<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
FOR QUARTERLY REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ______________.
COMMISSION FILE NUMBER 33-79532
-------------
LAROCHE INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3341472
(State of Incorporation) (I.R.S. Employer
Identification No.)
1100 JOHNSON FERRY ROAD N.E.
ATLANTA, GEORGIA 30342
(Address of principal executive offices)
(404) 851-0300
(Registrant's telephone number, including area code)
---------------
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 at least the past 90 days. Yes X No .
--- --
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
CLASS OUTSTANDING AS OF OCTOBER 15, 1998
----- ----------------------------------
Common Stock, $.01 par value 432,133 Shares
================================================================================
<PAGE> 2
LAROCHE INDUSTRIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at August 31, 1998 and February 28, 1998 1
Condensed Consolidated Statements of Income for the three months and six months ended
August 31, 1998 and August 31, 1997 3
Condensed Consolidated Statements of Cash Flows for the three months and six months
ended August 31, 1998 and August 31, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) (NOTE 1)
LaRoche Industries Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1998 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,945 $ 12,884
Receivables:
Trade, net of allowances of $521 and $527 as of
August 31, 1998 and February 28, 1998, respectively 49,159 52,709
Other 14,958 16,879
Inventories (Note 4) 33,318 36,399
Other current assets 2,040 1,162
--------- ---------
Total current assets 103,420 120,033
Investments and advances to affliates 54,676 50,428
Property, plant and equipment, at cost 335,867 321,685
Less accumulated depreciation (113,593) (105,561)
--------- ---------
Net property, plant and equipment 222,274 216,124
Other assets 17,055 18,829
========= =========
Total assets $ 397,425 $ 405,414
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 4
LaRoche Industries Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1998 1998
---------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 5) $ 30,419 $ 22,000
Accounts payable 38,879 53,431
Accrued compensation 11,184 8,503
Other accrued liabilities 16,142 15,457
Current portion of long-term debt (Note 5) 4,397 7,657
--------- ---------
Total current liabilities 101,021 107,048
Long-term debt (Note 5) 205,099 207,418
Deferred income taxes 17,518 17,518
Other noncurrent liabilities 42,160 38,277
Commitments and contingencies
Redeemable common stock 2,056 3,505
Stockholders' equity:
10% cumulative, voting preferred stock, $.01 par
value, 200,000 shares authorized, no shares outstanding -- --
Common stock, $.01 par value, 1,200,000 shares
authorized, 425,000 non-redeemable shares issued 4 4
Capital in excess of par value 630 630
Retained earnings 29,390 31,225
Foreign currency translation adjustment (332) (90)
Minimum pension liability (121) (121)
--------- ---------
Total stockholders' equity 29,571 31,648
--------- ---------
$ 397,425 $ 405,414
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 5
LaRoche Industries Inc.
Condensed Consolidated Statements of Income (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 100,725 $ 83,675 $ 228,425 $ 194,338
Cost of sales 88,519 73,648 195,842 168,059
--------- -------- --------- ---------
Gross profit 12,206 10,027 32,583 26,279
Selling, general and administrative
expenses 10,458 9,532 20,412 18,115
--------- -------- --------- ---------
Income from operations 1,748 495 12,171 8,164
Interest and amortization of debt
expense (5,358) (3,803) (10,782) (7,736)
Income from equity investments 574 856 2,407 2,104
Other (expense) income, net (2,041) 88 (2,394) 49
--------- -------- --------- ---------
(Loss) income before income taxes (5,077) (2,364) 1,402 2,581
Benefit (provision) for income taxes 878 945 (2,267) (1,033)
--------- -------- --------- ---------
Net (loss) income $ (4,199) $ (1,419) $ (865) $ 1,548
========= ======== ========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 6
LaRoche Industries Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
AUGUST 31, AUGUST 31,
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (865) $ 1,548
Depreciation and amortization 12,665 11,644
Net change in operating assets and liabilities 1,360 8,580
Loss on disposition of assets and other 134 1,614
Equity income, net of distributions (1,985) 521
Deferred income taxes -- 257
-------- --------
Net cash provided by operating activities 11,309 24,164
INVESTING ACTIVITIES
Capital expenditures (17,609) (16,206)
Investments in and advances to affliates (2,978) (603)
Plant turnarounds -- (1,830)
Proceeds from sale of facilities 794 --
-------- --------
Net cash used by investing activities (19,793) (18,639)
FINANCING ACTIVITIES
Net borrowings under revolving credit facility 8,419 395
Sales of common stock with redemption features 128 150
Purchase of redeemable common stock (1,646) (750)
Additions to long-term debt -- --
Repayments of long-term debt (5,618) (2,835)
Dividends paid (766) (439)
-------- --------
Net cash provided (used) by financing activities 517 (3,479)
-------- --------
Effect of exchange rate changes on cash (972) --
-------- --------
Net (decrease) increase in cash (8,939) 2,046
Cash at beginning of period 12,884 1,165
-------- --------
Cash at end of period $ 3,945 $ 3,211
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 7
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three months and six months ended August 31, 1998 may
not be indicative of the results that may be expected for the full fiscal year.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended February 28, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
EARNINGS PER SHARE
Earnings per share have not been presented since such data provides no
useful information as the shares of the Company are closely held.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
ACCOUNTING POLICIES
Derivatives. The Company enters into financial instruments to reduce its
exposure to foreign currency risk from its net investment in and cash flows from
its foreign operations. The Company also enters into fixed price forward
purchase contracts and option spread "collar" arrangements in order to establish
a fixed price or a range of prices for its natural gas purchases. The Company
includes in income the gains and losses related to the portion of these
agreements which are not designated as accounting hedges based upon the market
values of the instrument. Gains and losses related to the portion of these
agreements designated as accounting hedges of the Company's equity investment
are accounted for as an offset to the translation adjustment.
