2018 ANNUAL REPORT
Where Our Products Go -- 2018 Sales Mix
Industrial Acids
and Other
39%
Mining
11%
Agriculture
49%
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
550,000
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
2016
2017
2018
Dear Fellow Shareholders,
I’d like to start out by thanking our nearly 600
employees for their hard work and dedication to
the success of our Company. Over the past
year, LSB has undergone significant company-
wide changes as we progress on a path to
transform our business into a “best-in-class”
chemical manufacturing operator, that generates
consistent profitability and cash flow. Our
employees have risen to the challenge despite
the increasing performance demands we have
placed on them. We are fortunate to have a truly
great team committed to winning. I’d also like to
thank both our stock and bond holders. Your
in LSB reflects your
continued investment
confidence in our management
team and our
strategic plan that drives us on towards our
ultimate goal of delivering increased value for all
of our stakeholders.
journey over
Having recently been appointed LSB’s Chief
Executive Officer after four years serving as the
Company’s Chief Financial Officer,
this letter
provides me with the opportunity to reflect on
our
the past several years to
improve the operational reliability of our facilities,
products we
of
increase
manufacture
efficiencies
implement
throughout our operations, which we believe all
translates into stronger financial performance.
sale
and
the
the
2018 Results
We delivered significantly improved financial
performance in 2018 as compared to the prior
year. Our adjusted EBITDA for the year was
$72.9 million, up from $45.6 million in 2017. The
results were driven by improved operating
performance at our facilities; concerted sales
and marketing efforts enabling us to increase
our sales volumes of several of our products;
stronger product pricing, reflecting the market
absorption of new production capacity brought
online within our industry in 2017 and 2018; and
LSB Industries 2018 Annual Report
the acceptance of new distribution of product. Of
course, there are unpredictable aspects of our
business that periodically create headwinds for
us. In 2018 these included the impact of poor
weather conditions in our agricultural end market
geographies in the fourth quarter. The weather
conditions impacted the fall fertilizer application
season and resulted in excess inventory in the
market causing a decline in selling prices.
Additionally, cold weather in the fourth quarter
prompted a spike in our natural gas feedstock
prices, which made it more costly for us to
produce ammonia and downstream products. As
many of you know, ammonia is both the building
block chemical that we upgrade into all of our
other products and is also a product we sell
directly to both the agricultural and industrial
markets. Overall, however, 2018 was a year of
great progress for LSB, and we expect further
significant improvement in our financial results
for the full year 2019.
2018 Highlights Include:
Increased operating rates at our facilities.
We were very pleased with the progress that we
made in how our plants operated over the course
of 2018. Cherokee’s ammonia plant ran at a 94%
the full year, which is
on-stream rate for
essentially in-line with our target on-stream rate
for this facility. Pryor’s ammonia plant ran at an
89% on-stream rate for
the full year, which
included a 97% on-stream rate for the second
half of 2018, reflecting the significant progress we
made with this facility over the course of the year.
This was Pryor’s best full year performance since
LSB brought the facility online in 2010. We view
this as an indication that the leadership changes
and reliability investments we’ve made, coupled
with the maintenance management systems,
procedures,
preventative maintenance
programs we’ve been implementing, are yielding
and
1
LSB Industries 2018 Annual Report
positive results. While we anticipate that Pryor
may have periods of unscheduled downtime
during 2019, we expect
these periods of
downtime to be of less magnitude and frequency
going forward, and we continue to improve its
long-term reliability. We believe we are on the
right path towards achieving Pryor’s potential to
generate a consistent mid-90s on-stream rate for
its ammonia plant beginning in 2020. El Dorado’s
ammonia plant also performed well, operating at
an 88% on-stream rate for the full year, which it
capped off by running at 98% for the fourth
quarter, a meaningful improvement over 2017.
Completed several plant operational
improvement initiatives.
While our facilities performed well in 2018, we are
confident that they can operate at even greater
on-stream rates and expect all three of them to
deliver further improvements in 2019. We took a
number of actions over the course of the past
year to drive greater reliability and increased
on-stream rates. During the third quarter, we
completed a major turnaround on our Cherokee
facility, which included instrumentation and
control upgrades at the facility’s urea plant. These
upgrades have made a measurably positive
impact on its urea production. This facility is now
on a three-year turnaround cycle and won’t have
another scheduled major maintenance event until
the summer of 2021.
facilities, during 2018 we
Across all of our
completed the implementation of an enhanced
maintenance management
system, which
assists us in assessing, managing, executing
and improving our maintenance activities. This
allows us to manage our facilities based on the
data we collect. Additionally,
the new and
improved maintenance management system
includes a new work-order management system
and related processes that enable us to more
efficiently and cost effectively plan and manage
our work and procure the components we need
to maintain our plants. We have also identified
critical equipment throughout all of our facilities
and enhanced our preventive maintenance
programs on that equipment. Collectively, these
initiatives enacted over the course of 2018 have
2
to the
yielded positive results with respect
to
reliability of our plants, and we expect
recognize their full benefits as these initiatives
mature over the next 24 months.
Focused Sales and Marketing Efforts.
In 2017 we launched a strategy to expand the
distribution of our products through focused
marketing initiatives. The results have been very
encouraging, as we increased our overall sales
volume of HDAN over the past 24 months by
approximately 30% through:
(1) storing and
distributing HDAN at our Pryor Facility, which
allows us to sell to new markets and customers
out of that facility; and (2) educating growers on
the agronomic benefits and the additional
applications for HDAN. We will continue to look
for opportunities to position product in strategic
locations in order to sell additional product and
look to
expand margins. Additionally, we will
expand the grower’s use of HDAN through the
continued education of growers on the benefits
of HDAN versus competing products.
our
further
plants’
leverage
To
current
production capacity, we are expanding the
distribution of our mining products by partnering
with customers to take product further into the
Western U.S., as well as markets outside the
U.S. We also partnered with a current customer
to position an emulsion plant at our El Dorado
facility where we began selling products to that
customer in the fourth quarter of 2018. We will
continue
plant
opportunities at our facilities for these products
in 2019 with the goal of maximizing our
production capacity.
explore
further
guest
to
In addition, through increased marketing efforts,
we increased our sales volumes of nitric acid
and nitric acid blends by approximately 35%
over the past 24 months. We continue to focus
our efforts to expand our market for nitric acid
and nitric acid blend products in North America
by leveraging our knowledge of these products,
to
our ability
customers from multiple facilities, and the
flexibility of our logistics capabilities. The goal is
to fully utilize our available nitric acid production
capacity at all of our facilities.
to provide these products
Refinanced our Senior Secured Notes.
In 2018, we completed the refinancing of our
Senior Secured Notes by issuing $400 million of
new five-year Senior Secured Notes which were
used to repay our existing Senior Secured Notes.
This was important to the Company as it extended
the maturity of our debt by five years. This action
provided us with greater financial flexibility, which
we expect will allow us to execute on our strategic
initiative to improve our capital structure as we
begin to generate free cash flow which, in turn, will
increase value for our shareholders. We were
happy to receive continued support from several of
our previous noteholders as they reinvested in the
issuance of our new notes, in addition to one of
our preferred stockholders, who continued their
commitment in us by investing in the new issuance
of notes as well.
be
our
operating
concentrating
enhancement
Looking Ahead
Over the course of 2019, we will take further
steps with our
reliability and operational
improvement process through a thorough review
and
of
and
maintenance procedures, along with our training
programs. We will
on
communications at our facilities, particularly at
shift change, through a structured process, as
well as conducting leadership training all the way
from line supervision to corporate and plant
management. We are changing the way we do
reliable and
things to better achieve safe,
efficient operations. As I mentioned earlier, the
goal is to run our plants “best in class” which to
us means performing in the top quartile of our
to environmental, health
industry with respect
and safety metrics, plant reliability, utilization
rates and efficiency.
We will also perform two scheduled turnarounds
this year at both our Pryor and El Dorado
facilities. Pryor will undergo an extensive 30-day
turnaround, including the tie-in of a new “state of
the art” urea reactor
that will significantly
improve the reliability of its urea plant, while at
the same time adding to production capacity.
We believe that, with the work we are
performing during this turnaround at Pryor, the
reliability of both its ammonia and urea plants
will be improved materially. El Dorado will have
LSB Industries 2018 Annual Report
a shorter 14-day turnaround that will
include a
number of required inspections and work that
will allow us to operate its ammonia plant more
reliably and with greater production. After these
are completed, Pryor will be on a two-year
turnaround schedule with its next
turnaround
the summer of 2021, while El
planned for
Dorado will be on a three-year
turnaround
schedule with its next turnaround planned for the
summer
longer
2022. Having
turnaround cycles is much more efficient and
cost effective and will minimize the disruption to
our overall production beginning in 2020, a year
with no scheduled turnarounds.
these
of
Given our focus on these operating initiatives,
we expect our production facilities to continue to
show improved operating performance, and we
are targeting an average on-stream rate across
all three of our ammonia plants of approximately
94% for 2019. When combined with our
continued focus on the active marketing of our
products, we expect our stronger on-stream
rates to translate into a healthy increase in
production and sales volumes and enable us to
gain further operating leverage on our fixed cost
base.
We also are focused on improving margins on
the sale of our products as we continue to
review our current product sales and focus on
expanding partnership relationships with our
customers. We made great progress in this
regard in 2018 and expect
these
efforts in 2019.
to further
in
no
equipment
investment
Lastly,
or
information systems at our plants can deliver a
satisfactory return unless we have the right
people to run the facilities with a high level of
precision. We are fortunate to have the right
reliability
team enabling us to achieve our
targets in the quarters and years to come.
In Conclusion
Clearly there is a great deal of change underway
at LSB Industries, and we are very enthusiastic
about our prospects for delivering stronger
financial results by executing our strategic plan.
Our results in 2018 are an early indicator that
our strategies are producing results, but we are
current
just
started. With
getting
LSB’s
3
LSB Industries 2018 Annual Report
business improvement initiatives underway, and
I am
our strong team at all our
confident
in our ability to generate expanding
profitability and cash flow that will enable us to
strengthen our liquidity position and begin to
locations,
look at opportunities to gain scale to better
leverage our corporate platform, all the while,
building value for our shareholders.
Mark Behrman
President & Chief Executive Officer,
March 2019
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 2019; 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, 2018 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.
4
2018 FORM 10-K
THIS PAGE INTENTIONALLY LEFT BLANK
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
⌧⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
"" TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-7677
LSB INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of or other Jurisdiction
Incorporation or Organization)
3503 NW 63rd Street, Suite 500,
Oklahoma City, Oklahoma
(Address of Principal Executive Offices)
73-1015226
(I.R.S. Employer
Identification No.)
73116
(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. " Yes ⌧ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. " Yes ⌧ No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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. ⌧ Yes " No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports
submit such files). ⌧ Yes " No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. "
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
"
"
Accelerated filer
Smaller reporting company
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. "
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). " Yes ⌧ No
The aggregate market value of the Registrant’s voting common equity held by non-affiliates of the Registrant, computed by reference to the price at which the
voting common stock was last sold as of June 30, 2018, was approximately $111 million. As a result, the Registrant is an accelerated filer as of December 31,
2018. For purposes of this computation, shares of the Registrant’s common stock beneficially owned by each executive officer and director of the Registrant
and LSB Funding LLC were deemed to be owned by affiliates of the Registrant as of June 30, 2018. Such determination should not be deemed an admission
that such executive officers, directors or entity 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 22, 2019, the Registrant had 28,809,079 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for its annual meeting of stockholders will be filed with the Securities and Exchange Commission within 120
days after the end of its 2018 fiscal year, are incorporated by reference in Part III.
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.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
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 2018 fiscal year covered by
this report.
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Page
3
9
24
25
26
26
26
27
28
45
46
46
46
49
49
49
2
ITEM 1. BUSINESS
Overview
PART I
All references to "LSB Industries,” “LSB,” “the Company,” “we,” “us,” and “our” refer to LSB Industries, Inc. and its subsidiaries,
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
(the “El Dorado Facility”), Cherokee, Alabama (the “Cherokee Facility”), and Pryor, Oklahoma (the “Pryor Facility”), and we operate a
facility for Covestro AG (“Covestro”) in Baytown, Texas (the “Baytown Facility”). 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:
•
•
•
ammonia, fertilizer grade ammonium nitrate (“AN” and “HDAN”) and urea ammonia nitrate (“UAN”) for agricultural
applications;
high purity and commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid,
mixed nitrating acids, carbon dioxide, and diesel exhaust fluid (“DEF”) for industrial applications; and
industrial grade AN (“LDAN”) and AN solutions for mining applications.
The products we manufacture at our facilities are primarily derived from natural gas (a raw material feedstock). Our facilities and
production processes have been designed to produce products that are marketable at nearly each stage of production. This design has
allowed us to develop and deploy a business model optimizing 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
Products
Applications
Agricultural
UAN, HDAN, ammonia
Industrial Acids and Other
Nitric acid, metallurgical
and commercial grade
ammonia, sulfuric acid,
diesel exhaust fluid and
other urea solutions,
Specialty E-2 ammonium
nitrate, CO2
Mining
LDAN, AN solution, and
HDAN
Fertilizer and fertilizer blends
for corn and other crops; NPK
fertilizer blends
Semi-conductor and
polyurethane intermediates,
ordnance; Pulp and paper, alum,
water treatment, metals and
vanadium processing; Power
plant emissions abatement,
water treatment, refrigerants,
metals processing; Exhaust
stream additive, horticulture /
greenhouse applications;
refrigeration
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
2018
2017
2016
50%
39%
11%
0%
100%
43%
46%
9%
2%
100%
44%
42%
12%
2%
100%
Prior to July 1, 2016, we manufactured and sold a range of heating, ventilation and air conditioning products and related services (the
“Climate Control Business”). These products were primarily used in commercial, institutional and residential new building
construction and renovations. On July 1, 2016, we sold the Climate Control Business.
For information regarding our net sales, operating results 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 some raw material and other manufacturing costs. We
believe this product and market diversification strategy allows us to have more consistent levels of production compared to some of
our competitors and helps reduce the volatility risk inherent in the prices of our raw material feedstock and/or the changes in demand
for our products.
The strategy of developing industrial and mining customers helps 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 acquisitions of strategic assets or companies, mergers with other companies and investment in
additional production capacity where we believe those acquisitions, mergers or expansion of production capacity will enhance the
value of the Company and provide appropriate returns.
Key Operating Initiatives for 2019
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement
the following key initiatives:
•
•
Improving the On-Stream Rates of our Chemical Plants. Over the past 18 months, our focus has been on upgrading our
existing maintenance management system through technology enhancements and work processes to improve our
predictive and preventative maintenance programs at our facilities. We engaged outside maintenance experts to assist us
in expediting implementation and overall use. We have completed the initial implementation. Additionally, beginning in
the third quarter of 2018, we engaged outside consultants to do a thorough review of our operating and maintenance
procedures and our preventive maintenance programs at all of our facilities in an effort to determine where we may have
gaps in procedures and programs and where we may need enhancements. Based on the “Gap Analysis” completed, we
have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce
more products for sale while lowering our cost of production. Those initiatives are focused on operating behavior and
procedure enhancements including operator training, leadership training, shift change enhancements and operating and
maintenance procedures.
Focus on the Continued Improvement of Our Safety Performance. We believe that high safety standards are critical and a
precursor 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. As a result of these programs, we significantly lowered our
recordable incident rate in 2018 as compared to the prior year and we remain well below the national average for
recordable safety incidents.
4
•
•
•
•
Continue Broadening of the Distribution of our Products. We increased our overall sales volume of HDAN over the past
24 months by approximately 30% through various marketing initiatives which include: (1) storing and distributing HDAN
at our Pryor Facility which allows us to sell to new markets and customers out of that facility and; (2) educating growers
on the agronomic benefits and the additional applications for HDAN. To further leverage our plants current production
capacity, we are continuing to expand the distribution of our mining products by partnering with customers to take
product further into the Western U.S. as well as markets outside the U.S. We also partnered with a current customer to
position an emulsion explosives plant at our El Dorado Facility. We began selling product to that facility in the fourth
quarter of 2018. We will continue to explore further guest plant opportunities at our facilities in 2019.
In addition, through increased marketing efforts, we increased our sales volumes of nitric acid over the past 24 months by
approximately 35%. We continue to focus our efforts to expand our market for our nitric acid products in North America
and to fully utilize available nitric acid production capacity of our facilities.
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.
In 2019, 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.
Continued Focus on Procurement and Logistics.
In 2018, we engaged outside experts to assist us in centralizing and
expanding our Company-wide procurement efforts. We completed our initial areas of focus during the second quarter of
2018, completed the implementation of those changes, and began to see benefits during the third quarter of 2018. We
believe that these efforts along with several additional identified areas of focus, will result in an overall reduction in
expenses and capital spend in the aggregate of between $3 million to $5 million on an annualized basis, which we expect
to realize over the next 12 to 24 months. Additionally, we will continue to focus on improving the effectiveness and
overall cost of our logistics strategy through a centrally managed team focused on building logistics partners that will help
us further drive efficiencies in 2019.
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 in achieving those efforts. As a part of that, in the
second quarter of 2018, we refinanced our outstanding Senior Secured Notes. We will continue to actively seek ways to
improve our capital structure going forward.
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.
Our Competitive Strengths
Strategically Located Chemical Assets and Long-Standing Customer Relationships
Our business benefits from highly advantageous 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 and cost advantaged when selling a number of our
products West of the Mississippi River. 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 Tennessee River, providing barge delivery access, in
addition to truck and rail delivery access. Our Pryor Facility is located in the heart of the Southern Plains with close proximity to the
Port of Catoosa along with strategic rail and truck delivery access.
Advantaged Raw Material Cost Position
We currently produce ammonia at our El Dorado, Cherokee and Pryor Facilities, 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 has historically been lower than our El Dorado and Cherokee Facilities.
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
us to achieve enhanced margins.
5
Market Conditions
As discussed in more detail under “Key Industry Factors” of “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” (“MD&A”) contained 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 and those of soybean, cotton and wheat 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. Industry reports indicated China’s recent tariffs placed on U.S.
soybeans could result in a shift of 2 to 4 million acres that will be rotated from soybeans to corn in this next planting season. The
USDA also estimates an increase in 2019 corn acres that is in line with other industry reports ranging between 92 million to 93 million
acres. Soybean pricing concerns may drive crop planting selection when final crop choices are made at the farm level. The following
February estimates are associated with the corn market:
U.S. Area Planted (Million acres)
U.S. Yield per Acre (Bushels)
U.S. Production (Million bushels)
U.S. Ending Stocks (Million metric tons)
World Ending Stocks (Million metric tons)
2019 Crop
February Report (1)
89.1
176.40
14,420
44.1
309.8
2018 Crop
Percentage
February Report (1) Change (2)
90.2
176.6
14,609
54.4
340.8
(1.2%)
(0.1%)
(1.3%)
(18.9%)
(9.1%)
2017 Crop
Percentage
February Report (1) Change (3)
94.0
174.6
15,148
58.3
350.2
(5.2%)
1.0%
(4.8%)
(24.4%)
(11.5%)
(1)
Information obtained from WASDE reports dated February 8, 2019 (February Report) for the 2018/2019 (“2019 Crop”),
2017/2018 (“2018 Crop”) and 2016/2017 (“2016”) corn marketing years.
(2) Represents the percentage change between the 2019 Crop amounts compared to the 2018 Crop amounts.
(3) Represents the percentage change between the 2019 Crop amounts compared to the 2017 Crop amounts.
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 and metals and mineral
mining markets and are also used in the production of stone for construction and production of cement for quarrying operations. 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 low natural gas prices among other things. As reported by the U.S. Energy Information
Administration (“EIA”), annual coal production in the U.S. for the full year of 2018 was down 3% from 2017 due to this market’s
weak competitive position in the electrical generation sector compared with natural gas and to a lesser degree lower export demand.
EIA is forecasting another 3% decrease in U.S. coal production in 2019 followed by a continued decline of 7% in 2020. This
estimated decline is based on the continual shift in utility-scale electricity generation from coal to natural gas. 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. As part of our continued effort to expand
sales of our mining products, we entered into an agreement with a current customer, by which the customer has located an emulsion
explosives plant at our El Dorado Facility. We will continue to explore further guest plant opportunities in 2019.
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 sale prices during most of 2017.
Also, additional domestic supply of ammonia and other fertilizer products changed the physical flow of ammonia in North America
placing pressure on ammonia and other fertilizer prices until the distribution system accepted the new supply. Beginning in the fourth
quarter of 2017 and through 2018, we have seen an increase in fertilizer prices as imports of fertilizers have decreased significantly
and the distribution of the new domestic supply of fertilizer has been established. We expect this trend to continue in 2019.
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.
6
The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for
nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation
and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of
competitors’ facilities and 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.
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
and Ohio rivers by barge, and by delivering to certain Western States by rail. See our discussion above concerning broadening the
distribution of our AN products under “Key Operating Initiatives for 2019”.
In addition, we have an agreement with a third-party purchaser, Coffeyville Resources Nitrogen Fertilizers, LLC, (“CVR”), to market
and sell a portion of our UAN. Demand for sales under this agreement is based on the expected needs of the purchaser’s customers.
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 May 2019, with automatic one-year extensions, subject to a
180-day advance notice of termination from CVR or a 90-day advance notice from us.
We sell most of our agricultural products at the current spot market price in effect at the time of shipment, although we periodically
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 the primary raw materials 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.
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
Dorado Chemical Company (“EDC”) and Koch Fertilizer LLC (“Koch Fertilizer”) are parties to an ammonia purchase and sale
agreement, under which Koch Fertilizer agreed to purchase, with minimum purchase requirements, the ammonia that is in excess of
EDC’s internal needs. We began selling ammonia under this agreement during June 2016. The term of the agreement runs until June
2020, with annual renewal options.
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. We operate and maintain this facility pursuant to a long-term contract (the “Covestro
Agreement”). The term of this agreement runs until June 2021 with options for renewal. See discussion concerning the impact from
the adoption of ASC 606 in Note 2 to the Consolidated Financial Statements included in this report.
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 ammonia, sulfur 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 and
performance and provides inventory management as part of the value-added services offered to certain customers. See our discussion
above concerning broadening the distribution of our nitric acid products under “Key Operating Initiatives for 2019”.
Mining Products
We produce and sell LDAN and AN solution to the mining industry, which products 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 certain customers that provide for the annual sale of LDAN under various natural-
gas-based pricing arrangements. Additionally, during 2018 we entered into an agreement to have a current customer locate an
emulsion explosives plant at our El Dorado Facility. We began selling product to that facility during the fourth quarter of 2018. We
continue to explore further guest plant opportunities. See our discussion above concerning broadening the distribution of our mining
products under “Key Operating Initiatives for 2019”.
