(cid:71)(cid:72)(cid:3) (cid:68)(cid:69)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:89)(cid:72)(cid:86)(cid:86)(cid:72)(cid:79)(cid:15)(cid:3) (cid:76)(cid:87)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3) (cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:87)(cid:75)(cid:76)(cid:86)(cid:3) (cid:68)(cid:69)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:89)(cid:72)(cid:86)(cid:86)(cid:72)(cid:79)(cid:3) (cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3) (cid:81)(cid:72)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:69)(cid:72)(cid:3) (cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:71)(cid:3) (cid:88)(cid:81)der
warranty provisions. In order to operate the nitric acid plant while a permanent solution was developed, we obtained a consent
(cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:36)(cid:85)(cid:78)(cid:68)(cid:81)(cid:86)(cid:68)(cid:86)(cid:3) (cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:52)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:11)(cid:179)(cid:36)(cid:39)(cid:40)(cid:52)(cid:180)(cid:12)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:69)(cid:92)-pass the failed
nitrous oxide abatement system and continue to operate the new nitric acid plant until September 2018. We are in process of
extending the consent administrative order. We made use of our secondary nitric acid plant at the El Dorado Facility and shipped
product from our other facilities to ensure that customer demands were met while we designed and installed the by-pass system. We
29
anticipate that the design, fabrication, and installation of a new nitrous oxide abatement vessel will be complete by October 2018 and
all costs will be covered under warranty provisions.
Key Industry Factors
Supply and Demand
Agricultural
g
Sales of our agricultural products were approximately 43% of our total net sales for 2017. The price at which our agricultural
products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn,
depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions,
(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:80)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15)(cid:3)(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:88)(cid:83)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)ernational
and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry
economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price
volatility and effect product margins.
Additionally, changes in corn prices can affect the number of acres of corn planted in a given year, and the number of acres planted
will drive the level of nitrogen fertilizer consumption, likely effecting prices. The WASDE, dated February 8, 2018, estimates U.S.
corn production for 2016/2(cid:19)(cid:20)(cid:26)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:20)(cid:24)(cid:17)(cid:21)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:88)(cid:86)(cid:75)(cid:72)(cid:79)(cid:86)(cid:15)(cid:3)(cid:88)(cid:83)(cid:3)(cid:20)(cid:20)(cid:17)(cid:23)(cid:8)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:18)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:25) C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:15)(cid:3)(cid:85)(cid:72)(cid:73)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)
in planted and harvested acres. In addition, they estimate yields per acre of 174.6 bushels per acre for the 2017 Crop compared to
168.4 bushels per acre for the 2016 C(cid:85)(cid:82)(cid:83)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:90)(cid:82)(cid:85)(cid:79)(cid:71)(cid:3)(cid:70)(cid:82)(cid:85)(cid:81)(cid:3)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:18)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)C(cid:85)(cid:82)(cid:83)(cid:180)(cid:12)(cid:3)(cid:68)(cid:87)(cid:3)(cid:21)(cid:19)(cid:22)(cid:17)(cid:20)(cid:3)
million tons, a decrease over the 2017 Crop ending stocks of approximately 11.6% while U.S. corn ending stocks of 59.8 million tons,
an increase of approximately 3% over the prior year. This has led the WASDE to estimate that U.S. growers will plant 90.2 million
acres of corn in the 2018 Crop, a decrease of 3.8 million acres over the previous year, with expected yields of 176.6 bushels per acre, a
1% increase in yield from the previous year.
On the supply side, given the low price of natural gas in North America over the last several years, North American fertilizer
producers have become the global low-cost producers for delivered fertilizer products to the Midwest U.S. Several years ago, the
market believed that low natural gas prices would continue. That belief, combined with favorable fertilizer pricing, stimulated
investment in numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities.
Since those announcements, global nitrogen fertilizer supply has outpaced global nitrogen fertilizer demand causing oversupply
in the
global and North American markets. The increased fertilizer supply led to lower nitrogen fertilizer selling prices during most of 2017.
Also, additional domestic supply of ammonia will change the physical flow of ammonia in North America placing pressure on
ammonia and other fertilizer prices until the distribution system accepts the new supply. Beginning in the fourth quarter of 2017, we
have seen an increase in fertilizer prices as the imports of fertilizers has decreases significantly and the distribution of the new
domestic supply has been established. That has continued into the first quarter of 2018.
n
t
Industrial
Sales of our industrial products were approximately 46% of our total net sales for 2017. Our industrial products sales volumes are
dependent upon general economic conditions primarily in the housing, automotive, and paper industries. According to the American
Chemistry Council, the U.S. economic indicators continue to be positive for these sectors domestically. Our sales prices generally
vary with the market price of our feedstock (ammonia or natural gas, as applicable) in our pricing arrangements with customers.
Miningg
Sales of our mining products were approximately 9% of our total net sales for 2017. Our mining products are LDAN and AN-
solutions, which are primary used as AN fuel oil and specialty emulsions for surface mining of coal and for usage in quarries and the
construction industry. As reported by the EIA, annual coal production in the U.S. for the full year of 2017 is up 6% from 2016 due to
increased export demand. EIA is forecasting a 2% decrease in U.S. coal production in 2018 and another 2% decrease in 2019. U.S.
coal consumption is also expected to decline over the next two years due to low natural gas prices reducing demand for coal for coal-
fired electricity generation. EIA also expects U.S. coal export demand to decline in 2018 and 2019. We believe that coal production
in the U.S. continues to face significant challenges from competition from natural gas and renewable sources of energy. While we
believe, our plants are well-located to support the more stable coal-producing regions in the upcoming years, our current minin
g sales
volumes are being affected by overall lower customer demand for LDAN. We do not expect a significant increase in our mining
business in the near term.
uu
r
30
Farmer Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual
farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties
and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types
of crops planted.
d
Natural Gas Prices
Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural
gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and
stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive
n
position and that of other North American nitrogen fertilizer producers has been positively affected.
We historically have purchased natural gas in the spot market, using forward purchase contracts, or through a combination of both and
have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase
contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. We are able to purchase
natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems.
The following table shows the annual volume of natural gas we purchased and the average cost per MMBtu:
Natural gas volumes (MMBtu in millions) (1)
Natural gas average cost per MMBtu
2017
2016
27
3.04 $
20
2.66
$
(1)
The increase in volume in 2017 is primarily attributed to the new ammonia plant at the El Dorado Facility operating for the full
year compared to approximately half a year for 2016 and higher overall ammonia operating rates at our plants.
As of December 31, 2017, we had volume purchase commitments with a fixed cost for natural gas of approximately 1.3 million
MMBtus at an average cost of $2.42 per MMBtu. These commitments are for firm purchases during the first quarter of 2018 and
represent approximately 17% of our total exposed natural gas usage required for that period.
Transportation Costs
Costs for transporting nitrogen-based products can be significant relative to their selling price.
For example, ammonia is a hazardous
gas at ambient temperatures and must be transported in specialized equipment, which is more expensive than other forms of nitrogen
fertilizers. In recent years, a significant amount of the ammonia consumed annually in the U.S was imported. Therefore, nitrogen
fertilizers prices in the U.S. are influenced by the cost to transport product from exporting countries, giving domestic producers who
transport shorter distances an advantage.
t
Key Operational Factors
Facility Reliability
ions. The
Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operat
financial effects of planned downtime at our plants, including Turnarounds is mitigated through a diligent planning process that
considers the availability of resources to perform the needed maintenance, feedstock logistics and other factors. Unplanned downtime
of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower
production of our products and increased costs related to repairs and maintenance. All Turnarounds result in lost contribution margin
from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs
and maintenance, which repair, and maintenance costs are expensed as incurred. Also see the Turnaround costs presented in the
Quarterly Financial Data of the Consolidated Financial Statements included in this report.
n
aa
During the unplanned outage in the fourth quarter of 2017 at our Pryor Facility, we replaced the process gas pre-heat system which
was originally planned for the Turnaround in 2018. Although this extended the downtime, combined with previous maintenance work
done at the facility during 2017, it allowed us to avoid a Turnaround in 2018 that had been previously planned. Following the
Turnaround scheduled in 2019, we expect to move to a two-year Turnaround cycle at this facility.
d
At our El Dorado Facility, historically, we performed Turnaround projects on individual plants without shutting down the entire
facility as we have redundancy for most of our produced products. The effect of lost production from those have not been significant.
With the completion of the new ammonia plant, the facility will begin to schedule traditional Turnarounds that will require the
ammonia plant to be taken out of production and will cause a financial effect from lost production. This facility will perform a two-
year Turnaround currently scheduled in the third quarter of 2018 and following this initial Turnaround, the facility will move to a
three-year Turnaround cycle.
m
31
Our Cherokee Facility is currently on a two-year Turnaround cycle, with the last Turnaround being performed in the third quarter of
2016. The next Turnaround to be performed is expected to occur in the third quarter of 2018 at which time we expect to move to a
three-year Turnaround cycle.
Prepay Contracts
planning process and production scheduling. These
We use forward sales of our fertilizer products to optimize our asset utilization,
sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are
agreed upon. We use this program to varying degrees during the year depending on market conditions and our view of changing price
environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our
reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.
dd
Consolidated Results for 2017
Our consolidated net sales for 2017 were $427.5 million compared to $374.6 million for 2016. Our consolidated operating loss was
$34.1 million compared to $90.2 million for 2016. The items affect(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)
of Op(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:180)
Items Affecting Comparability of Results
On-Stream Rates
The on-stream rates of our plants affect our production, the absorption of fixed costs of each plant and sales of our products. It is a
key operating metric that we use to manage our business. In particular, we closely monitor the on-stream rates of our ammonia
plants
a
as that is the basic product as used to produce all upgraded products. In 2017, we improved the operating rates at our Cherokee
ammonia plant. The on-stream rate (excluding the effect from its scheduled Turnaround in 2016) for 2017 for our ammonia plant
increased to 99% from 96% in 2016. We believe that the ammonia plant will have a minimum on-stream rate for 2018 of 95%,
excluding the planned Turnaround days out of service.
The El Dorado Facility(cid:182)(cid:86)(cid:3)(cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:68)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:80)(cid:76)(cid:71)-2016. It is typical for newly operated plants that are in production
to go through a period of optimization (shakedown) that may require the plant to be taken out of operation for a period of time. Our
reported 2016 on-stream rate for the ammonia plant at El Dorado was 64%. For 2017, the on-stream rate for its ammonia plant was
86%. We believe that the ammonia plant will operate at a minimum of 95% on-stream rate for 2018, excluding the planned
Turnaround days out of service. The plant is currently producing ammonia in excess of 1,300 tons per day, which is above its
nameplate capacity of 1,150 tons per day.
f
At our Pryor Facility, the on-stream rate (excluding the effect from its Turnaround) for 2017 for our ammonia plant decreased to 69%
(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:27)(cid:25)(cid:8)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:88)(cid:81)(cid:83)(cid:79)(cid:68)(cid:81)(cid:81)(cid:72)(cid:71)(cid:3)(cid:71)(cid:82)(cid:90)(cid:81)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)ents - (cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:180)(cid:3)(cid:58)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)our
focus on improving on-stream rates as discussed in key initiatives for 2018 and the capital investments made to the ammonia plant to
date, will improve the on-stream rate for 2018.
Because of the improved ammonia production at the El Dorado Facility, during 2017, we sold approximately 200,000 tons of
ammonia that were in excess of our internal needs at this facility compared to approximately 88,000 tons in excess of our internal
needs in 2016.
Selling Prices
During 2017, selling prices for our agricultural products declined significantly over 2016 selling prices. Average selling prices for our
ammonia, UAN and HDAN decreased 17%, 12% and 6%, respectively compared to 2016 average selling prices. The decrease in
ammonia selling prices was impacted by several factors: (1) a wet spring that caused lower pre-plant ammonia application and
resulted in ammonia inventory buildup at the end of the spring season; (2) recent facility expansion projects that started ammonia
production but had not yet started planned upgraded production facilities and; (3) intended distribution systems for increased ammonia
production not yet in place. We expect this excess ammonia supply will begin to be absorbed in 2018 as these upgraded production
facilities begin production and the distribution systems are in place. The decrease in UAN and HDAN selling prices were caused by
lower average commodity prices and the nitrogen production capacity being added globally, and in North America specifically, that,
we believe, created uncertainty on the ability of producers to efficiently distribute the additional production.
Depreciation Expense
During 2017 and 2016, depreciation expense was $67.0 million and $59.4 million, respectively. The increase is primarily due to our
El Dorado expansion project being completed and placed into service during the second quarter of 2016.
32
Debt and Interest Expense
During 2017 and 2016, interest expense was $37.3 million and $30.9 million, net of capitalized interest $15.0 million for 2016
(minimal in 2017). Interest was capitalized based upon construction in progress of the El Dorado expansion project, which was
completed during the second quarter of 2016. Also, 2016 included interest expense of $5.5 million from the 12% Senior Secured
Notes which were repaid in October 2016, $2.2 million as a result of the debt modification associated with the Consent Solicitation
and interest expense from borrowings under our Working Capital Revolver Loan.
Certain Startup, One-Time, Warranty and Other Expenses (2016 only)
Durin(cid:74)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:40)(cid:79)(cid:3) (cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3) (cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3) (cid:81)(cid:72)(cid:90)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3) (cid:69)(cid:72)(cid:70)(cid:68)(cid:80)(cid:72)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)al. We estimate that our operating costs were $5.1
million higher during the first half of 2016, as a result of start-up and commissioning activities related to the new ammonia plant.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:81)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:68)(cid:70)(cid:76)(cid:71)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:86)(cid:87)(cid:68)(cid:85)(cid:87)
under our warranty provisions. The estimated impact on our operating results for 2016 was approximately $8 million to $9 million.
-up for which we believe a portion will be covered
(cid:81)
During 2016, EDC incurred a one-time fee of $12.1 million related to consulting services associated with the reduction of assessed
property values for the El Dorado projects real and personal property for both the nitric acid plant, nitric acid concentrator plant and
the ammonia plant. We expect material property tax savings in future periods through a reduction of property taxes paid.
n
Loss on Extinguishment of Debt (2016 only)
In October 2016, we called debt totaling $106.9 million (including accrued interest) to redeem all of the outstanding $50 million of the
12% Senior Secured Notes due 2019 at the original redemption price of 106% plus accrued interest and $50 million of the 7.75%
Senior Secured Notes due 2019 at the original redemption price of 103.875% plus accrued interest. As a result of this transaction, we
recognized a loss on extinguishment of debt of approximately $8.7 million.
t
33
Results of Operations
p
The following Results of Operations should be read in conjunction with our consolidated financial statements for the years ended
December 31, 2017, 2016, and 2015 (cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3) (cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:50)(cid:89)(cid:72)(cid:85)(cid:89)(cid:76)(cid:72)(cid:90)(cid:180)(cid:3) (cid:68)(cid:81)(cid:71) (cid:179)(cid:47)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:38)(cid:68)(cid:83)(cid:76)(cid:87)
al
(cid:53)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)MD&A.
(cid:71)
We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the
consolidated financial statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with
the cost of freight being recorded in cost of sales.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
p
,
,
The following table contains certain financial information relating to our continuing operations:
Net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Other products
Total net sales
Gross profit (loss)
Gross profit (loss) percentage (1)
Selling, general and administrative expense
Impairment of long-lived assets and goodwill
Other expense (income), net
Operating loss
Interest expense, net
Loss on extinguishment of debt
Non-operating other expense (income), net
Benefit for income taxes
Loss from continuing operations
2017
2016
(Dollars In Thousands)
Change
Percentage
Change
$ 184,054 $ 166,180
196,029 155,744
43,532
9,129
$ 427,504 $ 374,585
38,854
8,567
$
$
17,874
40,285
(4,678)
(562)
52,919
11%
26%
(11)%
(6 )%
14%
$
5,466 $
1.3 %
34,990
(cid:178)(cid:178)
4,567
(34,091 )
37,267
(cid:178)(cid:178)
(306)
(40,759 )
(30,293 )
(49,306)
$
(13.2)%
54,772
111 %
14.5%
40,168
1,621
(872)
(90,223)
30,945
8,703
218
(41,956)
(88,133)
(5,178)
(1,621)
5,439
56,132
6,322
(8,703)
(524)
1,197
57,840
(13)%
100 %
62%
20%
100 %
(3 )%
66%
Additions to property, plant and equipment (2):
$
37,433 $ 165,104
$
(127,671)
(77)%
Depreciation, depletion and amortization of
property, plant and equipment (2):
$
66,996
$
59,354
$
7,642
13%
(1) As a percentage of net sales
(2)
2017 additions to PP&E and DD&A are net of approximately $8.1 million and approximately $0.7 million respectively,
associated with the incentive tax (cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)- (cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:180)
34
The following tables provide key operating metrics for the Agricultural Products:
(
)
Product (tons sold)
UAN
HDAN
Ammonia
Other
Total
2017
488,794
279,789
94,210
25,664
888,457
2016
372,593
218,283
93,013
23,290
707,179
Change
Percentage
Change
116,201
61,506
1,197
2,374
181,278
31 %
28 %
1 %
10 %
26 %
)
Average Selling Prices (price per ton)
(p
p
g
g
UAN
HDAN
Ammonia
2017
2016
Change
Percentage
Change
$
$
$
153 $
237 $
276 $
173
253
331
$
$
$
(20)
(16)
(55)
(12) %
(6 ) %
(17) %
With respect to sales of Industrial and Other Chemical Products, the following table indicates the volumes sold of our major products:
)
Product (tons sold)
(
Nitric Acid - Baytown
Nitric Acid - All Other
AN Solution
Ammonia
Total
2017
476,790
100,628
16,977
228,849
823,244
2016
446,950
82,237
22,594
127,265
679,046
29,840
18,391
(5,617)
101,584
144,198
7 %
22 %
(25) %
80 %
21 %
g
Change
Percentage
g
Change
With respect to sales of Mining Products, the following table indicates the volumes sold of our major products:
)
Product (tons sold)
(
LDAN/HDAN
AN Solution
Total
Net Sales
2017
125,212
24,133
149,345
2016
93,039
60,496
153,535
Change
Percentage
Change
32,173
(36,363 )
(4,190)
35 %
(60) %
(3 ) %
Agricultural and industrial sales for 2017 were both significantly higher due to increased sales volumes that were partially offset by
decreased average selling prices while mining sales for 2017 were lower due to lower average prices and a net decrease in sales
volume compared to 2016.
ff
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Agricultural products sales increased primarily from higher sales volume across all product categories. The increase in
sales volume was primarily the result of overall improved on-stream and production rates at our El Dorado and Cherokee
Facilities, the absence of a Cherokee Turnaround in 2017 and the broadening of our distribution of HDAN to new markets
and customers. Partially offsetting the increase in sales volume was lower average selling prices, primarily due to: (1)
lower average commodity prices; (2) weather in the early spring that caused less ammonia to be applied during pre-plant
season which caused an inventory buildup and; (3) the nitrogen production capacity being added globally, and in North
America specifically.
t
Industrial acids and other chemical products sales increased driven by strong industrial ammonia sales at our El Dorado
Facility from higher plant on-stream rates (minimal ammonia production during the first half of 2016 from this facility).
In addition, nitric acid sales from El Dorado are continuing to expand and sales volume was significantly higher compared
to 2016, although at lower net prices due to longer shipping distances and stronger market competitive pressures.
Mining products sales decreased primarily as the result of both lower sales volume and lower selling prices of AN
Solution partially offset by increases in LDAN sales volume from our El Dorado Facility. We continue to face lower
sales volume of AN Solution from our Cherokee Facility as demand from our customers remains suppressed by overall
Appalachia coal market conditions and increased competitive production capacity in our region.
Other products consist of natural gas sales from our former working interests in certain natural gas properties and sales
from our former business that sold industrial machinery and related components, both of which were sold during 2017.
35
Gross Profit
As noted in the table above, we recognized a gross profit of $5.5 million in 2017 compared to a gross loss of $49.3 million in 2016, or
an increase in gross profit of $54.8 million. In addition to the net positive effect from the higher sales discussed above, our gross
profit improved primarily through:
uu
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a reduction in our feedstock and other operating costs at our El Dorado Facility as (i) this facility produced ammonia from
natural gas during 2017 compared to purchasing ammonia during most of the first half of 2016 and (ii) costs associated
with the start-up, commissioning and optimizing activities performed on the ammonia plant during 2016 that were not
incurred in 2017;
a reduction in overall fixed plant expenses;
a recovery of precious metals of $2.9 million during 2017, which metals had accumulated over time within certain
manufacturing equipment; and
improved absorption of fixed costs from improved on-stream and production rates at our Cherokee and El Dorado
Facilities and lower Turnaround expense at the Cherokee Facility as a Turnaround was not required in 2017.
ff
The increase in gross profit was partially offset by an increase in overall depreciation expense of approximately $7.6 million primarily
as a result of our new ammonia plant at our El Dorado Facility not being put into service until mid-May 2016, lower absorption of
fixed costs from lower on-stream rates at our Pryor Facility and higher average natural gas feedstock cost at our Cherokee and Pryor
Facilities.
In addition, during 2016, we incurred a one-time cost of $12.1 million relating to consulting services associated with the reduction of
property taxes from fixing the assessed value for our El Dorado Facility.
Selling General and Administrative Expense
p
g
Our SG&A expenses were $35.0 million for 2017, a decrease of $5.2 million compared to 2016. The decrease was driven by a $2.2
million reduction in compensation-related costs, $1.9 million reduction in insurance and other miscellaneous costs and $1.1 million
reduction in professional fees.
Impairment of Long-Lived Assets and Goodwill
p
g
During 2016, we recognized a non-cash impairment charge of $1.6 million to fully write-off the carrying value of goodwill.
Other Expense (Income), net
),
p
(
Our net other expense for 2017 was $4.6 million compared to net other income of $0.9 million for 2016. The change primarily
consists of a total net loss of $7.0 million relating to the sale of our working interest of certain natural gas properties, the sale of our
engineered products business (industrial machinery and related components) and other non-core assets partially offset by the
extinguishment and derecognition of a liability of approximately $1.4 million associated with a death benefit agreement as discussed
in Note 17 to the Consolidated Financial Statements and $0.1 million in miscellaneous items.
p
Interest Expense, net
,
Interest expense for 2017 was $37.3 million compared to $30.9 million for 2016. The increase is due primarily to a reduction in
capitalized interest during 2017 of $14.7 million as a result of the El Dorado expansion project completion during 2016. This
increase was partially offset by a decrease of $5.5 million relating to the 12% Senior Secured Notes sold in 2015 and repaid in 2016
and $2.2 million as a result of the debt modification associated with a consent solicitation completed in 2016.
n
Loss on Extinguishment of Debt
g
As a result of the repayment of $50 million of the 7.75% Senior Secured Notes and all of our 12% Senior Secured Notes in 2016, we
incurred a loss on extinguishment of debt of $8.7 million, consisting of prepayment premiums and writing off associated unamortized
debt issuance costs.
Benefit for Income Taxes
The benefit for income taxes for continuing operations in 2017 was $41 million compared to $42 million for the same period in 2016.
The effective tax rate, including the impact of tax reform adjustments, was 57% for 2017 compared to 32% for 2016. The increase in
the benefit rate is primarily due to the adjustments on the deferred tax assets and liabilities from the newly enacted tax rate as a result
of tax reform in 2017. The provisional adjustments related to tax reform resulted in recording a tax benefit of $23 million. Recently
enacted tax legislation is not expected to materially impact the near-term liquidity or financial condition of the company. Further
information on the impacts of tax reform in 2017 is included in Note 10 to the Consolidated Financial Statements.
36
Historically, our effective tax rate has been driven by the federal statutory rate with notable impacts from investment tax credits and
valuation allowances. Also, the adoption of ASU 2016-09 in 2017 may cause some volatility in the effective tax rate.
Income from Discontinued Operations, net of taxes
p
,
The results of operations of our former Climate Control Business are presented as discontinued operations. For 2017, income from
discontinued operations was $1.1 million, consisting of a gain of $2.6 million relating primarily
to estimate revisions to contingent
f
obligations and net of a tax provision of $1.5 million. For 2016, income from discontinued operations was $200.3 million, including a
gain of $282 million and net of a tax provision of $91.7 million.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
p
,
,
The following table contains certain financial information relating to our continuing operations:
Net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Other products
Total net sales
Gross profit (loss)
Gross profit (loss) percentage (1)
Selling, general and administrative expense
Impairment of long-lived assets and goodwill
Other income, net
Operating loss
Interest expense, net
Loss on extinguishment of debt
Non-operating other expense, net
Benefit for income taxes
Loss from continuing operations
2016
2015
(Dollars In Thousands)
Change
Percentage
Change
$ 166,180
155,744
43,532
9,129
$ 374,585
$ 209,770 $
167,520
47,475
12,930
$ 437,695 $
(43,590 )
(11,776 )
(3,943)
(3,801)
(63,110 )
(21)%
(7 )%
(8 )%
(29)%
(14)%
$
(49,306 )
$
(13.2)%
40,168
1,621
(872)
(90,223 )
30,945
8,703
218
(41,956 )
(88,133 )
20,048 $
4.6 %
49,813
43,188
(1,787)
(71,166)
7,371
(cid:178)(cid:178)
129
(32,520)
(46,146)
(69,354 )
(346)%
(17.8 )%
(9,645)
(41,567 )
915
(19,057 )
23,574
8,703
89
(9,436)
(41,987 )
(19)%
(96)%
(51)%
27%
320 %
100 %
69%
29%
91%
Additions to property, plant and equipment:
$ 165,104
$ 469,877 $
(304,773)
(65)%
Depreciation, depletion and amortization of property, plant
and equipment:
$
59,354
$
35,930
$
23,424
65%
(1) As a percentage of net sales
37
The following tables provide key operating metrics for the Agricultural Products:
(
)
Product (tons sold)
UAN
HDAN
Ammonia
Other
Total
2016
372,593
218,283
93,013
23,290
707,179
2015
354,695
171,294
90,658
19,237
635,884
Change
Percentage
Change
17,898
46,989
2,355
4,053
71,295
5 %
27 %
3 %
21 %
11 %
)
Average Selling Prices (price per ton)
(p
p
g
g
UAN
HDAN
Ammonia
2016
2015
Change
Percentage
Change
$
$
$
173 $
253 $
331 $
246
349
499
$
$
$
(73)
(96)
(168)
(30) %
(28) %
(34) %
With respect to sales of Industrial and Other Chemical Products, the following table indicates the volumes sold of our major products:
)
Product (tons sold)
(
Nitric Acid - Baytown
Nitric Acid - All Other
AN Solution
Ammonia
Total
2016
446,950
82,237
22,594
127,265
679,046
2015
500,725
54,108
18,523
36,235
609,591
(53,775 )
28,129
4,071
91,030
69,455
(11) %
52 %
22 %
251 %
11 %
Change
Percentage
Change
With respect to sales of Mining Products, the following table indicates the volumes sold of our major products:
)
Product (tons sold)
(
LDAN/HDAN
AN Solution
Total
Net Sales
2016
93,039
60,496
153,535
2015
70,660
76,071
146,731
Change
Percentage
Change
22,379
(15,575 )
6,804
32 %
(20) %
5 %
In general, for 2016, our agricultural sales were lower, influenced by lower selling prices for ammonia, UAN and HDAN, partially
offset by higher sales volume from improved on-stream rates at our facilities in 2016. Industrial products sales and mining sales both
which
y
decreased due primarily to lower selling prices partially offset by higher overall sales volumes. In addition, other products,
includes our natural gas working interest, decreased as natural gas sales prices and volumes declined in 2016 compared to 2015.
(cid:120)
(cid:120)
(cid:120)
Agricultural products comprised approximately 44% and 48% of our net sales for 2016 and 2015, respectively.
Agricultural sales decreased as our average selling prices per ton of our products were significantly lower for 2016
compared to 2015. This reduction in selling prices was partially offset by an increase in sales volumes for HDAN, UAN
and Ammonia. The increase in HDAN sales volume was driven by a strong spring fertilizer season which increased our
customer demand and expanded our customer base during 2016. The higher UAN and ammonia sales volumes were
primarily due to higher production at our Pryor Facility in 2016 compared to 2015 partially offset by lower production and
sales volumes at our Cherokee Facility due to performing a bi-annual Turnaround in 2016.
Industrial acids and other chemical products sales decreased primarily as the result of lower overall product selling prices.
A majority of our sales of these products are tied to the cost of our feedstock, primarily natural gas and ammonia, which
t
are passed through as part of the selling prices to our customers. Our feedstock costs were lower in 2016 compared to
2015. The decrease in selling prices was partially offset by higher sales volume of ammonia as our El Dorado Facility
began producing ammonia during the second quarter of 2016 compared to no production in 2015.
