lxu-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

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

 

73-1015226

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

16 South Pennsylvania Avenue, Oklahoma City, Oklahoma

 

73107

(Address of principal executive offices)

 

(Zip Code)

 

(405)  235-4546

(Registrant's telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report.)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

  Yes      No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes      No

The number of shares outstanding of the Registrant's common stock was 27,911,540 shares as of October 28, 2016.

 

 

 

 


FORM 10-Q OF LSB INDUSTRIES, INC.

TABLE OF CONTENTS

 

 

 

PART I – Financial Information

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

46

 

 

 

 

 

 

 

PART II – Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

52

 

 

 

 

 

Item 1A.

 

Risk Factors

 

52

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

52

 

 

 

 

 

Item 4.

 

Mining Safety Disclosures

 

52

 

 

 

 

 

Item 5.

 

Other Information

 

52

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

2


PART I

FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Information at September 30, 2016 is unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

76,010

 

 

$

127,195

 

Restricted cash

 

 

106,940

 

 

 

 

Accounts receivable, net

 

 

39,781

 

 

 

49,601

 

Inventories:

 

 

 

 

 

 

 

 

Finished goods

 

 

11,695

 

 

 

19,029

 

Raw materials

 

 

1,554

 

 

 

5,428

 

Total inventories, net

 

 

13,249

 

 

 

24,457

 

Supplies, prepaid items and other:

 

 

 

 

 

 

 

 

Prepaid insurance

 

 

1,680

 

 

 

10,563

 

Precious metals

 

 

9,375

 

 

 

12,918

 

Supplies

 

 

22,568

 

 

 

18,681

 

Prepaid and refundable income taxes

 

 

6,514

 

 

 

6,811

 

Other

 

 

2,323

 

 

 

4,701

 

Total supplies, prepaid items and other

 

 

42,460

 

 

 

53,674

 

Deferred income taxes

 

 

4,369

 

 

 

4,774

 

Current assets held for sale

 

 

 

 

 

72,996

 

Total current assets

 

 

282,809

 

 

 

332,697

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,089,845

 

 

 

978,709

 

 

 

 

 

 

 

 

 

 

Intangible and other, net

 

 

12,942

 

 

 

16,640

 

 

 

 

 

 

 

 

 

 

Noncurrent assets held for sale

 

 

 

 

 

33,781

 

 

 

$

1,385,596

 

 

$

1,361,827

 

 

(Continued on following page)

3


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Information at September 30, 2016 is unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In Thousands)

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

54,946

 

 

$

87,999

 

Short-term financing

 

 

919

 

 

 

9,119

 

Accrued and other liabilities

 

 

30,250

 

 

 

39,808

 

Current portion of long-term debt, net

 

 

110,495

 

 

 

22,468

 

Current liabilities held for sale

 

 

 

 

 

32,526

 

Total current liabilities

 

 

196,610

 

 

 

191,920

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

409,090

 

 

 

497,954

 

 

 

 

 

 

 

 

 

 

Noncurrent accrued and other liabilities

 

 

9,356

 

 

 

8,786

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities held for sale

 

 

 

 

 

12,136

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

112,556

 

 

 

52,179

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $156,377,000 (210,000 outstanding; aggregate liquidation preference

   of $212,287,000 at December 31, 2015)

 

 

137,983

 

 

 

177,272

 

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

 

 

2,000

 

 

 

2,000

 

Series D 6% cumulative, convertible Class C preferred stock, no par value;

   1,000,000 shares issued and outstanding

 

 

1,000

 

 

 

1,000

 

Common stock, $.10 par value; 75,000,000 shares authorized, 31,280,685 shares

   issued (27,131,724 shares at December 31, 2015)

 

 

3,128

 

 

 

2,713

 

Capital in excess of par value

 

 

193,516

 

 

 

192,249

 

Retained earnings

 

 

342,880

 

 

 

248,150

 

 

 

 

542,524

 

 

 

446,112

 

Less treasury stock, at cost:

 

 

 

 

 

 

 

 

Common stock, 3,369,145 shares (3,735,503 shares at December 31, 2015)

 

 

22,523

 

 

 

24,532

 

Total stockholders' equity

 

 

520,001

 

 

 

421,580

 

 

 

$

1,385,596

 

 

$

1,361,827

 

 

See accompanying notes.