5
<PAGE> 8
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
2. NEW ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standard No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information ("SFAS 131"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS 131 establishes standards
for disclosures of segment information about products and services,
geographic areas, major customers and certain interim disclosures of segment
information which are not required by accounting standards currently used by
the Company. These statements are required to be adopted in fiscal 1999. The
Company does not anticipate that SFAS 130 or 131 will have a material impact
on the Company's consolidated financial statements.
In February 1998, the FASB issued Statement of Financial Accounting Standard
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits ("SFAS 132"). The statement supersedes the disclosure requirements
in Statements No. 87, Employers' Accounting for Pensions, No. 88, Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The overall objective is to improve and
standardize disclosures about pensions and other postretirement benefits and
to make the required information easier to prepare and more understandable.
SFAS 132 eliminates certain existing disclosure requirements, but at the
same time adds new disclosures. The statement is required to be adopted in
fiscal 1999. The Company does not anticipate that SFAS 132 will have a
material impact on the Company's consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, Accounting for Derivative Financial Instruments and Hedging Activities
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The statement requires an entity
to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at their fair
value. Under SFAS 133, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign
currency denominated forecasted transaction. The accounting for changes in
the fair value of a derivative depends on the intended use of the instrument
and the resulting designation. SFAS 133 is required to be adopted for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company is currently evaluating the effects of this statement on the
consolidated financial statements and plans to implement SFAS 133 for the
fiscal year beginning March 1, 1999.
3. ACQUISITIONS
On October 17, 1997, the Company, through a subsidiary, acquired a 50% stock
interest in ChlorAlp S.A.S. ("ChlorAlp"), a joint venture company with
Rhodia Chimie, S.A. ("RPC"), a subsidiary of Rhone-Poulenc, S.A. ChlorAlp is
a joint venture that owns and operates, among other things, a chlorine,
caustic soda and bleach manufacturing and distribution facility in
Pont-de-Claix, France. In connection with such transactions, the Company,
through a subsidiary, and RPC entered into a Put and Call agreement
providing for certain rights of each party to require the other to buy or
sell its respective interest in ChlorAlp under certain circumstances. The
acquisition was accounted for as a purchase; accordingly, the third quarter
fiscal 1998 and subsequent periods'
6
<PAGE> 9
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
consolidated statements of income include the Company's share of the results of
operations of the joint venture since the acquisition date using the equity
method of accounting. The Company funded the purchase with funds drawn from the
Term Loan (as defined) portion of its Credit Facility (as defined).
On December 31, 1997, the Company, through a subsidiary, purchased
chlor-alkali and chlorinated methane compounds manufacturing facilities (the
"German Facility") located in Hochst near Frankfurt, Germany from Celanese GmbH,
a wholly-owned subsidiary of Hoechst AG. The acquisition was accounted for as a
purchase; accordingly, the February 28, 1998 and subsequent periods'
consolidated statements of income include the results of the operations of the
German Facility since the acquisition date. The Company funded the purchase with
funds drawn from the Revolving Credit Facility.
4. INVENTORIES
Components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 1998 FEBRUARY 28, 1998
--------------- -----------------
<S> <C> <C>
Finished goods and in-progress... $18,258 $20,143
Inventory purchased for resale... 2,138 6,689
Raw materials.................... 3,875 1,277
Supplies and catalysts........... 9,662 8,905
------- -------
33,933 37,014
Less LIFO reserve................ (615) (615)
------- -------
$33,318 $36,399
======= =======
</TABLE>
An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs and are subject to
change based on the final year-end LIFO inventory valuation.
7
<PAGE> 10
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
5. BORROWING ARRANGEMENTS
The Company's borrowings include the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1998 1998
---------- ------------
<S> <C> <C>
Revolving credit facility................... $ 30,419 $ 22,000
========= =========
Term debt:
--------- ---------
9 1/2% senior subordinated notes........ $ 174,288 $ 174,248
13% senior subordinated notes........... 915 915
Term loan............................... 32,813 34,271
Other notes payable..................... 1,480 5,641
--------- ---------
Total.............................. 209,496 215,075
Less current portion........................ (4,397) (7,657)
--------- ---------
Long-term debt.............................. $ 205,099 $ 207,418
========= =========
</TABLE>
In September 1997, the Company completed a refinancing of its principal
borrowings. In connection with this refinancing, the Company issued $175.0
million principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the
"Notes"). A portion of the proceeds from the Notes was applied to repurchase
$99.1 million of the Company's 13% Senior Subordinated Notes due 2004 (the "13%
Notes") and a portion was used to repay existing borrowings under the Company's
previous credit facility. In connection with redeeming the 13% Notes, the
Company paid prepayment premiums and incurred other costs of $17.3 million and
expensed unamortized issuance costs associated with the 13% Notes of $2.7
million. The total loss recognized as a result of this early extinguishment of
debt amounted to $12.3 million (net of income tax benefit of $7.7 million) and
was reflected in the Company's February 28, 1998 consolidated statement of
income as an extraordinary charge.
The Notes require semi-annual interest only payments on March 15 and
September 15 each year. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after September 15, 2002 at redemption
prices set out in the Notes Indenture, dated September 23, 1997, (the
"Indenture") pursuant to which the Notes were issued. The Notes are unsecured
obligations of the Company and the Indenture contains, among other things,
limitations on stock redemptions, dividends, borrowings and investments, and
restricts the Company from entering into certain transactions, all as set forth
therein. Debt issuance costs are being amortized using the straight-line method
over the life of the Notes.
In August 1997, the Company entered into a six year, $160.0 million senior
secured credit facility ("Credit Facility"), which provides for a $125.0 million
revolving credit facility ("Revolving Credit Facility") and $35.0 million term
loan ("Term Loan"). The Credit Facility is secured by substantially all of the
domestic assets of the Company and each of its domestic subsidiaries. Debt
issuance costs are being amortized over the life of the Credit Facility.
Interest is based on either the prime rate or LIBOR, plus up to 2.00%.
