lxu-10q_20170930.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, 2017

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”, “smaller reporting company” and “emerging growth 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

 

 

 

 

 

 

 

 

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 Exchange Act).

  Yes      No

The number of shares outstanding of the Registrant's common stock was 28,405,103 shares as of October 27, 2017.

 

 

 

 

 

 


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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II – Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

Item 1A.

 

Risk Factors

 

43

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

43

 

 

 

 

 

Item 4.

 

Mining Safety Disclosures

 

43

 

 

 

 

 

Item 5.

 

Other Information

 

43

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

2


PART I

FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Information at September 30, 2017 is unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,065

 

 

$

60,017

 

Accounts receivable, net

 

 

44,922

 

 

 

51,299

 

Inventories:

 

 

 

 

 

 

 

 

Finished goods

 

 

17,153

 

 

 

19,036

 

Raw materials

 

 

4,847

 

 

 

3,903

 

Total inventories

 

 

22,000

 

 

 

22,939

 

Supplies, prepaid items and other:

 

 

 

 

 

 

 

 

Prepaid insurance

 

 

1,606

 

 

 

11,217

 

Precious metals

 

 

8,491

 

 

 

8,648

 

Supplies

 

 

27,081

 

 

 

24,100

 

Prepaid and refundable income taxes

 

 

2,202

 

 

 

1,193

 

Other

 

 

2,746

 

 

 

1,733

 

Total supplies, prepaid items and other

 

 

42,126

 

 

 

46,891

 

Total current assets

 

 

162,113

 

 

 

181,146

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,020,638

 

 

 

1,078,958

 

 

 

 

 

 

 

 

 

 

Intangible and other assets, net

 

 

12,142

 

 

 

10,316

 

 

 

 

 

 

 

 

 

 

 

 

$

1,194,893

 

 

$

1,270,420

 

 

(Continued on following page)

3


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Information at September 30, 2017 is unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In Thousands)

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

49,018

 

 

$

54,246

 

Short-term financing

 

 

 

 

 

8,218

 

Accrued and other liabilities

 

 

29,185

 

 

 

44,037

 

Current portion of long-term debt

 

 

9,336

 

 

 

13,745

 

Total current liabilities

 

 

87,539

 

 

 

120,246

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

401,077

 

 

 

406,475

 

 

 

 

 

 

 

 

 

 

Noncurrent accrued and other liabilities

 

 

11,858

 

 

 

12,326

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

82,069

 

 

 

93,831

 

 

 

 

 

 

 

 

 

 

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 $179,036,000 ($161,788,000 at December 31, 2016)

 

 

167,129

 

 

 

145,029

 

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

 

 

3,128

 

 

 

3,128

 

Capital in excess of par value

 

 

195,206

 

 

 

192,172

 

Retained earnings

 

 

263,130

 

 

 

314,301

 

 

 

 

464,464

 

 

 

512,601

 

Less treasury stock, at cost:

 

 

 

 

 

 

 

 

Common stock, 2,875,582 shares (3,004,855 shares at December 31, 2016)

 

 

19,243

 

 

 

20,088

 

Total stockholders' equity

 

 

445,221

 

 

 

492,513

 

 

 

$

1,194,893

 

 

$

1,270,420

 

 

See accompanying notes.

4


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

September 30,

 

 

September 30,

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In Thousands, Except Per Share Amounts)

 

Net sales

 

$

92,390

 

 

$

80,262

 

 

$

338,587

 

 

$

289,216

 

Cost of sales

 

 

99,675

 

 

 

116,641

 

 

 

322,917

 

 

 

329,630

 

Gross profit (loss)

 

 

(7,285

)

 

 

(36,379

)

 

 

15,670

 

 

 

(40,414

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

7,975

 

 

 

9,962

 

 

 

26,752

 

 

 

31,730

 

Other expense (income), net

 

 

103

 

 

 

(409

)

 

 

2,258

 

 

 

(20

)

Operating loss

 

 

(15,363

)

 

 

(45,932

)

 

 

(13,340

)

 

 

(72,124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

9,291

 

 

 

13,333

 

 

 

27,941

 

 

 

21,129

 

Non-operating other expense (income), net

 

 

(844

)

 

 

2,451

 

 

 

(409

)

 

 

437

 