Raw Materials
The products we manufacture at our facilities are primarily derived from natural gas. This raw material feedstock is a commodity and
subject to price fluctuations. Natural gas is the primary raw material for producing ammonia, UAN, nitric acid and acid blends 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 16.6 million MMBtus of natural gas annually to produce approximately 470,000 tons of ammonia; the
Cherokee Facility would purchase approximately 5.8 million MMBtus of natural gas annually in order to produce approximately
7
180,000 tons of ammonia; and the Pryor Facility would purchase approximately 7.0 million MMBtus of natural gas annually to
produce approximately 235,000 tons of ammonia.
The chemical facilities’ natural gas feedstock requirements are 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, 2018, we did not have any
volume purchase commitments with a fixed cost for natural gas.
See further discussion relating to the outlook for our business under “Key Industry Factors”.
Regulatory Matters
We are subject to extensive federal, state and local environmental laws, rules and regulations as discussed under “Environmental,
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., EuroChem, Inc., OCI Partners NV, 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), Praxair, Inc., Trammo Inc. and Yara International (some of whom are our 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.
Employees
As of December 31, 2018, we employed 576 persons, 193 of whom are represented by unions under agreements that expire in July of
2019 through July of 2021.
Environmental, Health and Safety Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health
and safety matters (the “Environmental and Health Laws”), many of which provide for certain performance obligations, substantial
fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint and several
liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or
released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities of
third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of
others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.
In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities
that could expose us to material losses. In certain instances, citizen groups also have the ability to bring legal proceedings against us if
we are not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to
In addition, claims for damages to persons or property, including natural resources, may result from the environmental,
operate.
health and safety effects of our operations.
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines or
penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage if an environmental claim is made against us. The Environmental and Health Laws and enforcement policies thereunder
have in the past resulted, and could in the future result, in significant compliance expenses, cleanup costs (for our sites or third-party
sites where our wastes were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge
or disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products.
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.
Available Information
We make available free of charge through our Internet website (www.lsbindustries.com) or by calling Investor Relations (212) 836-
9607 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.
8
ITEM 1A. RISK FACTORS
Risks Related to Our Business and Industry
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 our ability to satisfy the redemption obligations for the Series E
cumulative redeemable Class C preferred stock (“Series E Redeemable Preferred”) depends on our financial condition and operating
performance, 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 $400 million principal amount of our Senior Secured Notes (the “Senior Secured Notes”), or the outstanding 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 on or after October 25, 2023, that applicable optional redemption date with respect
thereto.
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
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. If we
cannot make scheduled payments on our debt, we will be in default and the outstanding principal and interest on our debt could be
declared to be due and payable, in which case we could be forced into bankruptcy or liquidation or required to substantially restructure
or alter our business operations or debt obligations. In such an event, we may not have sufficient assets to repay all of our debt.
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.
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.
We currently have a substantial amount of indebtedness, as well as dividend and redemption requirements relating to our preferred
stock. As a result, this level could, among other things:
•
•
•
•
•
•
•
require us to dedicate a substantial portion of our cash flow to the payment of principal, 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.
9
Our debt agreements and our preferred stock contain covenants and restrictions that could restrict or limit our financial and
business operations. 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.
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. These covenants and other restrictions limit our ability
to, among other things:
•
•
•
•
•
•
•
•
•
•
•
incur additional debt or issue preferred shares;
pay dividends on, repurchase or make distributions in respect of capital stock, make other restricted payments;
or make investments;
sell or transfer assets;
create liens on assets to secure debt;
engage in certain fundamental corporate changes or changes to our business activities;
make certain material acquisitions;
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.
The Working Capital Revolver Loan also contains certain affirmative covenants and requires the borrowers to comply with a fixed
charge coverage ratio (as defined in the Working Capital Revolver Loan) if their excess availability (as defined in the Working Capital
Revolver Loan) falls below a certain level.
These covenants and restrictions could affect our ability to operate our business and may limit our ability to react to market conditions
or take advantage of potential business opportunities as they arise. Additionally, our ability to comply with these covenants may be
affected by events beyond our control, including general economic and credit conditions and industry downturns.
In addition, certain failures to make payments when due on, or the acceleration of, significant indebtedness constitutes a default under
some of our debt instruments, including the indenture governing the notes. Further, a breach of any of the covenants or restrictions in a
debt instrument could result in an event of default under such debt instrument. Upon the occurrence of an event of default under one of
these debt instruments, our lenders or noteholders could elect to declare all amounts outstanding under such debt instrument 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.
Despite our current levels of debt, we may still incur more debt ranking senior or equal in right of payment with our existing
obligations, including secured debt, which would increase the risks described herein.
limit but do not prohibit our ability to incur additional debt,
The agreements relating to our debt, including the Senior Secured Notes Indenture and the credit agreement governing our Working
Capital Revolver Loan,
including additional secured debt.
Notwithstanding the fact that the Senior Secured Notes Indenture and the credit agreement governing our Working Capital Revolver
Loan limit our ability to incur additional debt or grant certain liens on our assets, the restrictions on the incurrence of additional
indebtedness and liens are subject to a number of important qualifications and exceptions, and the additional indebtedness and liens
incurred in compliance with these restrictions could be substantial. If new debt is added to our current debt levels, the related risks that
we now face could intensify.
10
Borrowings under our Working Capital Revolver Loan bear interest at a variable rate, which subjects us to interest rate risk
and could cause our debt service obligations to increase.
All of our borrowings under our Working Capital Revolver Loan are at variable rates of interest and expose us to interest rate risk. If
interest rates increase, our debt service obligations on this variable rate indebtedness would increase even though the amount
borrowed remained the same. Although we may enter into interest rate swaps to reduce interest rate volatility, we cannot provide
assurances that we will be able to do so or that such swaps will be effective.
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. In addition, the cost for such equipment could be influenced by changes
in regulatory policies (including tariffs) of foreign governments, as well as the U.S. laws and policies affecting foreign trade and
investment.
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.
Because LSB is a holding company and operations are conducted through its subsidiaries, LSB’s ability to meet its obligations
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.
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 of Directors (the “Board”) has not made a
decision whether or not to pay dividends on our common stock in 2019, 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 agreements that may limit our ability to pay dividends on our outstanding common stock.
Future issuances or potential issuances of our common stock or preferred stock could adversely affect the price of our
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
our customers and their customers to obtain sufficient credit to support their operations; the failure of our customers to fulfill their
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 prices for
some of our products due to our customers’ reluctance to replenish inventories. The overall impact of a global economic downturn or
reduced overall global trade on us is difficult to predict, and our business could be materially adversely impacted.
In addition, conditions in the international market for nitrogen fertilizer significantly influence our operating results. The international
market for fertilizers is influenced by such factors as the relative value of the U.S. currency and its impact on the importation of
11
fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign
markets and other regulatory policies (including tariffs) 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 ours may
turn to our competitors for products that they would otherwise have purchased from us.
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.
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
of renewable fuels pursuant to the federal renewable fuel standards (“RFS”). To date, the RFS has been satisfied primarily with fuel
ethanol blended into gasoline. However, a number of factors, including the continuing “food versus fuel” debate and studies showing
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 or in part)
the current RFS, any of which could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer
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.
Furthermore, most ethanol is currently produced from corn and other raw grains, such as milo or sorghum, especially in the Midwest.
The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass,
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, the
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.
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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that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant
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
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.
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, distribution,
service, and reliability. We compete with many companies, domestic and foreign, that have greater financial, marketing and other
resources. Competitive factors could require us to reduce prices or increase spending on product development, marketing and sales,
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.
A substantial portion of our sales is dependent upon a limited number of customers.
For 2018, seven customers accounted for approximately 40% of our consolidated net sales. The loss of, or a material reduction in
purchase levels by, one or more of these customers could have a material adverse effect on our business and our results of operations,
financial condition and liquidity if we are unable to replace a customer 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 be no
assurance that we will effectively manage against price fluctuations in those raw materials.
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.
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.
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
regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by reduction in oil exploration and development
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.
We have suspended in the past, and could suspend in the future, production at our chemical facilities due to, among other things, the
high cost or lack of availability of 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.
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
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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.
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 litigation or
investigation as a result of inadequate insurance proceeds, if any, our business, results of operations, financial condition and liquidity
could be materially adversely affected. For further discussion of our litigation, please see “Other Pending, Threatened or Settled
Litigation” in Note 9 to the Consolidated Financial Statements included in this report.
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 (see discussion concerning our former CEO electing
not to enter into a new employment agreement in Note 15 to the Consolidated Financial Statements). Although we have employment
agreements with certain of our principal executive officers, including Mark T. Behrman and Cheryl A. Maguire, 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 effect on us. We believe that our future success will depend in large part on our continued ability to attract and retain highly
skilled and qualified personnel.
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
concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant 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.
Cyber security risks could adversely affect our business operations.
As we continue to increase our dependence on information technologies to conduct our operations, the risks associated with cyber
security also increase. We rely on our enterprise resource planning software (“ERP”) and other information systems, among other
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.
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 facilities
could adversely affect sales volumes and margins.
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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 third party’s
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
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.
In addition, producers in China have substantial capacity to produce and export urea. Depending on various factors, including
prevailing prices from other exporters, the price of coal, and the price of China’s export tariff, higher volumes of urea from 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.
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.
There can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual
future expenditures may be different from the amounts we currently anticipate. We try to anticipate 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.
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 products
manufactured and/or sold by us, which could have a negative effect on our revenues, cash flow and liquidity.
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.
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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 government,
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 products. 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.
The “Secure Handling of Ammonium Nitrate Act of 2007” was enacted by the U.S. Congress, and subsequently the U.S. Department
of Homeland Security (“DHS”) published a notice of proposed rulemaking in 2011. 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 and Hazard Investigation Board (“CSB”) released its final report on the West, Texas
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.
In January 2017, the U.S. Environmental Protection Agency (“EPA”) finalized revisions to its Risk Management Program (“RMP”).
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 of the rule’s new requirements will be required beginning in 2021. The EPA temporarily delayed the rule’s effective date
however, the delay was subsequently vacated with an immediate effective date. On December 3, 2018, the EPA published a final rule
that incorporates amendments to the RMP under 40 CFR Part 68. These requirements may have a negative effect on the profitability
of our AN business. The Occupational Safety and Health Administration (“OSHA”) is likewise considering changes to its Process
Safety 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
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.
In response to findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public
health and the environment, the EPA adopted regulations pursuant to the federal Clean Air Act to reduce greenhouse gas emissions
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
required to obtain preconstruction permits for such pollutants are also required to meet “best available control technology” 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
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raw materials necessary to produce our chemical products; and require us to incur substantial expenditures to retrofit our chemical
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.
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 have a
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 be
particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and
intensities, water shortages and changing temperatures. Any of these matters could have a material adverse effect on us.
Certain of our stockholders control a significant amount of our voting stock, and their interests could conflict with interests of
other stockholders.
LSB Funding LLC (“LSB Funding”), our largest voting shareholder, owns one share of Series F redeemable Class C preferred stock
(the “Series F Redeemable Preferred”), which has voting rights with common stock equal to 15.7% of the total voting power of LSB’s
common stock as of February 15, 2019.
Jack E. Golsen (“J. Golsen”), Steven J. Golsen (“S. Golsen”), Barry H. Golsen (“B. Golsen”), Linda Golsen Rappaport (“L.
Rappaport”), Golsen Family LLC, an Oklahoma limited liability company (“Family LLC”), SBL LLC, an Oklahoma limited liability
company (“SBL LLC”), and Golsen Petroleum Corp., an Oklahoma corporation (“GPC,” and together with Messrs. J. Golsen, S.
Golsen and B. Golsen, Ms. L. Rappaport, Family LLC, SBL LLC, each a “Golsen Holder” and, collectively, the “Golsen Holders”)
owned as of February 15, 2019, 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 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.
Pursuant to a Board Representation and Standstill Agreement entered into in connection with LSB Funding’s purchase of preferred
stock in December 2015, as amended in October 2017 and 2018, LSB Funding has the right to designate two directors on our Board,
and the Golsen Holders have the right to appoint two directors on our Board, 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
In addition, we have entered into
voting shares to approve a merger, consolidation or sale of all, or substantially all, of our assets.
severance agreements with our executive officers and some of the executive officers of certain subsidiaries that provide, among other
things, that if, within a specified period of time after the occurrence of a change in control of LSB, these officers are terminated, other
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.
We have authorized and unissued (including shares held in treasury) 46,155,095 shares of common stock and 4,090,231 shares of
preferred stock as of December 31, 2018. These unissued shares could be used by our management to make it more difficult, and
thereby discourage an attempt to acquire control of us.
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The foregoing provisions and agreements may discourage a third-party tender offer, proxy contest, or other attempts to acquire control
of us and could have the effect of making it more difficult to remove incumbent management.
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.
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:
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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.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed “Forward-Looking Statements” within the meaning of Section 27A of
the Securities Act of 1933 (as amended, the “Securities Act”) and Section 21E of the Securities Exchange Act. All statements in this
report other than statements of historical fact are Forward-Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results and performance of the Company to differ materially from such
statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “could” and similar expressions identify Forward-
Looking Statements. Forward-Looking Statements contained herein include, but are not limited to, the following: our ability to invest
in projects that will generate best returns for our stockholders;
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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;
annual natural gas requirements;
compliance by our Facilities with the terms of our 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 2019;
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.
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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:
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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
Reinvestment and Recovery Act, or in the interpretation of such;
laws and regulations, especially environmental regulations or the American
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;
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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
other factors described in “Risk Factors” contained in this report.
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.
Defined Terms
The following is a list of terms used in this report.
ADEQ
AN
ARO
ASU
B. Golsen
BAE
- The Arkansas Department of Environmental Quality.
- Ammonium nitrate.
- Asset retirement obligation.
- Accounting Standard Update.
- Barry H. Golsen.
- BAE Systems Ordinance Systems, Inc.
Baytown Facility
- The nitric acid production facility located in Baytown, Texas.
CAO
CEO
- A consent administrative order.
- Chief Executive Officer.
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.
Covestro
- The party with whom our subsidiary, EDN, has entered the Covestro Agreement.
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
- Depreciation, depletion and amortization.
UAN from PCC.
DEF
DHS
EDA
EDC
EDN
EIA
- Diesel Exhaust Fluid.
- The U.S. Department of Homeland Security.
- El Dorado Ammonia L.L.C.
- El Dorado Chemical Company.
- El Dorado Nitrogen L.L.C.
- The U.S. Energy Information Administration.
21
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
Family LLC
FASB
- Enterprise Resource Planning Software.
- The U.S. Environmental Protection Agency.
- Golsen Family LLC, an Oklahoma limited liability company.
- Financial Accounting Standards Board.
Financial Covenant
- Certain springing financial covenants associated with the working capital revolver loan.
GAAP
Global
- U.S. Generally Accepted Accounting Principles.
- Global Industrial, Inc., a subcontractor asserting mechanics liens for work rendered to LSB and
EDC.
Golsen Holders
-
Jack E. Golsen (“J. Golsen”), Steven J. Golsen (“S. Golsen”), Barry H. Golsen (“B. Golsen”),
Linda Golsen Rappaport (“L. Rappaport”), Golsen Family LLC, an Oklahoma limited liability
company (“Family LLC”), SBL LLC, an Oklahoma limited liability company (“SBL LLC”),
and Golsen Petroleum Corp., an Oklahoma corporation (“GPC,” and together with Messrs. J.
Golsen, S. Golsen and B. Golsen, Ms. L. Rappaport, Family LLC, SBL LLC, each a “Golsen
Holder” and, collectively, the “Golsen Holders”).
GPC
- Golsen Petroleum Corp., an Oklahoma corporation.
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.
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
unpaid dividends plus the participation rights value.
LSB
LSB Funding
MD&A
NIBE
NOL
NPDES
ODEQ
OSHA
PBRS
PCC
PP&E
- LSB Industries, Inc.
- LSB Funding L.L.C.
- Management’s Discussion and Analysis of Financial Condition and Results of Operations found
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.
- The Oklahoma Department of Environmental Quality.
- Occupational Safety and Health Administration.
- Performance-based restricted stock.
- Pryor Chemical Company.
- Plant, property and equipment.
Pryor Facility
- Our chemical production facility located in Pryor, Oklahoma.
22
Purchaser
- LSB Funding L.L.C.
Retirement Date
- Date of retirement of Jack E. Golsen as Executive Chairman of the Board, December 31, 2017.
RFS
RMP
RSU
SBL LLC
S. Golsen
SEC
- Federal renewable fuel standards.
- Risk Management Program.
- Restricted stock unit.
- SBL LLC, an Oklahoma limited liability company.
- Steven J. Golsen.
- 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.
Senior Secured Notes
- The Senior Secured Notes due on May 1, 2023 with a stated interest rate of 9.625%.
Series B Preferred
Series D Preferred
- The Series B 12% cumulative convertible Class C Preferred stock.
- 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, including the amended
terms discussed in Note 11 to the Consolidated Financial Statements.
Series F Redeemable Preferred - The Series F Redeemable Preferred stock with one share to vote as a single class on all matters
with our common stock equal to 456,225 shares of our common stock, including the amended
terms discussed in Note 11 to the Consolidated Financial Statements.
SG&A
Tax Cut Act
- Selling, general and administrative expense.
- The Tax Cuts and Jobs Act of 2017.
Transition Agreement
- An agreement between Jack Golsen and LSB, dated June 30, 2017.
TSA
Turnaround
UAN
U.S.
USDA
Warrants
WASDE
West Fertilizer
Working Capital
Revolver Loan
Zena
- A transition services agreement.
- A planned major maintenance activity.
- Urea ammonia nitrate.
- United States.
- United States Department of Agriculture.
- 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.
- World Agricultural Supply and Demand Estimates Report.
- West Fertilizer Company.
- Our secured revolving credit facility.
- Zena Energy L.L.C., a former subsidiary of the Company.
12% Senior Secured Notes
- A former $50 million aggregate principal amount of 12% Senior Secured Notes.
2005 Agreement
- A death benefit agreement with Jack E. Golsen.
2008 Plan
2016 Plan
- The 2008 Incentive Stock Plan.
- The 2016 Long Term Incentive Plan.
23
2017 Crop
2018 Crop
2019 Crop
7.75% Senior Secured Notes
- Corn crop marketing year (September 1 - August 31), which began in 2016 and ended in 2017.
- Corn crop marketing year (September 1 - August 31), which began in 2017 and ending in 2018.
- Corn crop marketing year (September 1 - August 31), which began in 2018 and ending in 2019.
- A former $425 million aggregate principal amount of 7.75% Senior Secured Notes issued
to the Original 7.75% Indenture, subsequently amended under the Supplemental
pursuant
Indenture, with a current interest rate of 8.50%.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
24
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ITEM 3. LEGAL PROCEEDINGS
See Legal Matters under Note 9 to the Consolidated Financial Statements included in this report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is trading on the New York Stock Exchange under the symbol “LXU”.
Stockholders
As of February 15, 2019, we had approximately 414 record holders of our common stock.
Equity Compensation Plans
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, 2019.
Sale of Unregistered Securities
There were no unregistered sales of equity securities in 2018 that have not been previously reported in a Quarterly Report on Form 10-
Q or Current Report on Form 8-K.
26
ITEM 6. SELECTED FINANCIAL DATA (1)
Selected Statement of Operations Data in Dollars:
Net sales (2)
Operating income (loss)
Interest expense, net
Provisions (benefit) for income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of taxes (3)
Net income (loss)
Net income (loss) income attributable to common stockholders
Income (loss) per common share attributable to
common stockholders:
Basic:
2018
Year ended December 31,
2017
2015
2016
(In Thousands, Except Per Share Data)
2014
$ 378,160 $ 427,504 $ 374,585 $ 437,695 $ 495,888
30,577
21,599
4,251
5,087
14,547
19,634
19,334
(90,223)
30,945
(41,956)
(88,133)
200,301
112,168
64,760 $ (38,038) $
(23,025)
43,064
1,740
(72,226)
—
(72,226)
(34,091)
37,267
(40,759)
(30,293)
1,076
(29,217)
(71,166)
7,371
(32,520)
(46,146)
11,381
(34,765)
$ (102,741) $ (59,447) $
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)
$
$
$
$
$
$
(3.74) $
— $
(3.74) $
(3.74) $
— $
(3.74) $
(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
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:
$1,148,333 $1,189,182 $1,270,420 $1,361,827 $1,130,572
$ 425,199 $ 409,399 $ 420,220 $ 520,422 $ 450,885
—
$ 202,169 $ 174,959 $ 145,029 $ 177,272 $
$ 342,197 $ 438,196 $ 492,513 $ 421,580 $ 434,048
Cash dividends declared per common share
$
— $
— $
— $
— $
—
(1)
(2)
(3)
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.
See discussion concerning the impact from the adoption of ASC 606 in Note 2 to the Consolidated Financial Statements.
See discussion of our discontinued operations in Note 17 to the Consolidated Financial Statements.
27
ITEM 7. MANAGEMENT’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, 2018 Consolidated Financial Statements included elsewhere in this report. Certain statements contained in this MD&A may be
deemed to be forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Overview
General
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 Operating Initiatives for 2019
We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement
the following key initiatives:
•
•
•
•
Improving the On-Stream Rates of our Chemical Plants. Over the past 18 months, our focus has been on upgrading our
existing maintenance management system through technology enhancements and work processes to improve our
predictive and preventative maintenance programs at our facilities. We engaged outside maintenance experts to assist us
in expediting implementation and overall use. We have completed the initial implementation. Additionally, beginning in
the third quarter of 2018, we engaged outside consultants to do a thorough review of our operating and maintenance
procedures and our preventive maintenance programs at all of our facilities in an effort to determine where we may have
gaps in procedures and programs and where we may need enhancements. Based on the “Gap Analysis” completed, we
have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce
more products for sale while lowering our cost of production. Those initiatives are focused on operating behavior and
procedure enhancements including operator training, leadership training, shift change enhancements and operating and
maintenance procedures.
Focus on the Continued Improvement of Our Safety Performance. We believe that high safety standards are critical and a
precursor 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. As a result of these programs, we significantly lowered our
recordable incident rate in 2018 as compared to the prior year and we remain well below the national average for
recordable safety incidents.