Availability under the Revolving Credit Facility is subject to limitations as
outlined in the Credit Agreement. At August 31, 1998 and February 28, 1998,
$30.4 million and $22.0 million, respectively, was outstanding under the
Revolving Credit Facility. The weighted average borrowing rate at August 31,
1998 and February 28, 1998 was approximately 8.33%
8
<PAGE> 11
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
and 7.97%, respectively. On October 17, 1997, the Company borrowed $35.0 million
under the Term Loan to fund the ChlorAlp acquisition. Principal and interest
payments under the Term Loan are due quarterly in varying amounts until October
17, 2002, as defined in the Credit Agreement. The borrowing rate was
approximately 7.69% and 7.62% at August 31, 1998 and February 28, 1998,
respectively. Under the terms of the Credit Agreement, the Company pays
commitment fees, on a quarterly basis, ranging from 0.25% to 0.50% per annum of
average unused balances. The Company is required, among other things, to
maintain certain working capital, debt to equity, and net worth levels under the
Credit Agreement.
At February 28, 1998, the Company was not in compliance with certain
covenants contained in the Credit Facility. The Company received amendments and
waivers with respect to such noncompliance. At August 31, 1998, the Company was
in compliance with the covenants, as amended. While the Company expects to
remain in compliance with the covenants contained in the debt agreements, it is
possible, under certain economic circumstances, that the Company may not comply
with such covenants in the future.
At February 28, 1998, no amounts of retained earnings were available to the
Company to make restricted payments (as defined) under certain restrictive
provisions of the above agreements, however, the Company generally is allowed to
annually pay up to $2.0 million of dividends.
6. ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to numerous federal, state and local environmental
laws and regulations. The Company is currently involved in the assessment,
removal and/or mitigation of chemical substances at various sites. Environmental
expenditures which relate to an existing condition caused by past operations and
which have no significant future economic benefit to the Company are expensed.
Future environmental related expenditures cannot be reliably determined in many
circumstances due to the early stages of investigations, the uncertainty of
specific remediation methods, changing environmental laws and interpretations
and other matters. Such environmental costs are accrued at the time the
expenditure becomes probable and the costs can be reasonably estimated.
In December 1997, the Company was named as a defendant in certain civil
antitrust actions and could be added as a defendant in other existing cases,
brought predominantly by various mining concerns, alleging that the Company is
guilty of violations of federal antitrust laws, various state antitrust and
unfair trade practice statutes, and common law fraud in connection with the
Company's blasting grade ammonium nitrate business as conducted in the mid to
late 1980's and early 1990's. Claims for specific monetary damage were not made
in such lawsuits. The Company believes that the plaintiffs in these cases have
targeted the Company because of the Company's previously disclosed plea
agreement with the U.S. Department of Justice in which the Company agreed to
plead guilty to one count charging the Company with participating in a
conspiracy to restrain competition in the pricing of ammonium nitrate during May
1992. The Company has filed answers denying liability in such civil actions and
intends vigorously to defend them. Because the matter is in a preliminary stage,
it is not yet possible to predict whether the Company will incur any liability
with respect to this matter. Accordingly, the Company has not recorded any
accruals related to such claims.
The Company owns and operates two pipelines to transport brine, a key raw
material in the production of chlor-alkali products, to its Gramercy facility.
The pipelines transverse land upon which the Company has been granted the right
to transport brine to its Gramercy facility. The Company has begun construction
to replace one of the pipelines due to operating difficulties and to provide
additional raw material for capacity expansion. A landowner recently filed a
lawsuit alleging that one of the pipelines is leaking brine. The lawsuit seeks
monetary damages and a
9
<PAGE> 12
LAROCHE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
prohibition of the Company's rights to transport brine through one of these
pipelines and asserts that the Company's right to replace this same pipeline has
expired. In connection with this lawsuit, the landowner sought a preliminary
injunction to immediately forbid the Company from using this pipeline. The Court
refused to grant such action but has required the Company to implement certain
programs including monitoring for potential leaks. With respect to the remaining
issues, management believes the Company has meritorious defenses to these
allegations and is vigorously defending itself against them. Because the matter
is in a preliminary stage, it is not possible to determine whether this
landowner will prevail.
In addition to the matters discussed above, the Company is involved in
certain other legal actions and claims arising in the ordinary course of
business. The amounts asserted in these matters are material to the Company's
financial statements, and certain claimants have not yet asserted an amount.
Although it is inherently impossible to predict with any degree of certainty the
outcome of such legal actions and claims, in the opinion of management (based on
advice of the Company's corporate and other legal counsel) such litigation and
claims are likely to be resolved without material adverse effect on the
Company's financial position and results of operations. It is possible, however,
that the resolution of certain matters could be material to the results of
operations of any single fiscal quarter.
7. SEASONALITY
A portion of the Company's nitrogen business serves the agricultural
fertilizer market. The business is seasonal with greater sales of such products
occurring in the spring and, to a lesser extent, the fall planting seasons.
8. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
investment in ChlorAlp (Note 3), the issuance of the Notes (Note 5) and the
acquisition of the German Facility (Note 3), as if each had occurred at the
beginning of fiscal 1998. The unaudited pro forma financial information is
provided for informational purposes only. It is based on historical information
and does not necessarily reflect the actual results of operations that would
have occurred had such transactions actually occurred at the beginning of such
periods nor is it necessarily indicative of future results of operations of the
combined company (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
AUGUST 31, 1997 AUGUST 31, 1997
--------------- -----------------
(unaudited)
<S> <C> <C>
Net sales............................................ $97,668 $222,324
Net income........................................... (1,861) 665
</TABLE>
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
included in this Quarterly Report on Form 10-Q and with the Company's
consolidated audited financial statements and notes thereto for the fiscal year
ended February 28, 1998.