Mining products sales decreased primarily due to lower product selling prices as a majority of our sales from these
passed through as part of the
products are tied to the cost of our feedstock, primarily natural gas and ammonia, which are
selling prices to our customers. Our feedstock costs were lower in 2016 compared to 2015. Additionally, our Cherokee
Facility performed its bi-annual Turnaround in 2016 which reduced the production of AN solution for 2016. The
reduction in production at our Cherokee Facility was partially offset by an increase in sales volume of LDAN at our El
Dorado Facility.
uu
t
38
(cid:120)
Other products consist of natural gas sales from our working interests in certain natural gas properties and sales of
industrial machinery and related components. The decrease in other products is primarily due to lower realized sales
prices out of the Marcellus Shale region combined with lower production volumes in 2016 compared to 2015. During
2016, the operator of these properties elected to slow well development due to the decline in natural gas sales prices.
They are currently reevaluating their development program as natural gas prices have increased making certain wells
economical to develop.
Gross Profit
As noted in the table above, we incurred a gross loss of $49.3 million in 2016 compared to gross profit of $20.0 million in 2015, or a
decrease in gross profit of approximately $69.3 million. In addition to the negative effect from lower sales discussed above, 2016
includes a one-time cost of $12.1 million relating to consulting services associated with the reduction of property taxes from fixing the
assessed value for our El Dorado Facility, costs incurred relating to the start-up and commissioning activities at our El Dorado
expansion project, increased repair expenses associated with unplanned downtime experienced at our Cherokee, Pryor and El Dorado
Facilities, an increase in overall depreciation expense partially offset by improved feedstock costs from lower average natural gas
prices and our El Dorado Facility producing ammonia from natural gas compared to purchasing ammonia for a portion of the year.
Selling General and Administrative Expense
p
g
Our SG&A expenses were $40.2 million for 2016, a decrease of $9.6 million compared to 2015. The decrease includes a $4.5 million
reduction in expenses related to shareholder activities, $3.8 million reduction in overall compensation related costs, and $1.5 million
reduction in training expenses partially offset by an increase of $1.5 million in legal fees related primarily to our review of
f
strategic
f
initiatives and updates to our corporate governance practices and policies.
Impairment of Long-Lived Assets and Goodwill
p
g
During 2016, we recognized a non-cash impairment charge of $1.6 million to fully write-off the carrying value of goodwill.
In 2015, we recognized non-cash impairment charges totaling $43.2 million, consisting of an impairment charge of $39.7 million to
reduce the carrying value of our working interest in natural gas properties and a $3.5 million impairment charge to reduce the carrying
value of certain plant assets related to unused ammonia production equipment at our Pryor Facility.
p
Interest Expense, net
,
Interest expense for 2016 was $30.9 million compared to $7.4 million for 2015. The increase is due primarily to a reduction in
capitalized interest during 2016 of $15.6 million as a result of the El Dorado expansion project completion. In addition, $4.5 million
of the increase in interest expense relates to the 12% Senior Secured Notes sold in November 2015 and repaid in October 2016 and
$2.2 million as a result of the debt modification of the Senior Secured Notes in 2016.
Loss on Extinguishment of Debt
g
As a result of the repayment of $50 million of the 7.75% Senior Secured Notes and all of our 12% Senior Secured Notes in 2016, we
incurred a loss on extinguishment of debt of $8.7 million, consisting of prepayment premiums and writing off associated unamortized
debt issuance costs.
Benefit for Income Taxes
The benefit for income taxes for 2016 was $42 million compared to $32.5 million for the same period in 2015. The effective tax rate
was 32% for 2016 and 41% for 2015. The decrease in the benefit rate is primarily related to the increased valuation allowance
established on state net operating losses that we anticipate will not be able to be utilized prior to expiration.
Income from Discontinued Operations, net of taxes
p
,
As previously reported, the results of operations of the Climate Control Business have been presented as discontinued operations. For
2016, income from discontinued operations was $200.3 million, including a gain of $282 million and net of a tax provision of $91.7
million. For 2015, income from discontinued operations was $11.4 million, net of a tax provision of $9 million.
39
LIQUIDITY AND CAPITAL RESOURCES
Q
The following table summarizes our continuing cash flow activities for 2017 and 2016:
Net cash flows from continuing operating activities
Net cash flows from continuing investing activities
Net cash flows from continuing financing activities
2017
2016
Change
(In Thousands)
2,276 $
(22,038) $ 24,314
(10,845) $
153,297 $
(164,142)
(16,132) $
(193,709) $ 177,577
$
$
$
Cash Flow from Continuing Operating Activities
g p
g
Net cash provided by continuing operating activities was $2.3 million for 2017 compared to net cash used of $22.0 million for 2016,
an improvement of approximately $24.3 million.
For 2017, the net cash provided is the result of a net loss of $29.2 million plus a noncash adjustment of $67 million for depreciation,
depletion and amortization of PP&E and other noncash adjustments totaling approximately $13.7 million less an adjustment of $40.4
million for deferred income taxes and approximately $8.8 million of net cash used primarily from our working capital including an
increase in our trade accounts receivable.
For 2016, the net cash used is the result of net income of $112.2 million less adjustments of $200.3 million for net income from
discontinued operations and $42 million for deferred income taxes, plus adjustments of $59.4 million for depreciation, depletion and
amortization of PP&E, $8.7 million for a loss on extinguishment of debt, other noncash adjustments totaling approximately $12.4
million and $27.6 million of net cash provided primarily from our working capital including an increase in our trade accounts payable,
and deferred income associated with an amended LDAN purchase and sales agreement.
Cash Flow from Continuing Investing Activities
g
g
Net cash used by continuing investing activities was $10.8 million for 2017 compared to net cash provided of $153.3 million, a change
of $164.1 million. For 2017, the net cash used relates to expenditures for PP&E of $35.4 million partially offset by net proceeds of
$23.8 million from the sale of our working interests in certain natural gas properties, engineered products business (industria
l
n
machinery and related components) and other (cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:53)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)
1 to the Consolidated Financial Statements and $0.8 million associated with other activities.
For 2016, the net cash provided consists of $362 million of net proceeds from the sale of the Climate Control Business and other
property and equipment and $3.8 million associated with other activities partially offset by $212.5 million of cash used for
expenditures for PP&E.
Cash Flow from Continuing Financing Activities
g
g
Net cash used by continuing financing activities was $16.1 million for 2017 compared to $193.7 million for 2016, a change of
approximately $177.6 million.
For 2017, the net cash used consists of payments on long-term debt and related costs of $14.2 million and $1.9 million of other
activities.
For 2016, the net cash used relates to the payments on the 7.75% and 12% Senior Secured Notes totaling $100 million, the redemption
of a portion of the Series E Redeemable Preferred including dividends of approximately $80 million, payments on long-term debt of
$15.4 million and payments of debt and equity modification, extinguishment and issuance costs of $13.1 million partially offset by net
proceeds from long-term debt financing of approximately $14.8 million.
t
40
Capitalization
p
The following is our total current cash, long-term debt, redeemable preferred stock (cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:29)(cid:3)
Cash and cash equivalents
Revolving credit facility and long-term debt:
Working Capital Revolver Loan
Senior Secured Notes due 2019
Secured Promissory Note due 2017 (1)
Secured Promissory Note due 2019
Secured Promissory Note due 2021
Secured Promissory Note due 2023
Other
Unamortized discount and debt issuance costs
Total long-term debt, including current portion, net
Series E and F redeemable preferred stock (2)
Total stockholders' equity
December 31,
December 31,
2017
2016
$
(In Millions)
33.6
$
(cid:178)(cid:178)
375.0
(cid:178)(cid:178)
8.2
11.2
16.7
3.0
(4.7 )
$
$
$
409.4
175.0
438.2
$
$
$
60.0
(cid:178)(cid:178)
375.0
6.5
9.2
14.3
18.6
4.2
(7.6 )
420.2
145.0
492.5
(1) During 2017, concurrently with the closing of the purchase and sale agreement relating to Zena discussed above under
(cid:179)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)-(cid:21)(cid:19)(cid:20)(cid:26)(cid:180)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72) Overview, a portion of the net proceeds (approximately $3.5 million) from the
sale was used to repay the remaining outstanding balance of this promissory note.
(2) Liquidation preference of $185.2 million as of December 31, 2017.
We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $50 million. As of
December 31, 2017, our Working Capital Revolver Loan was undrawn and had $41.2 million of availability.
As discussed below, we have planned capital improvements relating to maintaining and enhancing safety and reliability at our
facilities of approximately $35 million for 2018.
a
We believe that the combination of our cash on hand, the availability on our revolving credit facility,
operations will be sufficient to fund our anticipated liquidity needs for the next twelve months.
d
and our cash flow from
Compliance with Long - Term Debt Covenants
As discussed below unde(cid:85)(cid:3)(cid:179)(cid:47)(cid:82)(cid:68)(cid:81)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:180)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:58)(cid:82)rking Capital Revolver Loan requires, among other things, that we meet certain
financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant
trigger event has occurred and is continuing. As of December 31, 2017, no trigger event had occurred.
Loan Agreements and Redeemable Preferred Stock
g
Senior Secured Notes due 2019 (cid:177) LSB has $375 million aggregate principal amount of the 8.5% Senior Secured Notes
(cid:177)
currently outstanding. Interest is to be paid semiannually on February 1st and August 1st.
Secured Promissory Note due 2019 (cid:177) EDC is party to a secured promissory note
due June 29, 2019. This promissory note
bears interest at the annual rate of 5.73%. Principal and interest are payable in equal monthly installments with a final balloon
payment of approximately $6.7 million. This promissory note is secured by the cogeneration facility equipment and is guaranteed by
LSB.
(cid:177)
Secured Promissory Note due 2021 (cid:177) EDC is party to a secured promissory note due March 26, 2021. This promissory note
bears interest at the annual rate of 5.25%. Principal and interest are payable in monthly installments. This promissory note is secured
by a natural gas pipeline at the El Dorado Facility and is guaranteed by LSB.
(cid:177)
Secured Promissory Note due 2023 (cid:177) EDA is party to a secured promissory note due in May 2023. Principal and interest are
payable in equal monthly installments with a final balloon payment of approximately $6.1 million. This promissory note bears
interest at a rate that is based on the monthly LIBOR rate plus a base rate for a total of 5.62%. This promissory note is secured by the
ammonia storage tank and related systems and is guaranteed by LSB.
uu
(cid:177)
41
(cid:177)
Working Capital Revolver Loan (cid:177) At December 31, 2017, there were no outs
tanding borrowings under the Working Capital
Revolver Loan and the net credit available for borrowings under our Working Capital Revolver Loan was approximately $41.2
g Capital
f
million, based on our eligible collateral, less outstanding letters of credit as of that date. The maturity date of the Workin
Revolver Loan is January (cid:20)(cid:26)(cid:15)(cid:3)(cid:21)(cid:19)(cid:21)(cid:21)(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:3)(cid:86)(cid:83)(cid:85)(cid:76)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:68)(cid:85)(cid:79)(cid:76)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:83)(cid:85)(cid:76)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:48)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:39)(cid:68)(cid:87)(cid:72)(cid:180)(cid:12)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:28)(cid:19)(cid:3)(cid:71)(cid:68)(cid:92)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
maturity date of the currently (cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)e extent the Senior Notes are not refinanced or repaid
prior to the Springing Maturity Date. The Working Capital Revolver Loan Amendment also provides for a springing financial
(cid:70)(cid:82)(cid:89)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:15)(cid:3)(cid:76)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:89)(cid:68)ilability is less than or equal to the greater of 10.0% of
the total revolver commitments and $5 million, then the borrowers must maintain a minimum fixed charge coverage ratio of not less
than 1.00:1.00. The Financial Covenant, if triggered, is tested monthly. (cid:36)(cid:79)(cid:86)(cid:82)(cid:3)(cid:86)(cid:72)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:47)(cid:82)(cid:81)(cid:74)-
Term Debt Covenants.
Redemption of Series E Redeemable Preferred (cid:177) At December 31, 2017, there were 139,768 outstanding shares of Series E
(cid:177)
Redeemable Preferred.
(cid:36)(cid:87)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:21)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:15)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3) us at a
redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the
(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72) (cid:179)(cid:47)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:180)(cid:12)(cid:17) Additionally, at our option, we may redeem the Series E Redeemable
Preferred at any time at a redemption price per share equal to the Liquidation Preference of such share as of the redemption date.
Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares of Series E Redeemable Preferred and
(ii) all other required approvals, including under any principal U.S. securities exchange on which our common stock is then listed for
trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of common stock having an aggregate common
stock price equal to the amount of the aggregate Liquidation Preference of such shares being redeemed in shares of common stock in
lieu of cash at the redemption date.
k
In the event of liquidation, the Series E Redeemable Preferred is entitled to receive its Liquidation Preference before any such
distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other junior stock. In the event
of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding at the
Liquidation Preference.
Since carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for
dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as
of August 2, 2019, the earliest possible redemption date by the holder, this accretion has and will continue to affect income (loss) per
common share. In addition, this accretion could accelerate if the expected redemption date is earlier than August 2, 2019.
As of December 31, 2017, the aggregate liquidation preference (par value plus accrued dividends) was $185.2 million.
Also, see discussion in Notes 9 and 13 to Consolidated Financial Statements included in this report.
Capital Improvements (cid:177) 2017
(cid:177)
For 2017, capital improvements relating to PP&E were $37.4 million, which improvements include approximately $3.1 million
associated with maintaining compliance with environmental laws, regulations and guidelines. The capital improvements were funded
primarily from cash and working capital.
(cid:54)(cid:72)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79) improvements for 2018.
Expenses Associated with Environmental Regulatory Compliance
We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, we incurred
expenses of $4.1 million in 2017 in connection with environmental projects. For 2018, we expect to incur expenses ranging from $3.6m
million to $4.6 million in connection with additional environmental projects. However, it is possible that the actual costs could be
significantly different than our estimates.
Dividends
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.
Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the
annual rate of 14% of the liquidation value of $1,000 per share. Each share of Series E Redeemable Preferred is entitled to receive a
til paid,
semi-annual dividend, only when declared by our Board of Directors. In addition, dividends in arrears at the dividend date, un
shall compound additional dividends at the annual rate of 14%. The current semiannual compounded dividend is approximately
$90.69 per share for the current aggregate semi-annual dividend of $12.7 million. We also must declare a dividend on the Serie
s E
f
Redeemable Preferred on a pro rata basis with our common stock. As long as the Purchaser holds at least 10% of the Series E
Redeemable Preferred, we may not declare dividends on our common stock and other preferred stocks unless and until dividends have
been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash. As of December 31, 2017,
n
42
the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $45.5 million. See discussion under
(cid:73)
(cid:179)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:86)(cid:180)(cid:3)(cid:82)(cid:73)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)
(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)
(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:39)(cid:3)(cid:25)(cid:8)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:38)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:38)(cid:3)(cid:83)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:39)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:37) 12% cumulative
convertible Class C Preferred Stock (cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:37)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15) only when declared by our Board of Directors, as
follows:
(cid:120)
(cid:120)
$0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate dividend of $60,000, and
$12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate dividend of $240,000.
As of December 31, 2017, no dividend has been declared and the amount of accumulated dividends on the Series D Preferred and
Series B Preferred totaled approximately $0.7 million. All shares of the Series D Preferred and Series B Preferred are owned by the
Golsen Holders. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred.
Seasonalityy
See discussion above (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:51)(cid:68)(cid:85)(cid:87)(cid:3)(cid:44)-(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:85)(cid:72)(cid:81)(cid:71)(cid:86)(cid:17)
Performance and Payment Bonds
y
We are contingently liable to sureties in respect of insurance bonds issued by the sureties in connection with certain contracts entered
into by subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of
our subsidiaries. As of December 31, 2017, we have agreed to indemnify the sureties for payments, up to $10 million, made by them
in respect of such bonds. All of these insurance bonds are expected to expire or be renewed in 2018.
t
Off-Balance Sheet Arrangements
g
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.
43
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g
New Accounting Pronouncements
For recently adopted and recently issued accounting standards, see discussions in Note 1 (cid:177) Summary of Significant Accounting
Policies to the Consolidated Financial Statements included in this report.
(cid:177)
Critical Accounting Policies and Estimates
g
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 and fair values. It is reasonably possible that the estimates
and assumptions utilized as of December 31, 2017, could change in the near term. The more critical areas of financial reporting
affected by management's judgment, estimates and assumptions include the following:
Strategic Review of Certain Assets (cid:177) (cid:36)(cid:86)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3) (cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:50)(cid:89)(cid:72)(cid:85)(cid:89)(cid:76)(cid:72)(cid:90)(cid:15)(cid:180)(cid:3) (cid:82)(cid:81)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:78)(cid:72)(cid:92)(cid:3) (cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:21)(cid:19)(cid:20)(cid:27)(cid:3) (cid:76)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
continued review of our cost structure with the goal of reducing our annual overall costs. In conjunction with this review, we continue
to evaluate the return on investment and necessity of certain assets. As a result, we currently own certain assets (net book value of
approximately $7 million) that we are considering selling. Due to the nature of some of these assets, there may be a limited market.
As a result, and depending on appraisals obtained and offers received, if any, from potential buyers, it is reasonably possible we could
incur impairment charges or losses on sales of assets in the near term.
(cid:177)
Contingencies (cid:177) Certain conditions may exist which may result in a loss,
but which will only be resolved when future events
occur. We and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.
If the assessment of a contingency indicates that it is probable that a loss has been incurred, we would accrue for such contingent
losses when such losses can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not
probable but reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, would be disclosed. Estimates of potential legal fees and other
directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Loss contingency liabilities
are included in current and noncurrent accrued and other liabilities and are based on cu
the near
uu
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term. In addition, we recognize contingent gains when such gains are realized or realizable and earned.
n
the
t
We are involved in various legal matters that require management to make estimates and assumptions, including costs relating to
lawsuit styled City of West, Texas v CF Industries, Inc., et al,
and BAE Systems Ordinance Systems, Inc., et al. vs. El Dorado
Chemical Company, (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:51)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3) (cid:55)(cid:75)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:81)(cid:72)(cid:71)(cid:3) (cid:82)(cid:85)(cid:3) (cid:54)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:71)(cid:3) (cid:47)(cid:76)(cid:87)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3) (cid:82)(cid:73)(cid:3) (cid:49)(cid:82)(cid:87)(cid:72)(cid:3) (cid:20)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
Statements include in this report.
F
It is reasonably possible that the actual costs could be significantly different than our estimates.
f
Regulatory Compliance (cid:177) (cid:36)(cid:86)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:179)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:15)(cid:3) (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:54)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3) (cid:48)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:180)(cid:3) (cid:76)(cid:81)(cid:3) (cid:44)(cid:87)(cid:72)(cid:80)(cid:3) (cid:20)(cid:3) (cid:82)(cid:73) this report, we are
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. We will als
o be
obligated to manage certain discharge water outlets and monitor groundwater contaminants at our chemical facilities should we
discontinue the operations of a facility. However, certain conditions exist which may result in a loss, but which will only be resolved
when future events occur relating to these matters. We are involved in various environmental matters that require management to
make estimates and assumptions, including our current inability to develop a meaningful and reliable estimate (or range of estimate) as
to the costs relating to a corrective action study work plan approved by the Kansas Department of Health and (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:179)(cid:46)(cid:39)(cid:43)(cid:40)(cid:180)(cid:12)
discussed under footnote 3 (cid:177) Other Environmental Matters of Note 11. At December 31, 2017 and 2016, liabilities totaling $0.2
million and $0.3 million, respectively have been accrued relating to these issues as discussed. This liability is included in current
accrued and other liabilities and is based on current estimates that may be revised in the near term. At the time that cost estimates for
any corrective action are received, we will adjust our accrual accordingly. It is reasonably possible that the adjustment to the accrual
u
and the actual costs could be significantly different than ou
r current estimates.
(cid:177)
y
(cid:73)
Redeemable Preferred Stocks (cid:177) On December 4, 2015, we issued the Series E and F Redeemable Preferred. The redeemable
preferred stocks are redeemable outside of our control and are classified as temporary/mezzanine equity on our consolidated balance
(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:17)(cid:3) (cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:73)(cid:72)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:180)(cid:12)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3) (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)ired
bifurcation and are classified as derivative liabilities.
Currently, the carrying values of the redeemable preferred stocks are being increased by periodic accretions (recorded to retained
earnings and included in determining income or loss per share) using the interest method so that the carrying amount will equal the
redemption value as of August 2, 2019, the earliest possible redemption date by the holder. However, a portion of this accretion was
accelerated ($6.6 million) during 2016 as the result of the redemption discussed in Note 9 and the remaining accretion could accelerate
if the expected redemption date is earlier than August 2, 2019. Approximately $30 million of accretion (including the amount for
ff
45
earned dividends) was recorded to retained earnings in 2017. At December 31, 2017, the carrying value of these redeemable preferred
stocks was $175 million.
ff
r
For the embedded derivative, changes in fair value are recorded in our statement of
operations. As the result of the effect of certain
amendments to the Senior Secured Notes indenture (cid:11)(cid:179)(cid:44)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)Amendments(cid:180)(cid:12) in connection with the consent solicitation initiated in
August 2016 (cid:11)(cid:179)Consent Solicitation(cid:180)(cid:12) as discussed in Note 9, including the redemption of the portion of Series E Redeemable
Preferred discussed in Notes 9 and 13, we estimate that the contingent redemption feature has no fair value based on low probability
that the remaining shares of Series E Redeemable Preferred would be redeemed prior to August 2, 2019. At December 31, 2017 and
2016, the fair value of the participation rights was $2.7 million and $2.6 million, respectively, based on the equivalent of 303,646
shares of our common stock at $8.76 and $8.42 per share, respectively. No valuation input adjustments were considered necessary
relating to nonperformance risk for the embedded derivative based on our current forecast. The valuation is classified as Level 3.
f
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:77)(cid:88)(cid:71)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:68)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80) internal and external resources at
that time. Actual results could differ materially from these estimates and judgments, as additional information becomes known.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Q
Q
General
Our results of operations and operating cash flows are affected by changes in market prices of natural gas, changes in market i
rates and changes in market currency exchange rates.
y
nterest
Forward Sales Commitments Risk
Periodically, we enter into forward firm sales commitments for products to be delivered 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, 2017, we had no embedded
losses associated with sales commitments with firm sales prices.
y
Commodity Price Risk
x
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand
do not use derivative financial instruments to manage
fundamentals change. We are exposed to commodity price risk as we generally
risks related to changes in prices of commodities. We periodically enter into contracts to purc
hase natural gas for anticipated
production needs. Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas
that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these
contracts are exempt from the accounting and reporting requirements relating to derivatives. At December 31, 2017, we did not have
any natural gas derivatives not meeting the definition of a normal purchase and sale.
y
Interest Rate Risk
Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility. As of December 31, 2017, we
have zero borrowings on this credit facility. We are also exposed to interest rate risk on variable rate borrowings for certain
commercial loans in the amount of approximately $16.7 million. We currently do not hedge our interest rate risk associated with these
variable interest loans.
The following table presents principal amounts and related weighted-average interest rates by maturity date for our interest rate
sensitive debt agreements as of December 31, 2017:
2018
2019
Years ending December 31,
2020
(Dollars In Thousands)
2021
2022
Thereafter
Total
Expected maturities of long-term debt (1):
Variable interest rate debt
Weighted-average interest rate
Fixed interest rate debt
Weighted-average interest rate
$
1,980
$
5.49%
1,980
$
5.49%
$
7,166
$ 385,512
$
8.35%
8.34%
1,980
$
5.49%
$
5.25%
3,527
1,980
$ 1,980 $
5.49%
(cid:178)(cid:178) $
0.00%
1,218
5.49%
$
5.25%
6,765 $ 16,665
5.49%
5.49%
(cid:178)(cid:178) $ 397,423
0.00%
8.31%
(1)
The variable and fixed interest rate debt balances and weighted-average interest rate are based on the aggregate amount of debt
outstanding as of December 31, 2017.
46
The following table presents our significant purchase commitments under firm purchase commitments with fixed prices and related
weighted-average contract costs by contract terms as of December 31, 2017:
Firm purchase commitments:
Natural gas:
2018
Years ending December 31,
2020
2019
2021
(Dollars In Thousands, Except For Weighted Average Costs)
2022
Thereafter
Total
Total cost of contracts
Weighted-average cost per MMBtu
$
$
3,020 $
2.42 $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $ 3,020
2.42
(cid:178)(cid:178) $
At December 31, 2017 and 2016, we did not have any financial instruments with fair values significantly different from their carrying
amounts (which excludes issuance costs, if applicable), except for the Senior Secured Notes as shown below.
Senior Secured Notes (1)
Carrying
Amount
2017
Estimated
Fair Value
Carrying
Amount
2016
Estimated
Fair Value
$
375 $
(In Millions)
372 $
375 $
356
(1) Based on a quoted price of 99.25 and 94.88 at December 31, 2017 and 2016, respectively.
The Senior Secured Notes valuation is classified as Level 2. The valuations of our other long-term debt agreements are classified as
Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. The fair value measurements of our other long-term debt agreements are valued using a discounted cash flow model
that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market
interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings
of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance
risk
d
for our debt agreements. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities
since financial instruments do not include all assets, including intangibles, and all liabilities.
d
ff
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.
rr
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 Exchange Act). Our disclosure controls and procedures are designed to provide reasonable
assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act
(cid:76)(cid:86)(cid:3) (cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3) (cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3) (cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:76)(cid:80)(cid:72)(cid:3) (cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3) (cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:54)(cid:40)(cid:38)(cid:182)(cid:86)(cid:3) (cid:85)(cid:88)(cid:79)(cid:72)(cid:86) and forms. These include
(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)
including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our
internal control over financial reporting during the
disclosure controls and procedures were effective. There were no changes to our
quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal cont
rol over
financial reporting.
aa
r
ff
47
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act. Our internal control system (cid:76)(cid:86)(cid:3) (cid:68)(cid:3) (cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)
Executive Officer and Chief Financial Officer, designed to provide reasonable assurance to our management and Board of Directors
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States. 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, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness o
f our
ff
internal control over financial reporting as of December 31, 2017. 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 (2013 Framework).
Based on our assessment, we believe that, as of December 31, 2017, 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.
rr
48
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of LSB Industries, Inc.
Opinion on Internal Control over Financial Reporting
(cid:58)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:47)(cid:54)(cid:37)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:182)(cid:86) internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control(cid:178)Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, LSB Industries, Inc. (the Company) maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
f
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2017 consolidated financial statements of the Company and our report dated February 26, 2018 expressed an
unqualified opinion thereon.
f
Basis for Opinion
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)esponsible 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 (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)
over Financial Reporting(cid:17)(cid:3)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 uu
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
(cid:36)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)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
(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:79)(cid:72)(cid:86)(cid:17)(cid:3) (cid:3) (cid:36)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:82)(cid:89)(cid:72)(cid:85)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3) (cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3) (cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:11)(cid:20)(cid:12)(cid:3) (cid:83)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3) (cid:87)(cid:82) 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
f
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)ould have a material effect
(cid:83)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:79)(cid:92)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73) (cid:88)(cid:81)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:88)(cid:86)(cid:72)
(cid:73)
on the financial statements.
y
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.
h
/s/ Ernst & Young LLP
Oklahoma City, Oklahoma
February 26, 2018
49
ITEM 9B. OTHER INFORMATION
None.
Item 10, Item 11, Item 12, Item 13 and Item 14 are incorporated by reference to our definitive proxy statement which we intend to file
with the SEC on or before April 30, 2018.
PART III
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:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2017
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
( ) ( )
(a) (2) Financial Statement Schedule
The Company has included the following schedule in this report:
II - Valuation and Qualifying Accounts
Page
F-2
F-3
F-5
F-6
F-7
F-9
F-45
F-47
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.