Continue Broadening of the Distribution of our Products. We increased our overall sales volume of HDAN over the past
24 months by approximately 30% through various marketing initiatives which include: (1) storing and distributing HDAN
at our Pryor Facility which allows us to sell to new markets and customers out of that facility and; (2) educating growers
on the agronomic benefits and the additional applications for HDAN. To further leverage our plants’ current production
capacity, we are continuing to expand the distribution of our mining products by partnering with customers to take
product further into the Western U.S. as well as markets outside the U.S. We also partnered with a current customer to
position an emulsion explosives plant at our El Dorado Facility. We began selling product to that facility in the fourth
quarter of 2018. We will continue to explore further guest plant opportunities at our facilities in 2019.
In addition, through increased marketing efforts, we increased our sales volumes of nitric acid over the past 24 months by
approximately 35%. We continue to focus our efforts to expand our market for our nitric acid products in North America
and to fully utilize available nitric acid production capacity of our facilities.
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.
In 2019, 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.
28
•
•
Continued Focus on Procurement and Logistics.
In 2018, we engaged outside experts to assist us in centralizing and
expanding our Company-wide procurement efforts. We completed our initial areas of focus during the second quarter of
2018, completed the implementation of those changes, and began to see benefits during the third quarter of 2018. We
believe that these efforts along with several additional identified areas of focus, will result in an overall reduction in
expenses and capital spend in the aggregate of between $3 million to $5 million on an annualized basis, which we expect
to realize over the next 12 to 24 months. Additionally, we will continue to focus on improving the effectiveness and
overall cost of our logistics strategy through a centrally managed team focused on building logistics partners that will help
us further drive efficiencies in 2019.
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 in achieving those efforts. As a part of that, in the
second quarter of 2018, we refinanced our outstanding Senior Secured Notes. We will continue to actively seek ways to
improve our capital structure going forward.
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.
Business Developments - 2018
Financing Transaction and Series E Redeemable Preferred Letter Agreement
As discussed in Note 7 to the Consolidated Financial Statements, on April 25, 2018 (the date of the “Financing Transactions”), we
issued $400 million aggregate principal amount of 9.625% Senior Secured Notes due 2023 (the “Senior Secured Notes”). Most of the
net proceeds from the Senior Secured Notes were used to repurchase all of our senior secured notes due 2019.
As discussed in Note 11, in connection with the financing transactions discussed above, we entered into a letter agreement with the
holder of our Series E Redeemable Preferred to extend the date upon which a holder of Series E Redeemable Preferred has the right to
elect to have such holder’s shares of Series E Redeemable Preferred redeemed by us from August 2, 2019 to October 25, 2023. The
letter agreement also provides for the amendment of certain other terms relating to the Series E Redeemable Preferred, including an
increase in the per annum dividend rate payable in respect of the Series E Redeemable Preferred (a) by 0.50% on the third anniversary
of the financing transactions, (b) by an additional 0.50% on the fourth anniversary of the financing transactions and (c) by an
additional 1.0% on the fifth anniversary of the financing transactions.
Completion of a Turnaround at Cherokee
During 2018, we successfully completed a 35-day Turnaround performed on our plants at our Cherokee Facility. The next
Turnaround for this facility is scheduled in 2021. See additional discussion below under “Items Affecting Comparability of Results.”
Sale of Certain Non-Core Assets
During 2018, we sold certain non-core assets (primarily real estate properties) for approximately $6.0 million of net proceeds and
recognized a net gain of approximately $2.4 million that is included in other income. We continue to evaluate our assets to determine
if there are additional non-core assets that we should consider monetizing.
Key Industry Factors
Supply and Demand
Agricultural
Sales of our agricultural products were approximately 50% of our total net sales for 2018. The price at which our agricultural
products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn,
depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions,
competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international
and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry
economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price
volatility and effect product margins.
29
Additionally, changes in corn prices and those of soybean, cotton and wheat 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. Industry
reports indicated China’s recent tariffs placed on U.S. soybeans could result in a shift of 2 to 4 million acres that will be rotated from
soybeans to corn in this next planting season. The USDA also estimates an increase in 2019 corn acres that is in line with other
industry reports ranging between 92 million to 93 million acres. Soybean pricing concerns may drive crop planting selection when
final crop choices are made at the farm level. The following February estimates are associated with the corn market:
U.S. Area Planted (Million acres)
U.S. Yield per Acre (Bushels)
U.S. Production (Million bushels)
U.S. Ending Stocks (Million metric tons)
World Ending Stocks (Million metric tons)
2019 Crop
February Report (1)
89.1
176.40
14,420
44.1
309.8
2018 Crop
Percentage
February Report (1) Change (2)
90.2
176.6
14,609
54.4
340.8
(1.2%)
(0.1%)
(1.3%)
(18.9%)
(9.1%)
2017 Crop
Percentage
February Report (1) Change (3)
94.0
174.6
15,148
58.3
350.2
(5.2%)
1.0%
(4.8%)
(24.4%)
(11.5%)
(1)
Information obtained from WASDE reports dated February 8, 2019 (February Report) for the 2018/2019 (“2019 Crop”),
2017/2018 (“2018 Crop”) and 2016/2017 (“2016”) corn marketing years.
(2) Represents the percentage change between the 2019 Crop amounts compared to the 2018 Crop amounts.
(3) Represents the percentage change between the 2019 Crop amounts compared to the 2017 Crop amounts.
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 sale prices during most of 2017.
Also, additional domestic supply of ammonia and other fertilizer products changed the physical flow of ammonia in North America
placing pressure on ammonia and other fertilizer prices until the distribution system accepted the new supply. Beginning in the fourth
quarter of 2017 and through 2018, we have seen an increase in fertilizer prices as imports of fertilizers have decreased significantly
and the distribution of the new domestic supply of fertilizer has been established. We expect this trend to continue into 2019.
Industrial
Sales of our industrial products were approximately 39% of our total net sales for 2018. 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 ammonia or natural gas, as applicable, in our pricing arrangements with customers.
Mining
Sales of our mining products were approximately 11% of our total net sales for 2018. 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 2018 is down 3% from 2017 due
to this market’s weak competitive position in the electrical generation sector compared with natural gas and to a lesser degree lower
export demand. EIA is forecasting another 3% decrease in U.S. coal production in 2019 followed by a continued decline of 7% in
2020. This estimated decline is based on the continual shift in utility-scale electricity generation from coal to natural gas. 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. As part of our continued effort to
expand sales of our mining products, we entered into an agreement with a current customer, by which the customer has located an
emulsion explosives plant at our El Dorado Facility. We will continue to explore further guest plant opportunities in 2019.
Farmer Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual
farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties
and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types
of crops planted.
Natural Gas Prices
Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural
gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and
30
stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive
position and that of other North American nitrogen fertilizer producers has been positively affected.
We historically have purchased natural gas in the spot market, using forward purchase contracts, or through a combination of both and
have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase
contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. We are able to purchase
natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems.
The following table shows the annual volume of natural gas we purchased and the average cost per MMBtu:
Natural gas volumes (MMBtu in millions)
Natural gas average cost per MMBtu
Transportation Costs
2018
2017
28
2.91
$
27
3.04
$
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. However, we continue to evaluate the recent rising costs of rail and truck freight
domestically. Higher transportation costs may impact our margins if we are not able to pass through these costs. As a result, we
continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs.
Key Operational Factors
Facility Reliability
Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The
financial effects of planned downtime at our plants, including Turnarounds 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.
Our El Dorado Facility performed partial Turnaround activities in the second and third quarters of 2018. The remaining portion of this
Turnaround activity will be performed in the third quarter of 2019. Following the completion of this work, we expect the El Dorado
Facility to move to a three-year Turnaround cycle with the next Turnaround planned in the third quarter of 2022.
Our Cherokee Facility is currently on a three-year Turnaround cycle, with the last Turnaround performed in the third quarter of 2018
lasting 35 days. The next Turnaround to be performed is expected to occur in the third quarter of 2021.
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 a scheduled Turnaround in 2018. Completing the Turnaround at that time allowed us to avoid the
previously planned Turnaround in 2018. A Turnaround is scheduled for the third quarter of 2019 and we expect to continue with a
two-year Turnaround cycle at this facility with the next Turnaround planned for the third quarter of 2021. At that time, we will seek to
move to a three-year Turnaround cycle.
Prepay Contracts
We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These
sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are
agreed upon. We use this program to varying degrees during the year depending on market conditions and our view of changing price
environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our
reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.
Consolidated Results for 2018
Our consolidated net sales for 2018 were $378.2 million compared to $427.5 million for 2017. Our consolidated operating loss was
$23.0 million compared to $34.1 million for 2017. The items affecting our operating results are discussed below and under “Results
of Operations.”
31
Items Affecting Comparability of Results
Turnaround Expense
During 2018, we incurred Turnaround costs totaling approximately $9.8 million associated with a 35-day Turnaround performed on
our plants at our Cherokee Facility and a total of 12 days associated with Turnaround activity at our El Dorado Facility.
During 2017, we incurred Turnaround costs of approximately $1.3 million primarily relating to a 17-day Turnaround at our Pryor
Facility. Turnaround costs are included in cost of sales. The Turnaround costs noted above do not include the impact on operating
results relating to lost absorption of fixed costs or the reduced margins due to the lost production and subsequent product sales from
our plants being shut down during the Turnaround.
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
as ammonia is the basic product as used to produce all upgraded products. The on-stream rates noted below exclude Turnaround days,
when applicable.
At our Cherokee Facility, the ammonia plant on-stream rate for 2018 was 94% compared to 99% for the same period of 2017. The
ammonia plant’s on-stream rate was impacted by maintenance completed on its primary reformer during the first quarter of 2018. Our
target on-stream rate for this ammonia plant for 2019 is 95%.
At our El Dorado Facility, the ammonia plant’s on-stream rate for 2018 was 88% compared to 86% for the same period of 2017. The
ammonia plant’s on-stream rate for 2018 was impacted by maintenance completed on its boiler relating to tube failures caused by a
power outage during June 2018. The El Dorado Facility’s ammonia plant operated at 93% during the second half of 2018 and we are
targeting an ammonia plant average on-stream rate for 2019 of 95%.
At our Pryor Facility, the on-stream rate for 2018 for our ammonia plant increased to 89% from 69% in 2017. Despite having to
perform maintenance to repair leaks in the ammonia plant’s waste heat boiler during 2018, this was the Pryor Facility’s best full year
performance since we brought the facility online in 2010. We view this result as an indication that the leadership changes in personnel
and reliability investments made, coupled with the maintenance management systems, procedures and preventative maintenance
programs being implementing are yielding positive results. While we anticipate brief periods of unscheduled downtime during 2019
as we continue to take actions to improve long-term reliability, we are targeting an ammonia plant average on-stream rate for 2019 of
90%.
We believe that our focus on improving on-stream rates as discussed in key operating initiatives will continue to improve our overall
on-stream rate for 2019.
Selling Prices
During 2018, we experienced improved selling prices for our agricultural products compared to 2017. Average selling prices for our
ammonia, UAN and HDAN increased 16%, 15% and 11%, respectively compared to 2017 average selling prices. This increase
reflects a more favorable alignment of demand with market capacity for these products. We expect these overall sales price levels to
continue into 2019.
Our 2018 average industrial selling prices for our ammonia also improved compared to 2017. 2018 average Tampa Ammonia pricing
improved 12% as compared to 2017 and many of our industrial contracts are indexed to the Tampa Ammonia price.
Depreciation Expense
During 2018 and 2017, depreciation expense was $70.3 million and $67.0 million, respectively. For 2018, approximately $2.0 million
relates to accelerated depreciation at the El Dorado Facility due to the tube failures discussed above.
Interest Expense
During 2018 and 2017, interest expense was $43.1 million and $37.3 million, respectively. The change primarily relates to our Senior
Secured Notes, which includes approximately $0.9 million related to debt modification fees associated with the financing transactions
discussed above under “Business Developments - 2018” and in Note 7 to the Consolidated Financial Statements.
Loss on Extinguishment of Debt (2018 only)
As the result of the financing transactions relating to the Senior Secured Notes and repurchase of the senior secured notes due 2019,
we incurred a loss on extinguishment of debt of $6.0 million.
Valuation Allowance on Deferred Tax Assets (2018 only)
As discussed in Note 8 and below under “Critical Accounting Policies and Estimates”, during the second quarter of 2018, we
established a valuation allowance on a portion of our federal deferred tax assets (resulting in an income tax provision) since we
32
currently believe that it is more-likely-than-not that a portion of our federal deferred tax assets will not be able to be utilized. The
impact from the valuation allowance in 2018 was approximately $15 million.
Severance Benefits and Accelerated Stock-based Compensation (2018 only)
We incurred $5.3 million associated with certain severance benefits and accelerated stock-based compensation relating to Daniel D.
Greenwell, our former Chief Executive Officer (“CEO”), electing not to renew his employment agreement in December 2018.
Recovery from a Settlement with a Vendor (2018 only)
We and a vendor mediated a settlement relating primarily to a business interruption claim caused by defective work performed by the
vendor at our Pryor Facility. As a result of the settlement, the vendor paid us $4.0 million. As part of the settlement, we paid the
vendor $0.5 million to settle $1.1 million of invoices that were held in our accounts payable. As a result, we recognized a recovery
from this settlement totaling $4.6 million of which $4.4 million was classified as a reduction to cost of sales (primarily relating to our
business interruption claim) and the remaining balance of $0.2 million as a reduction to PP&E.
Adoption of ASC 606 in 2018
See discussion concerning the impact from the adoption of ASC 606 in Note 2.
Results of Operations
The following Results of Operations should be read in conjunction with our consolidated financial statements for the years ended
December 31, 2018, 2017, and 2016 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital
Resources” included in this MD&A.
We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the
consolidated financial statements and gross profit represents net sales less cost of sales. Net sales are reported on a gross basis with
the cost of freight being recorded in cost of sales.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table contains certain financial information relating to our continuing operations:
Net sales:
Agricultural products
Industrial acids and other chemical products (1)
Mining products
Other products
Total net sales
Gross profit
Gross profit percentage (2)
Selling, general and administrative expense
Other expense (income), net
Operating loss
Interest expense, net
Loss on extinguishment of debt
Non-operating other income, net
Provision (benefit) for income taxes (3)
Loss from continuing operations
Property, plant and equipment expenditures:
Depreciation, depletion and amortization of
property, plant and equipment:
2018
2017
(Dollars In Thousands)
Change
Percentage
Change
$ 187,164
148,598
42,398
—
$ 378,160
$ 184,054
196,029
38,854
8,567
$ 427,504
$
15,835
$
5,466
$
$
$
3,110
(47,431)
3,544
(8,567)
(49,344)
2%
(24)%
9%
(100)%
(12)%
10,369
190%
4.2%
1.3%
2.9%
40,811
(1,951)
(23,025)
43,064
5,951
(1,554)
1,740
(72,226)
37,050
70,266
$
$
34,990
4,567
(34,091)
37,267
—
(306)
(40,759)
(30,293)
35,425
66,996
$
$
5,821
(6,518)
11,066
5,797
5,951
(1,248)
42,499
(41,933)
$
$
1,625
3,270
17%
(32)%
16%
(104)%
(138)%
5%
5%
(1)
See discussion concerning the impact from the adoption of ASC 606 in Note 2 to the Consolidated Financial Statements
33
(2) As a percentage of net sales
(3)
See discussion in Note 8 to the Consolidated Financial Statements
The following tables provide key operating metrics for the Agricultural Products:
Product (tons sold)
UAN
HDAN
Ammonia
Other
Total
2018
400,054
284,433
82,586
23,422
790,495
2017
488,794
279,789
94,210
25,664
888,457
Change
(88,740)
4,644
(11,624)
(2,242)
(97,962)
Gross Average Selling Prices (price per ton)
2018
2017
Change
UAN
HDAN
Ammonia
$
$
$
176
264
319
$
$
$
153
237
276
$
$
$
23
27
43
Percentage
Change
(18) %
2 %
(12) %
(9) %
(11) %
Percentage
Change
15 %
11 %
16 %
With respect to sales of Industrial and Other Chemical Products, the following table indicates the volumes sold of our major products:
Product (tons sold)
Ammonia
Nitric Acid - excluding Baytown
Other Industrial Products
Total
2018
238,520
110,975
32,110
381,605
2017
228,849
100,628
31,485
360,962
Change
9,671
10,347
625
20,643
Percentage
Change
4 %
10 %
2 %
6 %
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
Net Sales
2018
163,308
2017
149,345
Change
13,963
Percentage
Change
9 %
•
•
•
•
Agricultural products sales increased primarily from higher average sales prices for our major products as a result of
improved commodity pricing and overall higher product selling prices. This increase was partially offset by the lost
production at our Cherokee Facility resulting from a 35-day Turnaround performed during 2018. UAN volumes were also
higher in 2017 due to the timing of barge shipments that crossed over year-end and landed in the first quarter of 2017.
Additionally, ammonia sales volumes were lower as a result of a poor fall application season. The delayed 2018 fall
harvest coupled with poor weather conditions resulted in a decline of approximately 55% of fall ammonia applications
compared to the 2017 fall application season. As a result of the lower demand, a portion of our agricultural ammonia was
sold into our industrial markets. HDAN sales volumes, although slightly higher than 2017, were also impacted by
substantially higher rainfall amounts occurring during the last few months of 2018.
Industrial acids and other industrial chemical products sales decreased approximately 24%, due to the impact from
adopting ASC 606 as discussed in Note 2. Since we adopted ASC 606 using the “modified retrospective” method, the
prior periods were not restated. If we had applied ASC 606 to these specific arrangements during 2017, net sales for these
products would have been reduced by approximately $65.4 million to $130.7 million representing a $17.9 million or
13.7% increase for 2018 compared to 2017. Excluding this impact, sales increased primarily due to improved average
selling prices and stronger sales volumes reflecting expanded marketing efforts and the continued strength of the U.S.
economy.
Mining product sales increased primarily as a result of the broadening of our AN distribution markets combined with new
guest plant arrangements.
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.
34
Gross Profit
As noted in the table above, we recognized a gross profit of $15.8 million in 2018 compared to $5.5 million in 2017, or an increase in
gross profit of approximately $10.3 million.
In addition to the net positive effect from the higher sales discussed above, our gross
profit improvement includes a net reduction of natural gas cost of approximately $1.3 million from lower average natural gas prices,
partially offset by higher natural gas volumes purchased as the result of improved on-stream and production rates at our Pryor and El
Dorado Facilities, which are the result of implementing our key operating initiatives to improve plant reliability. Our gross profit was
also impacted by the following:
•
•
approximately $8.5 million from higher expenses associated with the Turnarounds primarily performed at our Cherokee
and El Dorado Facilities and the resulting lost production during the 35-day and 12-day Turnarounds at Cherokee and El
Dorado: and
approximately $3.2 million from additional consulting costs associated with our reliability and purchasing initiatives.
Also, as discussed above under “Items Affecting Comparability-Recovery from a Settlement with a Vendor”, our 2018 gross profit
included a recovery from a settlement with a vendor of $4.4 million classified as a reduction to cost of sales (primarily relating to our
business interruption claim).
In addition, 2017 gross profit included a recovery of precious metals of $2.9 million and approximately $3.3 million of gross profit
associated with our former industrial machinery business and working interests in certain natural gas properties, both sold in 2017.
Selling General and Administrative Expense
Our SG&A expenses were $40.8 million for 2018, an increase of $5.8 million compared to 2017, of which $5.3 million associated
with severance benefits and accelerated stock-based compensation relating to our former CEO electing not to renew his employment
agreement in December 2018. Excluding this impact, SG&A expenses increased $0.5 million including higher professional fees of
$2.6 million associated with our legal matters partially offset by a reduction in insurance and other miscellaneous expenses of $0.5
million and the impact from $1.6 million of SG&A expenses related to two former businesses that were sold in 2017.
Other Expense (Income), net
Other income for 2018 was $2.0 million that includes a net gain from the sales of certain non-core assets (primarily consisting of real
estate). Other expense for 2017 was $4.6 million for 2017 that includes a total net loss of $7.0 million primarily from the sales 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 and $1.0
million in miscellaneous items.
Interest Expense, net
Interest expense for 2018 was $43.1 million compared to $37.3 million for 2017. The increase relates primarily to the issuance of the
Senior Secured Notes and approximately $0.9 million related to debt modification fees associated with this financing as discussed in
Note 7 to the Consolidated Financial Statements.
Loss on Extinguishment of Debt
During 2018, we incurred a loss on extinguishment of debt of approximately $6.0 million as discussed above under “Items Affecting
Comparability of Results - Loss on Extinguishment of Debt” and in Note 7.
Provision (Benefit) for Income Taxes
The provision for income taxes for 2018 was $1.7 million compared to a $40.8 million benefit in the same period in 2017. The
effective tax rate, including the impact of tax reform adjustments, was 2.5%, as compared to a benefit rate of 57% for 2017. The 2018
effective tax rate was impacted by adjustments made to our valuation allowances during 2018 including a reversal of approximately
$2.3 million of state valuation allowance related to tax law changes. The significant tax benefit in 2017 was primarily due to the
adjustments recorded in 2017 on the deferred tax assets and liabilities from the decrease in the federal enacted tax rate as a result of
tax reform in 2017.
Income from Discontinued Operations, net of taxes
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
obligations and net of a tax provision of $1.5 million.
35
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
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 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
Additions to property, plant and equipment:
Depreciation, depletion and amortization of property, plant
and equipment:
2017
2016
(Dollars In Thousands)
Change
Percentage
Change
$ 184,054
196,029
38,854
8,567
$ 427,504
$ 166,180
155,744
43,532
9,129
$ 374,585
$
5,466
$
(49,306)
1.3%
(13.2)%
$
$
$
34,990
—
4,567
(34,091)
37,267
—
(306)
(40,759)
(30,293)
40,168
1,621
(872)
(90,223)
30,945
8,703
218
(41,956)
(88,133)
17,874
40,285
(4,678)
(562)
52,919
54,772
14.5%
(5,178)
(1,621)
5,439
56,132
6,322
(8,703)
(524)
1,197
57,840
11%
26%
(11)%
(6)%
14%
111%
(13)%
(100)%
62%
20%
100%
(3)%
66%
$
$
37,433
$ 165,104
$ (127,671)
(77)%
66,996
$
59,354
$
7,642
13%
(1) As a percentage of net sales
The following tables provide key operating metrics for the Agricultural Products:
Product (tons sold)
UAN
HDAN
Ammonia
Other
Total
Average Selling Prices (price per ton)
UAN
HDAN
Ammonia
2017
488,794
279,789
94,210
25,664
888,457
2016
372,593
218,283
93,013
23,290
707,179
Change
116,201
61,506
1,197
2,374
181,278
Percentage
Change
31 %
28 %
1 %
10 %
26 %
2017
2016
Change
$
$
$
153
237
276
$
$
$
173
253
331
$
$
$
(20)
(16)
(55)
Percentage
Change
(12) %
(6) %
(17) %
36
With respect to sales of Industrial and Other Chemical Products, the following table indicates the volumes sold of our major products:
Product (tons sold)
Ammonia
Nitric Acid - excluding Baytown
Other Industrial Products
Total
2017
228,849
100,628
31,485
360,962
2016
127,265
82,237
38,059
247,561
Change
101,584
18,391
(6,574)
113,401
Percentage
Change
80 %
22 %
(17) %
46 %
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
Net Sales
2017
149,345
2016
153,535
Change
(4,190)
Percentage
Change
(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.