SEGMENT INFORMATION
Effective March 1, 1998, the Company restructured its reporting
segments. Previously, the Company's reporting segments included: Nitrogen
Products, which produces nitrogen fertilizer, blasting grade ammonium nitrate,
and industrial ammonia; Electrochemical Products, which produces chlorine and
caustic soda ("chlor-alkali") and the fluorocarbon HCFC-141b; and Alumina
Chemicals, which produces specialty activated alumina chemicals, Versal(R) gel
aluminas and hydrated alumina. As a result of the restructuring, the production
and sale of fluorocarbon HCFC-141b has been combined with the Alumina Chemicals
segment to form the Specialty Chemicals segment in order to appropriately align
the segments with the Company's management structure. The following table
presents business segment information for the three months and six months ended
August 31, 1998 and 1997, respectively. The prior year figures presented have
been reclassified to conform with the current year reporting changes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1998 AUGUST 31, 1997
------------------ ------------------ ------------------ ---------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------- -------- ------ --------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Nitrogen products $ 43,022 42.7% $51,635 61.7% $109,811 48.1% $131,727 67.8%
Electrochemical
products 44,089 43.8 12,260 14.7 88,719 38.8 25,291 13.0
Specialty chemicals 13,614 13.5 19,780 23.6 29,895 13.1 37,320 19.2
--------- ------ ------- ------ -------- ------ -------- -----
Total $ 100,725 100.0% $83,675 100.0% 228,425 100.0% 194,338 100.0%
========= ====== ======== ====== ======== ====== ======== ======
INCOME (LOSS) FROM
OPERATIONS:
Nitrogen products $ 2,276 130.2% $ 1,007 203.4% $ 9,652 79.3% $ 9,407 115.2%
Electrochemical
products 2,744 157.0 434 87.7 8,360 68.7 1,881 23.0
Specialty chemicals (2,168) 124.0) 753 152.1 (2,994) (24.6) (111) (1.3)
Corporate expense (1,104) (63.2) (1,699) 343.2) (2,847) (23.4) (3,013) (36.9)
--------- ----- ------- ------ -------- ------ -------- ------
$ 1,748 100.0% $ 495 100.0% $ 12,171 100.0% $ 8,164 100.0%
Total ========= ===== ======= ====== ======== ====== ======== ======
</TABLE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended August 31, 1998 and August 31, 1997
Net Sales. Net sales for the quarter ended August 31, 1998 increased
$17.0 million (20.4%) to $100.7 million from $83.7 million for the quarter ended
August 31, 1997.
The Nitrogen Products segment's net sales for the quarter ended August
31, 1998 decreased $8.6 million (16.7%) compared to the corresponding quarter in
the preceding year. The decrease in net sales was primarily due to reduced
agricultural prices of $4.5 million due to increases in global ammonia
production capacity and decreased
11
<PAGE> 14
sales volumes in industrial ammonia of $1.6 million due to the availability of
substitute products and poor market conditions. The decrease was also caused by
decreased volumes at the Company's warehouse facilities of $2.0 million due to a
slow planting season and the inclusion of sales from a newly formed joint
venture arrangement with the Jefferson River Terminal ("JRT") in income from
equity investments rather than net sales.
The Electrochemical Products segment's net sales for the quarter ended
August 31, 1998 increased $31.8 million (259.6%) compared to the corresponding
quarter in the preceding year. The increase was primarily caused by the
contribution of net sales from certain chlor-alkali and chlorinated methane
manufacturing facilities (the "German Facility") located near Frankfurt in
Hochst, Germany, which were acquired during the fourth quarter of the fiscal
1998, of $31.9 million.
The Specialty Chemicals segment's net sales for the quarter ended
August 31, 1998 decreased $6.2 million (31.2%) compared to the corresponding
quarter in the preceding year. The decrease was a result of decreased net sales
in alumina chemicals of $2.0 million and a decrease in the net sales of
fluorocarbons of $4.2 million. The decrease in alumina chemicals net sales
consists primarily of decreased sales volume of $0.8 million for Versal(R)
products due to sales order delays from certain customers and decreased sales of
$1.1 million for Active products due to price competition and poor market
conditions. The decrease in fluorocarbons net sales resulted primarily from
decreased sales volume in fluorocarbon products of $4.3 million due to
overcapacity in the market and the absence of sales from LaRoche Air Systems,
Inc. ("LASI") of $0.5 million, which was shutdown at the end of prior year. The
decrease was offset by an increase in unit selling price of $0.6 million.
Income from Operations. Income from operations for the quarter ended
August 31, 1998 increased $1.3 million (253.1%) to $1.8 million from $0.5
million for the quarter ended August 31, 1997.
The Nitrogen Products segment's income from operations increased by
$1.3 million for the quarter ended August 31, 1998 as compared to the
corresponding quarter in the prior year. The increase was primarily due to
improved margins of $2.6 million caused by reduced raw material costs and
precious metal recoveries, decreased manufacturing and distribution costs at the
plants of $1.8 million, a charge of $1.2 million due to the disposal of an
ammonia barge in prior year and increased volume at the Crystal City plant of
$0.6 million due to the start up of the low density blasting product ("LD")
operations. These increases were offset by decreased agricultural prices of $4.5
million caused by increases in global ammonia production capacity. In addition,
the division experienced decreases in sales volumes in industrial ammonia of
$0.6 million due to the availability of substitute products. Increased cost of
natural gas of $0.3 million was also a factor.
The Electrochemical Products segment's income from operations increased
by $2.3 million for the quarter ended August 31, 1998 as compared to the
corresponding quarter in the previous year. The increase was primarily the
result of the acquisition of the German Facility, which contributed $1.9 million
and decreases in energy costs and fixed manufacturing spending of $0.9 million
and $0.3 million, respectively, resulting from efficiencies gained from plant
upgrades. These increases were partially offset by increased legal expenses of
$0.4 million related to the brine line litigation (as discussed in the notes to
the financial statements) and lost contribution margin on caustic and chlorine
products of $0.5 million due to decreased volume resulting from lost production.