50
( )( )
(a)(3) Exhibits
Exhibit
Number
Exhibit Title
p
Incorporated by Reference
to the Followingg
y
3(i).1
3(ii).1
3(ii).2
3(ii).3
3(ii).4
Restated Certificate of Incorporation of LSB Industries, Inc., dated
January 21, 1977, as amended August 27, 1987
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:22)(cid:11)(cid:76)(cid:12)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86) Form 10-K filed
on February 28, 2013
Amended and Restated Bylaws of LSB Industries, Inc. dated
August 20, 2009, as amended February 18, 2010, January 17,
2014, February 4, 2014 and August 21, 2014
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:22)(cid:11)(cid:76)(cid:76)(cid:12)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 27, 2014
Fifth Amendment to the Amended and Restated Bylaws of LSB
Industries, Inc., dated as of April 26, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:22)(cid:11)(cid:76)(cid:76)(cid:12)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
April 30, 2015
Sixth Amendment to the Amended and Restated Bylaws of LSB
Industries, Inc., dated as of December 2, 2015
Exhibit 3(ii) to the Co(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Seventh Amendment to the Amended and Restated Bylaws of LSB
Industries, Inc., dated as of December 22, 2015
Exhibit 3(ii) to the Co(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 29, 2015
4.1(P)
(cid:54)(cid:83)(cid:72)(cid:70)(cid:76)(cid:80)(cid:72)(cid:81)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:37)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:21)(cid:26)(cid:3)
Statement on Form S-3 No. 33-9848
(cid:87)(cid:82)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
(cid:54)(cid:83)(cid:72)(cid:70)(cid:76)(cid:80)(cid:72)(cid:81)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:39)(cid:3)(cid:25)(cid:8)(cid:3)(cid:38)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3)
Convertible Class C Preferred Stock
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
March 3, 2011
(cid:54)(cid:83)(cid:72)(cid:70)(cid:76)(cid:80)(cid:72)(cid:81)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)
Certificate of Designations of Series E Cumulative Redeemable
Class C Preferred Stock of LSB Industries, Inc., dated as of
December 4, 2015
Certificate of Designations of Series F Cumulative Redeemable
Class C Preferred Stock of LSB Industries, Inc., dated as of
December 4, 2015
(cid:87)(cid:82)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:22)(cid:3)
Statement on Form S-3 ASR filed November 16,
2012
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Renewed Rights Agreement, dated as of December 2, 2008,
between the Company and UMB Bank, n.a.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 5, 2008
Amendment to Renewed Rights Agreement, dated December 3,
2008, between LSB Industries, Inc. and UMB Bank, n.a.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 5, 2008
Amendment to Renewed Rights Agreement, dated as of December
4, 2015, by and between LSB Industries, Inc. and UMB Bank, n.a.,
dated as of December 4, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Indenture, dated August 7, 2013, among LSB Industries, Inc., the
guarantors named therein and UMB Bank, n.a., as trustee
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 14, 2013
First Supplemental Indenture, dated as of September 7, 2016, by
and among LSB Industries, Inc., the guarantors party thereto and
UMB Bank, n.a., as trustee and notes collateral agent
Intercreditor Agreement, dated August 7, 2013, by and among
Wells Fargo Capital Finance, Inc., as agent and UMB Bank, n.a.,
as collateral agent, and acknowledged and agreed to by LSB
Industries, Inc. and the other grantors named therein
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
October 4, 2016.
Exhibit 99.1 to th(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 14, 2013
t
10.1*
Form of Death Benefit Plan Agreement, dated April 1, 1981
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
March 31, 2006
10.2*
LSB Industries, Inc. Outside Directors Stock Purchase Plan, dated
May 24, 1999
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
October 23, 2014
51
Exhibit
Number
10.3*
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5,
2008, as amended by First Amendment, effective June 5, 2014
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
June 11, 2014
10.4*
Form of Restricted Stock Agreement
10.5*
Form of Incentive Stock Option Agreement for 2008 Plan
10.6*
LSB Industries, Inc. 2016 Long Term Incentive Plan
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
January 8, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:27)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:23)(cid:17)(cid:27)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:54)-8 filed June
28, 2016
10.7*
10.8*
10.9*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Stock Option Agreement
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:23)(cid:17)(cid:28)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:54)-8 filed June
28, 2016
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Restricted Stock Unit Agreement (Director Award)
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:20)(cid:19)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:54)-8 filed
June 28, 2016
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Restricted Stock Agreement
Exhibit 4.11 (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) S-8 filed
June 28, 2016
Severance and Release Agreement, dated September 1, 2015, by
and between the Company and Barry H. Golsen
Exhibit 10.1 to the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
September 4, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:28)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
March 2, 2015
Employment Agreement and Amendment to Severance Agreement
dated January 12, 1989, between the Company and Jack E. Golsen,
dated March 21, 1996, (with Severance Agreement dated
January 17, 1989 attached) as amended by the First Amendment to
Employment Agreement, dated April 29, 2003, as amended by the
Second Amendment to Employment Agreement, dated May 12,
2005, as amended by the Third Amendment to Employment and
Severance Agreement, dated December 17, 2008, as amended by
the Fourth Amendment
to Employment Agreement, dated
January 1, 2015
2015 Amendment to Severance Agreement, dated April 27, 2015,
by and between the Company and Jack E. Golsen
Employment Agreement by and between LSB Industries, Inc. and
Mark Behrman, dated January 14, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:26)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86) Form 8-K filed
April 30, 2015
Exhibit 10.1 to (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
January 21, 2016
Restricted Stock Agreement by and between LSB Industries, Inc.
and Mark Behrman, dated as of December 31, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:26)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
Severance and Release Agreement, dated November 3, 2015, by
and between the Company and David R. Goss
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)orm 10-Q filed
November 9, 2015
Independent Contractor Agreement, dated September 30, 2015, by
and between the Company and Circle S. Consulting LLC,
(executed by Richard S. Sanders on behalf of Circle S. Consulting
LLC as President & Individually).
Exhibit 10.3 to the Com(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)
November 9, 2015
mm
-Q filed
Severance and Release Agreement by and between LSB Industries,
Inc. and David M. Shear, dated as of December 30, 2015
Exhibit 10.1 to the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
January 8, 2016
Consulting Agreement by and between LSB Industries, Inc. and
David M. Shear, dated as of December 31, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
January 8, 2016
Employment Agreement by and between LSB Industries, Inc. and
Daniel D. Greenwell, dated as of December 31, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K/A filed
January 7, 2016
Restricted Stock Agreement by and between LSB Industries, Inc.
and Daniel D. Greenwell, dated as of December 31, 2015
Exhibit 10.2 to the Com(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K/A filed
January 7, 2016
52
Exhibit
Number
10.22*
10.23*
10.24*
10.25*
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
Employment Agreement by and between LSB Industries, Inc. and
Michael Foster, dated as of January 5, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:24)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
Restricted Stock Agreement by and between LSB Industries, Inc.
and Michael Foster, dated as of January 5, 2016
Exhibit (cid:20)(cid:19)(cid:17)(cid:21)(cid:25)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
Separation and Release Agreement by and between LSB
Industries, Inc. and Tony M. Shelby, dated as of February 22, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
February 25, 2016
Employment Agreement by and between LSB Industries, Inc. and
John Diesch, executed as of July 21, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 2, 2016
10.26*
Form of Retention Bonus Agreement
10.27
10.28
10.29
Indemnification Agreement, dated October 14, 2015, by and
between the Company and Jack E. Golsen, together with a
schedule
identical agreements
between the Company and each of the other directors identified on
the schedule
identifying other substantially
Indemnification Agreement, dated October 14, 2015 by and
between the Company and David M. Shear, together with a
schedule
identical agreements
between the Company and each of its executive officers identified
on the schedule
identifying other substantially
Indemnification Agreement, dated as of December 4, 2015, by and
between LSB Industries, Inc. and Jonathan S. Bobb, together with
a schedule identifying other substantially identical agreements
between the Company and each of the other directors identified on
the schedule
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:27)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
(cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
October 19, 2015
Exhibit 10.2 (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
October 19, 2015
December 8, 2015
-K filed
10.30
Nitric Acid Supply, Operating and Maintenance Agreement, dated
October 23, 2008, by and among El Dorado Nitrogen, L.P., El
Dorado Chemical Company and Bayer MaterialScience LLC
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-Q filed
November 6, 2008
DATED
CERTAIN
INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A COMMISSION ORDER CF
#30125,
2013,
GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION
ACT.
OCTOBER 4,
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-Q filed
t
August 6, 2010
DATED
CERTAIN
INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A COMMISSION ORDER CF
#30124,
2013,
GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION
ACT.
OCTOBER 4,
10.31
Second Amendment to the Nitric Acid Supply, Operating and
Maintenance Agreement, dated June 16, 2010, by and among El
Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience LLC
53
Exhibit
Number
10.32
10.33
10.34
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
Third Amendment to the Nitric Acid Supply, Operating and
Maintenance Agreement, dated June 25, 2013, by and among El
Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience LLC
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-Q filed
t
August 9, 2013
DATED
INFORMATION WITHIN THIS
CERTAIN
EXHIBIT HAS BEEN OMITTED AS IT IS
SUBJECT OF A COMMISSION ORDER CF
#30123,
2013,
GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION
ACT.
OCTOBER 4,
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
Inc. and Slurry Explosive Manufacturing
Industries,
Corporation, LLC
Exhibits and Disclosure Letters to the 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
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:21)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K dated
December 27, 2002
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:69)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-Q filed
t
August 6, 2010
10.35
Ammonia Purchase and Sale Agreement by and between El
Dorado Chemical Company and Koch Fertilizer, LLC, dated as of
November 2, 2015
Exhibit 10.49 to the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
CERTAIN
INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A COMMISSION ORDER CF
#33502, DATED APRIL 4, 2016, GRANTING
REQUEST BY THE COMPANY
FOR
CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION
ACT.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-Q filed
August 8, 2016
DATED AUGUST
CERTAIN
INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A COMMISSION ORDER CF
2016,
#33783.
GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION
UNDER THE FREEDOM OF INFORMATION
ACT.
30,
10.36
Urea Ammonium Nitrate Purchase and Sale Agreement dated as of
March 3, 2016 and effective as of June 1, 2016 between
Coffeyville Resources Nitrogen Fertilizers, LLC and Pryor
Chemical Company
54
Exhibit
Number
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
Stock Purchase Agreement by and among Consolidated Industries
L.L.C. The Climate Control Group, Inc., NIBE Energy Systems
Inc. and, solely for purposes of Sections 6.8, 6.19 and 11.15
therein, LSB Industries, Inc., and solely for purposes of Section
11.16 therein, NIBE Indistrier AB (publ), dated as of May 11,
2016.
Contract on the supply of Basic Engineering Package, Detail
Engineering Package, Tagged Major Equipment and related
Advisory Services, between Weatherly Inc. and El Dorado
Chemical Company, dated November 30, 2012
Engineering, Procurement and Construction Agreement, dated
August 12, 2013, between El Dorado Ammonia L.L.C. and SAIC
Constructors, LLC
Construction Agreement-DMW2, dated November 6, 2013,
between El Dorado Chemical Company and SAIC Constructors,
LLC
Construction Agreement (cid:177) NACSAC, dated November 6, 2013,
between El Dorado Chemical Company and SAIC Constructors,
LLC
Engineering, Procurement and Construction Agreement, dated
December 31, 2013, between El Dorado Chemical Company and
SAIC Constructors, LLC
Engineering, Procurement and Construction Contract, Amendment
No. 1 dated October 20, 2015, by and between El Dorado
Ammonia LLC and SAIC Constructors, LLC
Settlement Agreement, dated April 26, 2015, by and among the
Company and Starboard Value LP and its certain affiliates and
associates
Consent Decree, dated May 28, 2014, by and among, LSB
Industries, Inc., El Dorado Chemical Co., Cherokee Nitrogen Co.,
the U.S.
Pryor Chemical Co., El Dorado Nitrogen, L.P.,
Department of Justice, the U.S. Environmental Protection Agency,
the Alabama Department of Environmental Management, and the
Oklahoma Department of Environment Quality
Second Amended and Restated Loan and Security Agreement,
dated December 31, 2013, by and among LSB Industries, Inc.,
each of its subsidiaries that are signatories thereto, the lenders
signatories thereto, and Wells Fargo Capital Finance, LLC
Amendment No. 1 to the Second Amended and Restated Loan and
Security Agreement, dated as of June 11, 2015, by and among LSB
Industries, Inc. its subsidiaries identified on the signature pages
thereof, the lenders identified on the signature pages thereof and
the arranger and
Wells Fargo Capital Finance, LLC, as
administrative agent for the Lenders
Amendment No. 2 to the Second Amended and Restated Loan and
Security Agreement, dated as of November 9, 2015, by and among
LSB Industries, Inc., its subsidiaries identified on the signature
pages thereof, the lenders identified on the signature pages thereof,
and Wells Fargo Capital Finance, LLC, as the arranger and
administrative agent for the Lenders
55
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
May 13, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 6, 2012
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 15, 2013
t
Exhibit 99.1 (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
November 12, 2013
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
November 12, 2013
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
y
January 7, 2014
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
October 26, 2015
Exhibit 99.1 to the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
April 30, 2015
Exhibit (cid:28)(cid:28)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
June 3, 2014
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:23)(cid:17)(cid:28)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
y
February 27, 2014
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:28)(cid:28)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
June 17, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
November 16, 2015
Exhibit
Number
10.49
10.50
10.51
10.52
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
Third Amended and Restated Loan and Security Agreement, dated
as of January 17, 2017, by and among LSB Industries, Inc., the
subsidiaries of LSB Industries, Inc. party thereto, the lenders party
thereto, and Wells Fargo Capital Finance, LLC, as the arranger and
administrative agent.
Security Agreement dated as of August 7, 2013, among LSB
Industries, Inc. and the other grantors identified therein in favor of
UMB Bank, N.A. as Collateral Agent
Supplement No. 1 to Security Agreement February 12, 2014
among LSB Industries, Inc. and the other grantors identified
therein in favor of UMB Bank, N.A., as Collateral Agent
Note Purchase Agreement, dated November 9, 2015, by and
among LSB Industries, Inc., the guarantors party thereto and LSB
Funding LLC
Exhibit 10(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
January 20, 2017
y
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:26)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:26)(cid:22)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:20)(cid:19)-K filed
February 29, 2016
Exhibit 10.1 to the Compan(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
November 16, 2015
10.53
Promissory Note, dated November 9, 2015, by LSB Industries, Inc. (cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62*
10.63
Joinder Agreement to Intercreditor Agreement, dated November 9,
2015, by and among LSB Funding LLC, Wells Fargo Capital
Finance, Inc., as ABL Agent, UMB Bank, N.A., as Notes Agent,
LSB Industries, Inc. and the guarantors party thereto
Joinder Agreement to Security Agreement, dated November 9,
2015, by and among LSB Funding LLC, UMB Bank, N.A., as
Collateral Agent, LSB Industries, Inc. and the guarantors party
thereto
Securities Purchase Agreement by and among LSB Industries, Inc.,
LSB Funding LLC, and Security Benefit Corporation, dated as of
December 4, 2015
November 16, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:23)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
November 16, 2015
November 16, 2015
-K filed
Exhibit 10.1 to the Co(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Warrant to Purchase Common Stock issued by LSB Industries, Inc.
to LSB Funding LLC, dated as of December 4, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Board Representation and Standstill Agreement by and among
LSB Industries, Inc., LSB Funding LLC, Security Benefit
Corporation, Todd Boehly and the Golsen Holders (as defined
therein), dated as of December 4, 2015
Exhibit 10.3 to the Co(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Registration Rights Agreement by and between LSB Industries,
Inc. and LSB Funding LLC, dated as of December 4, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:23)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
December 8, 2015
Letter Agreement, dated as of August 12, 2016, by and among
LSB Industries, Inc., LSB Funding LLC and Security Benefit
Corporation
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
August 12, 2016
Purchase and Sale Agreement dated May 11, 2017 between Zena
Energy L.L.C and BKV Chelsea, LLC.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:20)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K filed
May 11, 2017.
Transition Agreement dated June 30, 2017 by and between Jack E.
Golsen and LSB Industries, Inc.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:20)(cid:19)(cid:17)(cid:20)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:27)-K filed on
June 30, 2017
Amendment, dated October 26, 2017, to the Board Representation
and Standstill Agreement by and between LSB Industries, Inc.,
LSB Funding LLC, Security Benefit Corporation, Todd Boehly,
Jack E. Golsen, Barry H. Golsen, Linda Golsen Rappaport, Golsen
Family LLC, SBL LLC and Golsen Petroleum Corp., dated as of
December 4, 2015
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:20)(cid:19)(cid:17)(cid:20)(cid:17)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:41)(cid:82)(cid:85)(cid:80)(cid:3)(cid:27)-K Filed on
October 26, 2017
10.64*
Release Agreement, dated as of October 26, 2017, by and between
William F. Murdy and the Company.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:20)(cid:19)(cid:17)(cid:21)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:41)(cid:82)(cid:85)(cid:80)(cid:3) (cid:27)-K fled on
October 26, 2017
56
Exhibit
Number
12.1(a)
Exhibit Title
Incorporated by Reference
p
to the Followingg
y
Calculation of Ratios of Earnings to Fixed Charges and Combined
Fixed Charges and Preferred Stock Dividends
21.1(a)
Subsidiaries of the Company
23.1(a)
Consent of Independent Registered Public Accounting Firm
31.1(a)
31.2(a)
32.1(b)
32.2(b)
Certification of Daniel D. Greenwell, Chief Executive Officer,
pursuant to Sarbanes-Oxley Act of 2002, Section 302
Certification of Mark T. Behrman, Chief Financial Officer,
pursuant to Sarbanes-Oxley Act of 2002, Section 302
Certification of Daniel D. Greenwell, Chief Executive Officer,
furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906
Certification of Mark T. Behrman, Chief Financial Officer,
furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906
101.INS(a) XBRL Instance Document
101.SCH(a) XBRL Taxonomy Extension Schema Document
101.CAL(a) XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(a) XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(a) XBRL Taxonomy Extension Labels Linkbase Document
101.PRE(a) XBRL Taxonomy Extension Presentation Linkbase Document
Executive Compensation Plan or Arrangement
*
(a) Filed herewith
(b) Furnished herewith
(P) Paper copy filed
57
LSB Industries, Inc.
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.
f
Dated:
February 26, 2018
By:
/s/ Daniel D. Greenwell
Daniel D. Greenwell, President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
n
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
Dated:
February 26, 2018
By:
By:
By:
/s/ Daniel D. Greenwell
Daniel D. Greenwell, President and Chief Executive Officer
(Principal Executive Officer) and Chairman of the Board of
Director
/s/ Mark T. Behrman
Mark T. Behrman, Executive Vice President of Finance,
Chief Financial Officer (Principal Financial Officer)
/s/ Harold L. Rieker Jr.
Harold L. Rieker Jr., Vice President and Corporate Controller
(Principal Accounting Officer)
rr
By:
/s/ Jonathan S. Bobb
Jonathan S. Bobb, Director
By:
/s/ Jack E. Golsen
Jack E. Golsen, Chairman Emeritus
By:
/s/ Mark R. Genender
Mark R. Genender, Director
By:
/s/ Barry H. Golsen
Barry H. Golsen, Director
By:
/s/ Marran H. Ogilvie
Marran H. Ogilvie, Director
By:
/s/ Richard W. Roedel
Richard W. Roedel, Director
By:
/s/ Richard S. Sanders Jr.
Richard S. Sanders Jr., Director
By:
/s/ Lynn F. White
Lynn F. White, Director
58
LSB Industries, Inc.
Consolidated Financial Statements
And Schedule for Inclusion in Form 10-K
For the Fiscal Year ended December 31, 2017
Table of Contents
Financial Statements
Report of Independent Registered Public Accounting Firm ...........................................................................................................
Consolidated Balance Sheets ..........................................................................................................................................................
Consolidated Statements of Operations ..........................................................................................................................................
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) ..........................................................................................................................
Consolidated Statements of Cash Flows .........................................................................................................................................
Notes to Consolidated Financial Statements ...................................................................................................................................
Page
F(cid:177)2
F(cid:177)3
F(cid:177)5
F(cid:177)6
F(cid:177)7
F(cid:177)9
Quarterly Financial Data (Unaudited) .............................................................................................................................................
F(cid:177)45
Financial Statement Schedule
Schedule II (cid:177) Valuation and Qualifying Accounts ..........................................................................................................................
F(cid:177)47
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of LSB Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LSB Industries, Inc. (the Company) as of December 31, 2017 and
2016, and the related consolidated statements of operation(cid:86)(cid:15)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3) (cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:70)(cid:68)(cid:86)(cid:75)(cid:3) (cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:72)(cid:68)(cid:70)(cid:75)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:75)(cid:85)(cid:72)(cid:72)(cid:3) (cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)
period ended December 31, 2017, and the related notes and the financial statement schedule listed in the index at Item 15(a)
(cid:11)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)). In our opinion, the financial statements present fairly, in all material respects,
the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(cid:11)(cid:51)(cid:38)(cid:36)(cid:50)(cid:37)(cid:12)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)ternal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated February 26, 2018 expressed an unqualified opinion thereon.
f
r
Basis for Opinion
These financial statements are the responsibility of the Company(cid:182)s management. Our responsibility is to express an opinion on the
Company(cid:182)s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standa
rds require that we plan and perform the audit
h
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company(cid:182)s auditor since 1968.
Oklahoma City, Oklahoma
February 26, 2018
F-2
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Supplies, prepaid items and other:
Prepaid insurance
Precious metals
Supplies
Prepaid and refundable income taxes
Other
Total supplies, prepaid items and other
Total current assets
Property, plant and equipment, net
Intangible and other assets, net
LSB Industries, Inc.
Consolidated Balance Sheets
(Continued on following page)
December 31,
2017
2016
(In Thousands)
$
$
33,619
59,570
21,856
10,535
7,411
27,729
1,736
1,284
48,695
163,740
60,017
51,299
22,939
11,217
8,648
24,100
1,193
1,733
46,891
181,146
1,014,038
1,078,958
11,404
10,316
$
1,189,182
$
1,270,420
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, net
Noncurrent accrued and other liabilities
Deferred income taxes
Commitments and contingencies (Note 11)
Redeemable preferred stocks:
Series E 14% cumulative, redeemable Class C preferred stock, no par value,
210,000 shares issued; 139,768 outstanding; aggregate liquidation preference
of $185,231,000 ($161,788,000 at December 31, 2016)
Series F redeemable Class C preferred stock, no par value, 1 share issued
and outstanding; aggregate liquidation preference of $100
Stockholders' equity:
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,
31,280,685 shares issued
Capital in excess of par value
Retained earnings
Less treasury stock, at cost:
Common stock, 2,662,027 shares (3,004,855 shares at December 31, 2016)
Total stockholders' equity
See accompanying notes.
$
December 31,
2017
2016
(In Thousands)
$
55,992
8,585
35,573
9,146
109,296
54,246
8,218
44,037
13,745
120,246
400,253
406,475
11,691
54,787
12,326
93,831
174,959
145,029
(cid:178)(cid:178)
(cid:178)(cid:178)
2,000
1,000
3,128
193,956
256,214
456,298
18,102
438,196
1,189,182
$
2,000
1,000
3,128
192,172
314,301
512,601
20,088
492,513
$
1,270,420
F-4
LSB Industries, Inc.
Consolidated Statements of Operations
2017
Year Ended December 31,
2016
(In Thousands, Except Per Share Amounts)
2015
Net sales
Cost of sales
Gross profit (loss)
Selling, general and administrative expense
Impairments of long-lived assets and goodwill
Other expense (income), net
Operating loss
Interest expense, net
Loss on extinguishment of debt
Non-operating other expense (income), net
Loss from continuing operations before
benefit for income taxes
Benefit for income taxes
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Dividends on convertible preferred stocks
Dividends on Series E redeemable preferred stock
Accretion of Series E redeemable preferred stock
Net income attributable to participating securities
Net income (loss) attributable to common stockholders
Income (loss) per common share:
Basic:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Diluted:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
$
427,504 $
422,038
5,466
$
374,585
423,891
(49,306)
34,990
(cid:178)(cid:178)
4,567
(34,091)
37,267
(cid:178)(cid:178)
(306)
(71,052)
(40,759)
(30,293)
1,076
(29,217)
300
23,443
6,487
(cid:178)(cid:178)
(59,447) $
(2.22) $
0.04
(2.18) $
(2.22) $
0.04
(2.18) $
40,168
1,621
(872)
(90,223)
30,945
8,703
218
(130,089)
(41,956)
(88,133)
200,301
112,168
300
27,761
18,256
1,091
64,760
(5.28)
7.82
2.54
(5.28)
7.82
2.54
$
$
$
$
$
$
$
$
$
$
437,695
417,647
20,048
49,813
43,188
(1,787)
(71,166)
7,371
(cid:178)(cid:178)
129
(78,666)
(32,520)
(46,146)
11,381
(34,765)
300
2,287
686
(cid:178)(cid:178)
(38,038)
(2.17)
0.50
(1.67)
(2.17)
0.50
(1.67)
See accompanying notes.
F-5
LSB Industries, Inc.
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
(cid:73)
Common
Stock
Shares
Treasury
Stock-
Common
Shares
Non-
Redeemable
Preferred
Stock
Common
Stock
Par
Value
Capital in
Excess of
Par Value
Retained
Earnings
Treasury
Stock-
Common Total
26,968 (4,320) $
(In Thousands)
3,000 $
2,697 $ 170,537 $ 286,188 $ (28,374)
(34,765)
(300)
(2,287)
(686)
160
4
584
27,132 (3,736)
16
2,346
1,769
156
(3,842)
22,300
(1,613)
596
3,000
2,713 192,249 248,150
112,168
(27,761)
(18,256)
45
4,104
(34)
765
31,281 (3,005)
4
411
4,979
367
(5,339)
(84)
3,000
3,128 192,172 314,301
$434,048
(34,765)
(300)
(2,287)
(686)
2,346
1,785
156
(cid:178)(cid:178)
22,300
(1,613)
3,842
596
(24,532) 421,580
112,168
(27,761)
(18,256)
4,979
371
(cid:178)(cid:178)
(484)
(411)
4,855
(84)
(20,088) 492,513
$ 1,060
(29,217)
(23,443)
(6,487)
5,099
(3,175)
(140)
1,814
172
3,128 $ 193,956 $ 256,214 $ (18,102)
3,000 $
1,060
(29,217)
(23,443)
(6,487)
5,099
(1,361)
32
$438,196
317
26
31,281 (2,662) $
Balance at December 31, 2014
Net loss
Dividends paid on convertible preferred
stocks
Dividend accrued on redeemable preferred
stock
Accretion of redeemable preferred stock
Stock-based compensation
Exercise of stock options
Common stock issued for services
Restricted stock granted from treasury stock
Common stock warrants issued
Common stock warrants issuance costs
Excess income tax benefit associated
with stock-based compensation
Balance at December 31, 2015
Net income
Dividend accrued on redeemable preferred
stock
Accretion of redeemable preferred stock
Stock-based compensation
Exercise of stock options
Exercise of warrants, net
Issuance of restricted stock, net
Excess income tax detriment associated
with stock-based compensation
Balance at December 31, 2016
Cumulative effect of change in accounting
principle
Net loss
Dividend accrued on redeemable preferred
stock
Accretion of redeemable preferred stock
Stock-based compensation
Issuance of restricted stock, net
Other
Balance at December 31, 2017
See accompanying notes.
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
2017
Year Ended December 31,
2016
(In Thousands)
2015
$
(29,217) $
112,168
$
(34,765)
Cash flows from continuing operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided (used)
by continuing operating activities:
Income from discontinued operations, net of taxes
Deferred income taxes
Loss on extinguishment of debt
Impairments of long-lived assets and goodwill
Depreciation, depletion and amortization of property, plant and
equipment
Amortization of intangible and other assets
Loss on sales of businesses and other property and equipment
Stock-based compensation
Other
Cash provided (used) by changes in assets and liabilities
(net of effects of discontinued operations):
Accounts receivable
Inventories
Prepaid insurance
Prepaid and accrued income taxes
Other supplies, prepaid items and other
Accounts payable
Accrued interest
Customer deposits
Other current and noncurrent liabilities
Net cash provided (used) by continuing operating activities
Cash flows from continuing investing activities
Expenditures for property, plant and equipment
Net proceeds from sale of discontinued operations
Proceeds from sales of businesses and other property and equipment
Proceeds from short-term investments
Purchases of short-term investments
Proceeds from current and noncurrent restricted cash and
cash equivalents
Deposits of current and noncurrent restricted cash and cash equivalents
Proceeds from noncurrent restricted investments
Other investing activities
Net cash provided (used) by continuing investing activities
(Continued on following page)
F-7
(1,076)
(40,445)
(cid:178)(cid:178)
(cid:178)(cid:178)
66,996
2,147
6,977
5,213
434
(6,321)
56
635
(543)
(2,231)
1,374
(1 )
(1,035)
(687)
2,276
(35,425)
(cid:178)(cid:178)
23,841
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
739
(10,845)
(200,301)
(42,013)
8,703
1,621
59,354
1,940
356
3,992
4,471
(6)
1,372
(2,296)
5,619
167
16,632
(2,305)
376
8,112
(22,038)
(212,543)
356,704
5,259
(cid:178)(cid:178)
(cid:178)(cid:178)
186,935
(186,935)
(cid:178)(cid:178)
3,877
153,297
(11,381)
(27,436)
(cid:178)(cid:178)
43,188
35,930
1,530
11
1,639
1,372
3,677
(468)
2,500
906
(3,717)
(10,825)
(709)
(3,433)
(2,799)
(4,780)
(438,944)
(cid:178)(cid:178)
87
39,500
(25,000)
45,969
(cid:178)(cid:178)
25,000
2,709
(350,679)
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Cash flows from continuing financing activities
Proceeds from revolving debt facility
Payments on revolving debt facility
Proceeds from 12% senior secured notes, net of discount and fees
Payments on senior secured notes
Proceeds from other long-term debt, net of fees
Payments on other long-term debt
Payments of debt modification and issuance costs
Payments of debt extinguishment costs
Proceeds from loans secured by cash value of life insurance policies
Proceeds from short-term financing
Payments on short-term financing
Proceeds from issuance of redeemable preferred stocks, net of
discount and fees
Redemption of preferred stock
Proceeds from issuance of common stock warrants, net of
discount and fees
Payments of issuance costs relating to preferred stocks and warrants
Proceeds from exercises of stock options
Taxes paid on equity awards
Dividends paid on preferred stocks
Net cash provided (used) by continuing financing activities
Cash flows of discontinued operations:
Net cash provided (used) by operating activities
Net cash used by investing activities
Net cash provided (used) by financing activities
Net cash provided (used) by discontinued operations
Net decrease in cash and cash equivalents
$
2017
Year Ended December 31,
2016
(In Thousands)
2015
(cid:178)(cid:178) $
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(14,121)
(90)
(cid:178)(cid:178)
(cid:178)(cid:178)
10,919
(11,479)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(1,361)
(cid:178)(cid:178)
(16,132)
(1,461)
(cid:178)(cid:178)
(236)
(1,697)
(26,398)
$
76,516
(76,516)
(cid:178)(cid:178)
(100,000)
14,751
(15,402)
(7,332)
(4,938)
(cid:178)(cid:178)
11,161
(11,392)
(cid:178)(cid:178)
(71,966)
(cid:178)(cid:178)
(785)
371
(149)
(8,028)
(193,709)
(1,363)
(1,025)
(2,340)
(4,728)
(67,178)
47,438
(47,438)
47,889
(cid:178)(cid:178)
31,047
(12,923)
(1,200)
(cid:178)(cid:178)
1,288
10,273
(12,399)
180,013
(cid:178)(cid:178)
21,018
(2,472)
1,785
(cid:178)(cid:178)
(300)
264,019
38,313
(3,382)
(1,292)
33,639
(57,801)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
60,017
33,619 $
127,195
60,017
$
184,996
127,195
See accompanying notes.