Loss from continuing operations before benefit

   for income taxes

 

 

(23,810

)

 

 

(61,716

)

 

 

(40,872

)

 

 

(93,690

)

Benefit for income taxes

 

 

(6,698

)

 

 

(22,226

)

 

 

(10,741

)

 

 

(30,747

)

Loss from continuing operations

 

 

(17,112

)

 

 

(39,490

)

 

 

(30,131

)

 

 

(62,943

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

 

 

 

173,041

 

 

 

 

 

 

196,644

 

Net income (loss)

 

 

(17,112

)

 

 

133,551

 

 

 

(30,131

)

 

 

133,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on convertible preferred stocks

 

 

75

 

 

 

75

 

 

 

225

 

 

 

225

 

Dividends on Series E redeemable preferred stock

 

 

5,923

 

 

 

7,372

 

 

 

17,248

 

 

 

22,351

 

Accretion of Series E redeemable preferred stock

 

 

1,635

 

 

 

12,137

 

 

 

4,852

 

 

 

16,620

 

Net income attributable to participating securities

 

 

 

 

 

1,920

 

 

 

 

 

 

1,718

 

Net income (loss) attributable to common stockholders

 

$

(24,745

)

 

$

112,047

 

 

$

(52,456

)

 

$

92,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.91

)

 

$

(2.25

)

 

$

(1.93

)

 

$

(4.17

)

Income from discontinued operations, net of taxes

 

 

 

 

 

6.39

 

 

 

 

 

 

7.89

 

Net income (loss)

 

$

(0.91

)

 

$

4.14

 

 

$

(1.93

)

 

$

3.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.91

)

 

$

(2.25

)

 

$

(1.93

)

 

$

(4.17

)

Income from discontinued operations, net of taxes

 

 

 

 

 

6.39

 

 

 

 

 

 

7.89

 

Net income (loss)

 

$

(0.91

)

 

$

4.14

 

 

$

(1.93

)

 

$

3.72

 

 

See accompanying notes.

5


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Unaudited)

Nine Months Ended September 30, 2017

 

 

 

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

 

 

 

(In Thousands)

 

Balance at December 31, 2016

 

 

31,281

 

 

 

(3,005

)

 

$

3,000

 

 

$

3,128

 

 

$

192,172

 

 

$

314,301

 

 

$

(20,088

)

 

$

492,513

 

Cumulative effect of change in accounting

    principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,060

 

 

 

 

 

 

 

1,060

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,131

)

 

 

 

 

 

 

(30,131

)

Dividend accrued on redeemable

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,248

)

 

 

 

 

 

 

(17,248

)

Accretion of redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,852

)

 

 

 

 

 

 

(4,852

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,945

 

 

 

 

 

 

 

 

 

 

 

3,945

 

Issuance of restricted stock, net

 

 

 

 

 

 

130

 

 

 

 

 

 

 

 

 

 

 

(911

)

 

 

 

 

 

 

845

 

 

 

(66

)

Balance at September 30, 2017

 

 

31,281

 

 

 

(2,875

)

 

$

3,000

 

 

$

3,128

 

 

$

195,206

 

 

$

263,130

 

 

$

(19,243

)

 

$

445,221

 

 

See accompanying notes.

6


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(In Thousands)

 

Cash flows from continuing operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(30,131

)

 

$

133,701

 

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

   continuing operating activities:

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

 

 

 

(196,644

)

Deferred income taxes

 

 

(10,702

)

 

 

(31,128

)

Loss on sales of a business and other property and equipment

 

 

4,366

 

 

 

673

 

Depreciation, depletion and amortization of property, plant and equipment

 

 

50,341

 

 

 

41,480

 

Other

 

 

5,450

 

 

 

6,932

 

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

   discontinued operations):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,687

 

 

 

9,428

 

Inventories

 

 

3,282

 

 

 

12,499

 

Prepaid insurance

 

 

9,611

 

 

 

7,241

 

Prepaid and accrued income taxes

 

 

(1,009

)

 

 

298

 

Other supplies, prepaid items and other

 

 

(2,672

)

 

 

624

 

Accounts payable

 

 

(3,580

)

 

 

16,005

 

Accrued interest

 

 

(7,977

)

 

 

(7,679

)

Other current and noncurrent liabilities

 