The Specialty Chemicals segment's income from operations decreased by
$2.9 million resulting in a loss from operations of $2.2 million for the quarter
ended August 31, 1998. This decrease was comprised of an increase in the loss
from operations on alumina chemicals products of $2.7 million and an increase in
the loss from operations on fluorocarbon products of $0.3 million. The increase
in the loss from operations of alumina chemicals products was due to decreased
sales volume and selling price impact of Active alumina products of $1.2 million
and decreased sales volume of Versal(R) products of $0.7 million due to poor
market conditions. Additionally, unfavorable inventory variances of $1.2 million
added to the loss. A reduction in fixed costs of $0.4 million partially
attributable to the absence of labor difficulties experienced in prior year
partially offset the aforementioned declines. The decrease in income from
operations on fluorocarbon products included: (i) decreased sales volume offset
by pricing increases of $1.0 million and (ii) increased depreciation expenses of
$0.4 million due to the reduction of estimated useful lives on hydrochloro
fluorocarbon ("HCFC") assets. These amounts were partially offset by reduced
fixed manufacturing spending of $0.4 million, resulting primarily from reduction
of plant personnel,
12
<PAGE> 15
decreased fluorocarbon research and development costs of $0.4 million caused by
the discontinuation of development work on the next generation of foam blowing
agents and a decline in the loss from operations from LASI products of $0.3
million due to the shutdown of operations at the end of prior year.
Corporate Expenses. Corporate expenses for the quarter ended August 31,
1998 decreased $0.6 million to $1.1 million from $1.7 million for the quarter
ended August 31, 1997. For the quarters ended August 31, 1998 and 1997, as a
percentage of net sales, corporate expenses were 1.1% and 2.0%, respectively.
The decrease in corporate expenses for the quarter is primarily due to the
reduction of expenses related to the Company's performance based incentive plan
caused by lower than expected earnings.
Income From Equity Investments. Income from equity investments for the
quarter ended August 31, 1998 totaled $0.5 million compared to $0.9 million for
the quarter ended August 31, 1997. Income from equity investments reflects
equity income attributable to several joint ventures. The decrease in equity
income was primarily due to the contribution of the Company's share of loss from
the ChlorAlp joint venture, which was entered into in October 1997, of $0.6
million offset by an increase in the Company's share of income from the KLHP
joint venture of $0.3 million.
Other (Expense) Income, Net. For the quarter ended August 31, 1998,
other expense, net was $2.0 million compared to other income of $0.1 million for
the quarter ended August 31, 1997. The increase was primarily due to the
unrealized loss on the fair value of foreign natural gas exchange contracts for
foreign operations of $2.0 million and the loss on foreign currency
transactions, discussed below, of $0.8 million offset by foreign currency
translation gains of $0.2 million and a gain on the sale of an ammonia
distribution facility of $0.4 million.
The Company continues its policy of entering into fixed price forward
purchase contracts and option spread ("collar") arrangements in order to
establish a fixed price or a range of prices for its natural gas purchases in
order to manage its manufacturing costs. Additionally, the Company continues
participate in cross-currency interest rate swap agreements to hedge the
Company's investment in its foreign assets.
Interest and Amortization of Debt Expense. For the quarter ended August
31, 1998, interest and amortization of debt expense increased $1.6 million to
$5.4 million compared to $3.8 million for the quarter ended August 31, 1997. The
increase was primarily due to the Company's higher debt balances resulting from
the previously discussed acquisitions. At August 31, 1998 the Company's total
debt was $239.9 million compared to $142.4 million at August 31, 1997. The
amortization of debt expenses related to the Company's refinancing of its senior
indebtedness also contributed to the increase.
Benefit for Income Taxes. Benefit for income taxes for the quarter
ended August 31, 1998 was $0.9 million compared to a benefit of $0.9 million for
the quarter ended August 31, 1997. The effective tax benefit rate was 17.2% and
40.0%, respectively, at August 31, 1998 and 1997. The decrease in the effective
tax benefit rate resulted from the higher tax rates experienced by the Company's
international chlor-alkali operations (approximately 50%).
Net Loss. As a result of the factors described above, net loss for the
quarter ended August 31, 1998 was $4.2 million compared to a loss of $1.4
million for the quarter ended August 31, 1997.
Comparison of Six Months Ended August 31, 1998 and August 31, 1997
Net Sales. Net sales for the six months ended August 31, 1998 increased
$34.1 million (17.5%) to $228.4 million from $194.3 million for the six months
ended August 31, 1997.
The Nitrogen Products segment's net sales for the six months ended
August 31, 1998 decreased $21.9 million (16.6%) compared to the corresponding
period in the preceding year. The decrease in net sales was primarily due to
reduced agricultural prices of $9.6 million due to increases in global ammonia
production capacity and decreased sales volumes in industrial ammonia of $3.4
million due to the availability of substitute products. The decrease was also
caused by decreased volumes at the Company's warehouse facilities of $7.0
million due to a slow planting season and the inclusion of sales from a newly
formed joint venture arrangement with JRT in income from equity investments
rather than net sales. In addition, reduced LD resale volumes in the western
blasting market of
13
<PAGE> 16
$2.9 million contributed to the decline. These decreases were offset by
increased volume at the Crystal City facility of $1.6 million due to the start
up of the LD plant.
The Electrochemical Products segment's net sales for the six months
ended August 31, 1998 increased $63.4 million (250.8%) compared to the
corresponding period in the preceding year. The increase was primarily caused by
the contribution of net sales from the German Facility which was acquired during
the fourth quarter of the fiscal 1998, of $63.1 million. Additionally, increases
in ECU prices experienced by the Gramercy facility of $1.9 million due to
favorable market conditions were offset by decreased sales volume of $2.9
million resulting from the shutdown of the brine line for a two week period in
order to install an improved monitoring system.
