<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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE QUARTERLY PERIOD ENDED MAY 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 or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) 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)
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 JULY 15, 1998
----- -------------------------------
Common Stock, $.01 par value 437,977 Shares
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<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 May 31, 1998 and February 28, 1998 1
Condensed Consolidated Statements of Income for the three months ended May 31, 1998 and
May 31, 1997 3
Condensed Consolidated Statements of Cash Flows for the three months ended May 31, 1998
and May 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 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
</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>
MAY 31, FEBRUARY 28,
1998 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,277 $ 12,884
Receivables:
Trade, net of allowances of $524 and $527 as of
May 31, 1998 and February 28, 1998, respectively 63,543 52,709
Other 19,591 16,879
Inventories (Note 4) 31,597 36,399
Other current assets 770 1,162
---------- ----------
Total current assets 120,778 120,033
Investments and advances to affliates 53,025 50,428
Property, plant and equipment, at cost 329,343 321,685
Less accumulated depreciation (110,451) (105,561)
---------- ----------
Net property, plant and equipment 218,892 216,124
Other assets 18,066 18,829
========== ==========
Total assets $ 410,761 $ 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>
MAY 31, FEBRUARY 28,
1998 1998
--------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 5) $ 31,000 $ 22,000
Accounts payable 52,920 53,431
Accrued compensation 9,952 8,503
Other accrued liabilities 8,224 15,457
Current portion of long-term debt (Note 5) 6,177 7,657
--------- -----------
Total current liabilities 108,273 107,048
Long-term debt (Note 5) 206,408 207,418
Deferred income taxes 17,518 17,518
Other noncurrent liabilities 40,415 38,277
Commitments and contingencies
Redeemable common stock 3,601 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 34,194 31,225
Foreign currency translation adjustment (161) (90)
Minimum pension liability (121) (121)
--------- -----------
Total stockholders' equity 34,546 31,648
========= ==========
$ 410,761 $ 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
-----------------------------
MAY 31, MAY 31,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 127,700 $ 110,663
Cost of sales 107,323 94,411
--------- ---------
Gross profit 20,377 16,252
Selling, general and administrative
expenses 9,954 8,583
--------- ---------
Income from operations 10,423 7,669
Interest and amortization of debt
expense (5,424) (3,933)
Income from equity investments 1,833 1,248
Other expense, net (353) (39)
--------- ---------
Income before income taxes 6,479 4,945
Provision for income taxes (3,145) (1,978)
--------- ---------
Net income $ 3,334 $ 2,967
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 6
LaRoche Industries Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MAY 31, MAY 31,
1998 1997
-------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,334 $ 2,967
Depreciation and amortization 6,354 5,919
Net change in operating assets and liabilities (11,853) 13,861
Equity income, net of distributions (2,016) 151
-------- --------
Net cash (used) provided by operating activities (4,181) 22,898
INVESTING ACTIVITIES
Capital expenditures (8,858) (7,792)
Investments in and advances to affliates (931) (361)
Plant turnarounds - (194)
Proceeds from sale of facilities 770 -
-------- --------
Net cash used by investing activities (9,019) (8,347)
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit facility 9,000 (9,925)
Sales of common stock with redemption features 50 150
Repayments of long-term debt (2,510) (1,355)
Dividends paid (365) (219)
-------- --------
Net cash provided (used) by financing activities 6,175 (11,349)
-------- --------
Effect of exchange rate changes on cash (582) -
-------- --------
Net (decrease) increase in cash (7,607) 3,202
Cash at beginning of period 12,884 1,165
-------- --------
Cash at end of period $ 5,277 $ 4,367
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 7
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 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 ended May 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 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.
2. NEW ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards 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
5
<PAGE> 8
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
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 will have a material impact on the Company's consolidated financial
statements. The Company has evaluated SFAS 131 and has determined that its
impact on the Company's condensed consolidated financial statements is not
material.
In February 1998, the FASB issued Statement 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.
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'
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 consolidated statement of
income includes 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.
6
<PAGE> 9
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
4. INVENTORIES
Components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
MAY 31, 1998 1998
------------ ------------
<S> <C> <C>
Finished goods and in-progress... $17,796 $20,143
Inventory purchased for resale... 2,791 6,689
Raw materials.................... 2,384 1,277
Supplies and catalysts........... 9,241 8,905
----------- ---------
32,212 37,014
Less LIFO reserve................ (615) (615)
----------- ---------
$31,597 $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.