4


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

September 30,

 

 

September 30,

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In Thousands, Except Per Share Amounts)

 

Net sales

 

$

80,262

 

 

$

88,567

 

 

$

289,216

 

 

$

347,670

 

Cost of sales

 

 

116,641

 

 

 

100,365

 

 

 

329,630

 

 

 

326,053

 

Gross profit (loss)

 

 

(36,379

)

 

 

(11,798

)

 

 

(40,414

)

 

 

21,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

9,962

 

 

 

11,602

 

 

 

31,730

 

 

 

37,348

 

Impairment of natural gas properties

 

 

 

 

 

39,670

 

 

 

 

 

 

39,670

 

Other income, net

 

 

(409

)

 

 

(866

)

 

 

(20

)

 

 

(1,357

)

Operating loss

 

 

(45,932

)

 

 

(62,204

)

 

 

(72,124

)

 

 

(54,044

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

13,333

 

 

 

872

 

 

 

21,129

 

 

 

6,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating other expense (income), net

 

 

2,451

 

 

 

(23

)

 

 

437

 

 

 

(103

)

Loss from continuing operations before benefit

   for income taxes

 

 

(61,716

)

 

 

(63,053

)

 

 

(93,690

)

 

 

(60,439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

 

(22,226

)

 

 

(26,632

)

 

 

(30,747

)

 

 

(25,381

)

Loss from continuing operations

 

 

(39,490

)

 

 

(36,421

)

 

 

(62,943

)

 

 

(35,058

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

173,041

 

 

 

2,658

 

 

 

196,644

 

 

 

8,361

 

Net income (loss)

 

 

133,551

 

 

 

(33,763

)

 

 

133,701

 

 

 

(26,697

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on convertible preferred stocks

 

 

75

 

 

 

 

 

 

225

 

 

 

300

 

Dividend on Series E redeemable preferred stock

 

 

7,372

 

 

 

 

 

 

22,351

 

 

 

 

Accretion of Series E redeemable preferred stock

 

 

12,137

 

 

 

 

 

 

16,620

 

 

 

 

Net income attributable to participating securities

 

 

1,920

 

 

 

 

 

 

1,718

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

112,047

 

 

$

(33,763

)

 

$

92,787

 

 

$

(26,997

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(2.25

)

 

$

(1.60

)

 

$

(4.17

)

 

$

(1.56

)

Income from discontinued operations, net of taxes

 

 

6.39

 

 

 

0.12

 

 

 

7.89

 

 

 

0.37

 

Net income (loss)

 

$

4.14

 

 

$

(1.48

)

 

$

3.72

 

 

$

(1.19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(2.25

)

 

$

(1.60

)

 

$

(4.17

)

 

$

(1.56

)

Income from discontinued operations, net of taxes

 

 

6.39

 

 

 

0.12

 

 

 

7.89

 

 

 

0.37

 

Net income (loss)

 

$

4.14

 

 

$

(1.48

)

 

$

3.72

 

 

$

(1.19

)

 

See accompanying notes.

5


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Unaudited)

Nine Months Ended September 30, 2016

 

  

 

Common

Stock Shares

 

 

Non-Redeemable

Preferred Stock

 

 

Common Stock

Par Value

 

 

Capital in Excess of Par Value

 

 

Retained

Earnings

 

 

Treasury

Stock-Common

 

 

Total

 

 

 

(In Thousands)

 

Balance at December 31, 2015

 

 

27,132

 

 

$

3,000

 

 

$

2,713

 

 

$

192,249

 

 

$

248,150

 

 

$

(24,532

)

 

$

421,580

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

133,701

 

 

 

 

 

 

 

133,701

 