The Specialty Chemicals segment's net sales for the six months ended
August 31, 1998 decreased $7.4 million (19.9%) compared to the corresponding
period in the preceding year. The decrease was a result of decreased net sales
in alumina chemicals of $2.5 million and a decrease in the net sales of
fluorocarbons of $4.9 million. The decrease in alumina chemicals net sales
consist primarily of decreased sales volume of $1.1 million for Versal(R)
products due to sales order delays from certain customers, a reduction in the
sales volume of Active aluminas of $1.0 million due to price competition and
poor market conditions, and decreased sales of $0.4 million as a result of the
sale, in the preceding year, of the remaining inventory of calcined and tabular
products. The decrease in fluorocarbons net sales resulted primarily from
decreased sales volume in fluorocarbon products of $4.7 million due to
overcapacity in the market and price competition.
Income (Loss) from Operations. Income from operations for the six
months ended August 31, 1998 increased $4.0 million (49.1%) to $12.2 million
from $8.2 million for the six months ended August 31, 1997.
The Nitrogen Products segment's income from operations increased by
$0.2 million for the six months ended August 31, 1998 as compared to the
corresponding period in the prior year. The decrease was primarily due to
decreased agricultural prices of $9.6 million caused by increases in global
ammonia production capacity. In addition, the division experienced decreases in
sales volume in industrial ammonia and at the Company's warehouse facilities of
$1.3 million and $0.9 million, respectively, due to poor market conditions, a
slow planting season and the inclusion of results from the JRT joint venture in
income from equity investments instead of income from operations. Increases in
the cost of natural gas of $1.0 million also added to the reduction of income
from operations. Such decreases were partially offset by improved margins of
$8.4 million, primarily due to decreased ammonia raw material costs and reduced
fixed manufacturing and distribution costs at the plants of $3.9 million due to
the write off of ammonia barges at the Crystal City facility in fiscal year
1998.
The Electrochemical Products segment's income from operations increased
by $6.5 million for the six months ended August 31, 1998 as compared to the
corresponding period in the prior year. The increase was primarily the result of
the acquisition of the German Facility, which accounted for $5.7 million and an
increase in European ECU prices of $1.9 million caused by favorable market
conditions. In addition, the division experienced lower energy costs of $0.6
million resulting from efficiencies gained from plant upgrades. These increases
were partially offset by lost contribution margin on caustic and chlorine
products of $1.6 million due to decreased volume resulting from the brine supply
problems, as noted above and unfavorable inventory variances of $0.3 million.
The Specialty Chemicals segment's loss from operations increased by
$2.9 million to a loss of $3.0 million for the six months ended August 31, 1998
as compared to the corresponding period in the preceding year. This increase was
the result of an increase in the loss from operations on alumina chemicals
products of $2.3 million and decreased income from operations on fluorocarbon
products of $0.6 million. The increase in the loss from operations of alumina
chemicals products was due to reduced sales volume and selling price of Active
alumina products of $1.6 million, decreased sales volume of Versal products of
$0.7 million and unfavorable inventory variances of $1.3 million caused by the
liquidation of inventory. These items were partially offset by decreased net
fixed costs of $1.3 million somewhat attributable to the absence of labor
difficulties experienced in prior year. The decrease in income from operations
on fluorocarbon products included: (i) decreased sales volume offset by pricing
increases of $1.1 million, (ii) increased depreciation expenses of $0.7 million
due to the reduction of estimated useful lives on HCFC assets and (iii)
unfavorable fixed inventory variances of $0.5 million primarily due to
production cutbacks to reduce inventory levels. These amounts were partially
offset by reduced fluorocarbon
14
<PAGE> 17
research and development costs of $0.7 million caused by the discontinuation of
development work on the next generation of foam blowing agents and a decrease in
the loss from operations from LASI products of $0.6 million due to the shutdown
of operations at the end of prior year.
Corporate Expenses. Corporate expenses for the six months ended August
31, 1998 decreased $0.2 million to $2.8 million from $3.0 million for the six
months ended August 31, 1997. For the six months ended August 31, 1998 and 1997,
as a percentage of net sales, corporate expenses were 1.2% and 1.6%,
respectively. The decrease in corporate expenses for the period is primarily due
to the reduction of expenses related to the Company's performance based
incentive plan caused by lower than expected earnings. This reduction was
partially offset by expenses associated with the Company's recent hiring of its
vice president of the U.S. chlor-alkali business during fiscal 1999.
Income From Equity Investments. Income from equity investments for the
six months ended August 31, 1998 totaled 2.4 million compared to $2.1 million
for the six months ended August 31, 1997. Income from equity investments
reflects equity income attributable to several joint ventures. The increase in
equity income was primarily due to the inclusion of the Company's share of
income from the JRT joint venture of $0.2 million and an increase in the
Company's share of income from the CRILAR joint venture of $0.5 million. These
increases were partially offset by decreases in the Company's share of income
from the Sugar Creek and KLHP joint ventures of $0.3 million and $0.1 million,
respectively.
Other (Expense) Income, Net. For the six months ended August 31, 1998,
other expense, net was $2.4 million compared to other income of $0.1 million for
the six months ended August 31, 1997. The increase was primarily due to the
unrealized loss on the fair value of foreign natural gas exchange contracts of
$2.0 million and the loss on the foreign currency transactions, discussed below,
of $2.1 million. These losses were offset by an insurance recovery of $0.4
million for property damage at the Crystal City plant, a gain on the sale of an
ammonia distribution facility of $0.4 million and foreign currency translation
gains of $0.5 million.
The Company continues its policy of entering into fixed price forward
purchase contracts and collar arrangements in order to establish a fixed price
or a range of prices for its natural gas purchases in order to manage its
manufacturing costs. Additionally, the Company continues to participate in
cross-currency interest rate swap agreements to hedge the Company's investment
in its foreign assets.