•
•
•
•
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.
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 continued 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 continued to face lower
sales volume of AN Solution from our Cherokee Facility as demand from our customers remained 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.
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:
•
•
•
•
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.
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
37
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
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
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
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 and $0.1
million in miscellaneous items.
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.
Loss on Extinguishment of Debt
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 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.
Income from Discontinued Operations, net of taxes
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
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.
38
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our continuing cash flow activities for 2018 and 2017:
Net cash flows from continuing operating activities
Net cash flows from continuing investing activities
Net cash flows from continuing financing activities
Cash Flow from Continuing Operating Activities
2018
2017
Change
(In Thousands)
17,622
$
2,276
$ 15,346
(25,740) $
(10,845) $ (14,895)
547
$
(16,132) $ 16,679
$
$
$
Net cash provided by continuing operating activities was $17.6 million for 2018 compared to $2.3 million for 2017, an improvement
of approximately $15.3 million.
For 2018, the net cash provided is the result of a net loss of $72.2 million plus adjustments of $70.3 million for depreciation, depletion
and amortization of PP&E, $8.4 million for stock-based compensation, $6.0 million for a loss on extinguishment of debt, $1.8 million
for deferred taxes and other adjustments totaling approximately $2.8 million and net cash provided of approximately $0.5 million
primarily from our working capital including an increase in inventories and accounts payables and a decrease in accrued interest.
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.
Cash Flow from Continuing Investing Activities
Net cash used by continuing investing activities was $25.7 million for 2018 compared to $10.8 million for 2017, a change of $14.9
million.
For 2018, the net cash used is the result of $37.1 million on expenditures for PP&E partially offset by $6.7 million from net proceeds
from the sale of PP&E, $2.7 million representing the remaining proceeds from an indemnity escrow account associated with the sale
of the Climate Control business in 2016 and approximately $2.0 million relating to a recovery from a property insurance claim and
other investing activities.
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 (industrial machinery and related
components) and other property and equipment and $0.8 million associated with other activities.
Cash Flow from Continuing Financing Activities
Net cash provided by continuing financing activities was $0.5 million for 2018 compared to net cash used $16.1 million for 2017, a
change of approximately $16.6 million.
For 2018, the net cash provided consists of net proceeds of $390.5 million from the Senior Secured Notes, $10.9 million from short-
term financing, and $10.0 million from our Working Capital Revolver Loan partially offset by $375 million repayment of the senior
secured notes due 2019, payments of $20.0 million on other long-term debt and short-term financing, payments of $11.0 million for
debt related costs, payments of $2.8 million of fees associated with the modification of terms of our Series E Redeemable Preferred
and approximately $2.1 million of other financing activities.
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.
39
Capitalization
The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity:
Cash and cash equivalents
Revolving credit facility and long-term debt:
Working Capital Revolver Loan
Senior Secured Notes due 2023 (1)
Senior Secured Notes due 2019 (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,
2018
2017
(In Millions)
26.0
$
10.0
400.0
—
7.2
8.1
14.7
0.2
(15.0)
425.2
202.2
342.2
$
$
$
33.6
—
—
375.0
8.2
11.2
16.7
3.0
(4.7)
409.4
175.0
438.2
$
$
$
$
(1)
(2)
See discussion contained in Note 7 to the Consolidated Financial Statements.
Liquidation preference of $212.1 million as of December 31, 2018.
We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $50 million. During the
fourth quarter of 2018, we delivered product to several customers with extended short-term payment terms as a means of optimizing
our inventory and storage capacity headed into the spring season. We utilized the revolver to finance normal working capital
fluctuations such as these receivables. As of December 31, 2018, our Working Capital Revolver Loan had outstanding borrowings of
$10.0 million and $37.2 million of availability.
As discussed below, we have planned capital expenditures relating to maintaining and enhancing safety and reliability at our facilities
of approximately $30 million to $35 million. This is inclusive of a new sulfuric acid converter at our El Dorado Facility that we plan
to install in the fourth quarter of 2019 and estimate will cost approximately $7.5 million. We expect this investment to significantly
improve the reliability of that plant while increasing the production capacity from approximately 140,000 tons to 160,000 tons
allowing us to take advantage of attractive market conditions. We are finalizing the equipment financing for this capital project.
We believe that the combination of our cash on hand, the availability on our revolving credit facility, and our cash flow from
operations will be sufficient to fund our anticipated liquidity needs for the next twelve months.
Compliance with Long - Term Debt Covenants
As discussed below under “Loan Agreements,” the Working 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, 2018, no trigger event had occurred.
Loan Agreements and Redeemable Preferred Stock
Senior Secured Notes due 2019 and 2023 - See discussion contained in Note 7 to the Consolidated Financial Statements. As a
result of the financing transactions, our interest expense has increased as compared to 2017.
Secured Promissory Note due 2019 – EDC is party to a secured promissory note due in June 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.
Secured Promissory Note due 2021 – EDC is party to a secured promissory note due in March 2021. This promissory note
bears interest at the annual rate of 5.25%. Principal and interest are payable in monthly installments.
Secured Promissory Note due 2023 - 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 current total rate of 6.76%.
Working Capital Revolver Loan - At December 31, 2018, we had $10.0 million outstanding borrowings under the Working
Capital Revolver Loan and the net credit available for borrowings under our Working Capital Revolver Loan was approximately $37.2
40
million, based on our eligible collateral, less outstanding letters of credit as of that date. Also see discussion above under “Compliance
with Long-Term Debt Covenants.
Redemption of Series E Redeemable Preferred – At December 31, 2018, there were 139,768 outstanding shares of Series E
Redeemable Preferred.
At any time on or after October 25, 2023, each Series E holder has the right to elect to have such holder’s shares redeemed by us at a
redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the participation
rights value (the “Liquidation Preference”). 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.
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 October 25, 2023, 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 October 25, 2023.
As of December 31, 2018, the aggregate liquidation preference (par value plus accrued dividends) was $212.1 million.
Also, see discussion in Note 11 to the Consolidated Financial Statements included in this report.
Capital Expenditures – 2018
For 2018, capital expenditures relating to PP&E were $37.1 million, which expenditures include approximately $0.9 million
associated with maintaining compliance with environmental laws, regulations and guidelines. The capital expenditures were funded
primarily from cash and working capital.
See discussion above under “Capitalization” for our expected annual capital expenditures for 2019.
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 $3.2 million in 2018 in connection with environmental projects. For 2019, we expect to incur expenses ranging from $3.2
million to $4.2 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
current annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate will increase beginning on April 25, 2021
as discussed in Note 11. Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when
declared by our Board. In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the
current annual rate of 14%, but such annual rate will increase beginning on April 25, 2021. The current semi-annual compounded
dividend is approximately $103.83 per share for the current aggregate semi-annual dividend of $14.5 million. We also must declare a
dividend on the Series E 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, 2018, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $72.3 million.
Dividends on the Series D 6% cumulative convertible Class C preferred stock (the “Series D Preferred”) and Series B 12% cumulative
convertible Class C Preferred Stock (the “Series B Preferred”) are payable annually, only when declared by our Board, as follows:
•
•
$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.
41
As of December 31, 2018, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled
approximately $1.0 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.
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.
Performance and Payment Bonds
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, 2018, 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 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange
Act of 1934.
42
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New Accounting Pronouncements
For recently adopted and recently issued accounting standards, see discussions in Note 1 to the Consolidated Financial Statements
included in this report.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of
assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values. It is reasonably possible that the estimates
and assumptions utilized as of December 31, 2018, could change in the near term. The more critical areas of financial reporting
affected by management's judgment, estimates and assumptions include the following:
Contingencies – 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 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.
We are involved in various legal matters that require management to make estimates and assumptions, including costs relating to the
lawsuit styled City of West, Texas v CF Industries, Inc., et al, discussed under “Other Pending, Threatened or Settled Litigation” of
Note 9 to the Consolidated Financial Statements include in this report.
It is reasonably possible that the actual costs could be significantly different than our estimates.
Regulatory Compliance – As discussed under “Environmental, Health and Safety Matters” in Item 1 of 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 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. 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 Environment (“KDHE”)
discussed under footnote 3 – Other Environmental Matters of Note 9. At December 31, 2018 and 2017, liabilities totaling $0.2 million
for both periods 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 and the actual
costs could be significantly different than our current estimates.
Income Tax – As discussed in Note 8, during the second quarter of 2018, we established a valuation allowance on a portion of
our federal deferred tax assets. This valuation allowance is reflective of our quarterly analysis of the four sources of taxable income,
including the calculation of the reversal of existing tax assets and liabilities, the impact of the recent financing activities and our 2018
results. Based on our analysis, we now believe that it is more-likely-than-not that a portion of our federal deferred tax assets will not
be able to be utilized and the valuation allowance recorded during 2018 was approximately $15 million.
Senior Secured Notes – As discussed in Note 7, LSB completed the issuance and sale of the Senior Secured Notes in April
2018. A portion of this transaction was accounted for as an extinguishment of debt and a portion was accounted for as a non-
substantial debt modification. As a result, approximately $15.2 million of the fees/redemption premiums/discount was deferred and
included in discount and debt issuance costs and approximately $0.9 million of fees were expensed, as incurred, and are included in
interest expense. In addition, we recognized a loss on extinguishment of debt of approximately $6.0 million, primarily consisting of a
portion of the redemption premiums paid and the expensing of a portion of debt issuance costs associated with the 8.5% Senior
Secured Notes. The extinguishment and modification conclusion impacts the treatment of discounts and debt issuance costs. In
addition, certain embedded features included in the Senior Secured Notes were evaluated to identify if those features represented a
derivative and required bifurcation.
44
Redeemable Preferred Stocks – In December 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
In addition, certain embedded features (the “embedded derivative”) included in the Series E Redeemable Preferred required
sheet.
bifurcation and are classified as derivative liabilities. As discussed in Note 11, the terms of the Series E Redeemable Preferred were
amended in 2018 associated with a letter agreement in connection with the issuance and sale of the Senior Secured Notes discussed
above. The amended terms associated with the letter agreement were determined to result in a nonsubstantial modification, which
determination included estimates regarding the probability, timing and amount of shares redeemed prior to October 25, 2023, the
earliest possible redemption date by the holder. In addition, the letter agreement included a contingent redemption feature, which
required bifurcation from the Series E Redeemable Preferred and is classified as a derivative liability.
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 October 25, 2023, the earliest possible redemption date by the holder. Approximately $30 million of accretion
(including the amount for earned dividends) was recorded to retained earnings in 2018. At December 31, 2018, the carrying value of
these redeemable preferred stocks was $202.1 million.
For the embedded derivative, changes in fair value are recorded in our statement of operations. As the result of the financing
transaction relating to the Senior Secured Notes and the letter agreement, we estimate that the contingent redemption features have fair
value at December 31, 2018 since we estimate that it is probable that a portion of the shares of this preferred stock would be redeemed
prior to October 25, 2023.
At December 31, 2018 and 2017, the fair value of the embedded derivative was $1.6 million and $2.7 million, respectively, primarily
relating to the participation rights based on the equivalent of 303,646 shares of our common stock at $5.52 and $8.76 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.
Management’s judgment and estimates in the above areas are based on information available from internal and external resources at
that time. Actual results could differ materially from these estimates and judgments, as additional information becomes known.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Our results of operations and operating cash flows are affected by changes in market prices of natural gas, changes in market interest
rates and changes in market currency exchange rates.
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, 2018, we had no embedded
losses associated with sales commitments with firm sales prices.
Commodity Price Risk
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand
fundamentals change. We are exposed to commodity price risk as we generally do not use derivative financial instruments to manage
risks related to changes in prices of commodities. We periodically enter into contracts to purchase 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, 2018, we did not have
any natural gas derivatives not meeting the definition of a normal purchase and sale.
Interest Rate Risk
Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility. As of December 31, 2018, we
have $10.0 million 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 $14.7 million. We currently do not hedge our interest rate risk associated with these
variable interest loans.
45
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, 2018:
2019
2020
Years ending December 31,
2021
(Dollars In Thousands)
2022
2023
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
$ 1,980
$ 1,980
$ 11,980
$
6.44%
6.41%
6.37%
$ 10,572
$ 3,564
$ 1,259
$
9.52%
9.59%
9.62%
6.46%
45
9.62%
6,765
6.75%
$400,036
9.62%
$
$
— $ 24,685
—
— $415,476
—
6.53%
9.62%
(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, 2018.
At December 31, 2018 and 2017, we did not have any financial instruments with fair values significantly different from their carrying
amounts (which excludes issuance costs, if applicable). 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have included the financial statements and supplementary financial information required by this item immediately following
Part IV of this report and hereby incorporate by reference the relevant portions of those statements and information into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, with the participation of our Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15 under the 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
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These include
controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management,
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
disclosure controls and procedures were effective. There were no changes to our internal control over financial reporting during the
quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
46
Management’s Report on Internal Control over Financial Reporting
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 is a process, under the supervision of the Company’s Chief
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 of our
In making this assessment, it used the criteria set forth by the
internal control over financial reporting as of December 31, 2018.
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, 2018, 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.
47
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
We have audited LSB Industries, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control—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, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2018 consolidated financial statements of the Company and our report dated February 26, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We 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
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Oklahoma City, Oklahoma
February 26, 2019
48
ITEM 9B. OTHER INFORMATION
None.
PART III
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, 2019.
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, 2018 and 2017
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2018
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2018
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018
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-41
F-43
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.
49
(a)(3) Exhibits
Exhibit
Number
3(i).1
3(ii).1
3(ii).2
3(ii).3
3(ii).4
Exhibit Title
Incorporated by Reference
to the Following
Restated Certificate of Incorporation of LSB Industries, Inc.,
dated January 21, 1977, as amended August 27, 1987
Exhibit 3(i).1 to the Company’s 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
Exhibit 3(ii).1 to the Company’s Form 8-K filed
August 27, 2014
Fifth Amendment to the Amended and Restated Bylaws of LSB
Industries, Inc., dated as of April 26, 2015
Exhibit 3(ii) to the Company’s Form 8-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 Company’s Form 8-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 Company’s Form 8-K filed
December 29, 2015
4.1(P)
Specimen Certificate for the Company’s Series B Preferred Stock Exhibit 4.27 to the Company’s Registration
Statement on Form S-3 No. 33-9848
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Specimen Certificate for the Company’s Series D 6% Cumulative,
Convertible Class C Preferred Stock
Exhibit 4.3 to the Company’s Form 10-K filed
March 3, 2011
Specimen Certificate for the Company’s Common Stock
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 E-1 Cumulative Redeemable
Class C Preferred Stock of LSB Industries, Inc., dated as of
October 18, 2018
Certificate of Correction to Certificate of Designations of the
Series E-1 Cumulative Redeemable Class C Preferred Stock of
LSB Industries, Inc.
Certificate of Designations of Series F Cumulative Redeemable
Class C Preferred Stock of LSB Industries, Inc., dated as of
December 4, 2015
Certificate of Designations of Series F-1 Redeemable Class C
Preferred Stock of LSB Industries, Inc., dated as of October 18,
2018
Exhibit 4.3 to the Company’s Registration
Statement on Form S-3 ASR filed November 16,
2012
Exhibit 4.1 to the Company’s Form 8-K filed
December 8, 2015
Exhibit 4.1 to the Company’s Form 8-K filed
October 19, 2018
Exhibit 4.1 to the Company’s Form 8-K filed
November 2, 2018
Exhibit 4.2 to the Company’s Form 8-K filed
December 8, 2015
Exhibit 4.2 to the Company’s Form 8-K filed
October 19, 2018
Renewed Rights Agreement, dated as of December 2, 2008,
between the Company and UMB Bank, n.a.
Exhibit 4.1 to the Company’s Form 8-K filed
December 5, 2008
Amendment to Renewed Rights Agreement, dated December 3,
2008, between LSB Industries, Inc. and UMB Bank, n.a.
Exhibit 4.3 to the Company’s Form 8-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
Exhibit 4.3 to the Company’s Form 8-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
Exhibit 4.1 to the Company’s Form 8-K filed
August 14, 2013
50
Exhibit
Number
Exhibit Title
Incorporated by Reference
to the Following
4.13
4.14
4.15
4.16
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
Indenture, dated as of April 25, 2018, among LSB Industries, Inc.,
the subsidiary guarantors party thereto and Wilmington Trust,
National Association, as trustee and collateral agent.
Exhibit 4.1 to the Company’s Form 8-K filed
October 4, 2016.
Exhibit 99.1 to the Company’s Form 8-K filed
August 14, 2013
Exhibit 4.1 to the Company’s Form 8-K filed
April 25, 2018
Form of 9.625% Senior Secured Notes due 2023 (included in
Exhibit 4.1).
Exhibit 4.2 to the Company’s Form 8-K filed
April 25, 2018
10.1*
Form of Death Benefit Plan Agreement, dated April 1, 1981
Exhibit 10.2 to the Company’s Form 10-K filed
March 31, 2006
10.2*
10.3*
LSB Industries, Inc. Outside Directors Stock Purchase Plan, dated
May 24, 1999
Exhibit 99.2 to the Company’s Form 8-K filed
October 23, 2014
LSB Industries, Inc. 2008 Incentive Stock Plan, effective June 5,
2008, as amended by First Amendment, effective June 5, 2014
Exhibit 99.3 to the Company’s Form 8-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
Exhibit 10.3 to the Company’s Form 8-K filed
January 8, 2016
Exhibit 10.8 to the Company’s Form 10-K filed
February 29, 2016
Exhibit 4.8 to the Company’s Form S-8 filed June
28, 2016
10.7*
10.8*
10.9*
10.10*
10.11*
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Stock Option Agreement
Exhibit 4.9 to the Company’s Form S-8 filed June
28, 2016
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Restricted Stock Unit Agreement (Director Award)
Exhibit 4.10 to the Company’s Form S-8 filed
June 28, 2016
Form of LSB Industries, Inc. 2016 Long Term Incentive Plan
Restricted Stock Agreement
Exhibit 4.11 to the Company’s Form S-8 filed
June 28, 2016
Form of Time-Based Restricted Stock Agreement of LSB
Industries, Inc.
Exhibit 10.4 to the Company’s Form 8-K filed
January 3, 2019
Form of Performance-Based Restricted Stock Agreement of LSB
Industries, Inc.
Exhibit 10.5 to the Company’s Form 8-K filed
January 3, 2019
10.12*(a)
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Mark Behrman
10.13*
10.14*
10.15*
10.16*
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Mark Behrman
Exhibit 10.4 to the Company’s Form 10-Q filed
October 24, 2018
Employment Agreement, dated December 30, 2018, between LSB
Industries, Inc. and Mark T. Behrman
Exhibit 10.1 to the Company’s Form 8-K filed
January 3, 2019
Restricted Stock Agreement by and between LSB Industries, Inc.
and Mark Behrman, dated as of December 31, 2015
Exhibit 10.17 to the Company’s Form 10-K filed
February 29, 2016
Employment Agreement by and between LSB Industries, Inc. and
Daniel D. Greenwell, dated as of December 31, 2015
Exhibit 10.1 to the Company’s Form 8-K/A filed
January 7, 2016
51
Exhibit
Number
10.17*
10.18*(a)
10.19*(a)
10.20*
10.21*
10.22*
Exhibit Title
Incorporated by Reference
to the Following
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Daniel D. Greenwell
Exhibit 10.3 to the Company’s Form 10-Q filed
October 24, 2018
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Daniel D. Greenwell
General Release Agreement by and between LSB Industries, Inc.
and Daniel D. Greenwell, dated as of January 14, 2019
Restricted Stock Agreement by and between LSB Industries, Inc.
and Daniel D. Greenwell, dated as of December 31, 2015
Exhibit 10.2 to the Company’s Form 8-K/A filed
January 7, 2016
Employment Agreement by and between LSB Industries, Inc. and
Michael Foster, dated as of January 5, 2016
Exhibit 10.25 to the Company’s Form 10-K filed
February 29, 2016
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Michael J. Foster
Exhibit 10.5 to the Company’s Form 10-Q filed
October 24, 2018
10.23*(a)
Notice Period Extension Regarding Employment Agreement by
and between LSB Industries, Inc. and Michael J. Foster
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
Employment Agreement, dated December 30, 2018, between LSB
Industries, Inc. and Michael J. Foster
Exhibit 10.3 to the Company’s Form 8-K filed
January 3, 2019
Restricted Stock Agreement by and between LSB Industries, Inc.
and Michael Foster, dated as of January 5, 2016
Exhibit 10.26 to the Company’s Form 10-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
Exhibit 10.1 to the Company’s Form 8-K filed
February 25, 2016
Employment Agreement by and between LSB Industries, Inc. and
John Diesch, executed as of July 21, 2016
Exhibit 10.1 to the Company’s Form 8-K filed
August 2, 2016
Employment Agreement by and between LSB Industries, Inc. and
John Diesch, executed as of July 21, 2016
Exhibit 10.1 to the Company’s Form 8-K filed
February 11, 2019
Employment Agreement, dated December 30, 2018, between LSB
Industries, Inc. and Cheryl Maguire
Exhibit 10.2 to the Company’s Form 8-K filed
January 3, 2019
10.30*
Form of Retention Bonus Agreement
10.31
10.32
10.33
Indemnification Agreement, dated October 14, 2015, by and
together with a
between the Company and Jack E. Golsen,
schedule identifying other substantially identical agreements
between the Company and each of the other directors identified
on the schedule
Indemnification Agreement, dated October 14, 2015 by and
between the Company and David M. Shear,
together with a
schedule identifying other substantially identical agreements
between the Company and each of its executive officers identified
on the schedule
Indemnification Agreement, dated as of December 4, 2015, by
and between LSB Industries, Inc. and Jonathan S. Bobb, together
with a
substantially identical
agreements between the Company and each of the other directors
identified on the schedule
identifying other
schedule
Exhibit 10.28 to the Company’s Form 10-K filed
February 29, 2016
Exhibit 10.1 to the Company’s Form 8-K filed
October 19, 2015
Exhibit 10.2 to the Company’s Form 8-K filed
October 19, 2015
Exhibit 10.5 to the Company’s Form 8-K filed
December 8, 2015
52
Exhibit
Number
10.34
Exhibit Title
Incorporated by Reference
to the Following
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
Exhibit 10.1 to the Company’s Form 10-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
EXCHANGE
AND
COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
OCTOBER 4,
10.35
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
10.36
to the Nitric Acid Supply, Operating and
Third Amendment
Maintenance Agreement, dated June 25, 2013, by and among El
Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer
MaterialScience LLC
Exhibit 10.2 to the Company’s Form 10-Q filed
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
EXCHANGE
AND
COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
OCTOBER 4,
Exhibit 10.3 to the Company’s Form 10-Q filed
August 9, 2013
DATED
CERTAIN INFORMATION WITHIN THIS
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
EXCHANGE
AND
COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
OCTOBER 4,
10.37
10.38
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
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
Exhibit 2.1 to the Company’s Form 8-K dated
December 27, 2002
Exhibit 10.1b to the Company’s Form 10-Q filed
August 6, 2010
53
Exhibit
Number
10.39
Exhibit Title
Incorporated by Reference
to the Following
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 Company’s Form 10-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
COMPANY FOR
CONFIDENTIAL TREATMENT BY THE
SECURITIES
EXCHANGE
AND
COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
BY THE
Exhibit 10.1 to the Company’s Form 10-Q filed
August 8, 2016
DATED AUGUST 30,
CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A COMMISSION ORDER CF
#33783.