Dividend accrued on redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,351

)

 

 

 

 

 

 

(22,351

)

Accretion of redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,620

)

 

 

 

 

 

 

(16,620

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,201

 

 

 

 

 

 

 

 

 

 

 

4,201

 

Exercise of stock options

 

 

45

 

 

 

 

 

 

 

4

 

 

 

367

 

 

 

 

 

 

 

 

 

 

 

371

 

Exercise of warrants, net

 

 

4,104

 

 

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

 

 

(411

)

 

 

 

Issuance of restricted stock, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,887

)

 

 

 

 

 

 

2,420

 

 

 

(467

)

Excess income tax detriment associated

   with stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(414

)

 

 

 

 

 

 

 

 

 

 

(414

)

Balance at September 30, 2016

 

 

31,281

 

 

$

3,000

 

 

$

3,128

 

 

$

193,516

 

 

$

342,880

 

 

$

(22,523

)

 

$

520,001

 

 

See accompanying notes.

6


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(In Thousands)

 

Cash flows from continuing operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

133,701

 

 

$

(26,697

)

Adjustments to reconcile net income (loss) to net cash provided (used) by

   continuing operating activities:

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

(196,644

)

 

 

(8,361

)

Deferred income taxes

 

 

(31,128

)

 

 

(20,554

)

Impairment of natural gas properties

 

 

 

 

 

39,670

 

Depreciation, depletion and amortization of property, plant and equipment

 

 

41,480

 

 

 

26,483

 

Other

 

 

7,605

 

 

 

2,588

 

Cash provided (used) by changes in assets and liabilities (net of effects of

   discontinued operations):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,428

 

 

 

10,673

 

Inventories

 

 

12,499

 

 

 

(1,584

)

Prepaid insurance

 

 

7,241

 

 

 

9,956

 

Prepaid and accrued income taxes

 

 

298

 

 

 

(1,322

)

Other supplies, prepaid items and other

 

 

624

 

 

 

(3,943

)

Accounts payable

 

 

16,005

 

 

 

2,328

 

Accrued interest

 

 

(7,679

)

 

 

(8,202

)

Other current and noncurrent liabilities

 

 

5,746

 

 

 

(1,816

)

Net cash provided (used) by continuing operating activities

 

 

(824

)

 

 

19,219

 

 

 

 

 

 

 

 

 

 

Cash flows from continuing investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(202,187

)

 

 

(300,035

)

Net proceeds from sale of discontinued operations

 

 

349,373

 

 

 

 

Deposits of restricted cash

 

 

(186,935

)

 

 

 

Proceeds from current and noncurrent restricted cash and cash equivalents

 

 

79,995

 

 

 

45,969

 

Proceeds from short-term investments

 

 

 

 

 

24,500

 

Purchases of short-term investments

 

 

 

 

 

(25,000

)

Proceeds from noncurrent restricted investments

 

 

 

 

 

25,000

 

Other investing activities

 

 

3,488

 

 

 

156

 

Net cash provided (used) by continuing investing activities

 

 

43,734

 

 

 

(229,410

)

 

 

 

 

 

 

 

 

 

Cash flows from continuing financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving debt facility

 

 

76,516

 

 

 

15,101

 

Payments on revolving debt facility

 

 

(76,516

)

 

 

(1,800

)

Proceeds from other long-term debt, net of fees

 

 

14,751

 

 

 

31,047

 

Payments on other long-term debt

 

 

(11,653

)

 

 

(8,615

)

Payments of debt modification and issuance costs

 

 

(5,949

)

 

 

(121

)

Payments of issuance costs relating to preferred stocks and warrants

 

 

(785

)

 

 

 

Payments on short-term financing

 

 

(7,530

)

 

 

(9,509

)

Proceeds from exercises of stock options

 

 

371

 

 

 

1,785

 

Excess income tax benefit associated with stock-based compensation

 

 

 

 

 

330

 

Redemption of preferred stock

 

 

(71,966

)

 

 

 

Dividends paid on preferred stocks

 

