lxu-10q_20180630.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 June 30, 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

 

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 28,613,563 shares as of July 20, 2018.

 

 

 

 

 

 


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

 

24

 

 

 

 

 

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 June 30, 2018 is unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In Thousands)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,216

 

 

$

33,619

 

Accounts receivable, net

 

 

39,208

 

 

 

59,570

 

Inventories:

 

 

 

 

 

 

 

 

Finished goods

 

 

13,327

 

 

 

20,415

 

Raw materials

 

 

1,552

 

 

 

1,441

 

Total inventories

 

 

14,879

 

 

 

21,856

 

Supplies, prepaid items and other:

 

 

 

 

 

 

 

 

Prepaid insurance

 

 

4,763

 

 

 

10,535

 

Precious metals

 

 

6,640

 

 

 

7,411

 

Supplies

 

 

28,939

 

 

 

27,729

 

Prepaid and refundable income taxes

 

 

792

 

 

 

1,736

 

Other

 

 

1,434

 

 

 

1,284

 

Total supplies, prepaid items and other

 

 

42,568

 

 

 

48,695

 

Total current assets

 

 

143,871

 

 

 

163,740

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

986,737

 

 

 

1,014,038

 

 

 

 

 

 

 

 

 

 

Intangible and other assets, net

 

 

9,728

 

 

 

11,404

 

 

 

 

 

 

 

 

 

 

 

 

$

1,140,336

 

 

$

1,189,182

 

 

(Continued on following page)

3


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Information at June 30, 2018 is unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In Thousands)

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

51,278

 

 

$

55,992

 

Short-term financing

 

 

2,480

 

 

 

8,585

 

Accrued and other liabilities

 

 

21,387

 

 

 

35,573

 

Current portion of long-term debt

 

 

12,899

 

 

 

9,146

 

Total current liabilities

 

 

88,044

 

 

 

109,296

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

403,464

 

 

 

400,253

 

 

 

 

 

 

 

 

 

 

Noncurrent accrued and other liabilities

 

 

10,656

 

 

 

11,691

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

58,229

 

 

 

54,787

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $198,197,000 ($185,231,000 at December 31, 2017)

 

 

187,421

 

 

 

174,959

 

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

 

 

196,792

 

 

 

193,956

 

Retained earnings

 

 

207,750

 

 

 

256,214

 

 

 

 

410,670

 

 

 

456,298

 

Less treasury stock, at cost:

 

 

 

 

 

 

 

 

Common stock, 2,667,122 shares (2,662,027 shares at December 31, 2017)

 

 

18,148

 

 

 

18,102

 

Total stockholders' equity

 

 

392,522

 

 

 

438,196

 

 

 

$

1,140,336

 

 

$

1,189,182

 

 

See accompanying notes.

4


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

June 30,

 

 

June 30,

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(In Thousands, Except Per Share Amounts)

 

Net sales

 

$

103,199

 

 

$

122,853

 

 

$

203,649

 

 

$

246,197

 

Cost of sales

 

 

100,126

 

 

 

111,513

 

 

 

190,483

 

 

 

223,242

 

Gross profit

 

 

3,073

 

 

 

11,340

 

 

 

13,166

 

 

 

22,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

8,397

 

 

 

8,232

 

 

 

16,700

 

 

 

18,777

 

Other expense, net

 

 

545

 

 

 

3,406

 

 

 

451

 

 

 

2,155

 

Operating income (loss)

 

 

(5,869

)

 

 

(298

)

 

 

(3,985

)

 

 

2,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

11,693

 

 

 

9,292

 

 

 

20,999

 

 

 

18,650

 

Loss on extinguishment of debt

 

 

5,951

 

 

 

 

 

 

5,951

 

 

 

 

Non-operating other expense (income), net

 

 

(331

)

 

 

204

 

 

 

(1,240

)

 

 

435

 

Loss before provision (benefit) for income taxes

 

 

(23,182

)

 

 

(9,794

)

 

 

(29,695

)

 

 

(17,062

)

Provision (benefit) for income taxes

 

 

4,324

 

 

 

(2,761

)

 

 

3,402

 

 

 

(4,043

)

Net loss

 

 

(27,506

)

 

 

(7,033

)

 

 

(33,097

)

 

 

(13,019

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on convertible preferred stocks

 

 

75

 

 

 

75

 

 

 

150

 

 

 

150

 

Dividends on Series E redeemable preferred stock

 

 

6,628

 

 

 

5,789

 

 

 

12,966

 

 

 

11,325

 

Accretion of Series E redeemable preferred stock

 

 

802

 

 

 

1,618

 

 

 

2,401

 

 

 

3,217

 

Net loss attributable to common stockholders

 

$

(35,011

)

 

$

(14,515

)

 

$

(48,614

)

 

$

(27,711

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and dilutive net loss per common share:

 

$

(1.27

)

 

$

(0.53

)

 

$

(1.77

)

 

$

(1.02

)

 

See accompanying notes.