2016,
GRANTING REQUEST BY THE COMPANY
FOR CONFIDENTIAL TREATMENT BY THE
EXCHANGE
AND
SECURITIES
COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
Exhibit 10.1 to the Company’s Form 8-K filed
May 13, 2016
Exhibit 99.2 to the Company’s Form 8-K filed
December 6, 2012
Exhibit 10.1 to the Company’s Form 8-K filed
August 15, 2013
Exhibit 99.1 to the Company’s Form 8-K filed
November 12, 2013
Exhibit 99.2 to the Company’s Form 8-K filed
November 12, 2013
Exhibit 99.1 to the Company’s Form 8-K filed
January 7, 2014
Exhibit 10.1 to the Company’s Form 8-K filed
October 26, 2015
10.40
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
10.41
10.42
10.43
10.44
10.45
10.46
10.47
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 – 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
Procurement
Engineering,
Contract,
Amendment No. 1 dated October 20, 2015, by and between El
Dorado Ammonia LLC and SAIC Constructors, LLC
Construction
and
54
Exhibit
Number
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
Exhibit Title
Incorporated by Reference
to the Following
Settlement Agreement, dated April 26, 2015, by and among the
Company and Starboard Value LP and its certain affiliates and
associates
Exhibit 99.1 to the Company’s Form 8-K filed
April 30, 2015
Consent Decree, dated May 28, 2014, by and among, LSB
Industries, Inc., El Dorado Chemical Co., Cherokee Nitrogen Co.,
Pryor Chemical Co., El Dorado Nitrogen, L.P.,
the U.S.
the U.S. Environmental Protection
Department of
Environmental
of
Agency,
Management, and the Oklahoma Department of Environment
Quality
the Alabama Department
Justice,
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 Wells Fargo Capital Finance, LLC, as the arranger and
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
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.
to Third Amended and Restated Loan and
First Amendment
Security Agreement, dated as of April 16, 2018, by and among
Wells Fargo Capital Finance, LLC, as
the arranger and
administrative agent, the lenders party thereto, LSB Industries,
Inc. and its subsidiaries identified on the signature pages thereto
as borrowers and the Company’s subsidiaries identified on the
signature pages thereto as guarantors.
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 99.1 to the Company’s Form 8-K filed
June 3, 2014
Exhibit 4.9 to the Company’s Form 10-K filed
February 27, 2014
Exhibit 99.1 to the Company’s Form 8-K filed
June 17, 2015
Exhibit 10.3 to the Company’s Form 8-K filed
November 16, 2015
Exhibit 10.1 to the Company’s Form 8-K filed
January 20, 2017
Exhibit 10.1 to the Company’s Form 8-K filed
April 20, 2018
Exhibit 10.72 to the Company’s Form 10-K filed
February 29, 2016
Exhibit 10.73 to the Company’s Form 10-K filed
February 29, 2016
Exhibit 10.1 to the Company’s Form 8-K filed
November 16, 2015
Promissory Note, dated November 9, 2015, by LSB Industries,
Inc.
Exhibit 10.2 to the Company’s Form 8-K filed
November 16, 2015
55
Exhibit
Number
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69*
10.70
10.71
21.1(a)
23.1(a)
31.1(a)
Exhibit Title
Incorporated by Reference
to the Following
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
Amendment No. 1 to Intercreditor Agreement, dated as of April
25, 2018, among Wells Fargo Capital Finance, LLC, UMB Bank,
n.a.
and
and Wilmington Trust, National Association,
acknowledged by LSB Industries,
Inc. and the subsidiary
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
Exhibit 10.4 to the Company’s Form 8-K filed
November 16, 2015
Exhibit 10.1 to the Company’s Form 8-K filed
April 25, 2018
Exhibit 10.5 to the Company’s Form 8-K filed
November 16, 2015
Exhibit 10.1 to the Company’s Form 8-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
Exhibit 10.2 to the Company’s Form 8-K filed
December 8, 2015
Board Representation and Standstill Agreement by and among
Inc., LSB Funding LLC, Security Benefit
LSB Industries,
Corporation, Todd Boehly and the Golsen Holders (as defined
therein), dated as of December 4, 2015
Exhibit 10.3 to the Company’s Form 8-K filed
December 8, 2015
Registration Rights Agreement by and between LSB Industries,
Inc. and LSB Funding LLC, dated as of December 4, 2015
Exhibit 10.4 to the Company’s Form 8-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
Exhibit 10.1 to the Company’s Form 8-K filed
August 12, 2016
Securities Exchange Agreement, dated as of October 18, 2018, by
and between LSB Industries, Inc. and LSB Funding LLC
Exhibit 10.1 to the Company’s Form 8-K filed
October 19, 2018
Purchase and Sale Agreement dated May 11, 2017 between Zena
Energy L.L.C and BKV Chelsea, LLC
Exhibit 10.1 to the Company’s Form 8-K filed
May 11, 2017.
Transition Agreement dated June 30, 2017 by and between Jack
E. Golsen and LSB Industries, Inc.
Exhibit 10.1 to the Company’s Form 8-K filed on
June 30, 2017
Exhibit 10.1. to the Company’s Form 8-K Filed
on October 26, 2017
Exhibit 10.2 to the Company’s Form 8-K filed
October 19, 2018
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
Amendment to Board Representation and Standstill Agreement,
dated as of October 18, 2018, by and among LSB Industries, Inc.,
LSB Funding LLC, Security Benefit Corporation, Todd Boehly
and the Golsen Holders (as defined therein)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of Mark T. Behrman, Chief Executive Officer,
pursuant to Sarbanes-Oxley Act of 2002, Section 302
56
Exhibit
Number
31.2(a)
32.1(b)
32.2(b)
Exhibit Title
Incorporated by Reference
to the Following
Certification of Cheryl A. Maguire, Chief Financial Officer,
pursuant to Sarbanes-Oxley Act of 2002, Section 302
Certification of Mark T. Behrman, Chief Executive Officer,
furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906
Certification of Cheryl A. Maguire, 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
*
(a)
(b)
(P)
Executive Compensation Plan or Arrangement
Filed herewith
Furnished herewith
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.
Dated:
February 26, 2019
By:
/s/ Mark T. Behrman
Mark T. Behrman, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
Dated:
February 26, 2019
By:
By:
By:
/s/ Mark T. Behrman
Mark T. Behrman, President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Cheryl A. Maguire
Cheryl A. Maguire, Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
/s/ Harold L. Rieker Jr.
Harold L. Rieker Jr., Vice President and Corporate Controller
(Principal Accounting Officer)
By:
/s/ Richard W. Roedel
Richard W. Roedel, Chairman of the Board of Directors
By:
/s/ Jonathan S. Bobb
Jonathan S. Bobb, Director
By:
/s/ Jack E. Golsen
Jack E. Golsen, Chairman Emeritus
By:
/s/ Barry H. Golsen
Barry H. Golsen, Director
By:
/s/ Kanna Kitamura
Kanna Kitamura, 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, 2018
Table of Contents
Financial Statements
Report of Independent Registered Public Accounting Firm .............................................................................................................
Consolidated Balance Sheets ............................................................................................................................................................
Consolidated Statements of Operations ............................................................................................................................................
Consolidated Statements of Stockholders’ Equity............................................................................................................................
Consolidated Statements of Cash Flows ...........................................................................................................................................
Notes to Consolidated Financial Statements.....................................................................................................................................
Page
F–2
F–3
F–5
F–6
F–7
F–9
Quarterly Financial Data (Unaudited)...............................................................................................................................................
F–41
Financial Statement Schedule
Schedule II – Valuation and Qualifying Accounts ...........................................................................................................................
F–43
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, 2018 and
2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and the financial statement schedule listed in the index at Item 15(a) (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09 (Topic 606)
As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company changed its method of accounting for
revenue recognition on contracts with customers in the 2018 financial statements to reflect the accounting method change due to the
adoption of ASU 2014-09 Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’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 standards require that we plan and perform the audit
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’s auditor since 1968.
Oklahoma City, Oklahoma
February 26, 2019
F-2
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
Inventories:
Finished goods
Raw materials
Total inventories
Supplies, prepaid items and other:
Prepaid insurance
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
$
December 31,
2018
2017
(In Thousands)
$
26,048
67,043
(351)
66,692
27,726
1,483
29,209
10,924
24,576
661
8,303
44,464
166,413
974,248
7,672
33,619
59,873
(303)
59,570
20,415
1,441
21,856
10,535
27,729
1,736
8,695
48,695
163,740
1,014,038
11,404
$
1,148,333
$
1,189,182
LSB Industries, Inc.
Consolidated Balance Sheets
(Continued on following page)
F-3
LSB Industries, Inc.
Consolidated Balance Sheets (continued)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Short-term financing
Accrued and other liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, net
Noncurrent accrued and other liabilities
Deferred income taxes
Commitments and contingencies (Note 9)
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 $212,071,000 ($185,231,000 at December 31, 2017)
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; aggregate liquidation preference
of $2,785,000 ($2,545,000 at December 31, 2017)
Series D 6% cumulative, convertible Class C preferred stock, no par value;
1,000,000 shares issued and outstanding; aggregate liquidation preference
of $1,192,000 ($1,132,000 at December 31, 2017)
Common stock, $.10 par value; 75,000,000 shares authorized,
31,283,210 shares issued (31,280,685 shares at December 31, 2017)
Capital in excess of par value
Retained earnings
Less treasury stock, at cost:
December 31,
2018
2017
(In Thousands)
$
$
62,589
8,577
42,129
12,518
125,813
412,681
8,861
56,612
55,992
8,585
35,573
9,146
109,296
400,253
11,691
54,787
202,169
174,959
—
—
2,000
2,000
1,000
3,128
198,482
153,773
358,383
1,000
3,128
193,956
256,214
456,298
Common stock, 2,438,305 shares (2,662,027 shares at December 31, 2017)
Total stockholders' equity
16,186
342,197
1,148,333
$
18,102
438,196
1,189,182
$
See accompanying notes.
F-4
LSB Industries, Inc.
Consolidated Statements of Operations
2018
Year Ended December 31,
2017
(In Thousands, Except Per Share Amounts)
2016
$
$
378,160
362,325
15,835
$
427,504
422,038
5,466
Net sales
Cost of sales
Gross profit (loss)
Selling, general and administrative expense
Impairment of 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
provision (benefit) for income taxes
Provision (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
Basic and dilutive income (loss) per common share:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
40,811
—
(1,951)
(23,025)
43,064
5,951
(1,554)
(70,486)
1,740
(72,226)
—
(72,226)
34,990
—
4,567
(34,091)
37,267
—
(306)
(71,052)
(40,759)
(30,293)
1,076
(29,217)
300
26,840
3,375
—
(102,741) $
300
23,443
6,487
—
(59,447) $
374,585
423,891
(49,306)
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
(3.74) $
—
(3.74) $
(2.22) $
0.04
(2.18) $
(5.28)
7.82
2.54
$
$
$
See accompanying notes.
F-5
LSB Industries, Inc.
Consolidated Statements of Stockholders’ Equity
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
27,132
(3,736)
3,000
2,713
192,249
(In Thousands)
45
4,104
(34)
765
4
411
31,281
(3,005)
3,000
3,128
317
26
(2,662)
31,281
3,000
3,128
224
2
31,283
(2,438)
3,000
3,128
See accompanying notes.
4,979
367
(5,339)
(84)
192,172
5,099
(3,175)
(140)
193,956
8,358
(3,852)
20
198,482
248,150
112,168
(24,532) 421,580
112,168
(27,761)
(18,256)
314,301
1,060
(29,217)
(23,443)
(6,487)
256,214
(72,226)
(26,840)
(3,375)
153,773
(27,761)
(18,256)
4,979
371
—
(484)
(411)
4,855
(84)
(20,088) 492,513
1,060
(29,217)
(23,443)
(6,487)
5,099
(1,361)
32
(18,102) 438,196
(72,226)
1,814
172
(26,840)
(3,375)
8,358
(1,936)
20
(16,186) 342,197
1,916
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
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, 2018
F-6
LSB Industries, Inc.
Consolidated Statements of Cash Flows
2018
Year Ended December 31,
2017
(In Thousands)
2016
$
(72,226) $
(29,217) $
112,168
—
1,825
5,951
70,266
2,361
(1,637)
8,358
—
2,098
(2,167)
(6,698)
(389)
1,074
(121)
14,208
(6,919)
1,638
17,622
(37,050)
6,660
2,730
1,531
389
(25,740)
(1,076)
(40,445)
—
66,996
2,147
6,977
5,213
—
434
(6,321)
56
635
(543)
(2,231)
1,374
(1)
(1,722)
2,276
(35,425)
23,841
—
—
739
(10,845)
(200,301)
(42,013)
8,703
59,354
1,940
356
3,992
1,621
4,471
(6)
1,372
(2,296)
5,619
167
16,632
(2,305)
8,488
(22,038)
(212,543)
5,259
356,704
—
3,877
153,297
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
Depreciation, depletion and amortization of property, plant and
equipment
Amortization of intangible and other assets
Loss (gain) on sales of businesses and other property and equipment
Stock-based compensation
Impairment of goodwill
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
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
Proceeds from sales of businesses and other property and equipment
Net proceeds from sale of discontinued operations
Proceeds from property insurance recovery associated with property,
plant and equipment
Other investing activities
Net cash provided (used) by continuing investing activities
(Continued on following page)
F-7
LSB Industries, Inc.
Consolidated Statements of Cash Flows (continued)
2018
Year Ended December 31,
2017
(In Thousands)
2016
Cash flows from continuing financing activities
Proceeds from revolving debt facility
Payments on revolving debt facility
Proceeds from 9.625% 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-related costs, including extinguishment and
$
$
10,000
—
390,473
(375,000)
—
(9,170)
— $
—
—
—
—
(14,121)
modification costs
Proceeds from short-term financing
Payments on short-term financing
Payments of preferred stock modification costs
Redemption of preferred stock
Proceeds from exercises of stock options
Taxes paid on equity awards
Dividends paid on preferred stock
Net cash provided (used) by continuing financing activities
Cash flows of discontinued operations:
Net cash used by operating activities
Net cash used by investing activities
Net cash used by financing activities
Net cash used by discontinued operations
Net decrease in cash and cash equivalents
(10,974)
10,865
(10,872)
(2,777)
—
20
(2,018)
—
547
—
—
—
—
(7,571)
(90)
10,919
(11,479)
—
—
—
(1,361)
—
(16,132)
(1,461)
—
(236)
(1,697)
(26,398)
76,516
(76,516)
—
(100,000)
14,751
(15,402)
(12,270)
11,161
(11,392)
(785)
(71,966)
371
(149)
(8,028)
(193,709)
(1,363)
(1,025)
(2,340)
(4,728)
(67,178)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
33,619
26,048
$
60,017
33,619
$
127,195
60,017
$
See accompanying notes.
F-8
LSB Industries, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation – LSB Industries, Inc. (“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated
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.
Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to
current period presentation.
Nature of Business – We are engaged in the manufacture and sale of chemical products. The chemical products we primarily
manufacture, market and sell are ammonia, fertilizer grade AN (“HDAN”) and UAN for agricultural applications, high purity and
commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids,
carbon dioxide, and diesel exhaust fluid for industrial applications, and industrial grade AN (“LDAN”) and solutions for the mining
industry. We manufacture and distribute our products in four facilities; three of which we own and are located in El Dorado, Arkansas
(the “El Dorado Facility”); Cherokee, Alabama (the “Cherokee Facility”); and Pryor, Oklahoma (the “Pryor Facility”); and one of which
we operate on behalf of a global chemical company in Baytown, Texas (the “Baytown Facility”).
Sales to customers include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production
markets in the United States (U.S.); industrial users of acids throughout the U. S. and parts of Canada; and explosive manufacturers in
the U.S.
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. (“Zena”) and sales of industrial machinery and related components, which were sold during 2017.
During 2016, LSB completed the sale of all of the stock of Climate Control Group Inc. (an indirect subsidiary that conducted LSB’s
Climate Control Business) pursuant to the terms of a stock purchase agreement as discussed in Note 17 – Discontinued Operations.
Use of Estimates – The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents – Investments, which consist of highly liquid investments with original maturities of three months or
less, are considered cash equivalents.
Accounts Receivable – Our accounts receivable are stated at net realizable value. 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.
Sales to our customers are generally unsecured. Credit is extended to customers based on an evaluation of the customer’s financial
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 39% of our total net receivables (excluding the receivable amount related to the Wilson Settlement Agreement
discussed in Note 9) at December 31, 2018.
Inventories – Inventories are stated at the lower of cost (determined using the first-in, first-out (“FIFO”) basis) or net realizable value,
which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, transportation
or disposal. Finished goods include material, labor, and manufacturing overhead costs.
Because cost exceeded the net realizable value, inventory reserves were $278,000 and $933,000 at December 31, 2018 and 2017,
respectively.
F-9
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment – Property, plant and equipment (“PP&E”) are stated at cost, net of accumulated depreciation,
depletion and amortization (“DD&A”). Leases meeting capital
lease criteria are capitalized in PP&E. Major renewals and
improvements that increase the life, value, or productive capacity of assets are capitalized in PP&E while maintenance, repairs and
minor renewals are expensed as incurred.
In addition, maintenance, repairs and minor renewal costs relating to planned major
maintenance activities (“Turnarounds”) are expensed as they are incurred. All long-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
otherwise disposed, the asset’s carrying amount and related 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. 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, 2018 and 2017, we had no long-lived assets classified as held for sale.
Impairment of Long-Lived Assets and Goodwill – Long-lived assets are reviewed for impairment 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
depending on the event or change in circumstances, our asset groups are reviewed for impairment on a facility-by-facility basis (such
as the Cherokee, El Dorado or Pryor Facility).
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 carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the
reporting unit. See discussion below under 2016.
2016 Goodwill Impairment
Historically, the evaluation of goodwill for impairment involved a two-step test. Step 1 involved comparing the estimated fair value
of each respective reporting unit to its carrying value, including goodwill. Step 2 involved 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. To the extent the carrying amount of goodwill exceeded the implied goodwill,
the difference was the amount of the goodwill impairment.
During 2016, pricing for our key product groups deteriorated well below expectations and the lower price environment was expected
to continue throughout 2017. We determined the fair value of goodwill related to our El Dorado Facility was less than its carrying
amount (goodwill and other) implied under step 2, which resulted in an impairment charge of $1.6 million to fully write-down the
carrying value of goodwill.
Concentration of Credit Risks for Cash and Cash Equivalents and Sales – 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. None of the financial instruments held within U.S. were in excess of the federally insured limits.
Net sales to one customer, Koch Fertilizer LLC (“Koch Fertilizer”), represented approximately 13%, 10% and 11% of our total net
sales for 2018, 2017 and 2016, respectively. Net sales to one customer, Coffeyville Resources Nitrogen Fertilizer, LLC (“CVR”),
represented approximately 11% of our total net sales for 2018. Net sales to one customer, Covestro AG (“Covestro”), represented
approximately 12% and 13% of our total net sales for 2017 and 2016, respectively.
Capitalized Interest – Interest cost on borrowings incurred during a significant 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,
and 2016, interest capitalized amounted to $0.3 million and $15.0 million, respectively (none in 2018).
F-10
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accrued Insurance Liabilities – We are self-insured up to certain limits for group health, workers’ compensation and general
liability claims. Above these limits, we have commercial stop-loss insurance coverage for our contractual exposure on group health
claims and statutory limits under workers’ compensation obligations. We also carry umbrella insurance of $100 million for most
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.
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 – 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.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those 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 the statement of operations in the
period that includes the enactment date. 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. Significant judgment is applied in evaluating the need for and the magnitude of appropriate
valuation allowances against deferred tax assets.
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 relevant taxing authorities 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 statement of
operations. 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 period the credit arises and is earned.
See Note 8 – Income Taxes discussing the Tax Cuts and Jobs Act of 2017 and Staff Accounting Bulletin No. 118 ("SAB 118") issued
by the SEC.
Contingencies – 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 current estimates that may be revised in the near term.
In
addition, we recognize contingent gains when such gains are realized or when the contingencies have been resolved (generally at the
time a settlement has been reached).
Asset Retirement Obligations – In general, we record the estimated fair value of an asset retirement obligation (“ARO”) associated
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 asset’s respective useful life. We do not have any assets restricted for the purpose of settling our AROs.
F-11
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Redeemable Preferred Stocks – Our redeemable preferred stocks that are redeemable outside of our control are classified as
temporary/mezzanine equity. The redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or
In addition, certain embedded features included in the Series E Redeemable Preferred required bifurcation and are
discounts.
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 October 25, 2023, the earliest possible redemption date by the holder. The accretion was recorded to
retained earnings.
However, this accretion could change if the expected redemption date changes.
Equity Awards – Equity award transactions with employees are measured based on the estimated fair value of the equity awards
issued. For equity awards with 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 – See Note 2-Adoption of ASC 606 for discussion of our revenue recognition
accounting policy. In addition, sales and other similar taxes we collect concurrently with revenue-producing activities are excluded
from revenue. Also, we have elected to recognize the cost for freight and shipping when control of the product has transferred to the
customer as an expense in cost of sales.
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) – 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 when the contingencies have been resolved (generally at the time a
settlement has been reached). 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.