5. BORROWING ARRANGEMENTS
The Company's borrowings include the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28
MAY 31, 1998 1998
------------ -----------
<S> <C> <C>
Revolving credit facility................... $ 31,000 $ 22,000
========== =========
Term debt:
9 1/2% senior subordinated notes........... $ 174,268 $ 174,248
13% senior subordinated notes........... 915 915
Term loan............................... 33,542 34,271
Other notes payable..................... 3,860 5,641
---------- ---------
Total.............................. 212,585 215,075
Less current portion........................ (6,177) (7,657)
---------- ---------
Long-term debt.............................. $ 206,408 $ 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 were 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
7
<PAGE> 10
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
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 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 May 31, 1998 and February
28, 1998, $31.0 million and $22.0 million, respectively, was outstanding under
the Revolving Credit Facility. The weighted average borrowing rate at May 31,
1998 and 1997 was approximately 8.34% 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 May
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 has received amendments
and waivers with respect to such noncompliance. While the Company expects to
remain in compliance with the covenants contained in the debt agreements, it is
possible 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
8
<PAGE> 11
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
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 a one-count information 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 is 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, resulting in the release of gasoline into the Blind
River and surrounding area near Gramercy, Louisiana. The plaintiff seeks
recovery of damages of approximately $8.5 million. In addition, the Company has
been 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. The Company
is continuing a diligent investigation of the situation in order to evaluate
the allegations and the relative responsibility of the parties involved. The
Company is also responding to inquiries from regulatory authorities of the
State of Louisiana related to the gasoline release. Management believes the
Company has meritorious defenses to these claims and is vigorously defending
itself against them. Because the matter is in a preliminary stage, it is not
yet possible to predict whether the Company will incur any liability for the
rupture and release or to reasonably estimate the cost of any possible
liability. 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 been evaluating the
possibility of replacing one of the pipelines due to operating difficulties and
to provide additional raw material for capacity expansion. A landowner recently
filed a lawsuit that one of the pipelines is leaking brine. The lawsuit seeks
monetary damages and that the Company's rights to transport brine through one of
these pipelines should be prohibited and that its 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
9
<PAGE> 12
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued)
(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 MAY 31,
1997
-------------
(unaudited)
<S> <C>
Net sales............................................ $137,972
Net income........................................... 2,886
</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.
SIGNIFICANT DEVELOPMENTS
In September 1997, the Company refinanced its outstanding indebtedness
under its then-outstanding $100.0 million aggregate principal amount of 13%
Senior Subordinated Notes due 2004 (the "13% Notes") and then-existing bank
credit facility (the "Old Facility") (collectively, the "Refinancing"). The
Refinancing was funded through the issuance of $175.0 million aggregate
principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") and
the Credit Facility (as defined), the net proceeds from which were used to
repurchase approximately 99% of the 13% Notes and repay certain borrowings under
the Revolving Credit Facility. In connection with issuing the Notes and
redeeming the 13% Notes, the Company paid call and prepayment premiums and
incurred other costs. 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 is reflected in the Company's February 28, 1998 consolidated
statement of income as an extraordinary charge. In August 1997, the Company
entered into a six year, $160.0 million senior secured credit facility (the
"Credit Facility"), which currently provides for a $125.0 million revolving
credit facility (the "Revolving Credit Facility") and a $35.0 million term loan
(the "Term Loan"). The Company used a portion of the Revolving Credit Facility
to retire the Old Facility. All of the Term Loan was drawn in October 1997 for
purposes of closing the Chlor-Alkali Joint Venture (as defined).
The Company historically has expanded its business through acquisitions of
other related businesses and investments in joint venture arrangements, and the
Company continues to evaluate acquisition and joint venture opportunities.
Accordingly, in October 1998, the Company purchased a 50% interest in the French
chlor-alkali business at Rhodia Chimie, S.A. ("RPC"), a subsidiary of
Rhone-Pohlene, S.A. and entered into certain related arrangements with RPC (the
"Chlor-Alkali Joint Venture"). In connection with the Chlor-Alkali Joint
Venture, the Company purchased a 50% stock interest in ChlorAlp S.A.S.
("ChlorAlp"). The Company funded the purchase by drawing under the Team Loan
portion of its Credit Facility. Additionally, on December 31, 1997, the Company
(through a wholly-owned subsidiary) purchased certain chlor-alkali and
chlorinated methane manufacturing facilities (the "German Facility") located
near Frankfurt in Hochst, Germany from Celanese GmbH, Frankfurt, a subsidiary of
Hoechst AG. The Company funded the purchase with funds drawn from its Revolving
Credit Facility portion of its Credit Facility. In connection with the
aforementioned acquisitions, the Company entered into cross-currency interest
rate swap agreements to hedge its investments.
11
<PAGE> 14
SEGMENT INFORMATION
Effective March 1, 1998, the Company restructured its reporting segments.