 

663

 

 

 

5,746

 

Net cash provided (used) by continuing operating activities

 

 

19,329

 

 

 

(824

)

 

 

 

 

 

 

 

 

 

Cash flows from continuing investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(25,172

)

 

 

(202,187

)

Net proceeds from sale (including an advance on a potential sale) of

   businesses and other property and equipment

 

 

22,561

 

 

 

90

 

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

 

Other investing activities

 

 

415

 

 

 

3,398

 

Net cash provided (used) by continuing investing activities

 

 

(2,196

)

 

 

43,734

 

 

 

 

 

 

 

 

 

 

Cash flows from continuing financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving debt facility

 

 

 

 

 

76,516

 

Payments on revolving debt facility

 

 

 

 

 

(76,516

)

Proceeds from other long-term debt, net of fees

 

 

 

 

 

14,751

 

Payments on other long-term debt

 

 

(12,413

)

 

 

(11,653

)

Payments of debt modification and issuance costs

 

 

(90

)

 

 

(5,949

)

Payments of issuance costs relating to preferred stocks and warrants

 

 

 

 

 

(785

)

Payments on short-term financing

 

 

(9,145

)

 

 

(7,530

)

Proceeds from exercises of stock options

 

 

 

 

 

371

 

Redemption of preferred stock

 

 

 

 

 

(71,966

)

Dividends paid on preferred stocks

 

 

 

 

 

(8,028

)

Other financing activities

 

 

(66

)

 

 

 

Net cash used by continuing financing activities

 

 

(21,714

)

 

 

(90,789

)

Cash flows of discontinued operations:

 

 

 

 

 

 

 

 

Net cash used by operating activities

 

 

(2,171

)

 

 

(439

)

Net cash used by investing activities

 

 

 

 

 

(1,025

)

Net cash used by financing activities

 

 

(200

)

 

 

(1,842

)

Net cash used by discontinued operations

 

 

(2,371

)

 

 

(3,306

)

Net decrease in cash and cash equivalents

 

 

(6,952

)

 

 

(51,185

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

60,017

 

 

 

127,195

 

Cash and cash equivalents at end of period

 

$

53,065

 

 

$

76,010

 

 

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 Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 27, 2017.

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.  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.

During May 2017, Zena Energy L.L.C. (“Zena”), which was an indirect, wholly owned subsidiary of LSB, entered into a purchase and sale agreement with BKV Chelsea, LLC, (“BKV”).  Under the terms of the purchase and sale agreement, Zena agreed to sell to BKV substantially all of its assets, including Zena’s right, title, and interest in all of its oil and natural gas properties (the “Properties”) located in Wyoming County, Pennsylvania for a purchase price of approximately $16.3 million, subject to customary post-closing adjustments, which sale was completed on June 26, 2017.   As a result, we recognized a loss on the sale of approximately $4.0 million which is included in operating other expense. The carrying value of the assets sold was approximately $20.0 million and was included in plant, property and equipment (“PP&E”) at December 31, 2016.  Concurrently with the closing of the purchase and sale agreement, a portion of the net proceeds (approximately $3.5 million) was used to repay the remaining outstanding balance of a promissory note, which was secured by the Properties.

Zena’s prior ownership of working interests in natural gas properties was accounted for as an undivided interest, whereby we reflected our proportionate share of the underlying assets, liabilities, revenues and expenses. The working interest represented our share of the costs and expenses incurred primarily to develop the underlying leaseholds and to produce natural gas while the net revenue interest represented our share of the revenues from the sale of natural gas.  The net revenue interest was less than the working interest as the result of royalty interest due to others. We were not the operator of these natural gas properties.

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 ammonium nitrate (“HDAN”), urea ammonium nitrate (“UAN”), and ammonium nitrate (“AN”) solution 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.

In our opinion, the unaudited condensed consolidated financial statements of the Company as of September 30, 2017 and for the three and nine months periods ended September 30, 2017 and 2016 include all adjustments and accruals, consisting of normal, recurring accrual adjustments, 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 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 2016 Form 10-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.

8


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

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.  These financial instruments were held by financial institutions within the U.S. except for approximately $2.6 million. None of the financial instruments held within U.S. were in excess of the federally insured limits.