Interest and Amortization of Debt Expense. For the six months ended
August 31, 1998, interest and amortization of debt expense increased $3.1
million to $10.8 million compared to $7.7 million for the six months ended
August 31, 1997. The increase was primarily due to the Company's higher debt
balances resulting from the previously discussed acquisitions. At August 31,
1998 the Company's total debt was $239.9 million compared to $142.4 million at
August 31, 1997. The amortization of debt expenses related to the Company's
refinancing of its senior indebtedness also contributed to the increase.
Provision for Income Taxes. Provision for income taxes for the six
months ended August 31, 1998 was $2.3 million compared to a provision of $1.0
million for the six months ended August 31, 1997. The increase in the provision
resulted from the higher tax rates experienced by the Company's international
chlor-alkali operations (approximately 50%).
Net (Loss) Income. As a result of the factors described above, net
(loss) for the six months ended August 31, 1998 was $0.9 million compared to net
income of $1.5 million for the same period in the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of Six Months Ended August 31, 1998 and August 31, 1997
For the six months ended August 31, 1998, net cash provided by
operating activities decreased to $11.3 million compared to $24.2 million for
the six months ended August 31, 1997, respectively. The decrease was primarily
the result of net decreases in the Company's operating liabilities.
Specifically, an accounts payable decrease of $14.6 million was offset by an
increase in accrued liabilities of $3.4 million, resulting from the payment of
interest on the Company's debt agreements and the timing of working capital
requirements. In fiscal 1998, the increase in
15
<PAGE> 18
net cash provided by operating activities was primarily the result of increased
net income before depreciation and amortization and other non-cash charges
offset by less significant reductions in working capital than in the
corresponding six month period in the prior year.
Cash used by investing activities was $19.8 million for the six months
ended August 31, 1998 compared to $18.6 million in the six months ended August
31, 1997. The primary use of cash for the six months ended August 31, 1998 was
capital expenditures of $17.6 million. Major capital expenditures during the six
months ended August 31, 1998 included $2.6 million, $0.8 million and $1.0
million for the powerhouse project, cell improvements and brine line
improvements, respectively, at the Gramercy facility; $0.6 million for the
reconstruction of the nitric acid plant and plant upgrades at the Crystal City
facility; $0.8 million for fire safety improvements at the Cherokee facility;
$1.0 million for Geneva facility upgrades and turnaround costs; and $2.0 million
for the Company's ongoing software implementation project. Major capital
expenditures during the six months ended August 31, 1997 included $1.8 million
for the Phase II Cherokee expansion, $2.5 million for the Gramercy powerhouse
improvement projects, $3.3 million for the Company's ongoing software
implementation project and other capital projects of $5.2 million. The Company
intends to use cash flows from operations and borrowings under the Credit
Facility as the source of funds for the future completion of projects mentioned
above.
Net cash provided (used) by financing activities was $0.5 million and
($3.5 million) for the six months ended August 31, 1998 and 1997, respectively.
Cash used by financing activities of $8.4 million for the six months ended
August 31, 1998 included borrowings, net, of $8.4 million of outstanding
indebtedness under the Company's Revolving Credit Facility and repayments of
$5.6 million of long-term debt. Additionally, the Company purchased $1.6 million
of its redeemable common stock from former executives and paid dividends of $0.8
million to its shareholders. Cash used by financing activities of $3.5 million
for the six months ended August 31, 1997 included repayments of $2.8 million of
outstanding indebtedness under the Company's Old Facility. Management
anticipates that the Company's existing capital resources, cash flow generated
from future operations and drawings under the Revolving Credit Facility will
enable it to maintain its current operations, capital expenditures, acquisitions
and debt service for the foreseeable future.
EBITDA
EBITDA represents income from operations plus cash received from equity
investments, plus depreciation, amortization and other non-cash transactions
reflected in income from operations. In addition, EBITDA includes the Company's
50% share of ChlorAlp's EBITDA. EBITDA should not be considered as an
alternative measure of net income or cash flow provided by operating activities
(both as determined in accordance with generally accepted accounting
principles), but is presented to provide additional information related to the
Company's debt service capability. EBITDA should not be considered in isolation
or as a substitute for other measures of financial performance or liquidity. The
primary difference between EBITDA and cash flows provided by operating
activities relates primarily to changes in working capital requirements, and
payments made for interest and income taxes.
Comparison of Three Months Ended August 31, 1998 and August 31, 1997
EBITDA for the quarters ended August 31, 1998 and 1997 was $9.1 million
and $9.0 million, respectively. These amounts, included EBITDA of $5.7 million
and $6.3 million, respectively, for the Nitrogen Products segment; $4.2 million
and $1.3 million, respectively, for the Electrochemical Products segment; ($0.4
million) and $3.1 million, respectively, for the Specialty Chemicals segment;
and ($0.4 million) and ($1.7 million), respectively, for the corporate segment.
The decrease in EBITDA for the Nitrogen Products segment of $0.6 million was due
primarily to decreased agricultural prices caused by global increases in ammonia
production capacity, decreased volumes at the Company's warehouses due to a slow
planting season and increased natural gas costs. These decreases were offset
partially by improved margins primarily due to decreased ammonia raw material
costs and decreased fixed manufacturing costs at the plants. The increase in the
Electrochemical Products EBITDA of
16
<PAGE> 19
$3.0 million was primarily the result of the contribution of results from the
German Facility, which was acquired during the fourth quarter of fiscal 1998, of
$2.4 million. The decrease in EBITDA for the Specialty Chemicals segment of $3.5
million was due primarily to a decreased sales volume and selling price of
Active alumina products, unfavorable inventory variance due to liquidation of
inventory and decreased sales volume of HCFC's due to the phase out of those
products. The increase in corporate segment's EBITDA for the quarter is
primarily due to the reduction of expenses related to the Company's performance
based incentive plan caused by lower than expected earnings.