 

(8,028

)

 

 

(300

)

Net cash provided (used) by continuing financing activities

 

 

(90,789

)

 

 

27,918

 

Cash flows of discontinued operations:

 

 

 

 

 

 

 

 

Net cash provided (used) by operating activities

 

 

(439

)

 

 

24,992

 

Net cash used by investing activities

 

 

(1,025

)

 

 

(2,406

)

Net cash used by financing activities

 

 

(1,842

)

 

 

(1,425

)

Net cash provided (used) by discontinued operations

 

 

(3,306

)

 

 

21,161

 

Net decrease in cash and cash equivalents

 

 

(51,185

)

 

 

(161,112

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

127,195

 

 

 

184,996

 

Cash and cash equivalents at end of period

 

$

76,010

 

 

$

23,884

 

 

See accompanying notes.

 

 

7


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1: Summary of Significant Accounting Policies

For a complete discussion of our significant accounting policies, refer to the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016, except for Note 2 pertaining to discontinued operations, included in our Current Report on Form 8-K in Exhibit 99.3 filed with the SEC on August 26, 2016 (the “August Form 8-K”).

Basis of Consolidation - LSB Industries, Inc. (“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying condensed consolidated financial statements.  We are engaged in the manufacture and sale of chemical products.  LSB is a holding company with no significant operations or assets other than cash, cash equivalents, and investments in its subsidiaries.  Our ownership of working interests in natural gas properties is accounted for as an undivided interest, whereby we reflect our proportionate share of the underlying assets, liabilities, revenues and expenses. Our working interest represents our share of the costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while our net revenue interest represents our share of the revenues from the sale of natural gas.  The net revenue interest is less than our working interest as the result of royalty interest due to others. We are not the operator of these natural gas properties.  All material intercompany accounts and transactions have been eliminated.

On May 11, 2016, LSB, Consolidated Industries L.L.C., a direct, wholly owned subsidiary of LSB (“Consolidated”), and Climate Control Group, Inc., a direct, wholly owned subsidiary of Consolidated and an indirect subsidiary of LSB (the “Climate Control Group”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with NIBE Industrier AB (publ), and NIBE Energy Systems Inc., an indirect wholly owned subsidiary of NIBE Industrier AB (collectively “NIBE”) pursuant to which LSB, through Consolidated, agreed to sell to NIBE all of the outstanding shares of stock of the Climate Control Group for a total of approximately $364 million, subject to post-closing adjustments, which sale was completed on July 1, 2016. The Climate Control Group conducted LSB’s Climate Control Business (the “Climate Control Business”). The assets and liabilities of Climate Control Business have been reclassified and reported as held for sale as of December 31, 2015. Furthermore, the operating activities of Climate Control Business have been reclassified and reported as discontinued operations for all periods presented. Our financial statements and footnotes reflect our results from continuing operations unless otherwise noted. See Note 2 Discontinued Operations.

In our opinion, the unaudited condensed consolidated financial statements of the Company as of September 30, 2016 and for the three and nine-month periods ended September 30, 2016 and 2015 include all adjustments and accruals, consisting of normal, recurring accrual adjustments (except otherwise disclosed), which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities.  Our 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.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC.  These condensed consolidated financial statements should be read in connection with our audited consolidated financial statements and notes thereto included in our 2015 Form 10-K and the August Form 8-K.

Use of Estimates - The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Restricted Cash—Restricted cash consists of cash balances that are legally restricted or designated by us for specific purposes.

Concentration of Credit Risks for Cash and Cash Equivalents – Financial instruments relating to cash and cash equivalents potentially subject us to concentrations of credit risk.  All of these financial instruments were held by financial institutions within the U.S. and none of these financial instruments were in excess of the federally insured limits.