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. On January 1, 2017, we adopted ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory as discussed below in “Recently Issued Accounting Pronouncements”.

Precious Metals - Precious metals are used as a catalyst in our manufacturing process.  Precious metals are carried at cost, with cost being determined using the FIFO basis.  Because some of the catalyst consumed in the production process cannot be readily recovered and the amount and timing of recoveries are not predictable, we follow the practice of expensing precious metals as they are consumed.  Occasionally, during major maintenance or capital projects, we may be able to perform procedures to recover precious metals (previously expensed) which have accumulated over time within the manufacturing equipment.  Recoveries of precious metals are recognized at historical FIFO costs.  When we accumulate precious metals in excess of our production requirements, we may sell a portion of the excess metals.

During the second quarter of 2017, we recognized a recovery of precious metals of approximately $2.9 million, which recovery is classified as a reduction to cost of sales.

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 realizable and earned.  Amounts recoverable from the taxing authorities, if any, are included in accounts receivable.  The same financial statement classification is used for an incentive tax credit as the associated tax incurred.

During the third quarter of 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, 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).

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 discounts.  In addition, certain embedded features included in the Series E Redeemable Preferred required bifurcation and are classified as derivative liabilities.  The carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of August 2, 2019, the earliest possible redemption date by the holder. The amount of accretion was recorded to retained earnings. However, it is reasonably possible this accretion could accelerate if the expected redemption date is earlier than August 2, 2019.

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.

9


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

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.  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, 2016-12 and 2016-20.  We plan to adopt this ASU on the effective date of January 1, 2018 using the “modified retrospective” adoption method, meaning the standard is applied only to the most current period presented in the financial statements and apply only to existing contracts as of the effective date.  

We have performed a review of a majority of our contracts with customers with significant sales in 2016.  Most of these contracts are short-term (have been completed or will be completed before the effective date); however, we do have certain long-term sales contracts that may be affected by the new requirements.  In addition, although most of our revenue stream relates to the sale of chemical products, we have identified additional smaller revenue streams, such as performing various services, and rental income.  A contract review process has been implemented to obtain and review our new or amended contracts for analysis for adopting this ASU.  We are currently implementing changes to our processes, systems and controls to improve the ability to access, analyze, classify and account for our contracts.  In addition, we are implementing a process to identify, store and access data needed for the new disclosure requirements.  

We have developed an accounting policy and the methodology of identifying performance obligations, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation for the contacts that will be affected.  We plan to elect an accounting policy to account for shipping and handling activities performed after a customer obtains control of the good as activities to fulfil the promise to transfer the good to the customer. We also plan to elect an accounting policy to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction and collected by us from a customer.

Although we anticipate that upon adoption of this new ASU, the timing of revenue recognition and the financial statement presentation for certain of our revenue streams might change, we have not determined the effect on our financial statements.

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 FIFO. We prospectively adopted this ASU on January 1, 2017.  The adoption of this ASU did not impact our financial statements.

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 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 must be adopted using a modified retrospective transition, and provides for certain practical expedients. We plan to adopt this ASU on January 1, 2019.  Transition will require application of the new guidance at the beginning of the earliest comparative period presented.  Although we currently have a relatively small number of leases, we are evaluating the effect of this guidance on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. This guidance includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. We adopted this guidance on January 1, 2017.  Among other requirements, the new guidance requires all tax effects related to share-based payments at settlement (or expiration) to be recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded in equity, and tax deficiencies ("shortfalls") were recorded in equity to the extent of previous windfalls, and then to the income statement. As required, this change was applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements.

10


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulative effect adjustment as of the date of the adoption. As required, this change was applied on a modified retrospective basis, with a cumulative effect adjustment of change in accounting principle of approximately $1.1 million as a deferred tax asset with the offset in retained earnings.  We made an accounting policy election to account for the amount related to excess tax benefits and deficiencies utilizing the direct effect approach.

Under the new guidance, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. In addition, cash paid by an employer to taxing authorities when the employer directly withholds shares for tax withholding purposes is to be reported as financing activities. These changes were applied on a retrospective basis, but did not impact the statement of cash flows for the nine months ended September 30, 2016.

Under the new guidance, we made an accounting policy election to account for forfeitures as they occur, a change from the previous requirement to estimate forfeitures each period. As required, this change was applied on a modified retrospective basis; however, as of December 31, 2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.