Comparison of Six Months Ended August 31, 1998 and August 31, 1997
EBITDA for the six months ended August 31, 1998 and 1997 was $29.4
million and $23.9 million, respectively. These amounts included EBITDA of $16.1
million and $18.7 million, respectively, for the Nitrogen Products segment;
$13.7 million and $3.5 million, respectively, for the Electrochemical Products
segment; $1.7 million and $4.7 million, respectively, for the Specialty
Chemicals segment; and ($2.1 million) and ($3.0 million), respectively, for the
corporate segment. The decrease in EBITDA for the Nitrogen Products segment of
$2.6 million was due primarily to decreased agricultural prices caused by global
increases in ammonia production capacity, decreased volumes at the Company's
warehouses due to a slow planting season and increased natural gas costs. These
decrease were offset partially by improved margins primarily due to decreased
ammonia raw material costs and decreased fixed manufacturing costs at the
plants. The increase in the Electrochemical Products EBITDA of $10.1 million was
primarily the result of the contribution of results from the German Facility,
which was acquired during the fourth quarter of fiscal 1998, $9.1 million. The
decrease in EBITDA for the Specialty Chemicals segment of $3.0 million was due
primarily to a decreased sales volume and selling price of Active alumina
products, unfavorable inventory variance due to liquidation of inventory and
decreased sales volume of HCFC's due to the phase out of those products. The
increase in corporate segment's EBITDA for the period is primarily due to the
reduction of expenses related to the Company's performance based incentive plan
caused by lower than expected earnings.
YEAR 2000 COMPLIANCE
The Company is continuing a review of its business and operating
computer systems, to attempt to identify ways in which these systems could be
affected by problems incorrectly processing date information on and after
January 1, 2000. This process includes assessing all systems used by the Company
for Year 2000 impacts and costs to upgrade, upgrading systems that are not Year
2000 ready, and testing and monitoring systems for Year 2000 readiness. The
Company's implementation of a new enterprise-wide financial and operational
computer system during the past two years, which is expected to be completed by
December 1998, has facilitated this process, and is expected to significantly
reduce the Company's exposure to any negative impact of Year 2000.
Management is in the process of completing its evaluation of Year 2000
impact on the Company, and potential exposures of the Company to related
problems of its customers and suppliers. Based on preliminary findings,
management believes the potential exposure related to Year 2000, will not have a
material adverse effect on the Company's business, financial condition, or
results of operations. Additionally, management estimates that the total cost of
addressing the Year 2000 issue will be approximately $250,000. However, there
can be no assurance that the Company will identify all date-handling problems in
its business or operating systems or those of its customers and suppliers in
advance of their occurrence or that the Company will be able to successfully
remedy problems that are discovered, and accordingly, there can be no assurance
that such non-compliance will not have a material adverse effect on the Company.
SEASONALITY
Demand for the Company's fertilizer products is seasonal. Such seasonality
of demand requires the Company to build its inventory in anticipation of periods
of peak demand and may adversely affect the Company's cash flow.
17
<PAGE> 20
The Company typically realizes higher prices and margins for fertilizer during
the spring and, to a lesser extent, the fall planting seasons. Demand for the
Company's fertilizer is primarily dependent on United States agricultural
conditions, which can be volatile as a result of a number of factors, the most
important of which are weather patterns and conditions, current and projected
grain stocks and prices, and the governmental agricultural policy. Due to
fertilizer seasonality, interim results of operations may not be indicative of
the results expected for the full fiscal year. In addition, the Company
periodically performs extended major maintenance on its manufacturing facilities
that results in periods of reduced production at such facilities. Due to the
timing of these activities and other factors, interim results of operations may
not be indicative of the results expected for the full fiscal year.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
General. The Company and its subsidiaries have been named as defendants
in a number of legal actions arising from normal business activities. Although
management believes, based upon the information currently available, that,
except as otherwise described in this section, such other legal actions are
likely to be resolved without a material adverse effect upon the financial
condition and results of operations of the Company, resolution of certain
matters could be material to the results of operations of any single fiscal
quarter. However, the aggregate cost of such legal actions are inherently
impossible to predict and there can therefore be no assurance that this will be
the case.
Recent Developments. As previously reported, in June 1996, the Company
was named as a defendant in a suit alleging the Company's contractor struck and
damaged a gasoline pipeline owned by the plaintiff while the contractor was
performing work on an adjacent Company-owned facility. The pipeline later
ruptured leaking gasoline into the Blind River and surrounding area near
Gramercy, Louisiana. In addition, the Company was named in a class-action
petition and in one other individual suit filed on behalf of persons allegedly
harmed by the rupture of the pipeline. In August 1998, the Company settled the
suit filed by Marathon, with its exposure limited to the $1 million deductible
on its insurance coverage. The Company has coverage for and continues to defend
itself against the remaining claims. Because the remaining proceedings are in
the preliminary stage, it is not yet possible to predict whether the Company
will incur any liability or reasonably estimate the costs of any possible
liability.
ITEM 5. OTHER INFORMATION
On October 9, 1998, the Board of Directors elected Harold W. Ingalls to
the office of President and Chief Executive Officer of the Company. Mr. Ingalls'
appointment to the office is effective immediately.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
(b) REPORTS ON FORM 8-K
One Current Report on Form 8-K was filed on August 10, 1998, during the
quarter for which this report is filed, to report the resignation of the
Company's President and the appointment of Harold W. Ingalls as a Director and
Chief Operating Officer of the Company.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAROCHE INDUSTRIES INC.
(Registrant)
Date: October 15, 1998 By: /s/ Harold W. Ingalls
----------------------------------
Harold W. Ingalls
President and Chief Executive Officer
(Principal Executive Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS-AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q-2ND QUARTER FISCAL 1999-LAROCHE INDUSTRIES, INC.
</LEGEND>
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<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
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<RECEIVABLES> 64,117
<ALLOWANCES> 521
<INVENTORY> 33,318
<CURRENT-ASSETS> 103,420
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<TOTAL-ASSETS> 397,425
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</TABLE>