During 2017, we received notification from the State of Arkansas that incentive tax credits had been approved associated with certain
capital expenditures associated with the El Dorado Facility’s expansion projects completed primarily in the fourth quarter of 2015 and
the second quarter of 2016. As a result, in 2017, 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). At December 31, 2018 and 2017, our current and noncurrent incentive tax credits receivable totaled $3.1
million and $7.4 million, respectively.
Recognition of Insurance Recoveries – If an insurance claim relates to a recovery of our losses, we recognize the recovery when it is
probable and reasonably estimable. If our insurance claim relates to a contingent gain, we recognize the recovery when it is realized
or when the contingencies have been resolved (generally at the time a settlement has been reached). 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.
Cost of Sales – Cost of sales includes materials, labor and overhead costs to manufacture the products sold plus inbound freight,
purchasing and receiving costs, inspection costs, internal transfer costs, loading and handling costs, warehousing costs, railcar lease
costs and outbound freight. Maintenance, repairs and minor renewal costs relating to Turnarounds are included in cost of sales as they
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, if any, 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 contracts, and provision for losses, if any, on firm sales/purchase commitments are included in cost of sales.
Selling, General and Administrative Expense – Selling, general and administrative expense (“SG&A”) includes costs associated
with the sales, marketing and administrative functions. Such costs include personnel costs, including benefits, 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.
F-12
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Derivatives, Hedges and Financial Instruments – Derivatives are recognized in the balance sheet and are measured at fair value.
Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply, or hedge
accounting is elected.
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
chosen to present the fair values of our derivative contracts under master netting agreements using a gross fair value presentation as
there were no derivatives with fair values that were eligible to be offset as of December 31, 2018 and 2017.
Income (Loss) per Common Share – Net income (loss) attributable to common stockholders is computed by adjusting net income
(loss) by the amount of dividends and dividend requirements on preferred stocks and the accretion of redeemable preferred stocks, if
applicable. Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding, excluding contingently returnable common shares (unvested restricted stock), if
applicable. For periods we earn net income, a proportional share of net income is allocated to participating securities, if applicable,
determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and
participating securities (the “two-class method”). Certain securities (Series E Redeemable Preferred and restricted stock units)
participate in dividends declared on our common stock and are therefore considered to be participating securities.
Participating securities have the effect of diluting both basic and diluted income per common share during periods of net income. For
periods we incur a net loss, no loss is allocated to participating securities because they have no contractual obligation to share in our
losses. Diluted loss per common share is computed after giving consideration to the dilutive effect of our potential common stock
instruments that are outstanding during the period, except where such non-participating securities would be anti-dilutive.
Segment Information - With the sale of our Climate Control Business during July 2016, we operate in one principal business
segment – our chemical business.
Recently Adopted Accounting Pronouncements
ASU 2014-09 – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606), which superseded nearly all existing revenue recognition guidance
under GAAP.
In addition, the FASB issued various other ASUs further amending revenue recognition guidance (together “ASC
606”). On January 1, 2018, we adopted ASC 606 as discussed in Note 2.
ASU 2016-15 – 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 made eight targeted changes to how cash receipts and cash payments are presented and
classified in the statement of cash flows. On January 1, 2018, we adopted ASU 2016-15 on a retrospective basis. The adoption of this
ASU did not affect the presentation or classification of cash flow activities for 2017 or 2016.
ASU 2016-18 – 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. On January 1, 2018, we adopted ASU 2016-18 on retrospective basis. As the result of adopting this ASU, we removed the
presentation of investing cash flow activities relating to current and noncurrent restricted cash and cash equivalents from our statement
of cash flows for 2016, which change did not impact the total amount of net cash provided by continuing investing activities.
ASU 2018-05 – See Note 8 – Income Taxes.
F-13
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements
ASU 2016-02 and related ASUs – 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 and qualitative disclosures, including significant judgments made by management, will be required to provide
greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts.
We completed our assessment, design and plan for implementation and implementation of Topic 842 in order to adopt this standard
and will elect the additional transition method option provided by ASU 2018-11. Under this transition method, we will apply the new
accounting guidance (we expect the cumulative effect, if any, not to be material) on January 1, 2019, the date of adoption.
Consequently, our reporting for the comparative periods presented in the financial statements issued after the date of adoption would
continue to be in accordance with Topic 840, including disclosures. Upon adoption, we plan to elect the following accounting policies
or practical expedients related to Topic 842:
•
•
•
not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any
expired or existing leases, and not reassess initial direct costs for any existing leases;
apply accounting similar to Topic 840 operating leases accounting to leases that meet the definition of short-term leases;
and
not evaluate land easements that exist or expired before January 1, 2019 and that were not previously accounted for as
leases under Topic 840.
Currently, most of our leases are classified as operating leases under which we are the lessee.
In addition, our leases classified as
capital leases and other leases under which we are the lessor are not material. Upon adoption, we currently expect the effect of this
guidance on our consolidated financial statements will impact our balance sheet presentation (increase the amount of our assets for the
inclusion of right-of-use assets of approximately $15 million and an increase the amount of our liabilities for the inclusion of the
associated lease obligations of approximately $15 million).
2: Adoption of ASC 606
On January 1, 2018, we adopted ASC 606 using the “modified retrospective” adoption method, meaning the standard is applied only
to the most current period presented in the financial statements. Furthermore, we elected to apply the standard only to those contracts
which were not completed as of the date of the adoption. Results for reporting periods beginning on the date of adoption are presented
under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical
accounting methodology pursuant to ASC 605, Revenue Recognition (“ASC 605”).
Upon adoption, a cumulative effect adjustment was not required; however, the primary impact of adopting the new standard relates to
the reduction in net sales, cost of sales and SG&A resulting from the elimination of certain sales revenue involving products we do not
control under ASC 606, including products (we do not control) associated with marketing services we are performing as an agent for
our customers. The nature of these arrangements allows for other parties to maintain control of these products throughout the
production process.
The following line items in our consolidated statement of operations for the current reporting period has been provided to reflect both
the adoption of ASC 606 as well as a comparative presentation in accordance with ASC 605 previously in affect:
2018
As
Reported
Balance without Effect of Change
adoption of 606 Higher/(Lower)
$378,160 $
362,325
15,835
40,811
(23,025)
(In Thousands)
443,821 $
427,405
16,415
41,391
(23,025)
(65,661)
(65,080)
(580)
(580)
—
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Operating loss
F-14
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2: Adoption of ASC 606 (continued)
As mentioned in Note 1, we primarily derive our revenues from the sales of various chemical products. The following table presents
our net sales disaggregated by our principal markets, which disaggregation is consistent with other financial information utilized or
provided outside of our consolidated financial statements:
Net sales:
Agricultural products
Industrial acids and other chemical products
Mining products
Other products
Total net sales
2018
2017(a)
(Dollars In Thousands)
2016(a)
$
$
187,164
148,598
42,398
—
378,160
$
$
184,054
196,029
38,854
8,567
427,504
$
$
166,180
155,744
43,532
9,129
374,585
(a) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Revenue Recognition and Performance Obligations
We determine revenue recognition through the following steps:
•
•
•
•
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in
ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as,
the performance obligation is satisfied. Generally, satisfaction occurs when control of the promised goods is transferred to the
customer or as services are rendered or completed in exchange for consideration in an amount for which we expect to be entitled.
Generally, control is transferred when the preparation for shipment of the product to a customer has been completed. Most of our
contracts contain a single performance obligation with the promise to transfer a specific product. When the terms of a contract include
the transfer of multiple products, each distinct product is identified as a separate performance obligation.
Most of our revenue is recognized from performance obligations satisfied at a point in time, however, we have a performance
obligation to perform certain services that are satisfied over a period of time. Revenue is recognized from this type of performance
obligation as services are rendered and are based on the amount for which we have a right to invoice, which reflects the amount of
expected consideration that corresponds directly with the value of the services performed.
We only offer assurance-type warranties for our products to meet specifications defined by our contracts with customers, and do not
have any material performance obligations related to warranties, return, or refunds.
Transaction Price Constraints and Variable Consideration
For most of our contracts within the scope of ASC 606, the transaction price from the inception of a contract is constrained to a short
period of time (generally one month) as these contracts contain terms with variable consideration related to both price and quantity.
These contract prices are often based on commodity indexes (such as NYMEX) published monthly and the contract quantities are
typically based on estimated ranges. The quantities become fixed and determinable over a period of time as each sale order is
received from the customer.
The nature of our contracts also gives rise to other types of variable consideration, including volume discounts and rebates, make-
whole provisions, other pricing concessions, and short-fall charges. We estimate these amounts based on the expected amount to be
provided to customers, which result in a transaction price adjustment reducing revenue (net sales) with the offset increasing contract or
refund liabilities. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We
reassess these estimates on a quarterly basis.
The aforementioned constraints over transaction prices in conjunction with the variable consideration included in our material
contracts prevent a practical assignment of a specific dollar amount to performance obligations at the beginning and end of the period.
Therefore, we have applied the variable consideration allocation exception.
F-15
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
2: Adoption of ASC 606 (continued)
Future revenues to be earned from the satisfaction of performance obligations will be recognized when control transfers as goods are
loaded and weighed or services are performed over the remaining duration of our contracts. Although most of our contracts have an
original expected duration of one year or less, for our contracts with a duration greater than one year, the average remaining expected
duration was approximately 14 months at December 31, 2018.
Contract Assets and Liabilities
Our contract assets consist of receivables from contracts with customers. Our net accounts receivable primarily relate to these contract
assets and are presented in our consolidated balance sheets. Customer payments are generally due thirty to sixty days after the invoice
date.
Our contract liabilities primarily relate to deferred revenue and customer deposits associated with cash payments received in advance
from customers for volume shortfall charges and product shipments. We had approximately $7.0 million and $8.3 million of contract
liabilities as of December 31, 2018 and 2017, respectively. During 2018, revenues of $3.1 million were recognized and included in
the balance at the beginning of the period.
Practical Expedients and Other Information
We elected the transitional 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.
We elected the practical expedient to recognize revenue in the amount we have the right to invoice relating to certain services that are
performed for customers and, as a result we do not have to disclose the value of unsatisfied performance obligations.
We elected the practical expedient by which disclosures are not required regarding the value of unsatisfied performance obligations
for contracts with an original expected duration of one year or less.
We elected the practical expedient exempting the requirement to adjust the promised amount of consideration for the effects of a
significant financing component if we expect the financing time period to be one year or less.
Revenue recognized in the current period from performance obligations related to prior periods (for example, due to changes in
transaction price) was not material.
Our contract cost assets primarily relate to the portion of incentive compensation earned by certain employees that are considered
incremental and recoverable costs of obtaining a contract with a customer. Those costs are not material. We have elected the practical
expedient to expense as incurred any incremental costs of obtaining a contract if the associated period of benefit is one year or less.
F-16
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:
Numerator:
Net income (loss):
Adjustments for basic net income (loss) per common
share:
Dividend requirements on Series E Redeemable Preferred
Dividend requirements on Series B Preferred
Dividend requirements on Series D Preferred
Accretion of Series E Redeemable Preferred
Net income attributable to participating securities
Numerator for basic and dilutive net income (loss) per
common share - net income (loss) attributable to
common stockholders
Denominator:
Denominator for basic and dilutive net income (loss)
per common share - adjusted weighted-average
shares (1)
Basic and dilutive net income (loss) per common share:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
2016
2017
2018
(Dollars In Thousands, Except Per Share Amounts)
$
(72,226) $
(29,217) $
112,168
(26,840)
(240)
(60)
(3,375)
—
(23,443)
(240)
(60)
(6,487)
—
(27,761)
(240)
(60)
(18,256)
(1,091)
$
(102,741) $
(59,447) $
64,760
27,490,717
27,250,876
25,454,311
$
$
(3.74) $
—
(3.74) $
(2.22) $
0.04
(2.18) $
(5.28)
7.82
2.54
(1) All periods exclude the weighted-average shares of unvested restricted stock that are contingently returnable.
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
2018
916,666
1,183,622
303,646
175,454
2,579,388
2017
916,666
1,187,525
303,646
215,067
2,622,904
2016
916,666
908,568
412,869
361,168
2,599,271
F-17
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. Property, Plant and Equipment
Machinery, equipment and automotive
Buildings and improvements
Land improvements
Furniture, fixtures and store equipment
Construction in progress
Capital spare parts
Land
Less accumulated depreciation and
amortization
Useful lives in
years
3 - 30
10 - 30
10 - 40
3
N/A
N/A
N/A
December 31,
2018
2017
(In Thousands)
$ 1,189,438
39,032
8,076
1,122
28,753
28,945
4,583
1,299,949
$ 1,163,532
42,886
8,111
1,466
27,973
29,835
7,764
1,281,567
325,701
974,248
267,529
$ 1,014,038
$
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).
5. Current and Noncurrent Accrued and Other Liabilities
Accrued litigation settlement (See Note 9)
Accrued payroll and benefits (1)
Accrued interest
Deferred revenue
Accrued death and other executive benefits
Customer deposits
Series E redeemable preferred - embedded derivative
Accrued health and worker compensation insurance claims
Other
Less noncurrent portion
Current portion of accrued and other liabilities
December 31,
2018
2017
(In Thousands)
$
$
18,450 $
7,259
6,505
5,216
2,777
1,783
1,642
1,107
6,251
50,990
8,861
42,129 $
—
4,855
13,424
6,987
2,808
1,334
2,660
1,658
13,538
47,264
11,691
35,573
(1) At December 31, 2018, the amount includes certain severance benefits as discussed in Note 15.
F-18
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
6. 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 AROs.
As a result, a liability for only certain AROs has been established. However, we will continue to review these obligations and record a
liability when a reasonable estimate of the fair value can be made. At December 31, 2018 and 2017, our accrued liability for AROs
was $100,000, respectively.
7. Long-Term Debt
Working Capital Revolver Loan, with a current interest rate of
6.00% (A)
Senior Secured Notes due 2023 (B)
Senior Secured Notes due 2019 (B)
Secured Promissory Note due 2019, with a current rate
of 5.73% (C)
Secured Promissory Note due 2021, with a current interest rate
of 5.25% (D)
Secured Promissory Note due 2023, with a current interest rate
of 6.76% (E)
Other
Unamortized discount and debt issuance costs
Less current portion of long-term debt (F)
Long-term debt due after one year, net (F)
December 31,
2018
December 31,
2017
(In Thousands)
$
$
$
10,000
400,000
—
7,165
8,090
14,685
221
(14,962)
425,199
12,518
412,681
$
—
—
375,000
8,167
11,262
16,665
2,994
(4,689)
409,399
9,146
400,253
(A) Our revolving credit facility (the “Working Capital Revolver Loan”) provides for advances up to $50 million (but provides an
ability to expand the commitment an additional $25 million), based on specific percentages of eligible accounts receivable and
inventories and up to $10 million of letters of credit, the outstanding amount of which reduces the available for borrowing under the
Working Capital Revolver Loan. At December 31, 2018, our available borrowings under our Working Capital Revolver Loan were
approximately $37.2 million, based on our eligible collateral, less outstanding letters of credit. The maturity date of the Working
Capital Revolver Loan is January 17, 2022. The Working Capital Revolver Loan also provides for a springing financial covenant (the
“Financial Covenant”), which requires that, if the borrowing availability is less than or equal to the greater of 10.0% of the total
revolver commitments and $5 million, then the borrowers must maintain a minimum fixed charge coverage ratio of not less than 1.00
to 1.00. The Financial Covenant, if triggered, is tested monthly.
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
borrowing availability under the Working Capital Revolver Loan, or (b) Wells Fargo Capital Finance’s prime 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. Interest is paid monthly, if applicable.
The Working Capital Revolver Loan contains customary covenants including limitations on asset sales, liens, debt incurrence,
restricted payments, investments, dividends and transactions with affiliates.
The Working Capital Revolver Loan 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 our current
assets, including accounts receivable and inventory, subject to certain customary exceptions.
F-19
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
(B) On April 25, 2018, LSB completed the issuance and sale of $400 million aggregate principal amount of its 9.625% Senior Secured
Notes due 2023 (the “Senior Secured Notes”). The Senior Secured Notes were issued pursuant to an indenture, dated as of April 25,
2018 (the “Indenture”), by and among LSB, the subsidiary guarantors named therein, and Wilmington Trust, National Association, a
national banking association, as trustee and collateral agent (the “Notes Trustee”).
The Senior Secured Notes were issued at a price equal to 99.509% of their face value. A portion of the net proceeds from the Senior
Secured Notes were used to purchase/redeem the $375 million aggregate principal amount of the 8.5% Senior Secured Notes due
2019. The remaining net proceeds were primarily used to pay related transaction fees and expenses, redemption premiums, and
accrued interest on the notes purchased/redeemed.
A portion of above transaction was accounted for as an extinguishment of debt and a portion was accounted for as a non-substantial
debt modification. As a result, approximately $15.2 million of the fees/redemption premiums/discount was deferred and included in
discount and debt issuance costs and approximately $0.9 million of fees were expensed, as incurred, and are included in interest
expense. In addition, we recognized a loss on extinguishment of debt of approximately $6.0 million, primarily consisting of a portion
of the redemption premiums paid and the expensing of a portion of debt issuance costs associated with the 8.5% Senior Secured
Notes.
The Senior Secured Notes will mature on May 1, 2023 and rank senior in right of payment to all of our debt that is expressly
subordinated in right of payment to the notes and will rank pari passu in right of payment with all of our liabilities that are not so
subordinated, including the Working Capital Revolver Loan. LSB’s obligations under the Senior Secured Notes are jointly and
severally guaranteed by the subsidiary guarantors named in the Indenture on a senior secured basis.
Interest on the Senior Secured Notes accrues at a rate of 9.625% per annum and is payable semi-annually in arrears on May 1 and
November 1 of each year, which began on November 1, 2018.
LSB may redeem the Senior Secured Notes at its option, in whole or in part, subject to the payment of a premium ranging from a
“make-whole” premium to a premium of 3.609% of the principal amount so redeemed, in the case of any optional redemption prior to
May 1, 2022.
If LSB experiences a change of control, it must offer to purchase the notes at 101% of their principal amount, plus
accrued and unpaid interest, if any, to but excluding the date of purchase.
The Indenture contains covenants that limit, among other things, LSB and certain of its subsidiaries’ ability to (1) incur additional
indebtedness; (2) declare or pay dividends, redeem stock or make other distributions to stockholders; (3) make other restricted
payments, including investments; (4) create dividend and other payment restrictions affecting its subsidiaries; (5) create liens or use
assets as security in other transactions; (6) merge or consolidate, or sell, transfer, lease or dispose of all or substantially all of our
assets; and (7) enter into transactions with affiliates. Further, during any such time when the Senior Secured Notes are rated
investment grade by each of Moody’s Investors Service, Inc. and Standard & Poor’s Investors Ratings Services and no Default (as
defined in the Indenture) has occurred and is continuing, certain of the covenants will be suspended with respect to the Senior Secured
Notes.
The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include
nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain
judgments and certain events of bankruptcy and insolvency.
Obligations in respect of the Senior Secured Notes are secured by a first priority security interest in substantially all of our fixed
assets, subject to certain customary exceptions.
(C) El Dorado Chemical Company (“EDC”), one of our subsidiaries, is party to a secured promissory note due in June 2019.
Principal and interest are payable in equal monthly installments with a final balloon payment of approximately $6.7 million.
(D) EDC is party to a secured promissory note due in March 2021. Principal and interest are payable in monthly installments.
(E) El Dorado Ammonia L.L.C. (“EDA”), one of our subsidiaries, is party to a secured promissory note due in May 2023. Principal
and interest are payable in equal monthly installments with a final balloon payment of approximately $6.1million.
F-20
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
(F) Maturities of long-term debt for each of the five years after December 31, 2018 are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Less: Discount and debt issuance costs
$
$
12,552
5,544
3,239
12,025
406,801
—
14,962
425,199
8. Income Taxes
In December 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Cut Act”), making
significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate of 21%,
additional limitations on executive compensation, and limitations on the deductibility of interest.
The FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 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
Tax Cut Act.
In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Tax Cut Act by
applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects. In 2018 and
2017, we recorded tax expense related to these effects including the decrease in the federal corporate tax rate, additional limitations on
executive compensation, and limitations on the deductibility of interest. During the fourth quarter of 2018, we completed the
accounting for tax reform and there was no adjustment to provisional amounts recorded.
Provision (benefit) for income taxes from continuing operations are as follows:
Current:
Federal
State
Total Current
Deferred:
Federal
State
Total Deferred
Provision (benefit) for income taxes
2018
2017
(In Thousands)
2016
$
11
(96)
(85) $
$
67
(381)
(314) $
46
11
57
1,415
410
1,825
1,740
$
$
$
(50,084) $
9,639
(40,445) $
(40,759) $
(46,926)
4,913
(42,013)
(41,956)
$
$
$
$
$
The current provision 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
utilization of state NOL carryforwards and other temporary differences. We reduce income tax expense for tax credits in the year they
arise and are earned. At December 31, 2018, our gross amount of tax credits available to offset state income taxes was not material.
Most of these tax credits do not expire and carryforward indefinitely. The gross amount of federal tax credits was $8.1 million. These
credits carryforward for 20 years and begin expiring in 2034.
We utilized approximately $3.4 million, which includes the impact of changes in tax law, and $0.4 million of state NOL carryforwards
to reduce tax liabilities in 2018 and 2016, respectively, (none in 2017). At December 31, 2018, we have remaining federal and state
tax NOL carryforwards of $577.3 million and $667.9 million, respectively. The federal NOL carryforwards begin expiring in 2033
and the state NOL carryforwards began expiring in 2018.
F-21
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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. Information
evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax
liabilities and tax carrybacks, as well as an evaluation of currently available information about future years. In the second quarter of
2018, we established a valuation allowance on a portion of our federal deferred tax assets. Valuation allowances are reflective of our
quarterly analysis of the four sources of taxable income, including the calculation of the reversal of existing tax assets and liabilities,
the impact of the recent financing activities and our results of operations. Based on our analysis, we currently believe that it is more-
likely-than-not that a portion of our federal deferred tax assets will not be able to be utilized and the valuation allowance recorded for
2018 is approximately $14.6 million. For 2018, 2017 and 2016, we determined it was more-likely-than-not that approximately $608.9
million, $536.0 million and $312.3 million, respectively, of the state deferred tax assets would not be able to be utilized before
expiration and a valuation allowance was maintained for the deferred tax assets associated with these carryforwards, net of federal
benefit, of approximately $31.0 million and $26.9 million at December 31, 2018 and 2017, respectively. This includes a reversal of
approximately $2.3 million of valuation allowance related to tax law changes in 2018.