Going forward, the adoption of this ASU could cause volatility in the effective tax rate.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for us on January 1, 2018 and adoption will be applied on retrospective basis. We anticipate that upon adoption of this new ASU, there will be minimal, if any, effect on the presentation and classification for certain cash flow activities.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force.  The amendments in this ASU revise the guidance in Topic 230, Statement of Cash Flows, to require cash and cash equivalents to include restricted cash (and restricted cash equivalents) on the statement of cash flows.  This ASU is effective for us on January 1, 2018 and adoption will be applied on retrospective basis for all periods presented.  We plan to adopt this ASU on January 1, 2018. Upon adoption of this new ASU, we anticipate the removal of the presentation of cash flow activities relating to current and noncurrent restricted cash and cash equivalents from our statement of cash flows for 2016.

11


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 2: Discontinued Operations

On July 1, 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 agreement, we agreed to have a certain portion of the purchase price proceeds deposited in an indemnity escrow account. 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, which services have been completed.  At September 30, 2017 and December 31, 2016, our accounts receivable includes approximately $2.7 million representing an indemnity escrow balance. Additionally, at September 30, 2017 and December 31, 2016, our current and noncurrent accrued and other liabilities include approximately $3.2 million and $5.5 million, respectively, relating primarily to estimated contingent liabilities, costs associated with the TSA and severance agreements associated with the sale of the Climate Control Business.

Summarized results of discontinued operations are as follows for:

 

 

 

September 30,

 

 

September 30,

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

2016

 

 

2016

 

 

 

(In Thousands)

 

Net sales

 

$

 

 

$

138,609

 

Cost of sales

 

 

 

 

 

93,178

 

Selling, general and administrative expense

 

 

 

 

 

32,719

 

Transaction costs

 

 

 

 

 

2,535

 

Other expense (income), net

 

 

 

 

 

117

 

Income from operations of discontinued operations

 

 

 

 

 

10,060

 

Gain on sale of discontinued operation

 

 

281,590

 

 

 

281,590

 

Provision for income taxes

 

 

108,549

 

 

 

95,006

 

Income from discontinued operations, net of taxes

 

$

173,041

 

 

$

196,644

 

 

 

Summarized condensed cash flow information of discontinued operations is as follows for the nine months ended September 30, 2016 (in thousands):

 

Deferred income taxes

 

$

91,497

 

Depreciation and amortization of property, plant

   and equipment

 

$

1,607

 

Stock-based compensation

 

$

955

 

Expenditures for property, plant and equipment

 

$

273

 

Software and software development costs

 

$

675

 

 

 

12


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 3: Income (Loss) Per Common Share

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(17,112

)

 

$

133,551

 

 

$

(30,131

)

 

$

133,701

 

Adjustments for basic net income (loss) per common

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend requirements on Series E Redeemable

   Preferred

 

 

(5,923

)

 

 

(7,372

)

 

 

(17,248

)

 

 

(22,351

)

Dividend requirements on Series B Preferred

 

 

(60

)

 

 

(60

)

 

 

(180

)

 

 

(180

)

Dividend requirements on Series D Preferred

 

 

(15

)

 

 

(15

)

 

 

(45

)

 

 

(45

)

Accretion of Series E Redeemable Preferred

 

 

(1,635

)

 

 

(12,137

)

 

 

(4,852

)

 

 

(16,620

)

Net income attributable to participating securities

 

 

 

 

 

(1,920

)

 

 

 

 

 

(1,718

)

Numerator for basic and dilutive net income (loss) per

   common share - net income (loss) attributable to

   common stockholders

 

$

(24,745

)

 

$

112,047

 

 

$

(52,456

)

 

$

92,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and dilutive net income (loss)

   per common share - adjusted weighted-average

   shares (1)

 

 

27,249,304

 

 

 

27,075,629

 

 

 

27,248,889

 

 

 

24,926,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.91

)

 

$

(2.25

)

 

$

(1.93

)

 

$

(4.17

)

Income from discontinued operations, net of taxes

 

 

 

 

 

6.39

 

 

 

 

 

 

7.89

 

Net income (loss)

 

$

(0.91

)

 

$

4.14

 

 

$

(1.93

)

 

$

3.72