8


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

Income Taxes – For transactions structured as a sale of assets, the deferred taxes associated with those individual assets and liabilities, as well as any deferred taxes associated with the outside basis difference, would continue to be classified with our other deferred tax assets and liabilities rather than in the assets and liabilities held for sale balance sheet line items as such deferred taxes are not transferred with the sale.  For transactions structured as a sale of stock, the deferred taxes associated with outside basis differences are classified with our other deferred tax assets and liabilities as such deferred taxes are not transferred with the sale.

Redeemable Preferred Stocks - Our redeemable preferred stocks contain contingent redemption features that are outside of our control and are classified as temporary/mezzanine equity. The redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or discounts.  In addition, certain embedded features included in the Series E cumulative, redeemable Class C preferred stock (the “Series E Redeemable Preferred”) required bifurcation and are classified as derivative liabilities.  The carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of August 2, 2019, the earliest possible redemption date by the holder.  The amount of accretion was recorded to retained earnings.  See discussion concerning the redemption of a portion of the Series E Redeemable Preferred in Note 11 – Securities Financing Including Redeemable Preferred Stocks.

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.

Recently Issued Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under GAAP.  This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are evaluating our existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements.  The effects may include identifying performance obligations in existing arrangements, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  In July 2015, the FASB approved a one-year deferral of the effective date of this ASU with the option to early adopt but not before the original effective date.  In addition, the FASB has issued various ASUs further amending revenue recognition guidance, which includes ASU 2016-08, 2016-10, 2016-11 and 2016-12.  We plan to adopt this ASU on the effective date of January 1, 2018.  This ASU allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements.  We are currently evaluating the transition method that will be elected.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, rather than the lower of cost or market in the previous guidance. This amendment applies to inventory that is measured using first-in, first-out (“FIFO”). This ASU is effective for us on January 1, 2017. A reporting entity should apply the amendments in this ASU prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.  We currently do not expect a significant impact from adopting this ASU.

9


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. We plan to early adopt this ASU on December 31, 2016 and apply the guidance prospectively.  We currently do not expect a significant impact from adopting this ASU.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), creates Topic 842, Leases, and supersedes the lease requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful 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.  This ASU is effective for us on January 1, 2019 but early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.  We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

The FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting. This ASU includes multiple provisions intended to simplify various aspects of the accounting for share based payments.  This ASU is effective for us on January 1, 2017 and adoption will be applied prospectively with any adjustments reflected as of the beginning of the fiscal year.  We currently do not expect a significant impact from adopting this ASU.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for us on January 1, 2018 and adoption will be applied on retrospective basis unless it is impracticable to apply, in which case we would be required to apply the ASU prospectively as of the earliest date practicable. We are currently evaluating the impact of our pending adoption of this ASU on our consolidated financial statements and related disclosures.

 

10


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

Correction and Reclassifications

 

A previously reported correction and certain reclassifications made to our condensed consolidated statement of operations for the three and nine months ended September 30, 2015 are as follows:

 

 

 

 

Condensed Consolidated Statement of Operations

Three Months Ended September 30, 2015

 

 

 

As Previously

Reported

 

 

Adjustments /

Reclassifications

(1)

 

 

Adjustments /

Reclassifications

(2)

 

 

As Adjusted

 

 

 

(In Thousands)

 

Net sales

 

$

157,685

 

 

$

5,932

 

 

$

(75,050

)

 

$

88,567

 

Cost of sales

 

$

144,406

 

 

$

8,031

 

 

$

(52,072

)

 

$

100,365

 

Gross profit

 

$

13,279

 

 

$

(2,099

)

 

$

(22,978

)

 

$

(11,798

)

Selling, general and administrative expense

 

$

29,382

 

 

$

(2,345

)

 

$

(15,435

)

 

$

11,602

 

Provision for losses on accounts receivable

 

$

(161

)

 

$

246

 

 

$

(85

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations

Nine Months Ended September 30, 2015

 

 

 

As Previously

Reported

 

 

Adjustments /

Reclassifications

(1)

 

 

Adjustments /

Reclassifications

(2)

 

 

As Adjusted

 

 

 

(In Thousands)

 

Net sales

 

$

534,202

 

 

$

20,558

 