Deferred tax assets and liabilities include temporary differences and carryforwards as follows:
December 31,
2018
2017
Deferred compensation
Other accrued liabilities
Interest expense carryforward
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
Net deferred tax liabilities
$
$
$
$
$
(In Thousands)
2,637
1,579
11,267
154,914
12,581
(45,625)
137,353
$
2,393
1,964
—
142,950
15,933
(26,920)
136,320
(191,369)
(2,596)
—
(193,965) $
(186,561)
(2,561)
(1,985)
(191,107)
(56,612) $
(54,787)
All of our loss before taxes relates to domestic operations. Detailed below are the differences between the amount of the provision
(benefit) for income taxes and the amount which would result from the application of the federal statutory rate to “Loss from
continuing operations before provision (benefit) for income taxes”.
Benefit for income taxes at federal statutory rate
State current and deferred income tax benefit
Valuation allowance - Federal
Valuation allowance - State
Tax reform
Energy credit
Other
Provision (benefit) for income taxes
2018
2017
(In Thousands)
2016
$
$
(14,802) $
(4,089)
14,604
4,112
—
—
1,915
1,740
$
(24,868) $
(2,699)
—
7,651
(22,988)
—
2,145
(40,759) $
(45,531)
(4,452)
—
11,855
—
(888)
(2,940)
(41,956)
F-22
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
A reconciliation of the beginning and ending amount of uncertain tax positions is as follows:
Balance at beginning of year
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of year
$
$
2018
2017
(In Thousands)
657
$
11
—
(50)
—
618
$
$
$
618
—
—
(41)
—
577
2016
259
454
4
(60)
—
657
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 2018, 2017, and 2016, 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. We recognized
$0.1 million of interest and penalties associated with unrecognized tax benefits in 2017 (minimal amounts in 2018 and 2016). At
December 31, 2018 and 2017, approximately $0.2 million, respectively is accrued for interest and penalties.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few
exceptions, the 2015-2018 years remain open for all purposes of examination by the U.S. Internal Revenue Service (“IRS”) and other
major tax jurisdictions. During 2018, the IRS concluded their examination of our 2015 tax return and there are no changes to our
financial position, results of operations or cash flow resulting from the audit.
9. Commitments and Contingencies
Operating Leases - We lease certain PP&E under non-cancelable operating leases. Future minimum payments on operating leases
associated with our operations with initial or remaining terms of one year or more at December 31, 2018, are as follows:
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Operating
Leases
6,674
3,547
2,364
1,949
1,696
2,530
18,760
$
$
Expenses associated with our operating lease agreements, including month-to-month leases, were $10,235,000 in 2018, $9,813,000 in
2017 and $9,933,000 in 2016. Renewal options are available under certain of the lease agreements for various periods at
approximately the existing annual rental amounts.
Purchase and Sales Commitments – We have the following significant purchase and sales commitments.
UAN supply agreement – The Pryor Chemical Company (“PCC”) is party to an agreement with CVR. CVR has the exclusive right
If CVR fails to take
(but not the obligation) to purchase all the tons of UAN that are produced by PCC with certain limitations.
delivery of certain tons, PCC pursuant to the terms of the agreement may 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 180 days’ advance written notice of termination to PCC;
provided, however, that each party’s rights and obligations pertaining to UAN that CVR committed to purchase before such advance
notice will survive termination. Additionally, PCC can terminate the CVR Purchase Agreement upon 90 days’ advance written notice
of termination to CVR; provided, however, that each party’s rights and obligations pertaining to UAN that PCC committed to sell
prior to such advance notice will survive termination.
F-23
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
Ammonia supply agreement – EDC is party to an agreement, as amended, with Koch Fertilizer under which Koch 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
excess of El Dorado’s needs. The term of the agreement expires in June 2020 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 months prior to the end of term in
effect.
Covestro agreement – El Dorado Nitrogen LLC (“EDN”) and EDC, are party to an agreement (the “Covestro Agreement”) with
Covestro. EDN operates the Baytown Facility located within Covestro’s chemical manufacturing complex located in Baytown, Texas.
Under the terms of the Covestro Agreement, EDN is responsible for the maintenance and operation of the Baytown Facility, which
facility produces all of Covestro’s requirements for nitric acid for use in Covestro’s chemical manufacturing complex. If there is a
change in control 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.
See discussions in Note 10 for our commitments relating to derivative contracts at December 31, 2018. Certain of our subsidiaries are
parties to 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, 2018, we did not have any natural gas contracts
that
included volume purchase commitments with fixed costs. In addition, we had standby letters of credit outstanding of
approximately $2.7 million at December 31, 2018. We also had deposits from customers of $1.8 million for forward sales
commitments at December 31, 2018.
Wastewater Pipeline Operating Agreement – EDC is party to an operating agreement for the right to use a pipeline to dispose its
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 – We are contingently liable to sureties 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, 2018, 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 2019.
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 $6.2 million at December 31, 2018. Also see Note 15-Related Party Transactions.
Settlement of a Gain Contingency - During 2018, we and a vendor mediated a settlement relating primarily to a business interruption
claim caused by defective work performed by the vendor at our Pryor Facility. As a result of the settlement, the vendor paid us $4.0
million. As part of the settlement, we paid the vendor $0.5 million to settle $1.1 million of invoices that were held in our accounts
payable. As a result, we recognized a recovery from this settlement totaling $4.6 million of which $4.4 million was classified as a
reduction to cost of sales (primarily relating to our business interruption claim) and the remaining balance of $0.2 million as a
reduction to PP&E.
Legal Matters - Following is a summary of certain legal matters involving the Company:
A. Environmental Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health
and safety matters (collectively, the “Environmental and Health Laws”), many of which provide for certain performance obligations,
substantial fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint
and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been
stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities
of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of
others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In
connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that
could expose us to material losses. In certain instances, citizen groups also have the ability to bring legal proceedings against us if we are
not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to operate.
F-24
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety
effects of our operations.
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines or
penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient
coverage if an environmental claim is made against us. The Environmental and Health Laws and related enforcement policies have in
the past resulted, and could in the future result, in significant compliance expenses, cleanup costs (for our sites or third-party sites
where our wastes were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or
disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products. Further, a
number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material
adverse effect on their operations and our financial condition.
Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental and
Health Laws, and significant capital expenditures are expected to be incurred in the future. We will also be obligated to manage
certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a
facility. We did not operate the natural gas wells where we previously owned a working interest and compliance with Environmental
and Health Laws was controlled by others. We were responsible for our working interest proportionate share of the costs involved.
As of December 31, 2018, 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 6 – Asset Retirement Obligations.
1. Discharge Water Matters
Each of our manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control
streams, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water
runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental
agencies as authorized and overseen by the U.S. Environmental Protection Agency. These permits limit the type and amount of
effluents that can be discharged and control the method of such discharge.
On October 5, 2017, PCC filed a Permit Renewal Application for its Non-Hazardous Injection Well Permit at the Pryor facility.
Although the Injection Well Permit expired in 2018, PCC continues to operate the injection well pending the Oklahoma Department of
Environmental Quality (“ODEQ”) action on the Permit Renewal Application. PCC and ODEQ are engaged in ongoing discussions
related to the renewal of the injection well to address the wastewater stream.
Our El Dorado Facility is subject to a National Pollutant Discharge Elimination System (“NPDES”) permit issued by the Arkansas
In 2010, the ADEQ issued a draft NPDES permit renewal for the El
Department of Environmental Quality (“ADEQ”) in 2004.
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.
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 a result of the El Dorado Facility disposing its wastewater (beginning in September 2013) via a pipeline
constructed by the City of El Dorado, Arkansas. In August 2017, ADEQ issued a final NPDES permit, which included new dissolved
mineral limits as anticipated. However, EDC objected to the form of the permit specifically around the limits of storm-water runoff
and filed an appeal in September 2017. In September 2018, ADEQ formalized a Consent Administrative Order (“CAO”) to resolve all
outstanding permit violations and imposed a penalty in the amount of $124,000. On October 12, 2018, EDC and ADEQ entered into
CAO 18-085 that resolved all outstanding violations of the NPDES Permit, and EDC paid the previously agreed upon penalty.
In November 2006, the El Dorado Facility entered into a CAO that recognizes the presence of nitrate contamination in the shallow
groundwater. The CAO requires EDC to perform semi-annual groundwater monitoring, continue operation of a groundwater recovery
system, submit a human health and ecological risk assessment, and submit a remedial action plan. The risk assessment was submitted
in August 2007. In February 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should
continue semi-annual monitoring. The ADEQ’s review of the EDC proposed remedy is ongoing. Under the CAO, the ADEQ may
require additional wells be added to the program or may allow EDC to remove wells from the program. The final remedy for shallow
groundwater contamination, should any remediation be required, would be selected pursuant to a new consent administrative order
and based upon the risk assessment.
F-25
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
The cost of any additional remediation that may be required would be determined based on the results of the investigation and risk
assessment, of which cost (or range of costs, if any,) cannot currently be reasonably estimated. Therefore, no liability has been
established at December 31, 2018, in connection with this matter.
2. Other Environmental Matters
In 2002, certain of our subsidiaries sold substantially all of their operating assets relating to a Kansas chemical facility (the “Hallowell
Facility”) but retained ownership of the real property where the facility is located. Our subsidiary retained the obligation to be
responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface
contamination at the real property and develop a corrective action strategy based on the investigation.
In addition, certain of our
subsidiaries agreed to indemnify the buyer of such assets for these environmental matters.
As the successor to a prior owner of the Hallowell Facility, Chevron Environmental Management Company (“Chevron”) has agreed in
writing, within certain limitations, to pay and has been paying one-half of the costs of the investigation and interim measures relating
to this matter as approved by the Kansas Department of Health and Environment (the “KDHE”), subject to reallocation.
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 accrued our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be
reasonably estimated, which is included in our accrued liabilities for environmental matters discussed above. The estimated amount is
not discounted to its present value. As more information becomes available, our estimated accrual will be refined.
B. Other Pending, Threatened or Settled Litigation
In 2013, an explosion and fire occurred at the West Fertilizer Co. (“West Fertilizer”) located in West, Texas, causing death, bodily injury
and substantial property damage. West Fertilizer is not owned or controlled by us, but West Fertilizer was a customer of EDC, and
purchased AN from EDC from time to time. LSB and EDC received letters from counsel purporting to represent subrogated insurance
carriers, personal injury claimants and persons who suffered property damages informing LSB and EDC that their clients are conducting
investigations into the cause of the explosion and fire to determine, among other things, whether AN manufactured by EDC and supplied
to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether such AN may have been one of the
contributing factors of the explosion. Initial lawsuits filed named West Fertilizer and another supplier of AN as defendants.
In 2014, EDC and LSB were named as defendants, together with other AN manufacturers and brokers that arranged the transport and
delivery of AN to West Fertilizer, in the case styled City of West, Texas vs. CF Industries, Inc., et al., in the District Court of
McLennan County, Texas. The plaintiffs allege, among other things, that LSB and EDC were negligent in the production and
marketing of fertilizer products sold to West Fertilizer, resulting in death, personal injury and property damage. EDC retained a firm
specializing in cause and origin investigations with particular experience with fertilizer facilities,
to assist EDC in its own
investigation. LSB and EDC placed its liability insurance carrier on notice, and the carrier is handling the defense for LSB and EDC
concerning this matter.
Our product liability insurance policies have aggregate limits of general liability totaling $100 million, with a self-insured retention of
$250,000, which retention limit has been met relating to this matter. In August 2015, the trial court dismissed plaintiff’s negligence
claims against us and EDC based on a duty to inspect but allowed the plaintiffs to proceed on claims for design defect and failure to
warn.
Subsequently, we and EDC have entered into confidential settlement agreements (with approval of our insurance carriers) with several
plaintiffs that had claimed wrongful death and bodily injury and insurance companies asserting subrogation claims for damages from
the explosion. These settlements have been paid by the insurer as of December 31, 2018. 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 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, 2018, no liability reserve has been established in connection with this matter.
F-26
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
In May 2015, our subsidiary, EDC, was sued in the matter styled BAE Systems Ordinance Systems, Inc. (“BAE”), et al. vs. El Dorado
Chemical Company, in the United States District Court, Western District of Arkansas, for an alleged breach of a supply agreement to
In March 2018, the Court granted our motion for summary judgment and dismissed BAE’s claims
provide BAE certain products.
against the Company.
In 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.
On October 11, 2018, LSB entered into a preliminary, binding term sheet to settle Dennis Wilson vs. LSB Industries, Inc., et al., which
was subject to approval by the court. On January 17, 2019, the parties entered into a Stipulation and Agreement of Settlement (The
“Wilson Settlement Agreement”), pursuant to which the settlement amount of approximately $18.5 million is to be paid by our
insurers on behalf of LSB and certain current and former officers in exchange for, among other things, a release of all claims. The
Wilson Settlement Agreement received preliminary approval from the Court on February 25, 2019 and will be further reviewed by the
Court at a settlement hearing schedule for June 28, 2019. A liability for the settlement amount has been accrued and a receivable for
the loss recovery from our insurers for the settlement amount has been recognized as of December 31, 2018.
In 2015, we and EDA received formal written notice from Global Industrial, Inc. (“Global”) of Global’s intention to assert mechanic
liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new ammonia plant at
our El Dorado Facility. Global is a subcontractor of Leidos Constructors, LLC (“Leidos”), the general contractor for EDA for the
construction for the ammonia plant. Leidos terminated the services of Global with respect to their work performed at our El Dorado
Facility.
LSB and EDA intend to pursue recovery of any damage or loss caused by Global’s work performed at our El Dorado Facility.
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 which they have denied, and we intend to vigorously defend against the
allegation made by Global and seek reimbursement of legal expenses from Leidos under our contracts. Except for the invoices
totaling approximately $3.5 million that were not approved by Leidos for payment that are included in our accounts payable, no
liability has been established in connection with the claims asserted by Global. On September 25, 2018, the Court bifurcated the case
into: (1) Global’s claims against Leidos and LSB, and (2) the cross-claims between Leidos and LSB. Part (1) of the case was tried to
the Court during the fall of 2018. The Court took the matter under advisement, will consider the evidence and render judgment. LSB
intends to vigorously prosecute its claims against Leidos in Part (2) of the matter. A trial date for Part (2) of this matter is not yet set.
We are also involved in various other claims and legal actions (including matters involving gain contingencies). 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.
F-27
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Derivatives Hedges and Financial Instruments
For the periods presented, the following significant instrument is accounted for on a fair value basis:
Embedded Derivative
Certain embedded features (“embedded derivative”) relating to the redemption of the Series E Redeemable Preferred, which includes
certain contingent redemption features and the participation rights value have been bifurcated from the Series E Redeemable Preferred
and recorded as a liability. As the result of the financing transaction relating to the Senior Secured Notes and the letter agreement
relating to the Series E Redeemable Preferred as discussed in Notes 7 and 11, we estimate that the contingent redemption features
have fair value at December 31, 2018 since we estimate that it is probable that a portion of the shares of this preferred stock would be
redeemed prior to October 25, 2023. For certain other embedded features, we estimated no fair value at December 31, 2018 based on
our assessment that there is a remote probability that these features will be exercised.
At December 31, 2018, the fair value of the embedded derivative was valued using discounted cash flow models and primarily based
on the difference in the present value of estimated future cash flows with no redemptions prior to October 25, 2023 compared to
certain redemptions deemed probable during the same period and applying the effective dividend rate of the Series E Redeemable
Preferred. At December 31, 2017, we estimated that contingent redemption features had no fair value based on a remote probability of
redeeming any shares of this preferred stock prior to previous put date. In addition, at December 31, 2018 and 2017, the fair value of
the embedded derivative included the valuation of the participation rights, which was based on the equivalent of 303,646 shares of our
common stock at $5.52 and $8.76 per share, respectively.
The following is a summary of the classifications of valuations of fair value:
Level 1 - The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. At
December 31, 2018 and 2017, 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, 2018 and 2017, we did not have any significant contracts
classified as Level 2.
Level 3 – The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs
that are both unobservable and significant to the overall fair value measurement.
At December 31, 2018 and 2017, the valuations of the embedded derivative are classified as Level 3. This derivative is valued using
market information, management’s redemption assumptions, the underlying number of shares as defined in the terms of the Series E
Redeemable Preferred, and the market price of our common stock.
In addition, no valuation input adjustments were considered
necessary relating to nonperformance risk for the embedded derivative.
The line items identified as “Other” relate to carbon credits issued by the Climate Action Reserve in relation to a greenhouse gas
reduction program performed at the Baytown Facility. At December 31, 2018, the valuation ($2.35 per carbon credit) of the carbon
credits and the contractual obligations associated with these carbon credits is classified as Level 3 and is based on the most recent
sales transaction and reevaluated for market changes, if any, and on the range of ask/bid prices obtained from a broker adjusted for
minimal market volume activity. At December 31, 2017, we did not have any carbon credits or related contractual obligations
associated with carbon credits. The valuation is using undiscounted cash flows based on management’s assumption that the carbon
credits would be sold, and the associated contractual obligations would be extinguished in the near term.
F-28
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Derivatives Hedges and Financial Instruments (continued)
The following details our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2018 and 2017:
Description
Assets - Supplies, prepaid items and other:
Other
Total
Liabilities - Current and noncurrent accrued and
other liabilities:
Embedded derivative
Other
Total
Fair Value Measurements at
December 31, 2018 Using
Total Fair
Value at
December 31,
2018
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(In Thousands)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value at
December 31,
2017
$
$
$
$
533
533
$
$
— $
— $
— $
— $
533
533
$
$
—
—
(1,642) $
(533)
(2,175) $
— $
—
— $
— $
—
— $
(1,642) $
(533)
(2,175) $
(2,660)
—
(2,660)
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):
2018
Assets
2017
2016
2018
Liabilities
2017
2016
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
— $
—
—
— $
—
—
$
(In Thousands)
1,154
—
—
(2,660) $
—
—
(2,557) $
—
—
(1,154)
(5,817)
—
2,214
—
—
(1,681)
—
533
$
2,031
—
—
(2,031)
—
— $
1,256
—
—
(2,410)
—
— $
(606)
—
(229)
—
1,320
(2,175) $
(1,690)
—
—
—
1,587
(2,660) $
802
—
—
—
3,612
(2,557)
$
$
$
533
$
— $
— $
(1,780) $
(103) $
(983)
F-29
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
10. Derivatives Hedges and Financial Instruments (continued)
Net gains (losses) included in operating results and the statement of operations classifications are as follows:
Total net gains (losses) included in operating
results:
Cost of sales - Undesignated commodities contracts
Cost of sales - Undesignated foreign exchange contracts
Other income, net - Other
Non-operating other income (expense) - embedded
$
derivative
Total net gains (losses) included in operating results
$
2018
2017
(In Thousands)
2016
— $
—
361
1,247
1,608
$
— $
—
444
(103)
341
$
140
5
532
(983)
(306)
At December 31, 2018 and 2017, we did not have any financial instruments with fair values significantly different from their carrying
amounts (excluding issuance costs, if applicable). The fair value of financial instruments is not indicative of the overall fair value of
our assets and liabilities since financial instruments do not include all assets, including intangibles, and all liabilities.
Also, see discussions concerning the utilization of fair value in conjunction with the evaluation certain assets and liabilities initially
accounted for on a fair value basis under Note 6 – Asset Retirement Obligations.
11. Securities Financing Including Redeemable Preferred Stocks
Securities Purchase Agreement Including Redeemable Preferred Stocks
In December 2015 and pursuant to a securities purchase agreement between LSB and LSB Funding LLC (the “Purchaser”) and
Security Benefit Corporation, a Kansas corporation, both of which were unrelated third parties, LSB sold to the Purchaser:
•
•
•
$210,000,000 of the Series E Redeemable Preferred,
warrants to purchase 4,103,746 shares of common stock, par value $0.10 (the “Warrants”), and
one share of Series F Redeemable Class C preferred stock (the “Series F Redeemable Preferred”).
In connection with the closing of the Private Placement (the “Closing”), we entered into
•
•
•
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;
a Registration Rights Agreement by and between LSB and LSB Funding, which agreement expired in December 2018;
and
an amendment to renewed rights agreement, which amended agreement expired in January 2019 and we do not intend to
renew the agreement.
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
During 2016, we redeemed 70,232 shares of the Series E Redeemable Preferred (the “Series E Redemption”) for approximately $80
million, which included $78.3 million for the liquidation preference of $1,000 per share, plus accumulated dividends (the “Liquidation
Preference”) 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 were outstanding.
F-30
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Securities Financing Including Redeemable Preferred Stocks (continued)
During 2018, in connection with the issuance and sale of the Senior Secured Notes (the “Financing Transaction”) as discussed in Note
7, we entered into a letter agreement with the holder of our Series E Redeemable Preferred. The letter agreement extended the date
upon which the holder of the Series E Redeemable Preferred has the right to elect to redeem the Series E Redeemable Preferred shares
from August 2, 2019 to October 25, 2023. The letter agreement also provided for the amendment of certain other terms relating to the
Series E Redeemable Preferred, including an increase in the per annum dividend rate payable in respect of the Series E Redeemable
Preferred (a) by 0.50% on the third anniversary of the Financing Transaction, (b) by an additional 0.50% on the fourth anniversary of
the Financing Transaction and (c) by an additional 1.0% on the fifth anniversary of the Financing Transaction. To reflect the changes
stated in the letter agreement, we subsequently entered into a securities exchange agreement by and between LSB and the holder and
entered into the Certificate of Designations setting forth the rights, preferences, privileges and restrictions currently applicable to the
Series E Redeemable Preferred and Series F Redeemable Preferred, as filed with the Secretary of State of the State of Delaware (the
“Series E COD” and “Series F COD”). The Series E COD authorizes 139,768 shares of Series E Redeemable Preferred, which is the
number of shares outstanding at December 31, 2018.
The transaction associated with the letter agreement was determined to be a non-substantial modification. As a result, and as included
in the table below, a fee paid to the holder was deferred (reducing the Series E Redeemable Preferred balance) and will be periodically
accreted using the interest method through October 25, 2023, the earliest possible redemption date by the holder. In addition, the letter
agreement included a contingent redemption feature, which was bifurcated from the Series E Redeemable Preferred based on the
estimated fair value. This redemption feature is included in the embedded derivative as discussed in Note 10.
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
Corporation (the “Junior Stock”); (ii) on a parity with the other shares of Series E Redeemable Preferred and any other class or series
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
equal to 303,646 shares of common stock as of December 31, 2018. Generally, the holders of the Series E Redeemable Preferred
Shares (the “Series E Holders”) will not have any voting rights or powers, and consent of the Series E Holders will not be required for
taking of any action by us. However, the Series E Holders’ consent is required for
•
•
•
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
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 (the “Board”).