F-8
LSB Industries, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation (cid:177) LS(cid:37)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:11)(cid:179)(cid:47)(cid:54)(cid:37)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:180)(cid:15)(cid:3)(cid:179)(cid:58)(cid:72)(cid:180)(cid:15)(cid:3)(cid:179)(cid:56)(cid:86)(cid:180)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:179)(cid:50)(cid:88)(cid:85)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
in the accompanying consolidated financial statements. LSB is a holding company with no significant operations or assets other than
cash, cash equivalents, and investments in its subsidiaries. All material intercompany accounts and transactions have been eliminated.
r
(cid:177)
Nature of Business (cid:177) We are engaged in the manufacture and sale of chemical products. The chemical products we primarily
(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:15)(cid:3) (cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:86)(cid:72)(cid:79)(cid:79)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:15)(cid:3) (cid:73)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:3) (cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3) (cid:36)(cid:49)(cid:3) (cid:11)(cid:179)(cid:43)(cid:39)(cid:36)(cid:49)(cid:180)(cid:12)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:56)(cid:36)(cid:49)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:68)(cid:74)(cid:85)(cid:76)(cid:70)(cid:88)(cid:79)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3) (cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3) (cid:75)(cid:76)(cid:74)(cid:75)(cid:3) (cid:83)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3) (cid:68)(cid:81)(cid:71)
commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids,
mining
(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:71)(cid:76)(cid:82)(cid:91)(cid:76)(cid:71)(cid:72)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:72)(cid:86)(cid:72)(cid:79)(cid:3)(cid:72)(cid:91)(cid:75)(cid:68)(cid:88)(cid:86)(cid:87)(cid:3)(cid:73)(cid:79)(cid:88)(cid:76)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3)(cid:36)(cid:49)(cid:3)(cid:11)(cid:179)(cid:47)(cid:39)(cid:36)(cid:49)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)
industry. We manufacture and distribute our products in four facilities; three of which we own and are located in El Dorado, Arkansas
AA
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:30)(cid:3)(cid:38)(cid:75)(cid:72)(cid:85)(cid:82)(cid:78)(cid:72)(cid:72)(cid:15)(cid:3)(cid:36)(cid:79)(cid:68)(cid:69)(cid:68)(cid:80)(cid:68)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:75)(cid:72)(cid:85)(cid:82)(cid:78)(cid:72)(cid:72)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:51)(cid:85)(cid:92)(cid:82)(cid:85)(cid:15)(cid:3)(cid:50)(cid:78)(cid:79)(cid:68)(cid:75)(cid:82)(cid:80)(cid:68)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:51)(cid:85)(cid:92)(cid:82)(cid:85)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)of which
we operate o(cid:81)(cid:3)(cid:69)(cid:72)(cid:75)(cid:68)(cid:79)(cid:73)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:37)(cid:68)(cid:92)(cid:87)(cid:82)(cid:90)(cid:81)(cid:15)(cid:3)(cid:55)(cid:72)(cid:91)(cid:68)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:68)(cid:92)(cid:87)(cid:82)(cid:90)(cid:81)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:17)
(cid:68)(cid:68)
Sales to customers include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production
markets in the United States (U.S.); industrial users of acids throughout the U. S. and parts of Canada; and explosive manufacturers in
the U.S.
Other products consisted of natural gas sales from our working interests in certain natural gas properties of our former subsidiary Zena
Energy L.L.C. (cid:11)(cid:179)(cid:61)(cid:72)(cid:81)(cid:68)(cid:180)(cid:12) and sales of industrial machinery and related components both of which have been sold as discussed below.
For 2017, 2016 and 2015, these sales totaled $8.6 million, $9.1 million and $12.9 million, respectively.
During May 2017, Zena, which was an indirect, wholly owned subsidiary of LSB, entered into a purchase and sale agreement with
(cid:37)(cid:46)(cid:57)(cid:3) (cid:38)(cid:75)(cid:72)(cid:79)(cid:86)(cid:72)(cid:68)(cid:15)(cid:3) (cid:47)(cid:47)(cid:38)(cid:15)(cid:3) (cid:11)(cid:179)(cid:37)(cid:46)(cid:57)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71) (cid:86)(cid:68)(cid:79)(cid:72)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) (cid:61)(cid:72)(cid:81)(cid:68)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:86)(cid:72)(cid:79)(cid:79)(cid:3) (cid:87)(cid:82)(cid:3) (cid:37)(cid:46)(cid:57)(cid:3) (cid:68)(cid:79)(cid:79)(cid:3) (cid:82)(cid:73)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)
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Pennsylvania for a purchase price of approximately $16.3 million, which sale was completed on June 26, 2017. As a result, we
recognized a loss on the sale of approximately $4.0 million which is included in operating other expense. The carrying value of the
assets sold was approximately $20.0 million and was included in plant, property and equipment at December 31, 2016. Concurrently
with the closing of the purchase and sale agreement, a portion of the net proceeds (approximately $3.5 million) was used to rep
ay the
remaining outstanding balance of a promissory note, which was secured by the Properties.
a
(cid:61)(cid:72)(cid:81)(cid:68)(cid:182)(cid:86) prior ownership of working interests in natural gas properties was accounted for as an undivided interest, whereby we reflected
our proportionate share of the underlying assets, liabilities, revenues and expenses. The working interest represented our share of the
costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while the net revenue interest
represented our share of the revenues from the sale of natural gas. The net revenue interest was less than the working interest as the
result of royalty interest due to others. We were not the operator of these natural gas properties.
In October 2017, we sold our engineered products business (industrial machinery and related components) as discussed in Note 17
Related Party Transactions.
dd
-
uu
(cid:50)(cid:81)(cid:3) (cid:48)(cid:68)(cid:92)(cid:3) (cid:20)(cid:20)(cid:15)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3) (cid:47)(cid:54)(cid:37)(cid:15)(cid:3) (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:47)(cid:17)(cid:47)(cid:17)(cid:38)(cid:17)(cid:15)(cid:3) (cid:68)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:15)(cid:3) (cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)(cid:3) (cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:47)(cid:54)(cid:37)(cid:3) (cid:11)(cid:179)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:180)(cid:12)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)
(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:15)(cid:3) (cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3) (cid:68)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:15)(cid:3) (cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)(cid:3) (cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:81)(cid:3) (cid:76)(cid:81)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:47)(cid:54)(cid:37)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)l
Grou(cid:83)(cid:180)(cid:12)(cid:15)(cid:3) (cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:87)(cid:82)(cid:3) (cid:68)(cid:3) (cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)
(cid:86)(cid:72)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:49)(cid:44)(cid:37)(cid:40)(cid:3) (cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:85)(cid:3) (cid:36)(cid:37)(cid:3) (cid:11)(cid:83)(cid:88)(cid:69)(cid:79)(cid:12)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:49)(cid:44)(cid:37)(cid:40)(cid:3)
(cid:40)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3) (cid:54)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3) (cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3) (cid:68)(cid:81)(cid:3) (cid:76)(cid:81)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3) (cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)(cid:3) (cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:49)(cid:44)(cid:37)(cid:40)(cid:3) (cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:85)(cid:3) (cid:36)(cid:37)(cid:3) (cid:11)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3) (cid:179)(cid:49)(cid:44)(cid:37)(cid:40)(cid:180)(cid:12)(cid:3) (cid:83)(cid:88)(cid:85)(cid:86)(cid:88)(cid:68)(cid:81)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:47)(cid:54)(cid:37)(cid:15)(cid:3)
through Consolidated, agreed to sell to NIBE all of the outstanding shares of stock of the Climate Control Group for a total of
approximately $364 million, subject to post-closing adjustments, which sale was completed on July 1, 2016. The Climate Control
Group conducte(cid:71)(cid:3) (cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3) (cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)
Business have been reclassified and reported as discontinued operations for all periods presented. Our financial statements and
footnotes reflect our results from continuing operations unless otherwise noted. See Note 2 (cid:177) Discontinued Operations.
Use of Estimates (cid:177) The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:79)(cid:72)(cid:86)(cid:3)(cid:11)(cid:179)(cid:42)(cid:36)(cid:36)(cid:51)(cid:180)(cid:12)(cid:3)(cid:85)equires 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 (cid:177) Investments, which consist of highly liquid investments with original maturities of three months or
less, are considered cash equivalents.
(cid:177)
F-9
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
(cid:177)
Accounts Receivable (cid:177) Our accounts receivable are stated at net realizable valu
e. This value includes an appropriate allowance for
estimated uncollectible accounts to reflect any loss anticipated on accounts receivable balances. Our estimate is based on historical
experience and periodic assessment of outstanding accounts receivable, particularly those accounts that are past due (based upon the
terms of the sale). Our periodic assessment of our accounts receivable is based on our best estimate of amounts that are not
recoverable.
(cid:177)
Inventories (cid:177) Inventories are stated at the lower of co
f
which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, tran
or disposal. Finished goods include material, labor, and manufacturing overhead costs.
st (determined using the first-in, first-(cid:82)(cid:88)(cid:87)(cid:3)(cid:11)(cid:179)(cid:41)(cid:44)(cid:41)(cid:50)(cid:180)(cid:12)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:12)(cid:3)(cid:82)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)
sportation
On January 1, 2017, we prospectively adopted ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.
The adoption of this ASU did not impact our financial statements.
(cid:177)
Precious Metals (cid:177) Precious metals are used as a catalyst in our manufacturi
ng 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 (cid:177) (cid:51)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:15)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:11)(cid:179)(cid:51)(cid:51)(cid:9)(cid:40)(cid:180)(cid:12)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:72)d at cost, net of accumulated depreciation,
(cid:71)(cid:72)(cid:83)(cid:79)(cid:72)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:11)(cid:179)(cid:39)(cid:39)(cid:9)(cid:36)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:47)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3) (cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3) (cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3) (cid:70)(cid:85)(cid:76)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:51)(cid:51)(cid:9)(cid:40)(cid:17)(cid:3) (cid:48)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3) (cid:85)(cid:72)(cid:81)(cid:72)(cid:90)(cid:68)(cid:79)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)
improvements that increase the life, value, or productive capacity of assets are capitalized in PP&E while maintenance, repairs
and
y
minor renewals are expensed as incurred. In addition, maintenance, repairs and minor renewal costs relating to planned major
(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:11)(cid:179)(cid:55)(cid:88)(cid:85)(cid:81)(cid:68)(cid:85)(cid:82)(cid:88)(cid:81)(cid:71)(cid:86)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)-lived assets relate to domestic operations.
Fully depreciated assets are retained in PP&E and accumulated DD&A accounts until disposal. When PP&E are retired, sold, or
(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:90)(cid:76)(cid:86)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:39)(cid:39)(cid:9)(cid:36)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:80)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80) the accounts and any gain or loss
is included in other income or expense.
Fully depreciated assets are retained in PP&E and accumulated DD&A accounts until disposal. When PP&E are retired, sold, or
(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:90)(cid:76)(cid:86)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)ted accumulated DD&A are removed from the accounts and any gain or loss
is included in other income or expense.
For financial reporting purposes, depreciation of the costs of PP&E is primarily computed using the straight-line method over the
estimated useful lives of the assets. 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.
As it relates to our former natural gas properties, which were sold as discussed above, leasehold costs, intangible drilling and other
costs of successful wells and development dry holes were capitalized in PP&E based on successful efforts accounting. The costs of
exploratory wells were initially capitalized in PP&E but expensed if and when the well was determined to be nonproductive. DD&A
of the costs of our former producing natural gas properties was computed using the units of production method primarily on a field-
by-field basis using total proved or proved developed reserves, as applicable, which was estimated by our former independent
consulting petroleum engineer. No provision for DD&A was made on nonproducing leasehold costs and exploratory wells in progress
until such time the relevant assets related to proven reserves. Our former natural gas reserves were based on estimates and
assumptions, which affected our DD&A calculations. Our former independent consulting petroleum engineer, with our assistance,
prepared estimates of natural gas reserves based on available relevant data and information. For DD&A purposes, and as required by
(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:72)(cid:79)(cid:76)(cid:81)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:54)(cid:40)(cid:38)(cid:180)(cid:12)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)d on
average natural gas prices during the 12-month period, determined as an unweighted arithmetic average of the first-day-of-the-month
price for each month.
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
(cid:177)
Impairment of Long-Lived Assets and Goodwill (cid:177) Long-lived assets are reviewed for imp
airment whenever events or changes in
circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset (asset group) exceeds the estimated undiscounted future cash flows expected to
result from the use of the asset (asset group) and its eventual disposition. 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. In general, and
(such
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depending on the event or change in circumstances, our asset groups are reviewed for impairment on a facility-by-facility basis
as the Cherokee, El Dorado or Pryor Facility). As it relates to our former natural gas properties, which were sold as discussed above,
proven natural gas properties were reviewed for impairment on a field-by-field basis and nonproducing leasehold costs were reviewed
for impairment on a property-by-property basis.
In addition, if the event or change in circumstance relates to the probable sale of an asset (or group of assets), the specific asset (or
group of assets) is reviewed for impairment.
In addition, goodwill was reviewed for impairment at least annually. An impairment loss generally would be recognized when the
(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:88)(cid:81)(cid:76)(cid:87)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)ng unit. See discussion below under
2016.
In general, assets held for sale are reported at the lower of the carrying amounts of the assets or fair values less costs to sell. At
December 31, 2017 and 2016, we had no long-lived assets classified as held for sale.
The non-cash impairment charges discussed below were included in the consolidated statements of operations line item titled
impairment of long-lived assets and goodwill.
2016
Generally, the evaluation of goodwill for impairment involves a two-step test. Step 1 involves comparing the estimated fair value of
each respective reporting unit to its carrying value, including goodwill. Our step 1 test utilized both a market approach and
income
approach to estimate the fair values of our reporting units. The market approach was based on enterprise value to estimated EBITDA
oodwill is not
(cid:80)(cid:88)(cid:79)(cid:87)(cid:76)(cid:83)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:72)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:11)(cid:47)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:22)(cid:3)(cid:76)(cid:81)(cid:83)(cid:88)(cid:87)(cid:86)(cid:12)(cid:17)(cid:3)(cid:3)(cid:44)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:88)(cid:81)(cid:76)(cid:87)(cid:182)(cid:86)(cid:3)(cid:74)
(cid:71)
considered impaired. If the carrying value exceeds the estimated fair value, step 2 must be performed to determine whether goodwill
is impaired and, if so, the amount of the impairment. Step 2 involves calculating an implied fair value of goodwill by performing a
hypothetical allocation of the estimated fair value of the reporting unit determined in step 1 to the respective tangible and intangible
net assets of the reporting unit (Level 3 inputs). The remaining implied goodwill is then compared to the actual carrying amount of
the goodwill for the reporting unit. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the
amount of the goodwill impairment.
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During 2016, pricing for our key product groups deteriorated well below expectations foreseen at December 31, 2015. Additionally,
we believed the lower price environment was expected to continue throughout 2017. Thus, in accordance with ASC 350, we
determined it was more likely than not that the fair value of goodwill related to our El Dorado Facility was less than its carrying
e
amount (goodwill and other) implied under step 2, which resulted in an impairment charge of $1.6 million to fully write-down th
carrying value of goodwill.
n
2015
During 2015, we recognized an impairment charge of $39.7 million to write-down the carrying value ($62.2 million) of our former
working interest in natural gas properties in the Marcellus Shale region to their estimated fair value of $22.5 million. The impairment
charge represented the amount by which the carrying value of these former natural gas properties exceeded the estimated fair value
and was therefore not recoverable. The estimated fair value was determined based on estimated future discounted net cash flows, a
Level 3 input, using estimated production and prices at which we reasonably expect natural gas will be sold, including the evaluation
provided by our former independent consulting petroleum engineer in October 2015. The event triggering the review for impairment
related primarily from the results received from the evaluation. The impairment was due to the decline in prices for natural gas
futures, large natural gas price differentials in the Marcellus Shale region and the resulting changes in the drilling plans of these
natural gas properties tha(cid:87)(cid:3)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:86)(cid:180)(cid:3)(cid:70)(cid:68)(cid:87)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:179)(cid:83)(cid:85)(cid:82)(cid:69)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:180)(cid:3)(cid:70)(cid:68)(cid:87)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:72)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:72)(cid:85)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:71)(cid:72)(cid:89)eloped
within five years.
f
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Our former independent consulting petroleum engineering firm calculated our former natural gas reserves using volumetric analysis of
the reservoir and rate decline analysis for existing producers. The process of estimating proved reserves and future net cash flows is
complex involving decisions and assumptions in evaluating the available engineering and geologic data and natural gas prices and the
cost to produce these reserves and other factors, many of which are beyond our control. Those assumptions included estimates of
future natural gas production, commodity prices based on commodity futures price strips, operating and development costs, and a risk-
adjusted discount rate of 10%, which was based on an industry standard.
a
f
In addition, during 2015, we recognized an impairment charge of $3.5 million to write down the carrying value ($8.5 million) of
certain plant assets related to certain ammonia production equipment at our Pryor Facility to their estimated fair value of
approximately $5.0 million. The change of circumstances triggering the review for impairment related primarily to an offer received
from a possible buyer on this non-core ammonia production equipment. The estimated fair value was determined based on an offer
received from a possible buyer less estimated costs that would be incurred if the equipment is sold (Level 3 inputs). In 2016, this
ammonia production equipment was sold to a third party for a minimal gain.
Concentration of Credit Risks for Cash and Cash Equivalents and Sales (cid:177) Financial instruments relating to cash and cash
equivalents potentially subject us to concentrations of credit risk. These financial instruments were held by financial institutions
within the U.S. except for approximately $1.9 million. None of the financial instruments held within U.S. were in excess of the
federally insured limits.
(cid:177)
h
Net sales to one customer, Koch Fertilizer LLC, represented approximately 10%,
11% and 12% of our total net sales for 2017, 2016
and 2015, respectively. Net sales to one customer, Covestro AG (cid:11)(cid:179)Covestro(cid:180)(cid:12), represented approximately 12%, 13% and 15% of our
total net sales for 2017, 2016 and 2015, respectively. The sales to Covestro are pursuant to an agreement under which one of our
subsidiaries operates a nitric acid (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3) (cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:182)(cid:86)(cid:3) (cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3) (cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:91) (cid:68)(cid:86)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:49)(cid:82)(cid:87)(cid:72)(cid:3) (cid:20)(cid:20)(cid:3) (cid:177)
Commitments and Contingencies. This agreement: (a) allows us to pass-through most of the costs of producing the nitric acid that
Covestro purchases, including the cost of ammonia; (b) to receive management fees for managing the operations and for marketing
nitric acid not used by Covestro to third party customers and; (c) to receive a portion of any carbon credits that are sold.
(cid:177)
Capitalized Software (cid:177) Intangible and other noncurrent assets include cap
italized software that primarily relates to our enterprise
(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:86)(cid:82)(cid:73)(cid:87)(cid:90)(cid:68)(cid:85)(cid:72)(cid:3) (cid:11)(cid:179)(cid:40)(cid:53)(cid:51)(cid:180)(cid:12)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3) (cid:88)(cid:86)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:76)(cid:86)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:68)(cid:87)(cid:3) (cid:70)(cid:82)(cid:86)(cid:87)(cid:15)(cid:3) (cid:81)(cid:72)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:68)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:40)(cid:53)(cid:51)(cid:3) (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3) was
completed during 2016. For 2017 and 2016, our carrying value was $13.1 million and $12.9 million, and accumulated amortization of
$5.6 million and $3.5 million, respectively. Capitalized software costs include software purchase costs and internal and external costs
for implementing software. For financial reporting purposes, amortization of capitalized software costs is computed using the
straight-line method over the estimated useful lives of the software, which is primarily eight years. During 2016 and 2015, interest
cost capitalized in capitalized software was $0.1 million, $0.3 million, respectively (none in 2017). Interest costs capitalized ceased
during 2016 with the completion of the ERP project. No provision for amortization is made until such time as the relevant assets are
placed into service. Amortization expense related to capitalized software was $2.1 million, $1.7 million and $1.0 million for 2017,
2016 and 2015, respectively. Estimated amortization related to capitalized software is $2.4 million for 2018 and $1.2 million each of
the subsequent three years, 2019 through 2021 and $1.0 million in 2022.
n
r
Capitalized Interest (cid:177) Interest cost on borrowings incurred during a significa
nt construction or development project is capitalized.
Capitalized interest is added to the associated underlying asset and amortized over the estimated useful lives of the assets. For 2017,
2016 and 2015, interest capitalized amounted to $0.3 million, $15.0 million, $30.6 million, respectively.
(cid:177)
Accrued Insurance Liabilities (cid:177) We are self-(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3) (cid:88)(cid:83)(cid:3) (cid:87)(cid:82)(cid:3) (cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3) (cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3) (cid:75)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:15)(cid:3) (cid:90)(cid:82)(cid:85)(cid:78)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)
liability claims. Above these limits, we have commercial stop-loss insurance coverage for our contractual exposure on group health
(cid:76)(cid:82)ns. We also carry umbrella insurance of $100 million for most
(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3) (cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:86)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:90)(cid:82)(cid:85)(cid:78)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)
(cid:85)
general liability and auto liability risks. We have a separate $50 million insurance policy covering pollution liability at our chemical
facilities. Additional pollution liability coverage for our other facilities is provided in our general liability and umbrella policies. As it
related to our natural gas properties that we did not operate but only owned a working interest, insurance policies were maintained by
the operator, which we were responsible for our proportionate share of the costs involved.
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a
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Our accrued self-insurance liabilities are based on estimates of claims, which include the reported incurred claims amounts plus the
reserves established by our insurance adjustors and/or estimates provided by attorneys handling the claims, if any, up to the amount of
our self-insurance limits. In addition, our accrued insurance liabilities include estimates of incurred, but not reported, claims based on
historical claims experience. The determination of such claims and the appropriateness of the related liability is periodically reviewed
and revised, if needed. Changes in these estimated liabilities are charged to operations. Potential legal fees and other directly related
costs associated with insurance claims are not accrued but rather are expensed as incurred. Accrued insurance claims are included in
accrued and other liabilities. It is reasonably possible that the actual development of claims could be different than our estimates.
Executive Benefit Agreements (cid:177) We are party to certain benefit agreements with
certain key current and former 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.
(cid:177)
ff
Income Taxes (cid:177) We recognize deferred tax assets and liabilities for the expected future tax consequences attributable to net operating
(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:11)(cid:179)(cid:49)(cid:50)(cid:47)(cid:180)(cid:12)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:15)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)e 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 record interest related to unrecognized tax positions in interest expense and penalties in operating other expense.
Income tax benefits associated with amounts that are deductible for income tax purposes are recorded through the income statement.
These benefits are principally generated from exercises of non-qualified stock options and restricted stock. We reduce income tax
expense for investment tax credits in the year the credit arises and is earned.
f
See Note 10 (cid:177) Income Taxes discussing the Tax Cuts and Jobs Act of
2017 and Staff Accounting Bulletin No. 118 ("SAB 118") issued
by the SEC.
(cid:177)
(cid:177)
Contingencies (cid:177) Certain conditions may exist which may result in a loss, but wh
ich will only be resolved when future events occur.
We and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the
assessment of a contingency indicates that it is probable that a loss has been incurred, we would accrue for such contingent losses
when such losses can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable
but reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed. Estimates of potential legal fees and other directly related
costs associated with contingencies are not accrued but rather are expensed as incurred. 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. In
addition, we recognize contingent gains when such gains are realized or realizable and earned.
Asset Retirement Obligations (cid:177) (cid:44)(cid:81)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:36)(cid:53)(cid:50)(cid:180)(cid:12)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
with tangible long-lived assets in the period it is incurred and when there is sufficient information available to estimate the fair value.
An ARO associated with long-lived assets is a legal obligation under existing or enacted law, statute, written or oral contract or legal
construction. AROs, which are initially recorded based on estimated discounted cash flows, are accreted to full value over time
through charges to cost of sales. In addition, we capitalize the corresponding asset retirement cost as PP&E, which cost is depreciated
or depleted over the related as(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:73)(cid:88)(cid:79)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:71)(cid:82)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:36)(cid:53)(cid:50)(cid:86)(cid:17)
t
Redeemable Preferred Stocks (cid:177) Our redeemable preferred stocks that are redeemable outside of our control are classified as
temporary/mezzanine equity. The redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or
discounts. In addition, certain embedded features included in the Series E Redeemable Preferred required bifurcation and are
classified as derivative liabilities. The carrying values of the redeemable preferred stocks are being increased by periodic accretions
(including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will
equal the redemption value as of August 2, 2019, the earliest possible redemption date by the holder. The amount of accretion was
recorded to retained earnings.
n
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
However, it is reasonably possible this accretion could accelerate if the expected redemption date is earlier than August 2, 2019. See
discussion concerning the redemption in 2016 of a portion of the Series E Redeemable Preferred in Note 13 (cid:177) Securities Financing
including Redeemable Preferred Stocks.
(cid:177)
Equity Awards (cid:177) 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. Forfeitures are accounted for as they occur. In addition,
historically we issue new shares of common stock upon the exercise of stock options, but treasury shares may be used.
Revenue Recognition and Other Information (cid:177) We recognize revenue for substantially all of our operations at the time title to the
(cid:177)
goods transfers to the buyer and there remain no significant future performance obligations by us.
All net sales and long-lived assets relate to domestic operations for the periods presented. In addition, net sales to non-U.S. customers
were minimal.
Recognition of Incentive Tax Credits (Other Than Credits Associated with Income Taxes) (cid:177) If an incentive tax credit relates to a
recovery of taxes (other than income taxes) incurred, we recognize the incentive tax credit when it is probable and reasonably
estimable. If an incentive tax credit relates to an amount in excess of taxes incurred, the incentive tax credit is a contingent gain,
which we recognize the incentive tax credit when it is realized or realizable and earned. Amounts recoverable from the taxing
authorities, if any, are included in accounts receivable. The same financial statement classification is used for an incentive tax credit
as the associated tax incurred.
(cid:177)
r
During 2017, we received notification from the State of Arkansas that incentive tax credits had been approved associated with certain
(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:87)(cid:75)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85) of 2015 and
the second quarter of 2016. As a result, we recognized a current and noncurrent receivable totaling approximately $8.1 million
associated with these incentive tax credits with the offset reducing PP&E (covered by the tax credit) by approximately $7.4 million
and the remaining balance of $0.7 million as a reduction to cost of sales (recovery of previously incurred depreciation expense related
to the PP&E). As of December 31, 2017, our current and noncurrent incentive tax credits receivable totaled $7.4 million.
(cid:177)
our losses, we recognize the recovery when it is
Recognition of Insurance Recoveries (cid:177) If an insurance claim relates to a recovery of
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, if any, are included in accounts receivable. An insurance
recovery in excess of recoverable costs relating to a business interruption claim, if any, is a reduction to cost of sales. An insurance
recovery in excess of recoverable costs relating to a property insurance claim, if any, is included in property insurance recoveries in
excess of losses incurred.
n
(cid:177)
Cost of Sales (cid:177) Cost of sales includes materials, labor
and overhead costs to manufacture the products sold plus inbound freight,
r
purchasing and receiving costs, inspection costs, internal transfer costs, loading and handling costs, warehousing costs, railc
ar lease
ff
as they
costs and outbound freight. Maintenance, repairs and minor renewal costs relating to Turnarounds are included in cost of sales
are incurred. Precious metals used as a catalyst and consumed during the manufacturing process are included in cost of sales.