 

$

(207,090

)

 

$

347,670

 

Cost of sales

 

$

443,682

 

 

$

26,440

 

 

$

(144,069

)

 

$

326,053

 

Gross profit

 

$

90,520

 

 

$

(5,882

)

 

$

(63,021

)

 

$

21,617

 

Selling, general and administrative expense

 

$

89,598

 

 

$

(5,612

)

 

$

(46,638

)

 

$

37,348

 

Provision for losses on accounts receivable

 

$

352

 

 

$

(270

)

 

$

(82

)

 

$

 

(1)

Previously Reported Correction and Reclassifications – As discussed in our significant accounting policies note to our audited consolidated financial statements included in our August Form 8-K, in the fourth quarter of 2015, we corrected and reclassified certain shipping and handling costs associated with our Chemical Business.  In addition, we reclassified the provision for losses on accounts receivable to selling, general and administrative expenses (“SG&A”).  We revised our condensed consolidated statement of operations for the three and nine months ended September 30, 2015 to conform to the current presentation as summarized in the table above.

 

(2)

Discontinued Operation Reclassifications – As discussed in Note 2 – Discontinued Operations, the Climate Control Business met the criteria to be reported as held for sale during the second quarter of 2016 and we subsequently consummated such sale during the third quarter of 2016.  As a result, the activities of the Climate Control Business have been segregated from continuing operations and reported as discontinued operations for all periods presented. In the table above, we included the reclassifications associated with discontinued operations for the line items impacted by item (1) above.

 

 

 

11


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 2: Discontinued Operations

As discussed in Note 1, during the second quarter of 2016, we determined that our previously reported Climate Control Business met the criteria to be classified as a discontinued operation as a result of entering into a definitive agreement for the sale of substantially all of the common stock of the Climate Control Group.  

On July 1, 2016, LSB completed the sale of the Climate Control Group to NIBE pursuant to the terms of the Stock Purchase Agreement which, among other things, Consolidated sold all of the stock of the Climate Control Group for an aggregate purchase price of approximately $364 million, before the adjustments as set forth in the Stock Purchase Agreement.  As a result, we recognized a pre-tax gain on the sale of $281.6 million. Additionally, pursuant to the Stock Purchase Agreement, we paid approximately $2.6 million of the cost of a representation and warranty insurance policy and excess directors’ and officers’ insurance policy and agreed to have a certain portion of the purchase price proceeds deposited in both an indemnity escrow and a working capital adjustment escrow account (collectively, the “Escrow Accounts”).  In 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 for up to 18 months at an approximate total cost of $2.3 million.  At September 30, 2016, our accounts receivable includes approximately $10.1 million relating to the purchase price, of which a total of $4.7 million is being held in the escrow accounts.  Additionally, our current and noncurrent accrued and other liabilities include approximately $7.2 million relating primarily to estimated contingent liabilities, costs associated with the TSA and severance agreements associated with the sale of the Climate Control Business.

At December 31, 2015, the carrying amounts of the assets and liabilities of the Climate Control Group are as follows:

 

 

 

December 31,

 

 

 

2015

 

 

 

(In Thousands)

 

Cash and cash equivalents

 

$

119

 

Accounts receivable, net

 

 

43,001

 

Inventories, net

 

 

28,780

 

Other current assets

 

 

1,096

 

Property, plant and equipment, net

 

 

26,779

 

Intangible and other, net

 

 

7,002

 

Total assets classified as held for sale

 

 

106,777

 

Less noncurrent assets classified as held for sale

 

 

33,781

 

Current assets classified as held for sale

 

$

72,996

 

 

 

 

 

 

Accounts payable

 

 

20,003

 

Current and noncurrent accrued and other liabilities

 

 

24,659

 

Total liabilities classified as held for sale

 

 

44,662

 

Less noncurrent liabilities classified as held for sale

 

 

12,136

 

Current liabilities classified as held for sale

 

$

32,526

 

 

 

 

 

 

12


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 2: Discontinued Operations (continued)