5


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Unaudited)

 

 

 

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, 2017

 

 

31,281

 

 

 

(2,662

)

 

$

3,000

 

 

$

3,128

 

 

$

193,956

 

 

$

256,214

 

 

$

(18,102

)

 

$

438,196

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,097

)

 

 

 

 

 

 

(33,097

)

Dividend accrued on redeemable

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,966

)

 

 

 

 

 

 

(12,966

)

Accretion of redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,401

)

 

 

 

 

 

 

(2,401

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,935

 

 

 

 

 

 

 

 

 

 

 

2,935

 

Other

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

(99

)

 

 

 

 

 

 

(46

)

 

 

(145

)

Balance at June 30, 2018

 

 

31,281

 

 

 

(2,667

)

 

$

3,000

 

 

$

3,128

 

 

$

196,792

 

 

$

207,750

 

 

$

(18,148

)

 

$

392,522

 

 

See accompanying notes.

6


LSB INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

 

(In Thousands)

 

Cash flows from continuing operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(33,097

)

 

$

(13,019

)

Adjustments to reconcile net loss to net cash provided by continuing

   operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3,442

 

 

 

(4,004

)

Loss on extinguishment of debt

 

 

5,951

 

 

 

 

Depreciation, depletion and amortization of property, plant and equipment

 

 

36,666

 

 

 

34,162

 

Amortization of intangible and other assets

 

 

1,197

 

 

 

927

 

Loss on sales of a business and other property and equipment

 

 

474

 

 

 

4,158

 

Other

 

 

3,930

 

 

 

1,943

 

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

   discontinued operations):

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,927

 

 

 

(8,243

)

Inventories

 

 

7,343

 

 

 

7,760

 

Prepaid insurance

 

 

5,772

 

 

 

6,160

 

Prepaid and accrued income taxes

 

 

943

 

 

 

(1,040

)

Accounts payable

 

 

1,867

 

 

 

(2,364

)

Accrued interest

 

 

(6,333

)

 

 

(14

)

Other assets and other liabilities

 

 

(1,738

)

 

 

(3,485

)

Net cash provided by continuing operating activities

 

 

33,344

 

 

 

22,941

 

 

 

 

 

 

 

 

 

 

Cash flows from continuing investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(15,369

)

 

 

(16,362

)

Net proceeds from sale of businesses and other property and equipment

 

 

641

 

 

 

18,842

 

Proceeds from property insurance recovery associated with

   property, plant and equipment

 

 

1,531

 

 

 

 

Net proceeds from sale of discontinued operations

 

 

2,730

 

 

 

 

Other investing activities

 

 

115

 

 

 

952

 

Net cash provided (used) by continuing investing activities

 

 

(10,352

)

 

 

3,432

 

 

 

 

 

 

 

 

 

 

Cash flows from continuing financing activities

 

 

 

 

 

 

 

 

Proceeds from 9.625% senior secured notes, net of discount and fees

 

 

390,473

 

 

 

 

Payments on senior secured notes

 

 

(375,000

)

 

 

 

Payments on other long-term debt

 

 

(6,055

)

 

 

(10,653

)

Payments of debt-related costs

 

 

(9,805

)

 

 

(90

)

Payments on short-term financing

 

 

(6,105

)

 

 

(6,522

)

Payments of preferred stock modification costs

 

 

(2,677

)

 

 

 

Taxes paid on equity awards

 

 

(226

)

 

 

(67

)

Net cash used by continuing financing activities

 

 

(9,395

)

 

 

(17,332

)

Cash flows of discontinued operations:

 

 

 

 

 

 

 

 

Net cash used by operating activities

 

 

 

 

 

(1,714

)

Net cash used by financing activities

 

 

 

 

 

(131

)

Net cash used by discontinued operations

 

 

 

 

 

(1,845

)

Net increase in cash and cash equivalents

 

 

13,597

 

 

 

7,196

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

33,619

 

 

 

60,017

 

Cash and cash equivalents at end of period

 

$

47,216

 

 

$

67,213

 

 

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, 2017 (“2017 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 26, 2018.