Recoveries and gains from precious metals and business interruption insurance claims are reductions to cost of sales. Provisions for
(realization of) losses associated with inventory reserves, gains and losses (realized and unrealized), if any, from our commodities and
foreign currency futures/forward contracts, and provision for losses, if any, on firm sales/purchase commitments are included in cost
of sales.
uu
Selling, General and Administrative Expense (cid:177) (cid:54)(cid:72)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3) (cid:11)(cid:179)(cid:54)(cid:42)(cid:9)(cid:36)(cid:180)(cid:12)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3) (cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3) (cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
with the sales, marketing and administrative functions. Such costs include personnel costs, including benefits, professional fees, office
and occupancy costs associated with the sales, marketing and administrative functions. Also included in SG&A are any distribution
fees paid to third parties to distribute our products.
ff
Derivatives, Hedges, Financial Instruments and Carbon Credits (cid:177) Derivatives are recognized in
n
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.
(cid:177)
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
The fair value amounts recognized for our derivative contracts executed with the same counterparty under a master netting
arrangement may be offset. We have the choice to offset or not, but that choice must be applied consistently. A master netting
arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement
that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or
termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single
counterparty results in the net fair value of the transactions being reported as an asset or a liability in the balance sheet. We have
reements using a gross fair value presentation as
chosen to present the fair values of our derivative contracts under master netting ag
there were no derivatives with fair values that were eligible to be offset as of December 31, 2017 and 2016.
uu
(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:81)(cid:81)(cid:72)(cid:86)(cid:3)(cid:11)(cid:179)(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:86)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:17) Changes in
fair value of carbon credits are recorded in results of operations. The liabilities for contractual obligations associated with carbon
credits are recognized in the balance sheet and are measured at fair value unless we enter into a firm sales commitment to sell the
associated carbon credits. When we enter into a firm sales commitment, the sales price, pursuant to the terms of the firm sales
commitment, establishes the amount of the liability for the contractual obligation. Changes in fair value of contractual oblig
ations
associated with carbon credits are recorded in results of operations.
tt
(cid:177)
Income (Loss) per Common Share (cid:177) Net income (loss) attributable to common stock
holders is computed by adjusting net income
(loss) by the amount of dividends and dividend requirements on preferred stocks and the accretion of redeemable preferred stock
s, if
n
applicable. Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding, excluding contingently returnable common shares (unvested restricted stock), if
applicable. For periods we earn net income, a proportional share of net income is allocated to participating securities, if applicable,
determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and
(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:87)(cid:90)(cid:82)-(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3) (cid:80)(cid:72)(cid:87)(cid:75)(cid:82)(cid:71)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:38)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3) (cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:11)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:40)(cid:3) (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:88)(cid:81)(cid:76)(cid:87)(cid:86)(cid:12)
participate in dividends declared on our common stock and are therefore considered to be participating securities.
Participating securities have the effect of diluting both basic and diluted income per common share during periods of net income. For
periods we incur a net loss, no loss is allocated to participating securities because they have no contractual obligation to share in our
losses. Diluted loss per common share is computed after giving consideration to the dilutive effect of our potential common stock
instruments that are outstanding during the period, except where such non-participating securities would be anti-dilutive.
Segment Information - With the sale of our Climate Control Business during July 2016, we operate in one principal business
segment (cid:177) our chemical business.
(cid:177)
Recently Issued Accounting Pronouncements
ASU 2014-09 (cid:177) In May 2014,
(cid:87)(cid:75)(cid:72)(cid:3) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3) (cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3) (cid:11)(cid:179)(cid:41)(cid:36)(cid:54)(cid:37)(cid:180)(cid:12)(cid:3) (cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3) (cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:3) (cid:56)(cid:83)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3) (cid:11)(cid:179)(cid:36)(cid:54)(cid:56)(cid:180)(cid:12)
(cid:177)
2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance
(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:36)(cid:54)(cid:56)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:79)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:76)(cid:87)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:74)(cid:82)(cid:82)(cid:71)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) to
customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
U with the option to early adopt but not
services. In July 2015, the FASB approved a one-year deferral of the effective date of this AS
before the original effective date. In addition, the FASB has issued various ASUs further amending revenue recognition guidance,
which includes ASU 2016-08, 2016-10, 2016-11, 2016-12 and 2016-20.
f
t
We completed our assessment, solution development and implementation of Topic 606 in order to adopt this standard effective
(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:87)(cid:85)(cid:82)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:180)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:72)(cid:87)(cid:75)(cid:82)(cid:71)(cid:15)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3) period
presented in the financial statements and apply only to uncompleted contracts as of the effective date. Upon adoption, we also elected
the following accounting policies:
(cid:120)
(cid:120)
sales and other similar taxes we collect concurrent with revenue-producing activities are excluded from revenue, and
recognize the cost for freight and shipping when control of the product has transferred to the customer as an expense in cost
of sales.
We have elected the practical expedient for all contract modifications, such that all modifications prior to our adoption date for
uncompleted contracts would be evaluated in the aggregate for any potential impact to our financial statements. It is impractical to
determine a specific dollar amount in regard to the estimated effect of the application of this practical expedient. In addition, we have
elected the practical expedient to recognize revenue in the amount we have the right to invoice relating to certain services that are
transferred to customers.
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Upon adoption, we expect the cumulative effect, if any, not to be material. In accordance with the adoption method utilized, prior
tion
f
periods will not be retrospectively adjusted. Another impact of adopting the new standard relates to the expected future reduc
primarily to net sales and cost of sales resulting from the elimination of certain sales revenue involving products we do not control,
including products associated with marketing services we are performing as an agent (instead of
a principal) for our customers. The
rr
nature of these arrangements allows for other parties to maintain control of these products throughout the production process. For
example, relating to this specific impact, if we had applied the new standard to 2017, the reduction to net sales, cost of sales and
SG&A would be approximately $65.4 million, $64.7 million and $0.7 million, respectively, with no impact on operating loss.
(cid:177)
ASU 2016-02 (cid:177) In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842), which supersedes the lease requirements
in Topic 840, Leases. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report information
to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Extensive quantitative
to the
and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight in
extent of revenue and expense recognized and expected to be recognized from existing cont
racts. This ASU must be adopted using a
modified retrospective transition and provides for certain practical expedients. We plan to adopt this ASU on January 1, 2019.
Transition will require application of the new guidance at the beginning of the earliest comparative period presented. Although we
currently have a relatively small number of leases, we have obtained and continue to obtain information relating to our leases and
other right-to-use arrangements for the purpose of evaluating the effect of this gu
idance on our consolidated financial statements and
uu
related disclosures.
x
ff
(cid:177)
ASU 2016-09 (cid:177) In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. This guidance
includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the
financial statements. We adopted this guidance on January 1, 2017. Among other requirements, the new guidance requires all tax
effects related to share-based payments at settlement (or expiration) to be recorded through the income statement. Previously, tax
benefits in excess of compensation cost ("windfalls") were recorded in equity, and tax deficiencies ("shortfalls") were recorded in
equity to the extent of previous windfalls, and then to the income statement. As required, this change was applied prospectively to all
excess tax benefits and tax deficiencies resulting from settlements.
—
n
Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations.
Excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were
recorded through a cumulative effect adjustment as of the date of the adop
tion. As required, this change was applied on a modified
retrospective basis, with a cumulative effect adjustment of change in accounting principle of approximately $1.1 million as a deferred
tax asset with the offset in retained earnings. We made an accounting policy election to account for the amount related to excess tax
benefits and deficiencies utilizing the direct effect approach.
t
Under the new guidance, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the
statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities
and an outflow from operating activities. In addition, cash paid by an employer to taxing authorities when the employer directly
withholds shares for tax withholding purposes is to be reported as financing activities. These changes were applied on a retrospective
basis to the statements of cash flows, and as a result, net cash used by continuing operating activities decreased $0.1 million and $0.3
million and net cash used by continuing financing activities increased $0.1 million and net cash provided by continuing financing
activities decreased $0.3 million in 2016 and 2015, respectively. Also, in 2016, cash flows of discontinued operations associated with net
cash used by operating activities decreased $0.3 million and net cash used by financing activities increased $0.3 million.
Under the new guidance, we made an accounting policy election to account for forfeitures as they occur, a change from the previous
requirement to estimate forfeitures each period. As required, this change was applied on a modified retrospective basis; however, as
of December 31, 2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was
required. Going forward, the adoption of this ASU could cause volatility in the effective tax rate.
(cid:177)
ASU 2016-15 (cid:177) In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This ASU makes eight targeted changes to how cash receipts and cash payments are presented
and classified in the statement of cash flows. This ASU is effective for us on January 1, 2018 and adoption will be applied on
retrospective basis. We anticipate that upon adoption of this new ASU, the effect, if any, will not be material on the presentation and
classification for certain cash flow activities.
F-16
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
(cid:177)
ASU 2016-18 (cid:177) In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash, a
consensus of the FASB Emerging Issues Task Force. The amendments in this ASU revise the guidance in Topic 230, Statement of
Cash Flows, to require cash and cash equivalents to include restricted cash (and restricted cash equivalents) on the statement of cash
flows. This ASU is effective for us on January 1, 2018 and adoption will be applied on retrospective basis for all periods presented.
Upon adoption of this new ASU, we anticipate the removal of the presentation of cash flow activities relating to current and
noncurrent restricted cash and cash equivalents from our statement of cash flows for 2016.
2. Discontinued Operations
On July 1, 2016, LSB co(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:11)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:88)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:47)(cid:54)(cid:37)(cid:182)(cid:86)
Climate Control Business) pursuant to the terms of the stock purchase agreement. Additionally, pursuant to the stock purchase
agreement, we agreed to have a certain portion of the purchase price proceeds deposited in an indemnity escrow account. In
(cid:70)(cid:82)(cid:81)(cid:77)(cid:88)(cid:81)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:79)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:86)(cid:68)(cid:79)(cid:72)(cid:15)(cid:3) (cid:90)(cid:72)(cid:3) (cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71) (cid:76)(cid:81)(cid:87)(cid:82)(cid:3) (cid:68)(cid:3) (cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:11)(cid:179)(cid:55)(cid:54)(cid:36)(cid:180)(cid:12)(cid:15)(cid:3) (cid:83)(cid:88)(cid:85)(cid:86)(cid:88)(cid:68)(cid:81)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)h,
among other things, we agreed to provide certain information technology, payroll, legal, tax and other general services, which services
have been completed. At December 31, 2017 and 2016, our accounts receivable included approximately $2.7 million relating to the
sale of our Climate Control Business representing an indemnity escrow balance. Additionally, at December 31, 2017 and 2016, our uu
current and noncurrent accrued and other liabilities include approximately $0.4 million and $5.5 million, respectively, relating
primarily to estimated contingent liabilities, costs associated with the TSA and severance agreements associated with the sale of the
Climate Control Business.
Summarized results of discontinued operations are as follows for:
$
Net sales
Cost of sales
Selling, general and administrative expense
Transaction costs
Interest expense
Other expense (income), net
Income from operations of discontinued operations
Gain on sale of discontinued operations
Provision for income taxes
Income from discontinued operations, net of taxes
$
2017
Year Ended December 31,
2016
(In Thousands)
2015
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
2,595
1,519
1,076
$
$
138,609
93,178
32,719
2,535
(cid:178)
175
10,002
281,990
91,691
200,301
$
$
274,086
190,426
62,728
(cid:178)(cid:178)
10
608
20,314
(cid:178)(cid:178)
8,933
11,381
Summarized condensed cash flow information of discontinued operations is as follows:
Deferred income taxes
Depreciation and amortization of property, plant
and equipment
Stock-based compensation
Expenditures for property, plant and equipment
Software and software development costs
2017
Year Ended December 31,
2016
(In Thousands)
2015
2,461
$
88,356
$
8,917
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
$
$
$
$
1,607
955
273
675
$
$
$
$
4,566
634
863
2,466
(cid:3)
$
$
$
$
$
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income (loss) per Common Share
The following table sets forth the computation of basic and diluted net income (loss) per common share:
2017
2016
(Dollars In Thousands, Except Per Share Amounts)
2015
Numerator:
Net income (loss):
$
(29,217) $
112,168
$
(34,765)
Adjustments for basic net income (loss) per common
share:
Dividend requirements on Series E Redeemable
Preferred
Dividends and dividend requirements on Series B
Preferred
Dividends and dividend requirements on Series D
Preferred
Accretion of Series E Redeemable Preferred
Net income attributable to participating securities
Numerator for basic net income (loss) per common
share - net income (loss) attributable to common
stockholders
Dividends on convertible preferred stocks assumed
to be converted, if dilutive
Numerator for diluted net income (loss) per common
share
Denominator:
Denominator for basic and dilutive net income (loss)
per common share - adjusted weighted-average
shares (1)
Basic net income (loss) per common share:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Diluted net income (loss) per common share:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
(23,443)
(27,761)
(2,287)
(240)
(240)
(240)
(60)
(6,487)
(cid:178)(cid:178)
(60)
(18,256)
(1,091)
(60)
(686)
(cid:178)(cid:178)
(59,447)
64,760
(38,038)
(cid:178)(cid:178)
(cid:178)
300
$
(59,447) $
64,760
$
(37,738)
27,250,876
25,454,311 22,758,873
$
$
$
$
(2.22) $
0.04
(2.18) $
(5.28)
$
7.82
$
2.54
(2.22) $
0.04
(2.18) $
$
(5.28)
7.82
$
2.54
(2.17)
0.50
(1.67)
(2.17)
0.50
(1.67)
(1)
2017 and 2016 exclude the weighted-average shares of unvested restricted stock that are contingently returnable.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
3. Income (loss) per Common Share (continued)
The following weighted-average shares of securities were not included in the computation of diluted net income (loss) per common
share as their effect would have been antidilutive:
Convertible preferred stocks
Restricted stock and stock units
Series E redeemable preferred stock - embedded derivative
Stock options
Warrants
2017
916,666
1,187,525
303,646
215,067
(cid:178)(cid:178)
2,622,904
2016
916,666
908,568
412,869
361,168
(cid:178)(cid:178)
2015
916,666
1,448
34,998
898,582
314,808
2,599,271 2,166,502
4. Accounts Receivable
Trade receivables and other
Allowance for doubtful accounts
December 31,
2017
2016
(In Thousands)
$
$
59,873 $
(303)
59,570 $
51,656
(357)
51,299
(cid:54)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)(cid:38)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)ancial
condition and other factors. Concentrations of credit risk with respect to trade receivables are monitored and this risk is reduced due
to short-term payment terms relating to most of our significant customers. Six customers (including their affiliates) account for
approximately 36% of our total net receivables at December 31, 2017.
5. Inventories
December 31, 2017:
December 31, 2016:
Finished
Goods
Work-in-
Process
Raw
Materials
Total
$
20,415 $
(In Thousands)
(cid:178)(cid:178) $
1,441
$
21,856
$
19,036 $
(cid:178)(cid:178) $
3,903 $
22,939
Because cost exceeded the net realizable value, inventory reserves were $933,000 and $2,977,000 at December 31, 2017 and 2016,
respectively.
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. Property, Plant and Equipment
Machinery, equipment and automotive
Proved natural gas properties
Buildings and improvements
Furniture, fixtures and store equipment
Land improvements
Construction in progress
Capital spare parts
Land
Less accumulated depreciation, depletion and
amortization
Useful lives in
years
December 31,
2017
2016
2 - 30
*
10 - 30
4
10 - 40
N/A
N/A
N/A
(In Thousands)
$ 1,163,532 $ 1,159,001
76,679
(cid:178)(cid:178)
40,810
42,886
1,661
1,466
8,083
8,111
25,640
27,973
25,655
29,835
8,970
7,764
1,281,567 1,346,499
267,529
267,541
$ 1,014,038 $ 1,078,958
Machinery, equipment and automotive primarily includes the categories of property and equipment and estimated useful lives as
follows: processing plants and plant infrastructure (15-30 years); certain processing plant components (3-10 years); and trucks,
automobiles, trailers, and other rolling stock (2-7 years).
*
See information concerning the sale of our natural gas properties in Note 1(cid:177) Summary of Significant Accounting Policies.
(cid:177)
7. Current and Noncurrent Accrued and Other Liabilities
Accrued interest
Deferred revenue
Accrued payroll and benefits
Accrued death and other executive benefits (1)
Series E redeemable preferred - embedded derivative
Accrued health and worker compensation insurance claims
Customer deposits
Accrued liabilities associated with discontinued operations
Other
Less noncurrent portion
Current portion of accrued and other liabilities
December 31,
2017
2016
(In Thousands)
$
$
13,424 $
6,987
4,855
2,808
2,660
1,658
1,334
429
13,109
47,264
11,691
35,573 $
13,425
5,757
4,696
4,207
2,557
1,530
2,506
5,498
16,187
56,363
12,326
44,037
(1) During 2017, a death benefit agreement with Jack E. Golsen, our retired Executive Chairman of our Board, was terminated
pursuant to the terms of the agreement that allowed LSB to terminate at any time and for any reason prior to the death of the
ent
n
employee. As a result, the liability of approximately $1.4 million for the estimated death benefit associated with this agreem
was extinguished and derecognized with the offset classified as other income. For the year ended December 31, 2017, the effect
of this adjustment (after income taxes of $0.5 million) decreased basic and diluted loss per share by $0.03 per share.
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Asset Retirement Obligations
Currently, we have various legal requirements related to operations at our chemical facilities, including the disposal of wastewater
generated at certain of these facilities. Currently, there is insufficient information to estimate the fair value for certain of our asset
(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:179)(cid:36)(cid:53)(cid:50)(cid:180)(cid:12)(cid:17)(cid:3)(cid:36)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:15)(cid:3)(cid:68)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:81)(cid:79)(cid:92)(cid:3) certain AROs has been established. However, we will continue to
review these obligations and record a liability when a reasonable estimate of the fair va
lue can be made. As the result of the sale of
tt
(cid:61)(cid:72)(cid:81)(cid:68)(cid:182)(cid:86)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:74)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:36)(cid:53)Os of approximately $193,000
associated with the obligation to plug and abandon wells were extinguished and derecognized with the offset included in the net loss
on the sale of a business classified as operating other expense. At December 31, 2017 and 2016, our accrued liability for AROs was
$100,000 and $546,000, respectively.
t
9. Long-Term Debt
December 31, December 31,
2017
2016
(In Thousands)
$
Working Capital Revolver Loan, with a current interest rate of
5.00% (A)
Senior Secured Notes due 2019 (B)
Secured Promissory Note due 2017 (C)
Secured Promissory Note due 2019, with a current rate
of 5.73% (D)
Secured Promissory Note due 2021, with a current interest rate
of 5.25% (E)
Secured Promissory Note due 2023, with a current interest rate
of 5.62% (F)
Other, with a current weighted-average interest rate of 4.50%,
most of which is secured primarily by machinery and
equipment
Unamortized discount and debt issuance costs
Less current portion of long-term debt (G)
Long-term debt due after one year, net (G)
$
(cid:178)(cid:178) $
375,000
(cid:178)(cid:178)
(cid:178)(cid:178)
375,000
6,566
8,167
9,167
11,262
14,272
16,665
18,645
2,994
(4,689)
409,399
9,146
400,253 $
4,185
(7,615)
420,220
13,745
406,475
(A) (cid:50)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:20)(cid:26)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:11)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:86)(cid:180)(cid:12)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)nd
(cid:53)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:47)(cid:82)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:68)(cid:86)(cid:3)(cid:86)(cid:82)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:58)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:72)(cid:85)(cid:3)(cid:47)(cid:82)(cid:68)(cid:81)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:79)(cid:72)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86) and
(cid:58)(cid:72)(cid:79)(cid:79)(cid:86)(cid:3)(cid:41)(cid:68)(cid:85)(cid:74)(cid:82)(cid:3)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:3)(cid:11)(cid:179)(cid:58)(cid:72)(cid:79)(cid:79)(cid:86)(cid:3)(cid:41)(cid:68)(cid:85)(cid:74)(cid:82)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)
The aggregate commitment under the Working Capital Revolver Loan is for $50 million. Advances under the Working Capital
Revolver Loan are subject to a customary borrowing base. The Working Capital Revolver Loan provides for a subfacility for the
issuances of letters of credit in an aggregate amount not to exceed to $10 million, with the outstanding amount of any such letters of
credit reducing availability for borrowings under the Working Capital Revolver Loan. At December 31, 2017, the amount available
for borrowing under the Working Capital Revolver was $41.2 million.
n
Interest accrues on outstanding borrowings under the Working Capital Revolver Loan at a rate equal to, at our election, either (a)
LIBOR for an interest period selected by us plus an applicable margin equal to 1.50% per annum or 1.75% per annum, depending on
(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:58)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:72)(cid:85)(cid:3)(cid:47)(cid:82)(cid:68)(cid:81)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:11)(cid:69)(cid:12)(cid:3)(cid:58)(cid:72)(cid:79)(cid:79)(cid:86)(cid:3)(cid:41)(cid:68)(cid:85)(cid:74)(cid:82)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)me rate plus an applicable margin equal to
0.50% per annum or 0.75% per annum, depending on borrowing availability under the Working Capital Revolver Loan. At December
31, 2017, the interest rate was 5.0%. Interest is paid monthly, if applicable.
r
In addition, unused line fees in an amount equal to 0.25% per annum on the average daily balance of the unused revolver
commitments under the Working Capital Revolver Loan are payable by us, as well as customary fees in respect of letters of credit.
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Long-Term Debt (continued)
The maturity date of the Working Capital Revolver Loan is January 17, 2022(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:3)(cid:86)(cid:83)(cid:85)(cid:76)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:68)(cid:85)(cid:79)(cid:76)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:83)(cid:85)(cid:76)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:48)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:39)(cid:68)(cid:87)(cid:72)(cid:180)(cid:12)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)90 days prior to the maturity date of our Senior Secured Notes, to the extent the Senior Secured Notes are not
refinanced or repaid prior to the Springing Maturity Date. The Working Capital Revolver Loan does not include any amortization,
and all borrowings under the Working Capital Revolver Loan are due on the relevant maturity date.
As of December 31, 2017, the Working Capital Revolver Loan Amendment also provides for a springing financial covenant (the
(cid:179)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:15)(cid:3)(cid:76)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)less than or equal to the greater of 10.0% of the total revolver
commitments and $5 million, then the Borrowers must maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00. The
Financial Covenant, if triggered, is tested monthly.
The Working Capital Revolver Loan Amendment contains customary covenants including limitations on asset sales, liens, debt
incurrence, restricted payments, investments, dividends and transactions with affiliates.
The Working Capital Revolver Loan Amendment includes customary events of default. Upon the occurrence of any event of default,
the obligations under the Working Capital Revolver Loan may be accelerated and the revolver commitments may be terminated.
Obligations under the Working Capital Revolver Loan are secured by a first priority security interest in substantially all of t
(cid:37)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:81)(cid:87)(cid:82)(cid:85)(cid:92)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)
y
(cid:81)(cid:81)
het
(B) In 2013, LSB sold $425 million aggregate principal amount of the 7.75% Senior Secured Notes due (cid:21)(cid:19)(cid:20)(cid:28)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)
(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:180)(cid:12)(cid:3) (cid:76)(cid:81)(cid:3) (cid:68)(cid:3) (cid:83)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:72)(cid:3) (cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:87)(cid:82)(cid:3) (cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3) (cid:69)(cid:88)(cid:92)(cid:72)(cid:85)(cid:86)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:53)(cid:88)(cid:79)(cid:72)(cid:3) (cid:20)(cid:23)(cid:23)(cid:36)(cid:3) (cid:68)(cid:81)(cid:71)(cid:15)(cid:3) (cid:82)(cid:88)(cid:87)(cid:86)(cid:76)(cid:71)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:56)(cid:81)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3) (cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:15)(cid:3) (cid:83)(cid:88)(cid:85)(cid:86)(cid:88)(cid:68)(cid:81)t to
(cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:54)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:28)(cid:22)(cid:22)(cid:3)(cid:11)(cid:68)(cid:86)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3)
On September 7, 201(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:88)(cid:83)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:74)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)
Senior Secured Notes. Among other things, the Supplemental Indenture allowed us to redeem a portion of the Series E Redeemable
Preferred as discussed in Note 13 and redeem all of the then outstanding $50 million in aggregate principal amount of our 12% Senior
Secured Notes due 2019, and, in connection therewith, required us to redeem $50 million in aggregate principal amount of the Senior
Secured Notes. During October 2016, we made payments totaling $106.9 million related to the above redemptions resulting in the
recognition of a loss on extinguishment of debt of approximately $8.7 million.
Pursuant to the Supplemental Indenture, the interest rate applicable to all Senior Secured Notes outstanding after the consummation of
the 7.75% Notes Redemption, with retroactive effect to August 1, 2016, was automatically increased to 8.5% per annum. As a result
of the interest rate increase, we recognized an additional $1.2 million of interest expense during 2016.
For financial reporting purposes, the above transaction was a non-substantial debt modification. As a result, the consent fee of
approximately $5.4 million (equal to $13.25 per $1,000 principal amount of Senior Secured Notes for which a consent had been
validly delivered) paid to the holders of the Senior Secured Notes in connection with the Supplemental Indenture was deferred and
included in debt issuance costs and is being amortized over the remaining term of the Senior Secured Notes. In addition, we incurred
other fees of approximately $1.4 million for services performed by third parties, which fees were
expensed and included in interest
y
expense in 2016.
The Senior Secured Notes are general senior secured obligations of LSB. The Senior Secured Notes are jointly and severally and
d
fully
f
(cid:68)(cid:81)(cid:71)(cid:3) (cid:88)(cid:81)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3) (cid:74)(cid:88)(cid:68)(cid:85)(cid:68)(cid:81)(cid:87)(cid:72)(cid:72)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:68)(cid:79)(cid:79)(cid:3) (cid:82)(cid:73)(cid:3) (cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3) (cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3) (cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)-owned subsidiaries. Obligations in respect of the Senior Secured
Notes are secured by a first pr(cid:76)(cid:82)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:88)(cid:68)(cid:85)(cid:68)(cid:81)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:73)(cid:76)(cid:91)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)
customary exceptions. At December 31, 2017, the carrying value of the assets secured on a first-priority basis was approximately $1
billion and the carrying value of the assets secured on a second-priority basis was approximately $81 million.
LSB may redeem the Senior Secured Notes at its option at the following redemption prices (expressed as percentages of the principal
amount thereof), plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on the rele
vant
record date to receive interest due on the relevant interest payment date), if redeemed during the twelve-month period commencing on
August 1st of the year set forth below:
f
Year
Currently
2018 and thereafter
Senior Secured
Notes
101.938%
100.000%
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Long-Term Debt (continued)
The Indenture contains standard high yield incurrence covenants including limitations on liens, debt incurrence, restricted payments,
investments and transactions with affiliates, and contains standard high yield covenants requiring LSB to offer to purchase the Senior
Secured Notes upon the occurrence of certain asset sales or a change of control.
rr
(C) During 2017, concurrently with the closing of the purchase and sale agreement relating to Zena discussed in Note 1, a portion of
the net proceeds (approximately $3.5 million) from the sale was used to repay the remaining outstanding balance of this promissory
note.
(D) (cid:50)(cid:81)(cid:3)(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:38)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:11)(cid:179)(cid:40)(cid:39)(cid:38)(cid:180)(cid:12)(cid:15)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73) (cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)
(cid:68)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)
(cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:180)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72) 29, 2019. Principal and
interest are payable in 40 equal monthly installments with a final balloon payment of approximately $6.7 million. The Secured
Promissory Note due 2019 is secured by the cogeneration facility equipment and is guaranteed by LSB.
(cid:73)
(E) On April 9, 2015, (cid:40)(cid:39)(cid:38)(cid:15)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:21)(cid:20)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)
(cid:71)(cid:88)(cid:72)(cid:3) (cid:21)(cid:19)(cid:21)(cid:20)(cid:180)(cid:12)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:68)(cid:81)(cid:3) (cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3) (cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3) (cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3) (cid:7)(cid:20)(cid:25)(cid:17)(cid:21)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3) (cid:82)(cid:81)(cid:3) (cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3) (cid:21)(cid:25)(cid:15)(cid:3) (cid:21)(cid:19)(cid:21)(cid:20)(cid:17)(cid:3) (cid:3) (cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3) (cid:82)(cid:81)(cid:79)(cid:92)(cid:3) (cid:90)(cid:68)(cid:86)
payable monthly for the first 12 months of the term. Principal and interest are payable monthly for the remaining term. This Secured
Promissory Note due 2021 is secured by a natural gas pipeline constructed at the El Dorado Facility and is guaranteed by LSB.