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-31
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. Securities Financing Including Redeemable Preferred Stocks (continued)
At any time on or after October 25, 2023, each Series E Holder has the right to elect to have such holder’s shares redeemed by 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.
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 scope
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 10.
Series F Redeemable Preferred
The Series F COD authorizes one (1) shares of Series F Redeemable Preferred. The Series F Redeemable Preferred had voting rights
(the “Series F Voting Rights”) to vote as a single class on all matters which the common stock have the right to vote and was entitled
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 during 2016 as
discussed below.
With respect to the distribution of assets upon liquidation, dissolution or winding up of LSB, whether voluntary or involuntary, the
Series F Redeemable Preferred ranks (i) senior to our common stock and (ii) ranks junior to LSB’s Series B 12% Cumulative
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.
The Series F Redeemable Preferred will be automatically redeemed by LSB, in whole and not in part, for $0.01 immediately following
the date upon which the Series F Voting Rights have been reduced to zero.
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:
Balance at December 31, 2017
Fees associated with letter agreement
Bifurcation of embedded derivative
Accretion relating to liquidation preference on
preferred stock
Accretion for discount and issuance costs on
preferred stock
Accumulated dividends
Balance at December 31, 2018
Series E Redeemable Preferred
Series F Redeemable Preferred
Shares
139,768
$
Amount
Shares
(Dollars In Thousands)
174,959
(2,776)
(229)
—
2,153
—
—
139,768
$
1,222
26,840
202,169
Amount
—
—
—
—
—
—
—
1
—
—
—
—
—
1
$
$
F-32
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
11. 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. During 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.
12. Stockholders’ Equity
2016 Long Term Incentive Plan – During 2016, our Board adopted our 2016 Long Term Incentive Plan (the “2016 Plan”), which
plan was approved by our shareholders at our annual meeting of shareholders held on June 2, 2016. The effective 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.
In addition, no further awards will be granted under our 2008 Incentive Stock Plan (the “2008 Plan”) or our Outside Directors Stock
Purchase Plan (the “Outside Director Plan”) on or after the effective date of the 2016 Plan. Any awards that remain outstanding under
the 2008 Plan or the Outside Director Plan will continue to be governed by the respective plan’s terms and the terms of the specific
award agreement, as applicable.
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 participant will
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 (the “Committee”) of our Board. Our Board 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:
Stock Options – The Committee may grant either incentive stock options or non-qualified stock options. The Committee sets option
exercise prices and terms, except that the exercise price of a stock option may be no less than 100% of the fair market value, as
defined in the 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 years
subject to certain conditions.
F-33
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stockholders’ Equity (continued)
Stock Appreciation Rights (“SARs”) – The Committee may grant SARs as a right in tandem with the number of shares underlying
stock options granted under the 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 of the share’s fair market value, as defined in the 2016 Plan, on the date of exercise
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.
Stock Awards, Restricted Stock, Restricted Stock Units, and Other Awards – The Committee may grant awards of restricted
stock, restricted stock units, and other stock and cash-based awards, which may include the payment of stock in lieu of cash (including
cash payable under other incentive or bonus programs) or the payment of cash (which may or may not be based on the price of our
common stock).
Stock 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, 2018
2016 Plan
2,750,000
1,825,150
597,533
—
—
2008 Plan
210,266
124,000
100,620
(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.
Restricted Stock and Restricted Stock Units – During 2018, 2017, and 2016, the Committee approved various grants under the 2016
Plan of shares of restricted stock to certain executives and employees. Most of these shares 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. The unvested restricted
shares carry dividend and voting rights. Sales of these shares are restricted prior to the date of vesting. Pursuant to the terms of the
underlying restricted stock agreements, unvested restricted shares will immediately vest upon the occurrence of a change in control (as
defined by agreement), termination without cause or death. The unvested shares carry dividend and voting rights. Sales of these shares
are restricted prior to the date of vesting.
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.
During 2018, 2017 and 2016, the Committee approved the grant of shares 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 to receive one share of our
common stock following the grant date and are non-forfeitable. Vesting occurs upon the earliest to occur: (i) the director’s separation
from service, (ii) the third anniversary 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 was recognized as stock-based compensation expense (SG&A) on the
grant date in 2018, 2017 and 2016.
On December 30, 2018, the Committee approved the grant of 210,602 shares of performance-based restricted stock (“PBRS”) to
certain executives. However, key information to finalize the performance targets and range of vesting shares are based on projections
which required approval from the Board. As the approval was obtained in early January, the grant date for financial reporting
purposes is January 2019. Therefore, these PBRS shares are not reflected in the information below.
F-34
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stockholders’ Equity (continued)
A summary of restricted stock activity during 2018 is presented below:
Restricted Stocks
Restricted Stock Units
Unvested restricted stock outstanding at beginning of year
Granted
Vested
Cancelled or forfeited
Unvested restricted stock outstanding at end of year
Shares
1,189,473
$
$
369,350
(806,927) $
(12,431) $
$
739,465
Weighted-Average
Grant Date Fair
Value
Shares
Weighted-Average
Grant Date Fair
Value
7.51
5.47
9.11
6.20
7.79
43,764
$
$
35,511
(10,941) $
— $
$
68,334
11.42
5.28
11.42
—
8.23
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 (1)
Income tax benefit
Total weighted-average remaining vesting period in years
Total fair value of restricted stock vested during the year
(1)
See Note 15-Related Party Transactions.
Shares of restricted stock units granted
Total fair value of restricted stock unit granted
Weighted-average fair value per restricted stock unit granted during
year
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
$
$
$
$
$
$
$
$
$
$
$
Restricted Stock
2016
2017
2018
850,771
469,465
369,350
6,652,000
4,277,000
2,019,000
7.82
9.11
5.47
240,000
312,000
385,000
7,574,000
2,773,000
3,987,000
(398,000) $ (1,659,000) $ (1,157,000)
2.41
2,579,000
1.78
7,355,000
1.95
3,124,000
$
$
$
$
$
$
$
$
$
$
2018
35,511
187,000
Restricted Stock Units
2017
37,992
375,000
$
$
$
5.28
187,000
$
(34,000) $
1.75
125,000
$
$
9.87
375,000
$
(115,000) $
3.05
250,000
$
2016
27,654
375,000
13.56
375,000
(144,000)
2.50
—
Stock Options – No stock options have been granted under the 2016 Plan during 2018, 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 of grant and 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 fair value for of the stock options granted under the 2008 Plan were
estimated, using an option pricing model, as of the date of the grant, which date was also the service inception date.
The following table summarizes information about these granted stock options:
Total weighted-average remaining vesting period in years
Stock-based compensation expense - Cost of Sales
Stock-based compensation expense - SG&A
Income tax benefit
2018
2017
1.05
$
141,000
71,000
$
(54,000) $
1.53
$
317,000
108,000
$
(164,000) $
2016
2.25
321,000
836,000
(444,000)
$
$
$
F-35
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stockholders’ Equity (continued)
At December 31, 2018, the total stock-based compensation expense not yet recognized is $3,228,000, 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 2021.
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
2018
Shares
Weighted-Average
Exercise Price
206,210
$
— $
(2,525) $
(79,685) $
$
124,000
$
100,620
30.34
—
7.86
25.59
33.86
33.97
Total intrinsic value of options exercised during the year
Total fair value of options vested during the year
2018
2017
— $
— $
2016
216,000
169,000
$
451,000
$
469,000
$
$
Exercise Prices
$ 33.36
$ 34.50
33.36 - $
34.50
Shares
Outstanding
70,000
54,000
124,000
Exercise Prices
$ 33.36
$ 34.50
33.36 - $
34.50
Shares
Outstanding
46,620
54,000
100,620
$
$
Stock Options Outstanding At December 31, 2018
Weighted-
Average
Remaining
Contractual Life
in Years
Weighted-
Average Exercise
Price
Intrinsic Value of
Shares
Outstanding
3.34
1.27
4.61
$
$
$
18.83
15.02
33.85
Stock Options Exercisable At December 31, 2018
Weighted-
Average
Remaining
Contractual
Life in Years
Weighted-
Average
Exercise Price
2.74
1.57
4.31
$
$
$
15.46
18.52
33.98
$
$
—
—
—
—
—
—
Intrinsic Value of
Shares
Outstanding
Other – As of December 31, 2018, we have reserved 1.4 million shares of common stock issuable upon potential conversion of
preferred stocks and equity awards pursuant to their respective terms.
13. Non-Redeemable Preferred Stock
Series Non-Redeemable B Preferred – The 20,000 shares of Series B 12% cumulative, convertible preferred stock (“Series B
Preferred”), $100 par value, are convertible, in whole or in part, into 666,666 shares of our common stock (33.3333 shares of common
stock for each share of preferred stock) at any time at the option of the holder and entitle the holder to one vote per share. The Series
B Preferred provides for annual cumulative dividends of 12% ($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.
F-36
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
13. Non-Redeemable Preferred Stock (continued)
Series Non-Redeemable D Preferred – The 1,000,000 shares of Series D 6% cumulative, convertible Class C preferred stock
(“Series D Preferred”) have no par value and are convertible, in whole or in part, into 250,000 shares of our common stock (1 share of
common stock for 4 shares of preferred stock) at any time at the option of the holder. Dividends on the Series D Preferred are
cumulative and payable annually in arrears at the rate of 6% per annum ($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 share. All of the outstanding shares of Series D
Preferred are owned by the Golsen Holders.
See discussions concerning dividends on the Series B and D Preferred in Note 15 – Related Party Transactions.
Other – At December 31, 2018, we are authorized to issue an additional 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.
14. Executive Benefit Agreement, Employee Savings Plans and Collective Bargaining Agreements
We are party to death benefit agreement (“2005 Agreement”) with Jack E. Golsen, who retired as discussed in Note 15-Related Party
Transactions.
The 2005 Agreement provides that, upon Mr. Golsen’s death, we will pay to the designated beneficiary, a lump-sum payment of
$2,500,000 to be funded from the net proceeds received by us under certain life insurance policies on 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 benefit
Total accrued death benefit
December 31,
2018
2017
(In Thousands)
2,500 $
2,585 $
2,424
2,533
December 31,
2017
(In Thousands)
2016
$
$
2018
Costs (recovery of costs) associated with executive benefit
included in SG&A, net (1)
$
17
$
9
$
(341)
(1) During 2016, the employment of certain executives were terminated, resulting in the forfeiture of the respective benefits. As
a result of this event, the accrual for this estimated benefit was derecognized resulting in a net recovery of costs associated
with certain executive benefits.
The accrued executive benefit under the 2005 Agreement is included in 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 2005 Agreement 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-37
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
14. Executive Benefit Agreement, 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,
2018
2017
(In Thousands)
4,500
$
4,500
1,656
(1,559)
97
$
$
1,804
(1,482)
322
$
$
$
Cost of life insurance premiums
Decreases (increases) in cash surrender values
Net cost of life insurance premiums included in SG&A
2018
2017
(In Thousands)
14
$
162
176
$
$
$
54
149
203
$
$
2016
481
(51)
430
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, 2018. Beginning in January 2019, we will begin matching
50% of an employee’s contribution, up to 6%, for substantially all full-time employees.
Collective Bargaining Agreements - As of December 31, 2018, we employed 576 persons, 193 of whom are represented by unions
under agreements, which will expire in July of 2019 through July of 2021.
15. Related Party Transactions
During 2018, we sold $50.0 million and $0.5 million principal amount of notes to an affiliate of Security Benefit Corporation (“SBC”)
and Daniel D. Greenwell, respectively, associated with the issuance and sale of the Senior Secured Notes discussed in footnote (B) of
Note 7. As discussed in Note 11, we paid a fee of $2.7 million to an affiliate of SBC relating to the letter agreement amending the
terms of the Series E Redeemable Preferred. As discussed in Note 11, all outstanding shares of the Series E and Series F Redeemable
Preferred are held by this affiliate. Pursuant to the terms of the Board Representation and Standstill Agreement, our Board includes
two directors that are employees of SBC and affiliates. During 2018, 2017 and 2016, we incurred director fees associated with these
directors totaling approximately $0.3 million for each respective year.
Effective December 30, 2018, Daniel D. Greenwell elected not to enter into a new employment agreement and resigned from the
Board and his roles as Chairman and our Chief Executive Officer. Subject to the execution of a release agreement, which was
executed in January 2019, Mr. Greenwell was entitled to certain severance benefits pursuant to the terms of his employment
agreement. At December 31, 2018, our accrued and other liabilities include approximately $2.8 million relating primarily to severance
benefits owed to Mr. Greenwell.
In addition, approximately $2.7 million of share-based compensation was incurred due to the
accelerated vesting of 312,369 shares of restricted stock.
No dividends were declared during 2018, 2017 and 2016. At December 31, 2018, accumulated dividends on the Series B and Series D
Preferred totaled approximately $978,000. 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.
During 2018, 2017 and 2016, we incurred director fees associated with Barry H. Golsen totaling approximately $0.1 million for each
respective year.
As the result of Jack E. Golsen (“J. Golsen”) informing the Board of his election to retire as Executive Chairman effective December
31, 2017, we determined not to extend the employment agreement with J. Golsen beyond its current term expiring on December 31,
2017 (the “Retirement Date”) and, in accordance with the terms his employment agreement, delivered a notice of non-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.
F-38
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
15. Related Party Transactions (continued)
During 2017, we entered into a transition agreement (the “Transition Agreement”) with J. Golsen that commenced on January 1, 2018
and end upon the earlier of his death or a change in control as defined in the Transition Agreement. During the term, J. Golsen will
In accordance
receive an annual cash retainer of $480,000 and an additional monthly amount of $4,400 to cover certain expenses.
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 J. 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 $1.4 million 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 J. Golsen) for $3.5 million which sale resulted
in a loss of approximately $0.8 million, classified as operating other expense.
During 2016, we entered into a consulting agreement with Steven J. Golsen (“S. Golsen”), son of J. Golsen and former employee and
President and Chief Operating Officer of the Climate Control Business. Pursuant to the terms of the agreement, S. Golsen provided
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 was approximately $0.4 million and the term of the agreement was for 2 years through May 2018.
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,
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 $0.1 million 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.
16. 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
Supplies and accounts payable associated with
additions of property, plant and equipment
Dividend accrued on redeemable preferred stock
Accretion of redeemable preferred stock
$
$
$
$
$
$
2018
2017
(In Thousands)
2016
35,719
$
(1,138) $
34,274
$
(674) $
28,049
(2,611)
— $
8,125
16,484
26,840
3,375
$
$
$
17,105
23,443
6,487
$
$
$
$
—
16,056
19,733
6,546
F-39
LSB Industries, Inc.
Notes to Consolidated Financial Statements (continued)
17. Discontinued Operations
During 2016, LSB completed the sale of all the stock of Climate Control Group Inc. (an indirect subsidiary that conducted LSB’s
Climate Control Business) pursuant to the terms of the stock purchase agreement. Additionally, pursuant to the stock purchase
In
agreement, we agreed to have a certain portion of the purchase price proceeds deposited in an indemnity escrow account.
conjunction with the Climate Control Business sale, we entered into a transition services agreement (“TSA”), pursuant to which,
among other things, we agreed to provide certain information technology, payroll, legal, tax and other general services, which services
have been completed. At December 31, 2017 our accounts receivable included approximately $2.7 million relating to the sale of our
Climate Control Business representing an indemnity escrow balance which balance was received in 2018.
Summarized results of discontinued operations are as follows for:
Net sales
Cost of sales
Selling, general and administrative expense
Transaction costs
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
Year Ended December 31,
2017
2016
(In Thousands)
— $
—
—
—
—
—
2,595
1,519
1,076
$
138,609
93,178
32,719
2,535
175
10,002
281,990
91,691
200,301
$
$
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
$
$
$
$
$
Year Ended December 31,
2017
2016
(In Thousands)
2,461
$
— $
— $
— $
— $
88,356
1,607
955
273
675
F-40
LSB Industries, Inc.
Supplementary Information
Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for 2018 and 2017 are as follows.
2018
Net sales
Gross profit (loss) (1)
Net loss (1) (2)
Net loss attributable to common stockholders
Basic and dilutive loss per common share:
2017
Net sales
Gross profit (loss) (1)
Net income (loss) (1) (2)
Net loss attributable to common stockholders
Income (loss) per common share:
Basic and dilutive:
Loss from continuing operations
Income from discontinued operations, net of taxes
Net income (loss)
Three months ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
$
100,450
10,093
$
(5,591) $
(13,603) $
$
103,199
$
3,073
(27,506) $
(35,011) $
$
79,781
(9,742) $
(26,084) $
(33,422) $
94,730
12,411
(13,045)
(20,705)
(0.49) $
(1.27) $
(1.22) $
(0.75)
$
123,344
11,615
$
(5,986) $
(13,196) $
$
122,853
11,340
$
(7,033) $
(14,515) $
92,390
$
(7,285) $
(17,112) $
(24,745) $
88,917
(10,204)
914
(6,991)
(0.48) $
—
(0.48) $
(0.53) $
—
(0.53) $
(0.91) $
—
(0.91) $
(0.30)
0.04
(0.26)
$
$
$
$
$
$
$
$
$
$
$
F-41
LSB Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(1)
The following income (expense) items impacted gross profit (loss) and net income (loss):
Recovery from a settlement with a vendor
2018
Turnaround expense: (A)
2018
2017
Recovery of precious metals:
2017
March 31
June 30
September 30
December 31
Three months ended
(In Thousands)
— $
— $
— $
4,419
(302) $
(1,412) $
(7,939) $
(116)
— $
(120) $
(1,098) $
(102)
— $
2,905
$
— $
—
$
$
$
$
(2)
The following income (expense) items impacted net income (loss):
Loss on extinguishment of debt
2018
Interest expense, net:
2018
2017
Severance benefits and accelerated stock-based compensation
2018
Benefit (provision) for income taxes:
2018
2017
Income from discontinued operations, net of taxes
2017
$
$
$
$
$
$
$
— $
— $
(5,951) $
—
(9,306) $
(11,693) $
(11,009) $
(11,056)
(9,358) $
(9,292) $
(9,291) $
(9,326)
— $
— $
— $
(5,300)
922
1,282
$
$
(4,324) $
2,426
2,761
$
6,698
$
$
(764)
30,018
— $
— $
— $
1,076
(A) Turnaround expenses do not include the impact on operating results relating to lost absorption or reduced margins due to the
associated plants being shut down.
F-42
LSB Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2018, 2017, and 2016
(In Thousands)
Accounts receivable - allowance for doubtful accounts:
Description (1)
2018
2017
2016
Supplies-reserve for slow-moving items:
2018
2017
2016
Notes receivable - allowance for doubtful accounts:
2016
Deferred tax assets - valuation allowance:
2018
2017
2016
Balance at
Beginning of
Year
Additions-
Charges to
(Recovery of)
Costs and
Expenses
Deductions-
Write-
offs/Costs
Incurred
Balance at
End of Year
$
$
$
$
$
$
$
$
$
$
303
357
525
15
15
928
$
$
$
$
$
$
124
$
76
$
(54) $
— $
80
$
248
$
— $
— $
— $
— $
— $
913
$
970
$
— $
970
$
351
303
357
15
15
15
—
26,920
13,128
1,242
$
$
$
21,042
13,792
11,886
$
$
$
2,336
$
45,626
— $
26,920
— $
13,128
(1) Deducted in the consolidated balance sheet from the related assets to which the reserve applies.
Other valuation and qualifying accounts are detailed in our notes to consolidated financial statements.
F-43
THIS PAGE INTENTIONALLY LEFT BLANK
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) two
peer groups of entities (“Peer Group Index”), which represented publicly traded chemical companies that 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.
2013
2014
2015
2016
2017
2018
160
140
120
100
80
60
40
20
0
LSB Industries, Inc.
NYSE Composite Index
2019 Peer Group
2018 Peer Group
LSB Industries
NYSE Composite Index
2019 Peer Group
2018 Peer Group
2013
2014
2015
2016
2017
2018
100.00
76.65
17.67
20.53
21.36
13.46
100.00
106.87
102.62
115.02
136.76
124.72
100.00
106.32
100.00
105.80
74.93
77.56
80.65
84.23
91.27
97.18
85.60
85.39
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.
2018 Peer Group
American Vanguard Corporation
CVR Partners, LP
Green Plains Inc.
Innospec Inc.
Platform Specialty Products Corporation
The Andersons, Inc.
Balchem Corporation
Ferro Corporation
Hawkins, Inc.
Kraton Corporation
Rayonier Inc.
Tronox Limited
Compass Minerals International, Inc.
Flotek Industries, Inc.
Innophos Holdings, Inc.
OMNOVA Solutions Inc.
Quaker Chemical Corporation
AdvanSix Inc.
CF Industries Holdings, Inc.
Flotek Industries, Inc.
Innophos Holdings, Inc.
The Mosaic Company
PolyOne Corporation
Yara International ASA
2019 Peer Group
American Vanguard Corporation
China Green Agriculture, Inc.
H.B. Fuller Company
Innospec Inc.
Nutrien Ltd.
Quaker Chemical Corporation
Balchem Corporation
CVR Partners, LP
Hawkins, Inc.
Landec Corporation
OMNOVA Solutions Inc.
Stepan Company
LSB DIRECTORS
Mark T. Behrman
President and Chief Executive Officer
Jonathan S. Bobb
Director, Eldridge Industries
Richard W. Roedel
Chairman of the Board
Retired Chairman and CEO
BDO Seidman, LLP
Barry H. Golsen
GOL Capital, LLC
Former President and CEO LSB Industries, Inc.
Richard S. Sanders, Jr.
President, Circle S Consulting, Inc.
Former Vice President of Manufacturing,
Terra Industries, Inc.
LSB EXECUTIVE OFFICERS
Mark T. Behrman
President, and Chief Executive Officer
John H. Diesch
Executive Vice President-Manufacturing
Michael J. Foster
Executive Vice President,
General Counsel, and Secretary
Jack E. Golsen
Chairman Emeritus of the Board
Kanna Kitamura
Senior Director and Head of Human Resources,
Eldridge Industries
Lynn F. White
Founder and Managing Director,
Twemlow Group, LLC
Cheryl Maguire
Senior Vice President, and Chief Financial
Officer
HEADQUARTERS
LSB Industries, Inc.
3503 NW 63rd Street, Suite 500,
Oklahoma City, OK
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
Cheryl Maguire
Senior Vice President, and Chief Financial Officer
Tel: (405) 235-4546
Fax: (405) 235-5067
Email: cmaguire@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
3503 NW 63rd Street, Suite 500,
Oklahoma City, OK
(405) 235-4546
www.lsbindustries.com