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.  Certain prior period amounts reported in our condensed 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 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.

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 the second and fourth quarters of 2017, respectively.  

During July 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. During the first quarter of 2018, we received the remaining proceeds held in a related indemnity escrow account of $2.7 million.

In our opinion, the unaudited condensed consolidated financial statements of the Company as of June 30, 2018 and for the three and six-month periods ended June 30, 2018 and 2017 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 2017 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.

Income Taxes – We recognize deferred tax assets and liabilities for the expected future tax consequences attributable to net operating loss (“NOL”) carryforwards, tax credit carryforwards, and the differences, if any, between the financial statement carrying amounts and the tax basis of our assets and liabilities.  We establish valuation allowances if we believe it is more likely than not that some or all of deferred tax assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period date of enactment.

8


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

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 9 – Income Taxes discussing the Tax Cuts and Jobs Act of 2017 and Staff Accounting Bulletin No. 118 ("SAB 118") issued by the SEC.

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 October 25, 2023, 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 change if the expected redemption date changes.

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 ASUs further amending revenue recognition guidance, which includes ASU 2016-08, 2016-10, 2016-11, 2016-12 and 2016-20.  The core principle of these ASUs (together “ASC 606”) is to allow for an entity to 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 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.

On January 1, 2018, we adopted ASC 606 as discussed in Note 2-Adoption of ASC 606.

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 the six months ended June 30, 2017.

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.  The adoption of this ASU did not affect the presentation of cash flow activities for the six months ended June 30, 2017.

ASU 2018-05 – See Note 9 – Income Taxes.

Recently Issued Accounting Pronouncements

ASU 2016-02 – 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.  As of June 30, 2018, this ASU must be adopted using a modified retrospective transition; however, the FASB has proposed an additional transition method option and that ASU is currently pending to be issued. Under the modified retrospective transition method, we are required to apply the new guidance at the beginning of the earliest comparative period presented (including recognizing a cumulative-effect adjustment as of January 1, 2017).  Under the proposed additional transition method, we have the option to apply the new guidance (including recognizing a cumulative-effect adjustment) on January 1, 2019, the date we plan to adopt this ASU. Consequently, under this proposed optional

9


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 1: Summary of Significant Accounting Policies (continued)

method, our reporting for the comparative periods presented in the financial statements issued after the date of adoption would continue to be in accordance with current GAAP, including disclosures.  This ASU and ASU 2018-01 also provide for certain practical expedients that we are currently evaluating for possible election.  

Although we currently have a relatively small number of leases (most are currently classified as operating leases under which we are the lessee), we have obtained and continue to obtain information relating to our leases and other right-to-use arrangements for the purpose of evaluating the effect of this guidance on our consolidated financial statements and related disclosures.  In addition, we are developing and testing changes to our accounting system as the result of this ASU.  We currently expect most of the effect of this guidance on our consolidated financial statements to impact our balance sheet presentation (increase the amount of our assets for the inclusion of right-of-use assets and increase the amount of our liabilities for the inclusion of the associated lease obligations).  For 2017, expenses associated with our operating lease agreements, including month-to-month leases, were $9.8 million.  As of December 31, 2017, our future minimum payments on operating lease agreements with initial or remaining terms of one year or more totaled $21.2 million.

Note 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 condensed consolidated statement of operations for the current reporting periods have been provided to reflect both the adoption of ASC 606 as well as a comparative presentation in accordance with ASC 605 previously in affect:

 

 

 

Three Months Ended June 30, 2018

 

 

 

As

 

 

Balance without

 

 

Effect of Change

 

 

 

Reported

 

 

adoption of 606

 

 

Higher/(Lower)

 

 

 

(In Thousands)

 

Net sales

 

$

103,199

 

 

$

120,492

 

 

$

(17,293

)

Cost of sales

 

 

100,126

 

 

 

117,264

 

 

 

(17,138

)

Gross profit

 

 

3,073

 

 

 

3,228

 

 

 

(155

)

Selling, general and administrative expense

 

 

8,397

 

 

 

8,552

 

 

 

(155

)

Operating loss

 

 

(5,869

)

 

 

(5,869

)

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

As

 

 

Balance without

 