(cid:92)
(F) (cid:50)(cid:81)(cid:3)(cid:54)(cid:72)(cid:83)(cid:87)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:20)(cid:25)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:36)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3)(cid:47)(cid:17)(cid:47)(cid:17)(cid:38)(cid:17)(cid:3)(cid:11)(cid:179)(cid:40)(cid:39)(cid:36)(cid:180)(cid:12)(cid:15)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3) (cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)
n
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3) (cid:51)(cid:85)(cid:82)(cid:80)(cid:76)(cid:86)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3) (cid:49)(cid:82)(cid:87)(cid:72)(cid:3) (cid:71)(cid:88)(cid:72)(cid:3) (cid:21)(cid:19)(cid:21)(cid:22)(cid:180)(cid:12)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3) (cid:82)(cid:73)(cid:3) (cid:68)(cid:81)(cid:3) (cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3) (cid:86)(cid:87)(cid:82)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3) (cid:87)(cid:68)(cid:81)(cid:78)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:68)
(cid:73)(cid:73)
initial funding received of $15 million and a maximum principal note amount of $19.8 million. (cid:50)(cid:81)(cid:3) (cid:48)(cid:68)(cid:92)(cid:3) (cid:20)(cid:22)(cid:15)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:47)(cid:82)(cid:68)(cid:81)
(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:28)(cid:17)(cid:27)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)ion was
(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:39)(cid:68)(cid:87)(cid:72)(cid:180)(cid:12)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:23)(cid:17)(cid:27)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:71)(cid:85)(cid:68)(cid:90)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)
converted to a seven-year secured term loan requiring 83 equal monthly principal and interest payments with a final balloon payment
of approximately $6.1 million. This note bears interest at a rate that is based on the monthly LIBOR rate plus a base rate for a total of
5.62% and matures in May 2023. The Secured Promissory Note due 2023 is secured by the ammonia storage tank and related systems
and is guaranteed by LSB.
y
(cid:81)
r
(cid:73)
(G) Maturities of long-term debt for each of the five years after December 31, 2017 are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Less: Discount and debt issuance costs
9,146
387,492
5,507
3,198
1,980
6,765
4,689
409,399
$
10. Income Taxes
I(cid:81)(cid:3) (cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3) (cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:56)(cid:81)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3) (cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3) (cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:87)(cid:82)(cid:3) (cid:79)(cid:68)(cid:90)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:55)(cid:68)(cid:91)(cid:3) (cid:38)(cid:88)(cid:87)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:45)(cid:82)(cid:69)(cid:86)(cid:3) (cid:36)(cid:70)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:21)(cid:19)(cid:20)(cid:26)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3) (cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)
significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from
35% to 21% for tax years beginning after December 31, 2017, additional limitations on executive compensation, and limitations on the
deductibility of interest. We have estimated our provision for income taxes in accordance with the Act and guidance available as of
the date of this filing. As a result, we have recorded $23 million as additional income tax benefit in the fourth quarter of 2017, the
period in which the legislation was enacted, primarily related to the decrease in the federal corporate tax rate. This reflects the
provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are
expected to reverse in the future. The ultimate impact may differ from these provisional amounts, due to, among other things,
ff
additional analysis, changes in interpretations and assumptions we have made, and additional regulatory guidance that may be issued.
In December 2017, the SEC issued SAB 118 to address the application of GAAP in situations when a registrant does not have the
necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for
certain income tax effects of the Act. In accordance with SAB 118, we have determined that the $23 million of the deferred tax
benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities is a provisional amount and a
reasonable estimate at December 31, 2017.
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Benefit for income taxes from continuing operations are as follows:
Current:
Federal
State
Total Current
Deferred:
Federal
State
Total Deferred
Benefit for income taxes
$
$
$
$
$
2017
2016
(In Thousands)
2015
67 $
(381)
(314) $
46
$
11
$
57
(4,655)
(429)
(5,084)
(50,084) $
9,639
(40,445) $
(40,759) $
(46,926)
$
4,913
$
$
(42,013)
(41,956)
(25,958)
(1,478)
(27,436)
(32,520)
The current provision (benefit) for federal income taxes shown above includes regular federal income tax after the consideration of
permanent and temporary differences between income for GAAP and tax purposes. The current provision (benefit) for state income
taxes includes regular state income tax and provisions for uncertain income tax positions, and other similar adjustments.
The deferred tax provision (benefit) results from the recognition of changes in our prior year deferred tax assets and liabilities, and the
income tax expense for tax credits in the year they
utilization of state NOL carryforwards and other temporary differences. We reduce
arise and are earned. At December 31, 2017, our gross amount of the investment tax credits av
ailable to offset state income taxes was
not material. These investment tax credits do not expire and carryforward indefinitely. The gross amount of federal tax credits was
$8.0 million. These credits carryforward for 20 years and begin expiring in 2034.
aa
f
We utilized approximately $0.4 million and $9.6 million of state NOL carryforwards to reduce tax liabilities in 2016 and 2015,
respectively, (none in 2017). At December 31, 2017, we have remaining federal and state tax NOL carryforwards of $541.9 million
and $579.8 million, respectively. The federal NOL carryforwards begin expiring in 2033 and the state NOL carryforwards begin
expiring in 2017.
We considered both positive and negative evidence in our determination of the need for valuation allowances for the deferred tax
assets associated with federal and state NOLs and federal credits and in conjunction with the IRC Section 382 limitation and
determined that it was more-likely-than-not that the federal NOL and credits would be utilized before expiration. For 2017, 2016 and
2015, we determined it was more-likely-than-not that approximately $536.0 million, $312.3 million and $34.5 million, respectively, of
the state NOL carryforwards would not be able to be utilized before expiration and a valuation allowance was maintained for the
deferred tax assets associated with these state NOL carryforwards, net of federal benefit of approximately $26.9 million and $13.1
million in 2017 and 2016, respectively.
When non-(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:179)(cid:49)(cid:54)(cid:50)(cid:86)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:72)(cid:85)(cid:70)(cid:76)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:82)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:83)(cid:85)(cid:72)(cid:68)(cid:71)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)
market value of the stock issued and the exercise price of the NSOs as compensation expense in determining taxable income. Prior to
the adoption of ASU 2016-09 on January 1, 2017 (as discussed under Recently Issued Accounting Pronouncements of Note 1),
income tax benefits related to stock-based compensation deductions in excess of the compensation expense recorded for financial
reporting purposes were not recognized in earnings as a reduction of income tax expense for financial reporting purposes. The excess
stock-based compensation tax deduction for 2015 was $0.6 million (none for 2016), respectively, and was included in the net change
in capital in excess of par value rather than an increase in the benefit for income tax
es. Upon adoption of this ASU, excess tax
n
benefits that were not previously recognized, because the related tax deduction had not reduced current taxes payable, were recorded
with a cumulative effect adjustment as discussed in Note1. Under the new guidance, all tax effects related to share-based payments at
settlement (or expiration) are recorded through the income statement when it arises, subject to normal valuation allowance
considerations. In 2017, we recognized an excess tax benefit of $0.2 million.
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Deferred tax assets and liabilities include temporary differences and carryforwards as follows:
mm
December 31,
2017
2016
Allowance for doubtful accounts
Inventory
Deferred compensation
Other accrued liabilities
Net operating loss
Other
Less valuation allowance on deferred tax assets
Total deferred tax assets
Property, plant and equipment
Prepaid and other insurance reserves
Other
Total deferred tax liabilities
$
$
$
(In Thousands)
77 $
316
2,393
1,964
142,950
15,540
(26,920)
136,320 $
158
2,048
4,003
3,024
150,277
18,337
(13,128 )
164,719
(186,561)
(2,561)
(1,985)
(191,107) $
(249,714)
(4,603)
(4,233)
(258,550)
Net deferred tax liabilities
$
(54,787) $
(93,831 )
All of our income (loss) before taxes relates to domestic operations. Detailed below are the differences between the amount of the
benefit for income taxes and the amount which would result from the application of (cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:47)(cid:82)(cid:86)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:76)(cid:81)(cid:74)
(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:180)(cid:17)
f
2017
2016
(In Thousands)
(45,531)
Benefit for income taxes at federal statutory rate
State current and deferred income tax benefit
Energy credit
Valuation allowance
Tax reform
Other
Benefit for income taxes
$
$
(24,868) $
(2,699)
(cid:178)(cid:178)
7,651
(22,988)
2,145
(40,759) $
$
(4,452)
(888)
11,855
(cid:178)
(2,940)
$
(41,956)
A reconciliation of the beginning and ending amount of uncertain tax positions is as follows:
2016
(In Thousands)
259
454
$
4
(60)
(cid:178)(cid:178)
$
657
657 $
11
(cid:178)(cid:178)
(50)
(cid:178)(cid:178)
618 $
2017
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
$
$
F-25
2015
(27,512)
(2,184)
(2,846)
918
(cid:178)(cid:178)
(896)
(32,520)
2015
657
70
13
(443)
(38)
259
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
We expect that the amount of unrecognized tax benefits may change as the result of ongoing operations, the outcomes of audits, and
the expiration of statute of limitations. This change is not expected to have a significant effect on our results of operations or financial
condition. For 2017, 2016, and 2015, if recognized, the effect on the effective tax rate from unrecognized tax benefits would be
insignificant.
We record interest related to unrecognized tax positions in interest expense and penalties in operating other expense. During 2017, we
recognized $132,000 of interest and penalties associated with unrecognized tax benefits. Minimal amounts were recognized in 2016
and 2015. At December 31, 2017, $201,000 is accrued for interest and penalties (minimal at December 31, 2016).
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. With few
exceptions, the 2014-2017 years (cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:83)(cid:72)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:68)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:11)(cid:179)(cid:44)(cid:53)(cid:54)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)
major tax jurisdictions. We are currently under examination by the IRS for the tax year 2015.
n
11. Commitments and Contingencies
Operating Leases - We lease certain PP&E under non-cancelable operating leases. Future minimum payments on operating leases
associated with our continuing operations with initial or remaining terms of one year or more at December 31, 2017, are as follows:
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Operating
Leases
$
$
7,148
6,119
2,825
1,565
1,259
2,291
21,207
Expenses associated with our operating lease agreements, including month-to-month leases, were $9,813,000 in 2017, $9,933,000 in
2016, and $9,845,000 in 2015. Renewal options are available under certain of the lease agreements for various periods at
approximately the existing annual rental amounts.
Purchase and Sales Commitments (cid:177) We have the following significant purchase and sales commitments.
(cid:177)
(cid:177)
Covestro agreement (cid:177) El Dorado Nitrogen LLC
(cid:11)(cid:179)(cid:40)(cid:39)(cid:49)(cid:180)(cid:12)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:40)(cid:39)(cid:38)(cid:15)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:81)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)
(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:17)(cid:3)(cid:3)(cid:40)(cid:39)(cid:49)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:92)(cid:87)(cid:82)(cid:90)(cid:81)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:182)(cid:86) chemical manufacturing complex located in Baytown, Texas.
in
(cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:40)(cid:39)(cid:49)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:81)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:68)(cid:70)(cid:76)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:88)(cid:86)(cid:72)
(cid:73)(cid:73)
(cid:38)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:85)(cid:82)(cid:182)(cid:86)(cid:3) (cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3) (cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:91)(cid:3) that provides a pass-through of certain costs plus a profit. In addition, EDN is
responsible for the maintenance and operation of the Baytown Facility. If there is a change in co
ntrol of EDN, Covestro has the right
to terminate the Covestro Agreement upon payment of certain fees to EDN. The Covestro Agreement expires in June 2021, with
options for renewal.
tt
UAN supply agreement (cid:177) (cid:55)(cid:75)(cid:72)(cid:3) (cid:51)(cid:85)(cid:92)(cid:82)(cid:85)(cid:3) (cid:38)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:11)(cid:179)PCC(cid:180)(cid:12) is party to an agreement with Coffeyville Resources Nitrogen
uced by
(cid:87)
(cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:3)(cid:11)(cid:179)(cid:38)(cid:57)(cid:53)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:38)(cid:57)(cid:53)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:11)(cid:69)(cid:88)(cid:87)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:56)(cid:36)(cid:49)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)
PCC with certain limitations. If CVR fails to take delivery of certain tons, PCC pursuant to the terms of the agreement may
f
immediately sell such unpurchased product to a third-party without restriction. The initial term of the agreement expires in May 2019,
but includes automatic renewals for one or more additional one-year terms unless terminated by either party by delivering a notice of
termination at least twelve months prior to the end of term in effect. However, CVR may unilaterally terminate the agreement upon
(cid:20)(cid:27)(cid:19)(cid:3) (cid:71)(cid:68)(cid:92)(cid:86)(cid:182)(cid:3) (cid:68)(cid:71)(cid:89)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) (cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3) (cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:87)(cid:82)(cid:3) (cid:51)(cid:38)(cid:38)(cid:30)(cid:3) (cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3) (cid:75)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:72)(cid:68)(cid:70)(cid:75)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:83)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:82)(cid:3)
UAN that CVR committed to purchase before such advance notice will survive termination. Additionally, PCC can terminate the
(cid:38)(cid:57)(cid:53)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:28)(cid:19)(cid:3)(cid:71)(cid:68)(cid:92)(cid:86)(cid:182)(cid:3)(cid:68)(cid:71)(cid:89)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:57)(cid:53)(cid:30)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3)(cid:75)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)
and obligations pertaining to UAN that PCC committed to sell prior to such advance notice will survive termination.
uu
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Ammonia supply agreement (cid:177) (cid:40)(cid:39)(cid:38)(cid:3) (cid:76)(cid:86)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:68)(cid:81)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:46)(cid:82)(cid:70)(cid:75)(cid:3) (cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:15)(cid:3) (cid:47)(cid:47)(cid:38)(cid:3) (cid:11)(cid:179)(cid:46)(cid:82)(cid:70)(cid:75)(cid:3) (cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:180)(cid:12)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:46)(cid:82)(cid:70)(cid:75)
Fertilizer agrees to purchase, with minimum purchase requirements, the ammonia that (a) will be produced at the El Dorado Facility
and (b) that is in (cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)May 2019 but automatically continues for
one or more additional one-year terms unless terminated by either party by delivering a notice of termination at least nine mon
nn
ths prior
to the end of term in effect.
r
(cid:177)
Other purchase and sales commitments - See Note 12 (cid:177) Derivatives, Hedges, Financial Instruments and Carbon Credits for our
commitments relating to derivative contracts and carbon credits at December 31, 2017. During 2017, certain subsidiaries entered into
contracts to purchase natural gas for anticipated production needs at certain of our facilities. Since these contracts are considered
normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a
reasonable period of time in the normal course of business and are documented as such, these contracts are exempt from the
accounting and reporting requirements relating to derivatives. At December 31, 2017, our natural gas contracts, which are exempt mm
from mark-to-market accounting, included the volume purchase commitments with fixed costs of approximately 1.3 million MMBtus
of natural gas. These contracts extend through March 2018 at a weighted-average cost of $2.42 per MMBtu ($3.0 million) and a
weighted-average market value of $2.58 per MMBtu ($3.2 million). In addition, we had standby letters of credit outstanding of
approximately $3.4 million at December 31, 2017. We also had deposits from customers of $1.3 million for forward sales
commitments at December 31, 2017.
Wastewater Pipeline Operating Agreement (cid:177) EDC is party to an operating agreement for
the right to use a pipeline to dispose its
(cid:177)
wastewater. EDC is contractually obligated to pay a portion of the operating costs of the pipeline, which portion is estimated to be
$100,000 to $150,000 annually. The initial term of the operating agreement is through December 2053.
Performance and Payment Bonds (cid:177) We are contingently liable to sur
eties in respect of certain insurance bonds issued by the sureties
in connection with certain contracts entered into by certain subsidiaries in the normal course of business. These insurance bonds
primarily represent guarantees of future performance of our subsidiaries. As of December 31, 2017, we have agreed to indemnify the
sureties for payments, up to $10 million, made by them in respect of such bonds. All of these insurance bonds are expected to expire
or be renewed in 2018.
y
(cid:177)
Employment and Severance Agreements - We have employment 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 $13.7 million at December 31, 2017.
ff
Legal Matters - Following is a summary of certain legal matters involving the Company:
A. Environmental Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health
ions,
(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3)(cid:80)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:11)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:47)(cid:68)(cid:90)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)
(cid:75)
substantial fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint
and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been
stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities
of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of
others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In
connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that
could expose us to material losses. In certain instances, citizen groups also have the ability to bring legal proceedings against us if we are
not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to operate. In
addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety
effects of our operations.
d
ff
l
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines o
r
penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage if an environmental claim is made against us. The Environmental and Health Laws and related enforcement policies have in
the past resulted, and could in the future result, in significant compliance expenses, cleanup co
sts (for our sites or third-party sites
where our wastes were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or
disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products. Further, a
number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material
adverse effect on their operations and our financial condition.
r
t
and
Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental
Health Laws, and significant capital expenditures are expected to be incurred in the future. We will also be obligated to mana
ge
certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a
facility. We did not operate the natural gas wells where we previously owned a working interest and compliance with Environmental
and Health Laws was controlled by others. We were responsible for our working interest proportionate share of the costs involved.
As of December 31, 2017, our accrued liabilities for environmental matters totaled $183,000 relating primarily to the matters
discussed below. It is reasonably possible that a change in the estimate of our liability could occur in the near term. Also, see
discussion in Note 8 (cid:177) Asset Retirement Obligations.
(cid:177)
y
uu
1. Discharge Water Matters
Each of our manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control
streams, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water
runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental
(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3) (cid:68)(cid:86)(cid:3) (cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:82)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:72)(cid:81)(cid:3) (cid:69)(cid:92)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:56)(cid:17)(cid:54)(cid:17)(cid:3) (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:51)(cid:85)(cid:82)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:36)(cid:74)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:40)(cid:51)(cid:36)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3) (cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:86)(cid:3) (cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:92)(cid:83)(cid:72)(cid:3) (cid:68)(cid:81)d
amount of effluents that can be discharged and control the method of such discharge.
nn
Our Pryor Facility is authorized by permit to inject wastewater into an on-site underground injection well through 2018. The
(cid:50)(cid:78)(cid:79)(cid:68)(cid:75)(cid:82)(cid:80)(cid:68)(cid:3) (cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:52)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:11)(cid:179)(cid:50)(cid:39)(cid:40)(cid:52)(cid:180)(cid:12)(cid:3) (cid:75)(cid:68)(cid:86)(cid:3) (cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:3) (cid:80)(cid:68)(cid:92)(cid:3) (cid:81)(cid:82)(cid:87)(cid:3) (cid:69)(cid:72)(cid:3) (cid:85)enewed following its
expiration, and PCC may have to find an alternative means of waste water disposal after the permit expires. PCC has engaged in
ongoing discussions with the ODEQ regarding future disposal of this wastewater stream.
(cid:50)(cid:88)(cid:85)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3) (cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:51)(cid:82)(cid:79)(cid:79)(cid:88)(cid:87)(cid:68)(cid:81)(cid:87)(cid:3) (cid:39)(cid:76)(cid:86)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:40)(cid:79)(cid:76)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:54)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:3)(cid:11)(cid:179)(cid:49)(cid:51)(cid:39)(cid:40)(cid:54)(cid:180)(cid:12)(cid:3)(cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:36)(cid:85)(cid:78)(cid:68)(cid:81)(cid:86)(cid:68)s
(cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3) (cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3) (cid:52)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:11)(cid:179)(cid:36)(cid:39)(cid:40)(cid:52)(cid:180)(cid:12)(cid:3) (cid:76)(cid:81)(cid:3) (cid:21)(cid:19)(cid:19)(cid:23)(cid:17)(cid:3) (cid:3) (cid:44)(cid:81)(cid:3) (cid:21)(cid:19)(cid:20)(cid:19)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:36)(cid:39)(cid:40)(cid:52)(cid:3) (cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3) (cid:68)(cid:3) (cid:71)(cid:85)(cid:68)(cid:73)(cid:87)(cid:3) (cid:49)(cid:51)(cid:39)(cid:40)(cid:54)(cid:3) (cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:3) (cid:85)(cid:72)(cid:81)(cid:72)(cid:90)(cid:68)(cid:79)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:40)(cid:79)
Dorado Facility, which contains more restrictive discharge limits than the previous 2004 permit.
These more restrictive limits could impose additional costs on the El Dorado Facility and may require the facility to make operational
changes in order to meet these more restrictive limits. From time to time, the El Dorado Facility has had difficulty meeting the more
restrictive dissolved minerals NPDES permit levels, primarily related to storm-water runoff and EDC is currently working with ADEQ
to resolve this issue through a new permit, which is currently in progress.
t
EDC believes that the El Dorado Facility has generally demonstrated its ability to comply with applicable ammonia and nitrate permit
levels, but has, from time to time, had difficulty meeting the more restrictive dissolved minerals permit levels, primarily related to
storm-water runoff. We do not believe this matter regarding meeting the permit requirements as to the dissolved minerals is a
continuing issue for the process wastewater as the result of the El Dorado Facility disposing its wastewater (beginning in September
2013) via a pipeline constructed by the City of El Dorado, Arkansas. On August 30, 2017, ADEQ issued a final NPDES permit,
which included new dissolved mineral limits as anticipated. However, EDC objected to the form of the permit and filed an appeal on
September 27, 2017. The appeal places an automatic stay on the objectionable conditions and EDC is working with the ADEQ to
obtain modifications to the renewed permit terms. We believe that the issue with the storm-water runoff should be resolved, if and
when the appeal is resolved.
f
During 2012, EDC paid a penalty of $100,000 to settle an administrative complaint issued by the EPA, and thereafter handled by the
U.S. Department of Justi(cid:70)(cid:72)(cid:3)(cid:11)(cid:179)(cid:39)(cid:50)(cid:45)(cid:180)(cid:12)(cid:15)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:79)(cid:79)(cid:72)(cid:74)(cid:72)(cid:71)(cid:3)(cid:89)(cid:76)(cid:82)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3)(cid:21)(cid:19)(cid:19)(cid:23)(cid:3)(cid:49)(cid:51)(cid:39)(cid:40)(cid:54)(cid:3)(cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:21)(cid:19)(cid:19)(cid:23)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)(cid:17)(cid:3)(cid:3)(cid:36)(cid:87)(cid:3)
the time of settlement, the DOJ advised that an additional action may be brought for alleged permit violations occurring after 2010.
As of the date of this report, no action has been filed by the DOJ against EDC. As a result, the cost (or range of costs) cannot
currently be reasonably estimated regarding this matter. Therefore, no liability has been established for potential future penalties as of
December 31, 2017.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
(cid:44)(cid:81)(cid:3) (cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:40)(cid:79)(cid:3) (cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3) (cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:76)(cid:86)(cid:3) (cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:68)(cid:3) (cid:38)(cid:82)(cid:81)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3) (cid:36)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:50)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:38)(cid:36)(cid:50)(cid:180)(cid:12)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3) (cid:87)he
presence of nitrate contamination in the shallow groundwater. The 2006 CAO required EDC to continue semiannual groundwater
to
monitoring, to continue operation of a groundwater recovery system and to submit a human health and ecological risk assessment
the ADEQ relating to the El Dorado Facility. The risk assessment was submitted in August 2007. In February 2015, the ADEQ sta
ted
t
that El Dorado Chemical was meeting the requirements of the CAO and should continue semi-annual monitoring. The final remedy
for shallow groundwater contamination, should any remediation be required, will be selected pursuant to a new consent administrative
order and based upon the risk assessment. The cost of any additional remediation that may be required will be determined based on
the results of the investigation and risk assessment, of which cost (or range of costs) cannot currently be reasonably estimated.
Therefore, no liability has been established at December 31, 2017, in connection with this matter.
h
2. Air Matters
PCC had been advised by the ODEQ that the agency was conducting an investigation into whether the Pryor Facility was in
(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:50)(cid:39)(cid:40)(cid:52)(cid:3)(cid:68)(cid:76)(cid:85)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:88)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:51)(cid:38)(cid:38)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:76)(cid:85)(cid:3)(cid:72)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)in 2011,
were intentionally misreported to the ODEQ. We received notice from the ODEQ that the criminal investigation into PCC associated
with this matter is closed.
3. Other Environmental Matters
In November 2006, EDC entered into a CAO with the ADEQ to address nitrates in shallow groundwater. The CAO requires EDC to
perform semi-annual groundwater monitoring, continue operation of a groundwater recovery system, submit a human health and
(cid:72)(cid:70)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:69)(cid:80)(cid:76)(cid:87)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:17) (cid:3)(cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92) submitted
to th(cid:72)(cid:3)(cid:36)(cid:39)(cid:40)(cid:52)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:19)(cid:26)(cid:15)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:80)(cid:82)(cid:81)(cid:76)(cid:87)(cid:82)(cid:85)(cid:72)(cid:71)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:87)(cid:87)(cid:72)(cid:81)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:36)(cid:39)(cid:40)(cid:52)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:39)(cid:38)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:80)(cid:72)(cid:71)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:82)(cid:81)(cid:74)(cid:82)(cid:76)(cid:81)(cid:74)(cid:17)(cid:3)
Under the CAO, the ADEQ may require additional wells be added to the program or may allow EDC to remove wells from the
program. At this time, the duration and cost (or range of costs) of the ground water monitoring program or the necessity for any
additional remediation cannot be reasonably estimated.
In 2002, certain of our subsidiaries sold substantially all of their operating assets rela
u
(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:46)(cid:68)(cid:81)(cid:86)(cid:68)(cid:86)(cid:3)(cid:70)(cid:75)(cid:72)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:43)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)
(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:180)(cid:12)(cid:3) (cid:69)(cid:88)(cid:87)(cid:3) (cid:85)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:85)(cid:72)(cid:68)(cid:79)(cid:3) (cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3) (cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:76)(cid:86)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:17)(cid:3) (cid:3) (cid:50)(cid:88)(cid:85)(cid:3) (cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3) (cid:85)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81) to be
responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface
contamination at the real property and develop a corrective action strategy based on the investigation. In addition, certain of our
subsidiaries agreed to indemnify the buyer of such assets for these environmental matters.
(cid:36)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:88)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:43)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:38)(cid:75)(cid:72)(cid:89)(cid:85)(cid:82)(cid:81)(cid:3)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:11)(cid:179)(cid:38)(cid:75)(cid:72)(cid:89)(cid:85)(cid:82)(cid:81)(cid:180)(cid:12)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:71) in
writing, within certain limitations, to pay and has been paying one-half of the costs of the investigation and interim measures relating
(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:80)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72) (cid:46)(cid:68)(cid:81)(cid:86)(cid:68)(cid:86)(cid:3)(cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:46)(cid:39)(cid:43)(cid:40)(cid:180)(cid:12)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)
Our subsidiary and Chevron have retained an environmental consultant to prepare and perform a corrective action study work plan as
to the appropriate method to remediate the Hallowell Facility. The proposed strategy includes long-term surface and groundwater
monitoring to track the natural decline in contamination. The KDHE is currently evaluating the corrective action strategy, and, thus, it
is unknown what additional work the KDHE may require, if any, at this time. We are advised by our consultant that until the study is
completed there is not sufficient information to develop a meaningful and reliable estimate (or range of estimate) as to the cost of the
remediation. We accrued our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could
be reasonably estimated, which is included in our accrued liabilities for environmental matters discussed above. The estimated
amount is not discounted to its present value. As more information becomes available, our estimated accrual will be refined.
B. Other Pending, Threatened or Settled Litigation
(cid:44)(cid:81)(cid:3) (cid:36)(cid:83)(cid:85)(cid:76)(cid:79)(cid:3) (cid:21)(cid:19)(cid:20)(cid:22)(cid:15)(cid:3) (cid:68)(cid:81)(cid:3) (cid:72)(cid:91)(cid:83)(cid:79)(cid:82)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:73)(cid:76)(cid:85)(cid:72)(cid:3) (cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:68)(cid:87)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:58)(cid:72)(cid:86)(cid:87)(cid:3) (cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:3) (cid:38)(cid:82)(cid:17)(cid:3) (cid:11)(cid:179)(cid:58)(cid:72)(cid:86)(cid:87)(cid:3) (cid:41)(cid:72)(cid:85)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:85)(cid:180)(cid:12)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:58)(cid:72)(cid:86)(cid:87)(cid:15)(cid:3) (cid:55)(cid:72)(cid:91)(cid:68)(cid:86)(cid:15)(cid:3) (cid:70)(cid:68)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74) death,
bodily injury and substantial property damage. West Fertilizer is not owned or controlled by us, but West Fertilizer was a customer of
EDC, and purchased AN from EDC from time to time. LSB and EDC received letters from counsel purporting to represent
subrogated insurance carriers, personal injury claimants and persons who suffered property damages informing LSB and EDC that
their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether AN
manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether
such AN may have been one of the contributing factors of the explosion. Initial lawsuits filed named West Fertilizer and another
supplier of AN as defendants. In 2014, EDC and LSB were named as defendants, together with other AN manufacturers and brokers
that arranged the transport and delivery of AN to West Fertilizer, in the case styled City of West, Texas vs. CF Industries, Inc., et al.,
r
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
the
in the District Court of McLennan County, Texas. The plaintiffs allege, among other things, that LSB and EDC were negligent in
n
production and marketing of fertilizer products sold to West Fertilizer, resulting in death, pers
onal injury and property damage. EDC
retained a firm specializing in cause and origin investigations with particular experience with fertilizer facilities, to assist EDC in its
own investigation. LSB and EDC placed its liability insurance carrier on notice, and the carrier is handling the defense for LSB and
EDC concerning this matter. Our product liability insurance policies have aggregate limits of general liability totaling $100
million,
with a self-(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:88)(cid:85)(cid:87)(cid:3)(cid:71)(cid:76)(cid:86)(cid:80)(cid:76)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:79)(cid:68)(cid:76)(cid:81)(cid:87)(cid:76)(cid:73)(cid:73)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:74)(cid:79)(cid:76)(cid:74)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:87)(cid:3)(cid:88)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:39)(cid:38)
based on a duty to inspect but allowed the plaintiffs to proceed on claims for design defect and failure to warn.
rr
f
(cid:87)
t
Subsequently, we and EDC have entered into confidential settlement agreements (with approval of our insurance carriers) with se
veral
t
plaintiffs that had claimed wrongful death and bodily injury and insurance companies asserting subrogation claims for damages from
ff
the explosion. A portion of these settlements have been paid by the insurer as of December 31, 2017. While these settlements resolve
the claims of a number of the claimants in this matter for us, we continue to be party to litigation related to this explosion by other
plaintiffs, in addition to indemnification or defense obligations we may have to other defendants. We intend to continue to defend
these lawsuits vigorously and we are unable to estimate a possible range of loss at this time if there is an adverse outcome in this
matter as to EDC. As of December 31, 2017, no liability reserve has been established in connection with this matter, except for the
unpaid portion of the settlement agreements discussed above, but we have incurred professional fees up to our self-insured retention
amount.
n
In May 2015, our subsidiary, EDC, was sued in the matter styled BAE Systems Ordinance Systems, Inc. (cid:11)(cid:179)(cid:37)(cid:36)(cid:40)(cid:180)(cid:12)(cid:15)(cid:3)et al. vs. El Dorado
Chemical Company, in the United States District Court, Western District of Arkansas, for an alleged breach of a supply agreement to
(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3) (cid:37)(cid:36)(cid:40)(cid:3) (cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3) (cid:3) (cid:44)(cid:87)(cid:3) (cid:76)(cid:86)(cid:3) (cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3) (cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3) (cid:68)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:87)(cid:75)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:76)(cid:81)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3) (cid:87)o BAE was due to a force
majeure (cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:3) (cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:68)(cid:3) (cid:73)(cid:76)(cid:85)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:72)(cid:91)(cid:83)(cid:79)(cid:82)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:87)(cid:3) (cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3) (cid:81)(cid:76)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3) (cid:68)(cid:70)(cid:76)(cid:71)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:68) force majeure clause in the supply agreement
(cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:88)(cid:86)(cid:72)(cid:86)(cid:3)(cid:40)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:37)(cid:36)(cid:40)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:72)-litigation demand indicated a claim of approximately
$18 million. EDC intends to vigorously defend this matter. The cost (or range of costs), if any, EDC would incur relating to this
matter cannot currently be reasonably estimated. Therefore, no liability has been established at December 31, 2017.
h
In September 2015, a case styled Dennis Wilson vs. LSB Industries, Inc., et al., was filed in the United States District Court for the
Southern District of New York. The plaintiff purports to represent a class of our shareholders and asserts that we violated federal
securities laws by allegedly making material misstatements and omissions about delays and cost overruns at our El Dorado Chemical
Company manufacturing facility and about our financial well-being and prospects. The lawsuit, which also names certain current and
former officers, seeks an unspecified amount of damages. Given the uncertainty of litigation, the preliminary stage of the case, and
the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the
reasonably possible loss or range of loss that may result from this action.
t
(cid:85)(cid:85)
(cid:44)(cid:81)(cid:3)(cid:54)(cid:72)(cid:83)(cid:87)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:39)(cid:36)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:11)(cid:179)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:180)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82) assert
mechanic liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new
actor for
(cid:68)(cid:80)(cid:80)(cid:82)(cid:81)(cid:76)(cid:68)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:88)(cid:69)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:47)(cid:72)(cid:76)(cid:71)(cid:82)(cid:86)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:3)(cid:11)(cid:179)(cid:47)(cid:72)(cid:76)(cid:71)(cid:82)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)
EDA for the construction for the ammonia plant. Leidos terminated the services of Global with respect to their work performed at our
El Dorado Facility in July 2015 and Global claims it is entitled to payment for certain work prior to its termination in the sum of
approximately $18 million. Leidos reports that it made an estimated $6 million payment to Global on or about September 11, 2015,
and EDA paid Leidos approximately $3.5 million relating to work performed by subcontractors of Global. Leidos has not approved
certain payments to Global pending the result of on-going audits and investigation undertaken to quantify the financial impact of
(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:182)(cid:86)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:17)(cid:3)(cid:3)(cid:40)(cid:39)(cid:36)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:82)(cid:81)(cid:76)(cid:87)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:47)(cid:72)(cid:76)(cid:71)(cid:82)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:90)(cid:81)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)etermine whether any
ge
n
additional payment should be released to Global for any work not in dispute. LSB and EDA intend to pursue recovery of any dama
(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:182)(cid:86)(cid:3) (cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:40)(cid:79)(cid:3) (cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:15)(cid:3)(cid:47)(cid:72)(cid:76)(cid:71)(cid:82)(cid:86)(cid:3) and Global reached an
agreement whereby the approximately $3.6 (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3)(cid:47)(cid:72)(cid:76)(cid:71)(cid:82)(cid:86)(cid:182)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:88)(cid:81)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3) (cid:86)(cid:88)(cid:69)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:15)(cid:3)(cid:89)(cid:72)(cid:81)(cid:71)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:76)(cid:72)(cid:85)(cid:86)(cid:3) (cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)
paid (and these suppliers and subcontractors will in turn issue releases of their respective claims and liens). In addition, Global will
reduce the value of its claim as against Leidos, and its lien amount as against the project by a similar amount. After all such lower tier
supplier and subcontractors are satisfied, the Global claim and lien amount will be reduced to approximately $5 million. In March
2016, EDC and we were served a summons in a case styled Global Industrial, Inc. d/b/a Global Turnaround vs. Leidos Constructors,
LLC et al., where in Global seeks damages under breach of contract and other claims. We have requested indemnifications from
Leidos under the terms of our contracts and we intend to vigorously defend against the allegation made by Global. No liability has
been established in connection with the remaining $5 million claim. In addition, LSB and EDA intend to pursue recovery of any
(cid:71)(cid:68)(cid:80)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:182)(cid:86)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:40)(cid:79)(cid:3)(cid:39)(cid:82)(cid:85)(cid:68)(cid:71)(cid:82)(cid:3)(cid:41)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)
y
l
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
We are also involved in various other claims and legal actions. It is possible that the actual future development of claims could be
different from our estimates but, after consultation with legal counsel, we believe that changes in our estimates will not have a
material effect on our business, financial condition, results of operations or cash flows.
12. Derivatives, Hedges, Financial Instruments and Carbon Credits
For the periods presented, the following significant instruments are accounted for on a fair value basis:
Carbon Credits and Associated Contractual Obligation
Periodically, we are issued carbon credits by the Climate Action Reserve in relation to a greenhouse gas reduction project performed
at the Baytown Facility. At December 31, 2017 and 2016, we did not have any carbon credits or related contractual obligations. The
cash flows associated with the carbon credits and the associated contractual obligations are included in cash flows from continuing
investing activities.
ff
Embedded Derivative
(cid:38)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:73)(cid:72)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:11)(cid:179)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:180)(cid:12)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:71)(cid:72)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)udes
certain contingent redemption features and the participation rights value as discussed in Note 13, has been bifurcated from the Series E
Redeemable Preferred and recorded as a liability. As the result of the Indenture Amendments in connection with the previously
reported redemption of a portion of our Senior Secured Notes as discussed in Note 9, including the redemption of the portion of Series
E Redeemable Preferred discussed in Notes 9 and 13, we estimate that the contingent redemption feature has no fair value at
December 31, 2017 based on low probability that the remaining shares of Series E Redeemable Preferred would be redeemed prior to
August 2, 2019. At December 31, 2017 and 2016, the fair value of the participation rights was based on the equivalent of 303,646
shares of our common stock at $8.76 and $8.42 per share, respectively.
f
f
The following is a summary of the classifications of valuations of fair value:
Level 1 - The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. At
December 31, 2017 and 2016, we did not have any contracts classified as Level 1.
Level 2 - The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other
than quoted prices that are observable for these contracts. At December 31, 2017 and 2016, we did not have any significant contracts
classified as Level 2.
Level 3 (cid:177) The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs
that are both unobservable and significant to the overall fair value measurement. At December 31, 2017 and 2016, we did not have
any carbon credits or related contractual obligations associated with carbon credits. At December 31, 2017 and 2016, the valuations
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:47)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:22)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)demption
assumptions, the underlying number of shares as defined in the terms of the Series E Redeemable Preferred, and the market price of
our common stock. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the
embedded derivative.
F-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
The following details our liabilities associated with continuing operations that are measured at fair value on a recurring basis at
December 31, 2017 and 2016:
Description
Liabilities - Current and noncurrent accrued and
other liabilities:
Embedded derivative
Foreign exchange contracts
Total
Fair Value Measurements at
December 31, 2017 Using
Total Fair
Value at
December 31,
2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
pInputs
(Level 2)
(In Thousands)
Significant
Unobservable
pInputs
(Level 3)
Total Fair
Value at
December 31,
2016
(2,660)
(cid:178)(cid:178)
(2,660) $
$
(cid:178)
(cid:178)
(cid:178) $
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178) $
(2,660)
(cid:178)(cid:178)
(2,660) $
(2,557)
(1)
(2,558)
None of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and Level 2 classifications for
(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)(cid:36)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:180)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)entering into the Stock Purchase Agreement
relating to the subsequent sale of the Climate Control Business, the valuation of the embedded derivative transferred from Level 2 to
Level 3 as the result of the changes in probability relating to contingent redemption features requiring the use of significant
unobservable inputs. The classification transfer of this derivative was deemed to occur at the beginning of the second quarter of 2016.
r
In addition, the following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):
r
Beginning balance
Transfers into Level 3
Transfers out of Level 3
Total realized and unrealized gains (losses)
included in operating results
Purchases
Issuances
Sales
Settlements
Ending balance
Total gains (losses) for the period included in
operating results attributed to the change in
unrealized gains or losses on assets and
liabilities still held at the reporting date
2017
$
Assets
2016
2015
2017
Liabilities
2016
2015
$
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
1,154 $
(cid:178)(cid:178)
(cid:178)(cid:178)
(In Thousands)
2,779 $
(cid:178)(cid:178)
(cid:178)(cid:178)
(2,557) $
(cid:178)(cid:178)
(cid:178)(cid:178)
(1,154) $
(5,817)
(cid:178)(cid:178)
(2,779)
(cid:178)
(cid:178)
2,031
(cid:178)(cid:178)
(cid:178)(cid:178)
(2,031)
(cid:178)(cid:178)
(cid:178)(cid:178)
$
1,256
(cid:178)(cid:178)
(cid:178)(cid:178)
(2,410)
(cid:178)(cid:178)
(cid:178)(cid:178) $
2,351
(cid:178)(cid:178)
(cid:178)(cid:178)
(3,976)
(cid:178)(cid:178)
1,154 $
(1,690)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
1,587
(2,660) $
802
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
3,612
(2,557) $
(1,447)
(cid:178)
(cid:178)
(cid:178)
3,072
(1,154)
$
$
(cid:178)(cid:178)
$
(cid:178)(cid:178) $
1,143 $
(103) $
(983) $
(1,143)
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Derivatives, Hedges, Financial Instruments and Carbon Credits (continued)
Net gains (losses) included in operating results and the statement of operations classifications are as follows:
2017
2016
(In Thousands)
2015
Total net gains (losses) included in operating
results:
Cost of sales - Undesignated commodities contracts
Cost of sales - Undesignated foreign exchange contracts
Other income - Carbon credits
Other expense - Contractual obligations relating to carbon
credits
Non-operating other expense - embedded derivative
Interest expense - Undesignated interest rate contracts
Total net gains (losses) included in operating results
$
$
(cid:178)(cid:178) $
(cid:178)(cid:178)
2,031
(1,587)
(103)
(cid:178)(cid:178)
341 $
140 $
5
1,514
(982)
(983)
(cid:178)(cid:178)
(306) $
(3,376)
(72)
3,663
(2,759)
(520)
(47)
(3,111)
At December 31, 2017 and 2016, we did not have any financial instruments with fair values significantly different from their carrying
amounts (which excludes issuance costs, if applicable), except for the Senior Secured Notes as shown below.
Senior Secured Notes (1)
Carrying
Amount
2017
Estimated Carrying
Amount
Fair Value
2016
Estimated
Fair Value
$
375 $
(In Millions)
372 $
375 $
356
(1)
Based on a quoted price of 99.25 and 94.88 at December 31, 2017 and 2016, respectively.
The Senior Secured Notes valuations are classified as Level 2. The valuations of our other long-term debt agreements are classified as
Level 3 and are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. The fair value measurements of our other long-term debt agreements are valued using a discounted cash flow model
that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market
interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings
of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance
risk
d
for our debt agreements. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities
since financial instruments do not include all assets, including intangibles, and all liabilities.
d
Also, see discussions concerning the utilization of fair value in conjunction with the evaluation of goodwill for impairment in 2016
under Note 1 (cid:177) Summary of Significant Accounting Policies and certain a
ssets and liabilities initially accounted for on a fair value
basis under Note 8 (cid:177) Asset Retirement Obligations.
n
(cid:177)
(cid:177)
13. Securities Financing Including Redeemable Preferred Stocks
Securities Purchase Agreement Including Redeemable Preferred Stocks
In December 2015 and pursuant to a secur(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81) (cid:47)(cid:54)(cid:37)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:47)(cid:54)(cid:37)(cid:3) (cid:41)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:47)(cid:47)(cid:38)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:85)(cid:180)(cid:12)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)
Security Benefit Corporation, a Kansas corporation, both of which are unrelated third parties, LSB sold to the Purchaser:
(cid:120)
(cid:120)
(cid:120)
$210,000,000 of the Series E Redeemable Preferred,
warrants to purchase 4,103,746 shares of common stock, par value $0.10 (cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:58)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:82)(cid:81)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:41)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:38)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:38)(cid:3)(cid:83)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:41)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:17)
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Securities Financing Including Redeemable Preferred Stocks (continued)
(cid:44)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:81)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:72)(cid:3)(cid:51)(cid:79)(cid:68)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)
(cid:120)
(cid:120)
(cid:120)
the Certificate of Designations setting forth the rights, preferences, privileges and restrictions applicable to the Series E
Redeemable Preferred and Series F Redeemable Preferred, as filed with the Secretary of State of the State of Delaware
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:38)(cid:50)(cid:39)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:41)(cid:3)(cid:38)(cid:50)(cid:39)(cid:180)(cid:12)(cid:30)(cid:3)
(cid:68)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3) (cid:47)(cid:54)(cid:37)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:47)(cid:54)(cid:37)(cid:3)(cid:41)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:180)(cid:12)(cid:30)(cid:3)
and
an (cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) (cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3) (cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)
(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:47)(cid:54)(cid:37)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:56)(cid:48)(cid:37)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:15)(cid:3)(cid:81)(cid:17)(cid:68)(cid:17)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:179)(cid:56)(cid:48)(cid:37)(cid:180)(cid:12)(cid:15)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:23)(cid:15)(cid:3)(cid:21)(cid:19)(cid:19)(cid:27)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:179)(cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)
The Series E and Series F Redeemable Preferred and Warrants were recorded at fair value upon issuance, net of issuance costs or
discounts. The valuations were classified as (Level 3). The Warrants were valued based on a Black-Scholes-Merton option pricing
model and a Finnerty model to determine the estimated discount for lack of marketability. The Series E Redeemable Preferred was
valued with discounted cash flow models that calculated the present value of future cash flows using possible redemption scenarios
and using published market yields for publicly traded unsecured fixed income securities with similar credit ratings. No valuation input
adjustments were considered necessary relating to the nonperformance risk for the Warrants or Series E Redeemable Preferred. Based
on the terms of the Series F Redeemable Preferred, we determined that this share had minimal economic value.
Series E Redeemable Preferred
The Series E COD authorizes 210,000 shares of Series E Redeemable Preferred. On September 19, 2016, we redeemed 70,232 shares
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:7)(cid:27)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:7)(cid:26)(cid:27)(cid:17)(cid:22)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) for
the liquidation preference of $1,000 per share, plus accumulated dividends (th(cid:72)(cid:3) (cid:179)(cid:47)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:180)(cid:12) and $1.7 million for the
participation rights value associated with the Series E Redemption. The Series E Redemption was funded from a portion of the
proceeds from the sale of our Climate Control Business. After the redemption, 139,768 shares of the Series E Redeemable Preferred
remain outstanding as of December 31, 2017.
With respect to the distribution of assets upon liquidation, dissolution or winding up of LSB, whether voluntary or involuntary, the
Series E Redeemable Preferred ranks (i) senior to the common stock, the Series B 12% Cumulative Convertible Preferred Stock, the
Series D 6% Cumulative Convertible Class C Preferred Stock, the Series 4 Junior Participating Class C Preferred Stock and any other
class or series of stock of LSB (other than Series E Redeemable Preferred) that ranks junior to the Series E Redeemable Preferred
either or both as to the payment of dividends and/or as to the distribution of assets on any liquidation, dissolution or winding up of the
Corpora(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:45)(cid:88)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:12)(cid:30)(cid:3)(cid:11)(cid:76)(cid:76)(cid:12)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:83)(cid:68)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:72)(cid:85)ies
of stock of LSB (other than Series E Redeemable Preferred) created after the date of the Series E COD (that specifically ranks pari
passu to the Series E Redeemable Preferred) and (iii) junior to any other class or series of stock of LSB created after the date of the
Series E COD that specifically ranks senior to the Series E Redeemable Preferred.
The Series E Redeemable Preferred has a 14% annual dividend rate and a participating right in dividends and liquidating distributions
(cid:72)(cid:84)(cid:88)(cid:68)(cid:79)(cid:3) (cid:87)(cid:82)(cid:3) (cid:22)(cid:19)(cid:22)(cid:15)(cid:25)(cid:23)(cid:25)(cid:3) (cid:68)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3) (cid:22)(cid:20)(cid:15)(cid:3) (cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3) (cid:3) (cid:42)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:40)(cid:3) (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:40)
(cid:43)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:180)(cid:12)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:89)(cid:82)ting rights or powers, and consent of the Series E Holders will not be required for taking of any action
(cid:69)(cid:92)(cid:3)(cid:88)(cid:86)(cid:17)(cid:3)(cid:3)(cid:43)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:43)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
(cid:120)
(cid:120)
(cid:120)
amendments to increase or decrease the authorized amount of Series E Redeemable Preferred,
the creation or increase of any shares of any class or series of capital stock of LSB ranking pari passu with or senior to the
f
Series E Redeemable Preferred, or
any amendment that adversely affect the powers, preferences or special rights of the Series E Redeemable Preferred.
Dividends accrue semi-annually in arrears and are compounded. Dividends are payable only when and if declared by the Board of
Directors (t(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:180)(cid:12)(cid:17)
Additionally, we must declare a dividend on the Series E Redeemable Preferred on a pro rata basis with the common stock. As long
as LSB Funding holds at least 10% of the Series E Redeemable Preferred, we may only declare dividends on Junior Stock unless and
until dividends have been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash. The
Series E Redeemable Preferred has a liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the
participation rights value. The participation rights value is the product of the pro rata number of Series E Redeemable Preferred shares
being redeemed and the price of our common stock as of such date.
F-34
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Securities Financing Including Redeemable Preferred Stocks (continued)
(cid:36)(cid:87)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:21)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:15)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:3)(cid:43)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3) us at a
redemption price per share equal to the Liquidation Preference of such share as of the redemption date. Additionally, we, at our
option, may redeem the Series E Redeemable Preferred at any time at a redemption price per share equal to the Liquidation Preference
of such share as of the redemption date. Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares
of Series E Redeemable Preferred and (ii) all other required approvals, including under any principal U.S. securities exchange on
which our common stock is then listed for trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of
common stock having an aggregate common stock price equal to the amount of the aggregate Liquidation Preference of such shares
being redeemed in shares of common stock in lieu of cash at the redemption date.
In the event of liquidation, the Series E Redeemable Preferred is entitled to receive its Liquidation Preference before any such
distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other Junior Stock. In the event
of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding.
n
The Series E Redeemable Preferred is redeemable outside of our control and is therefore classified as temporary/mezzanine equity.
As a result of an analysis performed on the embedded derivatives within the Series E Redeemable Preferred, certain contingent
redemption features were determined to not be clearly and closely related to the debt-like host and also did not meet any other
r
scope
y
exceptions for derivative accounting. Therefore, these redemption features and participation rights value are being accounted for as
derivative instruments and the fair value of these derivative instruments were bifurcated from the Series E Redeemable Preferred and
recorded as a liability. See discussion in Note 12.
Series F Redeemable Preferred
The Series F COD authorizes one (1) shares of Series F Redeemable Preferred. The Series F Redeemable Preferred has voting rights
(th(cid:72)(cid:3)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:41)(cid:3)(cid:57)(cid:82)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:89)(cid:82)(cid:87)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:81)(cid:74)(cid:79)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:80)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:89)(cid:82)(cid:87)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:81)titled
to a number of votes equal to 4,559,971 shares of our common stock, but, the number of votes that may be cast by the Series F
Redeemable Preferred was reduced automatically to 456,225 shares of common stock upon the exercise of the warrants discussed
below.
f
With respect to the distribution of assets upon liquidation, dissolution or winding up of LSB, whether voluntary or involuntary, the
(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:41)(cid:3) (cid:53)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:85)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3) (cid:11)(cid:76)(cid:12)(cid:3) (cid:86)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3) (cid:87)(cid:82)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:11)(cid:76)(cid:76)(cid:12)(cid:3) (cid:85)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3) (cid:77)(cid:88)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3) (cid:87)(cid:82)(cid:3) (cid:47)(cid:54)(cid:37)(cid:182)(cid:86)(cid:3) (cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:37)(cid:3) (cid:20)(cid:21)(cid:8)(cid:3) (cid:38)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)
Convertible Preferred Stock, Series D 6% Cumulative Convertible Class C Preferred Stock, Series 4 Junior Participating Class C
Preferred Stock, Series E Redeemable Preferred and any other class or series of stock of LSB after the date of the Series F COD
that
specifically ranks senior to the Series F Redeemable Preferred.
r
The Series F Redeemable Preferred will be automatically redeemed by LSB, in whole and not in part, for $0.01 immediately follow
the date upon which the Series F Voting Rights have been reduced to zero.
y
ing
In the event of liquidation, the Series F Redeemable Preferred is entitled to receive its liquidation preference of $100 before any such
distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other stock junior to the Series F
Redeemable Preferred.
Changes in our Series E and Series F Redeemable Preferred are as follows:
Series E Redeemable Preferred (cid:3)
Series F Redeemable Preferred
Balance at December 31, 2016
Accretion relating to liquidation preference on
preferred stock
Accretion for discount and issuance costs on
preferred stock
Accumulated dividends
Balance at December 31, 2017
Shares
Amount
Shares
(Dollars In Thousands)
145,029
Amount
1 $
139,768
$
(cid:178)(cid:178)
4,559
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
139,768
$
1,928
23,443
174,959
(cid:178)(cid:178)
(cid:178)(cid:178)
1 $
F-35
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Securities Financing Including Redeemable Preferred Stocks (continued)
Warrants
In conjunction with the issuance of the Series E and Series F Redeemable Preferred in December 2015 to the Purchaser, we issued
warrants to the Purchaser to purchase 4,103,746 shares of common stock. Each warrant afforded
the holder the opportunity to
purchase one share of common stock at a warrant exercise price of $0.10. In May 2016, all of the Warrants were exercised by the
holder in a cashless exercise resulting in the issuance of 4,103,746 shares of our common stock, of which 34,422 shares of common
stock were surrendered (shares classified as treasury stock) by the holder in payment of the exercise price.
n
Amendment to Renewed Rights Agreement
Pursuant to the Securities Purchase Agreement, on December 4, 2015, LSB and UMB Bank, as rights agent, entered into an
amendment to the renewed rights agreement as (cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:179)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:23)(cid:3)(cid:177) Stockholders Equity.
(cid:177)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
2016 Long Term Incentive Plan (cid:177) During 2016, our board of directors adopted our 2016 Long Term Incentive Plan
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)
(cid:51)(cid:79)(cid:68)(cid:81)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)e date
of the 2016 Plan is April 19, 2016 and no awards may be granted under the 2016 Plan on and after the tenth anniversary of its
effective date.
(cid:177)
In addition, no further awards will be granted under our 2008 (cid:44)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:21)(cid:19)(cid:19)(cid:27)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:180)(cid:12) or our Outside Directors Stock
(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)Outside Director Plan(cid:180)(cid:12)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:17)(cid:3)(cid:3)(cid:36)(cid:81)(cid:92)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)
the 2008 Plan or the Outside Director Plan (cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:74)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71) (cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:3)
award agreement, as applicable.
(cid:71)
The maximum aggregate number of shares reserved and available for issuance under the 2016 Plan shall not exceed 2,750,000 shares
plus any shares that become available for reissuance under the share counting provisions of the 2008 Plan following the effective date
of the 2016 Plan, subject to adjustment as permitted under the 2016 Plan. Shares subject to any award that is canceled, forfeited,
expires unexercised, settled in cash in lieu of common stock or otherwise terminated without a delivery of shares to a particip
ant will
r
again be available for awards under the 2016 Plan to the extent allowable by law. Under the 2016 Plan, awards may be made to
employees, directors and consultants (for services rendered) of LSB or our subsidiaries subject to limitations as defined by the 2016
Plan.
The 2016 Plan will be administered by the compensation committee (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:180)(cid:12) of our board of directors. Our board of
directors or the Committee may amend the 2016 Plan, except that if any applicable statute, rule or regulation requires shareholder
approval with respect to any amendment of the 2016 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 2016 Plan.
The following may be granted by the Committee under the 2016 Plan:
(cid:177)
Stock Options (cid:177) The Committee may grant either incentive stock options or
r
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 2016 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 ye
ars
x
subject to certain conditions.
F-36
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:12)
(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:36)(cid:83)(cid:83)(cid:85)(cid:72)(cid:70)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:11)(cid:179)(cid:54)(cid:36)(cid:53)(cid:86)(cid:180)(cid:12) (cid:177) The Committee may grant SARs as a right in tandem with the number of shares underlying
stock options granted under the 2016 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 (cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:182)(cid:86)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:15)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:72)(cid:85)(cid:70)(cid:76)(cid:86)(cid:72)(cid:3)
over its fair market value on the date the SAR was granted. Exercise of a 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.
(cid:177)
Stock Awards, Restricted Stock, Restricted Stock Units, and Other Awards (cid:177) 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 Incentive Plans - The following information relates to our long-term incentive plans:
Maximum number of securities for issuance
Number of awards available to be granted (1)
Number of unvested restricted stock/restricted
stock units outstanding
Number of options outstanding
Number of options exercisable
December 31, 2017
2008 Plan
2016 Plan
2,750,000
2,137,895
788,113
(cid:178)(cid:178)
(cid:178)(cid:178)
445,124
206,210
151,210
(1) Includes 2008 Plan shares canceled, forfeited, expired unexercised, which became available for reissuance under the
2016 Plan after the effective date of the 2016 Plan.
Amounts disclosed within this note include amounts attributable to our discontinued operations for prior periods, unless otherwise
noted.
Restricted Stock and Restricted Stock Units (cid:177) During 2017, the Committee approved various grants under the 2016 Plan of shares of
restricted stock (cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:48)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:89)(cid:72)(cid:86)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:82)(cid:81)(cid:72)-year period
at the rate of one-third per year for three years while a portion of these grants vest 100% at the end of three years. During 2016, the
Committee approved various grants under the 2016 Plan of shares of restricted stock (cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)
employees. Most of the 2016 Restricted Stock vest at the end of each one-year period at the rate of one-third per year for three years
while a portion of these grants vest 100% at the end of three years. On December 31, 2015, the Committee approved the grants under the
(cid:21)(cid:19)(cid:19)(cid:27)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:15)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68) portion of these awards immediately
vested as of the grant date. The non-vested 2017, 2016 and 2015 Restricted Stock carry dividend and voting rights. Sales of these shares
are restricted prior to the date of vesting. Excluding the shares that immediately vested, the 2015 Restricted Stock vest at the end of each
one-year period at the rate of one-third per year for three years. Pursuant to the terms of the 2017, 2016 and 2015 Restricted Stock
agreements, unvested restricted shares will immediately vest upon the occurrence of a change in control (as defined by agreement), nn
termination without cause or death.
d
t
tt
During 2016, four employees surrendered a total of 280,000 shares of stock options previously granted under the 2008 Plan. These
employees were also granted shares of restricted stock. These transactions were accounted for as modifications of stock awards. The
total incremental fair value of these modified awards (additional compensation cost) was approximately $1.5 million and will be
recognized on a straight-line basis over the requisite service period of three years, but the recognition of these costs could be accelerated if
the unvested restricted shares immediately vest.