 

Effect of Change

 

 

 

Reported

 

 

adoption of 606

 

 

Higher/(Lower)

 

 

 

(In Thousands)

 

Net sales

 

$

203,649

 

 

$

237,042

 

 

$

(33,393

)

Cost of sales

 

 

190,483

 

 

 

223,570

 

 

 

(33,087

)

Gross profit

 

 

13,166

 

 

 

13,472

 

 

 

(306

)

Selling, general and administrative expense

 

 

16,700

 

 

 

17,006

 

 

 

(306

)

Operating loss

 

 

(3,985

)

 

 

(3,985

)

 

 

 

 

Except for the change in accounting policies for revenue recognition as a result of adopting ASC 606, there have been no changes to our significant accounting policies as described in the 2017 Form 10-K that had a material impact on our condensed consolidated financial statements and related notes.

10


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 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 tables present our net sales disaggregated by revenue source:

 

 

 

Three Months Ended

June 30,

 

 

 

2018

 

 

2017(a)

 

 

 

(Dollars In Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

Agricultural products

 

$

58,024

 

 

$

57,236

 

Industrial acids and other chemical products

 

 

32,775

 

 

 

53,217

 

Mining products

 

 

12,400

 

 

 

10,344

 

Other products

 

 

 

 

 

2,056

 

Total net sales

 

$

103,199

 

 

$

122,853

 

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017(a)

 

 

 

(Dollars In Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

Agricultural products

 

$

110,293

 

 

$

120,499

 

Industrial acids and other chemical products

 

 

70,912

 

 

 

102,097

 

Mining products

 

 

22,444

 

 

 

17,960

 

Other products

 

 

 

 

 

5,641

 

Total net sales

 

$

203,649

 

 

$

246,197

 

 

 

(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.  

 

11


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 2: Adoption of ASC 606 (continued)

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.

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 16 months at June 30, 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 condensed 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.  These contract liabilities are presented in Note - 5 Current and Noncurrent Accrued and Other Liabilities. For the three and six months ended June 30, 2018, revenues of $2.3 million and $4.0 million were recognized and included in the balance at the beginning of each 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.

 

12


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 3: Loss Per Common Share

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(27,506

)

 

$

(7,033

)

 

$

(33,097

)

 

$

(13,019

)

Adjustments for basic net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend requirements on Series E Redeemable

   Preferred

 

 

(6,628

)

 

 

(5,789

)

 

 

(12,966

)

 

 

(11,325

)

Dividend requirements on Series B Preferred

 

 

(60

)

 

 

(60

)

 

 

(120

)

 

 

(120

)

Dividend requirements on Series D Preferred

 

 

(15

)

 

 

(15

)

 

 

(30

)

 

 

(30

)

Accretion of Series E Redeemable Preferred

 

 

(802

)

 

 

(1,618

)

 

 

(2,401

)

 

 

(3,217

)

Numerator for basic and dilutive net loss per common

   share - net loss attributable to common stockholders

 

$

(35,011

)

 

$

(14,515

)

 

$

(48,614

)

 

$

(27,711

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and dilutive net loss per

   common share - adjusted weighted-average

   shares (1)

 

 

27,492,979

 

 

 

27,249,304

 

 

 

27,476,180

 

 

 

27,248,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and dilutive net loss per common share:

 

$

(1.27

)

 

$

(0.53

)

 

$

(1.77

)

 

$

(1.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Excludes 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 loss per common share as their effect would have been antidilutive:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Restricted stock and stock units

 

 

1,160,116

 

 

 

1,195,560

 

 

 

1,177,715

 

 

 

1,156,493

 

Convertible preferred stocks

 

 

916,666

 

 

 

916,666

 

 

 

916,666

 

 

 

916,666

 

Series E Redeemable Preferred - embedded derivative

 

 

303,646

 

 

 

303,646

 

 

 

303,646

 

 

 

303,646

 

Stock options

 

 

180,309

 

 

 

217,608

 

 

 

188,215

 

 

 

218,309

 

 

 

 

2,560,737

 

 

 

2,633,480

 

 

 

2,586,242

 

 

 

2,595,114

 

 

Note 4: Inventories

At June 30, 2018 and December 31, 2017, because costs exceeded the net realizable value, inventory adjustments were $567,000 and $933,000, respectively.

13


LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 5: Current and Noncurrent Accrued and Other Liabilities

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In Thousands)

 

Accrued interest