During 2017 and 2016, the Committee approved the grant of 37,992 and 27,654 shares respectively, of Restricted Stock Units (RSU)
to our non-employee directors for payment of a portion of their director fees under the 2016 Plan. Each RSU represents a right tot
receive one share of our common stock following the grant date and are non-forfeitable. Vesting occurs upon the earliest to occur: (i)
(cid:87)(cid:75)(cid:72)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:182)(cid:86)(cid:3) (cid:86)(cid:72)(cid:83)(cid:68)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80)(cid:3) (cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:15)(cid:3) (cid:11)(cid:76)(cid:76)(cid:12)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3) (cid:68)(cid:81)(cid:81)(cid:76)versary of the grant date, or (iii) the occurrence of a change of control as
defined by the agreement. Based on terms of the RSU agreements, the grant date fair value of approximately $375,000 was
recognized as stock-based compensation expense (SG&A) on the grant date in 2017 and 2016 (based on $9.87 per share for the 2017
grant and $13.56 per share for the 2016 grant). During 2017, RSUs totaling 21,882 shares vested due to separation from service of
two non-(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:182)(cid:86)(cid:3) (cid:68)(cid:86)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3) (cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3) (cid:73)(cid:85)(cid:82)(cid:80) 11 members to 9 members. At December 31, 2017, the number of
outstanding shares of unvested RSUs was 43,764.
F-37
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:12)
The following table summarizes information about these granted restricted stocks:
2017
2016
2015
Shares of restricted stock granted
Total fair value of restricted stock granted
Weighted-average fair value per restricted stock granted during year
Stock-based compensation expense - Cost of sales
Stock-based compensation expense - SG&A
Income tax benefit
Total weighted-average remaining vesting period in years
Total fair value of restricted stock vested during the year
469,465
850,771
$ 4,277,000 $ 6,652,000
7.82
9.11 $
$
$
240,000
312,000 $
$ 3,987,000 $ 2,773,000
$ (1,659,000) $ (1,157,000 )
$
$
$
$
$
1.95
2.41
$ 3,124,000 $ 2,579,000
$
584,959
4,200,000
7.18
(cid:178)(cid:178)
405,000
(156,000)
3.00
405,000
2017
Unvested restricted stock outstanding at beginning of year
Granted
Vested
Cancelled or forfeited
Unvested restricted stock outstanding at end of year
Shares
1,038,290 $
469,465 $
(318,282) $
(cid:178)(cid:178) $
1,189,473 $
Weighted-Average
Grant Date Fair Value
8.60
9.11
9.81
(cid:178)(cid:178)
7.51
(cid:177)
Stock Options (cid:177) No stock options have been granted under the 2016 Plan
during 2017 or 2016. As it relates to stock options granted
under the 2008 plan, the exercise price of the outstanding options granted were equal to the market value of our common stock at the
date o(cid:73)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:39)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:19)(cid:27)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:22)(cid:24)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:21)(cid:19)(cid:20)(cid:24)
(cid:50)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)es, which grants included 5,000 shares of stock options related to discontinued operations. The exercise
price of the 2015 Options was equal to the market value of our common stock at the date of grant. The 2015 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. The 2015 Options expire in 2025. The fair value for the 2015 Options was estimated, using an option pricing model, as of
the date of the grant, which date was also the service inception date.
F-38
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(continued)
The fair value for the 2015 Options were estimated using a Black-Scholes-Merton option pricing model with the following
assumptions:
(cid:120)
(cid:120)
(cid:120)
(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;
a dividend yield based on historical data;
volatility factors of the expected market price of our common stock based on historical volatility of our common stock
primarily over approximately six years from the date of grant; and
a weighted-average expected life of the options based on the historical exercise behavior of these employees and outside
director, if applicable.
f
The following table summarizes information about these granted stock options:
Weighted-average risk-free interest rate
Dividend yield
Weighted-average expected volatility
Total weighted-average expected forfeiture rate
Weighted-average expected life (years)
Total weighted-average remaining vesting period in
years (1)
Total fair value of options granted for continuing
operations (2)
Stock-based compensation expense - Cost of sales for
continuing operations (1) (3)
Stock-based compensation expense - SG&A for
continuing operations (1) (4)
Income tax benefit for continuing operations (1) (5)
2017
2016
2015
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1.73%
(cid:178)(cid:178)
38.32%
0.00%
5.11
1.53
2.25
3.76
N/A
N/A $ 1,853,000
$
317,000 $
321,000 $
303,000
$
$
108,000 $
(164,000) $
836,000 $ 1,410,000
(662,000)
(444,000) $
(1)
For 2017 and 2016, information relates to continuing operations only.
(2) Approximately $62,000 $ for 2015 is included in discontinued operations.
(3) Approximately $126,000 for 2015 is included in discontinued operations.
(4) Approximately $508,000 for 2015 is included in discontinued operations.
(5) Approximately $(244,000) for 2015 is included in discontinued operations.
At December 31, 2017, the total stock-based compensation expense not yet recognized is $9,514,000, relating to non-vested restricted
stock and stock options, which we will be amortizing (subject to adjustments for actual forfeitures) through the respective remaining
vesting periods through December 2020.
F-39
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:12)
The following information relates to our stock options:
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Exercisable at end of year
(1) Relates to continuing operations only.
2017 (1)
Weighted-Average
Exercise Price
Shares
219,230 $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(13,020) $
206,210 $
151,210 $
30.36
(cid:178)(cid:178)
(cid:178)(cid:178)
30.67
30.34
29.25
Weighted-average fair value per option granted during year
2017
N/A
2016
N/A
2015
$
14.19
Total intrinsic value of options exercised during the year
$
(cid:178)(cid:178) $
216,000
$
4,292,000
Total fair value of options vested during the year
$
451,000 $
469,000
$
2,411,000
Exercise Prices
$ 7.86
$
$
$
9.69 -
33.36 -
7.86 -
9.97
34.50
34.50
Exercise Prices
$ 7.86
$
$
$
9.69 -
33.36 -
7.86 -
9.97
34.50
34.50
$
$
$
$
$
$
Stock Options Outstanding At December 31, 2017
Weighted-
Average
Remaining
Contractual Life
in Years
Weighted-
Average Exercise
Price
Intrinsic Value of
Shares
Outstanding
0.92 $
0.83 $
5.77 $
5.10 $
7.86 $
9.70
33.80
30.34 $
15,773
(cid:178)(cid:178)
(cid:178)(cid:178)
15,773
Stock Options Exercisable At December 31, 2017
Weighted-
Average
Remaining
Contractual
Life in Years
Weighted-
Average
Exercise Price
Intrinsic Value of
Shares
Outstanding
0.92 $
0.83 $
5.26 $
4.44 $
7.86 $
9.70
33.99
29.25 $
15,773
(cid:178)(cid:178)
(cid:178)(cid:178)
15,773
Shares
Outstanding
17,525
10,685
178,000
206,210
Shares
Outstanding
17,525
10,685
123,000
151,210
F-40
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
(cid:20)(cid:23)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:12)
(cid:177)
(cid:71)
Preferred Share Rights Plan (cid:177) (cid:50)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:19)(cid:28)(cid:15)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:3)(cid:69)(cid:72)(cid:70)(cid:68)(cid:80)(cid:72)(cid:3)
effective upon the expiration of our previous shareholder rights plan. Pursuant to the Securities Purchase Agreement as discussed in
Note 13 (cid:177) Securities Financing, on December 4, 2015, LSB and UMB, as rights agent, entered into an amendment to the Renewed
(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:11)(cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3) (cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3) (cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:53)(cid:72)(cid:81)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3) (cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:179)(cid:36)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:76)(cid:81)(cid:74)
(cid:51)(cid:72)(cid:85)(cid:86)(cid:82)(cid:81)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:36)ffiliates and Associates (as defined therein) in order to permit the issuance of the Securities
discussed in Note 13, and additional securities issuable to the Purchaser as contemplated by the terms of the Securities, witho
ut
uu
triggering the issuance of Series 4 Junior Participating Class C Preferred Stock. The Renewed Rights Agreement will affect a
potential acquirer unless the acquirer negotiates with our Board and the Board approves the transaction. Pursuant to the renewed plan,
one preferred share purc(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:11)(cid:68)(cid:3)(cid:179)(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:180)(cid:12)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:87)(cid:87)(cid:68)(cid:70)(cid:75)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:72)(cid:84)(cid:88)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)
stock. Prior to becoming exercisable, the Rights trade together with our common stock. In general, if a person or group acquires or
announces a tender or exchange offer for 15% or more of our common stock (except for the Golsen Holders and certain other limited
excluded persons, as amended), then the Rights become exercisable. Each Right entitles the holder (other than the person or group
that triggers the Rights being exercisable) to purchase from us one one-hundredth of a share of Series 4 Junior Participating Preferred
(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:81)(cid:82)(cid:3)(cid:83)(cid:68)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:72)(cid:85)(cid:70)(cid:76)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:23)(cid:26)(cid:17)(cid:26)(cid:24)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:81)(cid:72)-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 (o
ther than the person or group that
h
urities)
uu
triggered the Rights being exercisable) to purchase shares of our common stock (or, in certain circumstances, cash or other sec
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 person or group that triggered the Rights being exercisable) 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 may
exchange each Right (other than those held by the acquirer) for one share of our common stock, subject to adjustment. Our Board
may redeem the Rights at a price of $0.01 per Right generally at any time before 10 days after the Rights become exercisable. Our
Board may exchange all or part of the Rights (except to the person or group that triggered the Rights being exercisable) for our uu
common stock at an exchange ratio of one common share per Right until the person triggering the Right becomes the beneficial owner
of 50% or more of our common stock.
d
(cid:177)
Other (cid:177) As of December 31, 2017, we have reserved 1.5 million
preferred stocks and equity awards pursuant to their respective terms.
shares of common stock issuable upon potential conversion of
15. Non-Redeemable Preferred Stock
Series Non-Redeemable B Preferred (cid:177) (cid:55)(cid:75)(cid:72)(cid:3) (cid:21)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:37)(cid:3) (cid:20)(cid:21)(cid:8)(cid:3) (cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3) (cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3) (cid:83)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:11)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3) (cid:37)(cid:3)
(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:15)(cid:3)(cid:7)(cid:20)(cid:19)(cid:19)(cid:3)(cid:83)(cid:68)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:82)(cid:79)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:15)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:25)(cid:25)(cid:25)(cid:15)(cid:25)(cid:25)(cid:25)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:22)(cid:22)(cid:17)(cid:22)(cid:22)(cid:22)(cid:22)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73) common
(cid:73)
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% ($12.00 per share) from date of issue, payable when and as declared.
All of the outstanding shares of the Series B Preferred are owned by the Golsen Holders.
r
(cid:177)
Series Non-Redeemable D Preferred (cid:177) The 1,000,000 shares of Series D 6% cu
mulative, convertible Class C preferred stock
(cid:11)(cid:179)(cid:54)(cid:72)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:39)(cid:3)(cid:51)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:180)(cid:12)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:81)(cid:82)(cid:3)(cid:83)(cid:68)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:82)(cid:79)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:15)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:21)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:20) 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 ($0.06 per share) of the liquidation preference of $1.00 per
share. Each holder of the Series D Preferred shall be entitled to .875 votes per shar
e. All of the outstanding shares of Series D
Preferred are owned by the Golsen Holders.
ff
See discussions concerning dividends on the Series B and D Preferred in Note 17 (cid:177) Related Party Transactions.
(cid:177)
(cid:177)
Other (cid:177) At December 31, 2017, we are authorized to issue an add
itional 230,000 shares of $100 par value preferred stock and an
additional 3,860,000 shares of no par value preferred stock. Upon issuance, our Board will determine the specific terms and
conditions of such preferred stock.
F-41
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Executive Benefit Agreements, Employee Savings Plans and Collective Bargaining Agreements
We are party to an (cid:76)(cid:81)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)(cid:68)(cid:79)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:179)(cid:20)(cid:28)(cid:28)(cid:21)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12) with a former executive (cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:71)(cid:72)(cid:68)(cid:87)(cid:75)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:179)(cid:21)(cid:19)(cid:19)(cid:24)(cid:3)
Ag(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)Jack E. Golsen, who retired as discussed in Note 17-Related Party Transactions. The 1992 Agreement provides for
annual benefit payments for life payable in monthly installments.
a
(cid:55)(cid:75)(cid:72)(cid:3) (cid:21)(cid:19)(cid:19)(cid:24)(cid:3) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:15)(cid:3) (cid:88)(cid:83)(cid:82)(cid:81)(cid:3) (cid:48)(cid:85)(cid:17)(cid:3) (cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:182)(cid:86)(cid:3) (cid:71)(cid:72)(cid:68)(cid:87)(cid:75)(cid:15)(cid:3) (cid:90)(cid:72)(cid:3) (cid:90)(cid:76)(cid:79)(cid:79)(cid:3) (cid:83)(cid:68)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3) (cid:68)(cid:3) (cid:79)(cid:88)(cid:80)(cid:83)-sum payment of
$2,500,000 to be funded from the net proceeds received by us under certain life insurance policies on his 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.
The following table includes information about these agreements:
Total undiscounted death benefits (1)
Total accrued death benefits (1)
Total undiscounted executive benefits
Total accrued executive benefits
$
$
$
$
December 31,
2017
2016
(In Thousands)
2,424 $
2,533 $
4,208
4,007
191 $
191 $
201
168
2015
2017
December 31,
2016
(In Thousands)
Costs (recovery of costs) associated with executive benefits
included in SG&A, net (2)
$
9 $
(341)
$
(561)
(1) See discussion concerning the termination of a 1981 Agreement during 2017 and the sale of certain life insurance policies
also surrendered certain life insurance policies on
during 2016 in Note 17 (cid:177) Related Party Transactions. In addition, we
for(cid:80)(cid:72)(cid:85)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:182)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)
(cid:177)
(2) During 2016 and 2015, the employment of certain executives, subject to the provisions of the 1981 and 1992 Agreements,
were terminated, resulting in the forfeiture of the respective benefits. As a result of these events, the accrual for these
estimated benefits was derecognized resulting in a net recovery of costs associated with certain executive benefits.
Accrued death and executive benefits under the above agreements are 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 policies on
various individuals in which we are the beneficiary. Some of these life insurance policies have cash surrender values that we have
borrowed against. The net cash surrender values of these policies are included in other assets.
F-42
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
16. Executive Benefit Agreements, Employee Savings Plans and Collective Bargaining Agreements (continued)
The following table summarizes certain information about these life insurance policies.
Total face value of life insurance policies
Total cash surrender values of life insurance policies
Loans on cash surrender values
Net cash surrender values
December 31,
2017
2016
(In Thousands)
4,500 $
4,670
1,804 $
(1,482)
322 $
2,270
(1,409)
861
$
$
$
2017
2016
(In Thousands)
2015
Cost of life insurance premiums
Decreases (increases) in cash surrender values
Net cost of life insurance premiums included in SG&A
$
$
14 $
162
176 $
481
$
(51)
$
430
1,040
(586)
454
Employee Savings Plans - 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 certain employees, which
amounts were not material for each of the three years ended December 31, 2017.
Collective Bargaining Agreements - As of December 31, 2017, we employed 569 persons, 166 of whom are represented by unions
under agreements, which will expire in July of 2018 through November of 2019.
mm
17. Related Party Transactions
(cid:36)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:45)(cid:68)(cid:70)(cid:78)(cid:3)(cid:40)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:3)(cid:11)(cid:179)(cid:45)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:180)(cid:12)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:75)(cid:76)(cid:86)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:39)ecember
31, 2017, we determined not to extend the employment agreement with J. Golsen beyond its current term expiring on December 31,
(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:39)(cid:68)(cid:87)(cid:72)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:3)(cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:82)(cid:81)-renewal to
J. Golsen. J. Golsen will remain a member of the Board and, following the Retirement Date, will have the title of Chairman Emeritus.
(cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:45)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:20)(cid:15)(cid:3)
2018 and end upon the earlier of his death or a change in control as defined in the Transition Agreement. During the term, J. Golsen
will receive an annual cash retainer of $480,000 and an additional monthly amount of $4,400 to cover certain expenses. In accordance
with the terms of the Transition Agreement, we will also reimburse J. Golsen for his cost of certain medical insurance coverage until
his death. Effective as of the Retirement Date, our existing severance agreement with J. Golsen will terminate. In consideration for
his services, including as Chairman Emeritus, we will pay J. Golsen a one-time payment equal to $2,320,000 upon the consummation
of a change in control that occurs prior to his death.
During 2017, a death benefit agreement with Mr. Golsen was terminated pursuant to the terms of the agreement that allowed us to
terminate at any time and for any reason prior to the death of the employee. As a result, the liability of approximately $1,400,000 for
the estimated death benefit associated with this agreement was extinguished and derecognized with the offset classified as operating
other income in 2017.
During 2017, we sold our engineered products business (industrial machinery and related components) to Industrial Acquisitions LLC
and Industrial Products LLC (both entities are owned by immediate family members of Jack E. Golsen the Executive Chairman of our
(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:180)(cid:12)) for $3,500,000 which sale resulted in a loss of approximately $839,000, classified as operating other
expense.
f
(cid:39)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:88)(cid:79)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:54)(cid:87)(cid:72)(cid:89)(cid:72)(cid:81)(cid:3)(cid:45)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:3)(cid:11)(cid:179)(cid:54)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:180)(cid:12)(cid:15)(cid:3)(cid:86)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:45)(cid:17)(cid:3)(cid:42)(cid:82)(cid:79)(cid:86)(cid:72)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72) and
President and Chief Operating Officer of the Climate Control Business. Pursuant to the terms of the agreement, S. Golsen is to
provide services relating to the sale of the Climate Control Business and subsequent services to improve the transition process from
LSB to NIBE. The total consulting fee is $425,000 and the term of the agreement is for 2 years through May 2018 but could be
terminated earlier under certain circumstances.
During 2016, we executed agreements, sold and assigned our rights in certain life insurance policies owned by us as beneficiary. The
purchase price of these policies was the cash surrender value at the time of purchase. These policies insured our two Board members,
F-43
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Related Party Transactions (continued)
J. Golsen and Barry H. Golsen and a former employee, S. Golsen. We received approximately $1.7 million from the sale of these life
insurance policies.
During 2016, we incurred consulting fees of approximately $135,000 from one of our Board members, Mr. Richard Sanders. These
fees relate to services performed by Mr. Sanders as an Interim Executive Vice President, Chemical Manufacturing, which involved the
oversight of our chemical plant operations during this time period. On August 1, 2016, these consulting services ceased when we
appointed Mr. John Diesch in this executive position.
In 2015, we paid annual dividends totaling $300,000 on our Series B Preferred and our Series D Preferred (none in 2017 and 2016).
At December 31, 2017, accumulated dividends on the Series B and Series D Preferred totaled approximately $678,000. The Series B
Preferred and Series D Preferred are non-redeemable preferred stocks issued in 1986 and 2001, respectively, of which all outstanding
shares are owned by the Golsen Holders.
18. Supplemental Cash Flow Information
The following provides additional information relating to cash flow activities:
Cash payments (refunds) for:
Interest on long-term debt and other, net of capitalized
interest
Income taxes, net
Noncash investing and financing activities:
Incentive tax credit receivable associated with property,
plant and equipment
Accounts receivable, accounts payable, other liabilities,
and long-term debt associated with additions of
property, plant and equipment
Accounts payable, long-term debt associated with
additions of capitalized internal-use software and
software development
Dividend accrued on redeemable preferred stock
Accretion of redeemable preferred stock
Equity issuance costs, including amounts in accounts
payable
Debt issuance costs incurred associated with senior
secured notes, including amounts in accounts payable
2017
2016
(In Thousands)
2015
$
$
34,274 $
(674) $
28,049
(2,611)
$
$
5,389
(5,845)
$
8,125 $
(cid:178)
$
(cid:178)(cid:178)
$
17,105 $
16,056
$
65,471
$
$
$
$
$
(cid:178)(cid:178) $
23,443 $
6,487 $
759
19,733
6,546
$
$
$
2,242
2,287
686
(cid:178)(cid:178) $
(cid:178)
$
9,754
(cid:178)(cid:178) $
(cid:178)
$
2,566
F-44
LSB Industries, Inc.
Supplementary Information
Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for 2017 and 2016 are as follows.
2017
Net sales
Gross profit (loss) (1)
Loss from continuing operations (1) (2)
Income from discontinued operations, net of taxes
Net income (loss)
Net income (loss) attributable to common stockholders
Income (loss) per common share:
Basic:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Diluted:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
2016
Net sales
Gross profit (loss) (1)
Loss from continuing operations (1) (2)
Income from discontinued operations, including taxes
Net income (loss)
Net income (loss) attributable to common stockholders
Income (loss) per common share:
Basic:
Loss from continuing operations
Income from discontinued operations, including taxes
Net income (loss)
Diluted:
Loss from continuing operations
Income from discontinued operations, including taxes
Net income (loss)
March 31
June 30
September 30
(In Thousands, Except Per Share Amounts)
December 31
Three months ended
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
123,344 $
11,615 $
(5,986) $
(cid:178)(cid:178)
(5,986) $
(13,196) $
122,853 $
11,340 $
(7,033) $
(cid:178)(cid:178)
(7,033) $
(14,515) $
92,390 $
(7,285) $
(17,112) $
(cid:178)(cid:178)
(17,112) $
(24,745) $
88,917
(10,204)
(162)
1,076
914
(6,991)
(0.48) $
(cid:178)(cid:178)
(0.48) $
(0.53) $
(cid:178)(cid:178)
(0.53) $
(0.91) $
(cid:178)(cid:178)
(0.91) $
(0.48) $
(cid:178)(cid:178)
(0.48) $
(0.53) $
(cid:178)(cid:178)
(0.53) $
(0.91) $
(cid:178)(cid:178)
(0.91) $
(0.30)
0.04
(0.26)
(0.30)
0.04
(0.26)
98,972 $
(6,164) $
(15,765) $
824
(14,941) $
(24,609) $
109,982 $
2,129 $
(7,688) $
22,779
15,091 $
5,055 $
80,262 $
(36,379) $
(39,490) $
173,041
133,551 $
112,047 $
85,369
(8,892)
(25,190)
3,657
(21,533)
(28,654)
(1.11) $
0.03
(1.08) $
(0.70) $
0.90
0.20 $
(2.25) $
6.39
4.14 $
(1.11) $
0.03
(1.08) $
(0.70) $
0.90
0.20 $
(2.25) $
6.39
4.14 $
(1.19)
0.13
(1.06)
(1.19)
0.13
(1.06)
F-45
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(1) The following income (expense) items impacted gross profit (loss) and loss from continuing operations:
Depreciation expense:
2017
2016
Recovery of precious metals:
2017
Turnaround costs: (A)
2017
2016
March 31
June 30
September 30 December 31
Three months ended
(In Thousands)
$
(17,115) $
(17,047) $
(16,179) $
(16,655)
$
(10,590) $
(14,028) $
(16,862) $
(17,874)
$
(cid:178)(cid:178) $
2,905 $
(cid:178)(cid:178) $
(cid:178)
$
$
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(1,098) $
(cid:178)(cid:178) $
(535) $
(8,597) $
(cid:178)
(cid:178)
Consulting fee - property tax services:
2016
$
(12,095) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)
(2) The following items increased (decreased) loss from continuing operations:
Impairment of goodwill:
2016
Interest expense, net:
2017
2016
Benefit for income taxes:
2017
$
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
1,621
$
$
9,358 $
9,292 $
9,291 $
9,326
1,350 $
6,446 $
13,333 $
9,816
$
(1,282) $
(2,761) $
(6,698) $
(30,018)
(A) Turnaround costs do not include the impact on operating results relating to lost absorption or reduced margins due to the
r
associated plants being shut down.
F-46
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2017, 2016, and 2015
(In Thousands)
Accounts receivable - allowance for doubtful accounts:
Description (1)
2017
2016
2015
Supplies-reserve for slow-moving items:
2017
2016
2015
Notes receivable - allowance for doubtful accounts:
2017
2016
2015
Deferred tax assets - valuation allowance:
2017
2016
2015
Balance at
Beginning of
Year
Additions-
Charges to
(Recovery of)
Costs and
Expenses
Deductions-
Write-
offs/Costs
Incurred
Balance at
End of Year
$
$
$
$
$
$
$
$
$
357 $
(54) $
(cid:178)(cid:178) $
303
525 $
80 $
248 $
357
684 $
224 $
383 $
525
15 $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
928 $
(cid:178)(cid:178) $
913 $
15
15
928 $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
928
(cid:178)(cid:178) $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
970 $
(cid:178)(cid:178) $
970 $
(cid:178)(cid:178)
(cid:178)(cid:178)
970 $
(cid:178)(cid:178) $
(cid:178)(cid:178) $
970
$
13,128 $
13,792 $
(cid:178)(cid:178) $
26,920
$
$
1,242 $
11,886 $
(cid:178)(cid:178) $
13,128
292 $
950 $
(cid:178)(cid:178) $
1,242
(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.
n
F-47
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PERFORMANCE GRAPH & PEER GROUP LIST
THIS PAGE INTENTIONALLY LEFT BLANK
Stock Performance Graph
The following table compares the cumulative total stockholder return for the last five fiscal years of (a) LSB
Industries, Inc. (the “Company”), (b) the NYSE Composite Stock Index (“NYSE Composite Index”), (c) a peer
group of entities (“Peer Group Index”) which represented publicly traded chemical companies, which are
primarily included in the Standard Industrial Classification (SIC) code section of chemical and allied products.
The table set forth below covers the period from year-end 2012 through year-end 2017.
2012
2013
2014
2015
2016
2017
200
180
160
140
120
100
80
60
40
20
0
LSB Industries, Inc.
NYSE Composite Index
Peer Group
LSB Industries, Inc.
NYSE Composite Index
Peer Group Index
Fiscal Year Ended
2012
2013
2014
2015
2016
2017
100.00
115.81
88.76
20.47
23.77
24.73
100.00
126.40
135.08
129.69
145.33
172.77
100.00
122.45
129.55
94.97
103.14
118.99
Assumes $100 invested at year-end 2012 in the common stock of the Company, the NYSE Composite Index and
the Peer Group Index, and the reinvestment of dividends, if any.
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 (as amended, the
“Securities Act”) or the Securities Exchange Act of 1934 (as amended, the “Exchange Act” (and together, 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 Index
American Vanguard Corporation
The Andersons, Inc.
Balchem Corporation
Calgon Carbon Corporation
CF Industries Holdings Inc.
Compass Minerals International, Inc.
CVR Partners, LP
Ferro Corporation
Flotek Industries, Inc.
Green Plains Inc.
Hawkins Inc.
Innophos Holdings, Inc.
Innospec Inc.
Kraton Corporation
OCI Partners LP
OMNOVA Solutions Inc.
Platform Speciality Products Corporation
Quaker Chemical Corporation
Rayonier Inc.
Tronox Limited
LSB DIRECTORS
Jonathan S. Bobb
Director, Eldridge Industries
Mark R. Genender
Managing Director, Eldridge Industries
Barry H. Golsen
GOL Capital, LLC
Former President and CEO LSB Industries, Inc.
Jack E. Golsen
Chairman Emeritus of the Board
Daniel D. Greenwell
Chairman, CEO, and President
Richard W. Roedel
Retired Chairman and CEO
BDO Seidman, LLP
Richard S. Sanders, Jr.
President, Circle S Consulting, Inc.
Former Vice President of Manufacturing,
Terra Industries, Inc.
LSB EXECUTIVE OFFICERS
Daniel D. Greenwell
Chairman, CEO, and President
Mark T. Behrman
Executive Vice President and CFO
John H. Diesch
Executive Vice President-Manufacturing
Lynn F. White
Founder and Managing Director,
Twemlow Group, LLC
Michael J. Foster
Senior Vice President,
General Counsel, and Secretary
HEADQUARTERS
LSB Industries, Inc.
16 South Pennsylvania Ave.
Oklahoma City, OK 73017
Tel: (405) 235-4546
Fax: (405) 235-5067
Email: info@lsbindustries.com
TRANSFER AGENT &
REGISTRAR
Computershare Trust Company, N.A.
462 S. 4th Street, Suite 1600
Louisville, KY 40202
Tel: (800) 884-4225 (US & Canada)
(781) 575-2879 (outside US & Canada)
INVESTOR RELATIONS
WEBSITE
Mark T. Behrman
Executive Vice President, CFO
Tel: (405) 235-4546
Fax: (405) 235-5067
Email: mbehrman@lsbindustries.com
INDEPENDENT AUDITORS
Ernst & Young LLP
Oklahoma City, OK
www.lsbindustries.com
Visit our website for details about our plants,
products, operations and policies.
SECURITY LISTING
Common Stock listed on the New York Stock
Exchange, NYSE Ticker Symbol: LXU
16 South Pennsylvania Ave.
Oklahoma City, OK 73107
(405) 235-4546
www.lsbindustries.com