Previously, the Company's reporting segments included: Nitrogen Products, which
produce nitrogen fertilizer, blasting grade ammonium nitrate, and industrial
ammonia; Electrochemical Products, which produce chlorine and caustic soda
("chlor-alkali") and the fluorocarbon HCFC-141b; and Alumina Chemicals, which
produce specialty activated alumina chemicals, Versal(R) gel aluminas and
hydrated alumina. Effective March 1, 1998, the production and sale of its
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 ended May 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
-----------------------------------------------------
MAY 31, 1998 MAY 31, 1997
------------------------- ------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES:
Nitrogen products $ 66,789 52.3% $ 80,092 72.4%
Electrochemical products 44,630 34.9 13,031 11.8
Specialty chemicals 16,281 12.8 17,540 15.8
----------- ---------- ---------- ----------
Total $ 127,700 100.0% $ 110,663 100.0%
=========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Nitrogen products $ 7,376 70.8% $ 8,400 109.5%
Electrochemical products 5,616 53.9 1,444 18.8
Specialty chemicals (826) (8.0) (861) (11.2)
Corporate expense (1,743) (16.7) (1,314) (17.1)
----------- ---------- ---------- ----------
Total $ 10,423 100.0% $ 7,669 100.0%
=========== ========== ========== ==========
</TABLE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended May 31, 1998 and May 31, 1997
Net Sales. Net sales for the quarter ended May 31, 1998 increased $17.0
million (15.4%) to $127.7 million from $110.7 million for the quarter ended May
31, 1997.
The Nitrogen Products segment's net sales for the quarter ended May 31,
1998 decreased $13.3 million (16.6%) compared to the corresponding quarter in
the preceding year. The decrease in net sales was primarily due to reduced
agricultural prices of $5.8 million due to increases in global ammonia
production capacity and decreased sales volumes in industrial ammonia of $1.7
million due to poor market conditions. The decrease was also caused by
decreased volumes at the Company's warehouse facilities of $6.1 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 May
31, 1998 increased $31.6 million (242.5%) compared to the corresponding quarter
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 $31.2 million. Additionally, increases in ECU prices
experienced by the Gramercy facility of $1.9 million due to
12
<PAGE> 15
favorable market conditions were offset by decreased sales volume of $2.1
million resulting from the shutdown of the brine line for a two week period in
order to install an improved monitoring system designed to address the recent
lawsuit asserted by the landowner of the property upon which the pipeline
transverses (as disclosed in the notes to the financial statements).
The Specialty Chemicals segment's net sales for the quarter ended May 31,
1998 decreased $1.3 million (7.2%) compared to the corresponding quarter in the
preceding year. The decrease was a result of decreased net sales in alumina
chemicals of $0.5 million and a decrease in the net sales of fluorocarbons of
$0.8 million. The decrease in alumina chemicals net sales consist primarily of
decreased sales volume of $0.4 million for Versal(R) products due to sales
order delays from certain customers and decreased sales of $0.4 million on the
remaining inventory of calcined and tabular products, whose operations were
sold in fiscal year 1997. The decrease in fluorocarbons net sales resulted
primarily from decreased sales volume and selling prices in fluorocarbon
products of $0.6 million due to poor market conditions.
Income (Loss) from Operations. Income (loss) from operations for the
quarter ended May 31, 1998 increased $2.8 million (35.9%) to $10.4 million from
$7.7 million for the quarter ended May 31, 1997.
The Nitrogen Products segment's income from operations decreased by $1.0
million (12.2%) for the quarter ended May 31, 1998 as compared to the
corresponding quarter in the prior year. The decrease was primarily due to
decreased agricultural prices of $5.8 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
$0.6 million and $0.5 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 $0.7 million also added to the reduction of first
quarter income from operations. Such decreases were partially offset by
improved margins of $5.9 million primarily due to decreased ammonia raw
material costs and reduced fixed manufacturing costs at the plants of $0.9
million.
The Electrochemical Products segment's income from operations increased by
$4.2 million (288.9%) for the quarter ended May 31, 1998 as compared to the in
the corresponding quarter in the prior year. The increase was primarily the
result of the acquisition of the German Facility, which accounted for $3.8
million and an increase in ECU prices of $1.9 million caused by favorable
market conditions. These increases were partially offset by increased natural
gas costs of $0.3 million and lost contribution margin on caustic and chlorine
products of $1.2 million due to decreased volume resulting from the brine
supply problems, as noted above.
The Specialty Chemicals segment's loss from operations decreased by $0.1
million (4.1%) to a loss of $0.8 million for the quarter ended May 31, 1998 as
compared to the corresponding quarter in the preceding year. This decrease was
a result of a decrease in the loss from operations on alumina chemicals
products of $0.3 million and decreased income from operations on fluorocarbon
products of $0.3 million. The decrease in the loss from operations of alumina
chemicals products was due to decreased net fixed costs of $0.7 million
somewhat attributable to the absence of labor difficulties experienced in prior
year, partially offset by a lower contribution margin on decreased sales of
Active alumina products of $0.3 million. The decrease in income from operations
on fluorocarbon products included: (i) unfavorable fluorocarbon fixed inventory
variances of $0.5 million due to production cutbacks and reduced inventory
levels, and (ii) increased depreciation expenses of $0.4 million due to the
reduction of estimated useful lives on hydrochloric fluorocarbon assets. These
amounts were partially offset by reduced 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 decrease in the loss from
operations from LaRoche Air Systems, Inc. products of $0.4 million due to the
shutdown of operations at the end of prior year.
Corporate Expenses. Corporate expenses for the quarter ended May 31, 1998
increased $0.4 million (32.7%) to $1.7 million from $1.3 million for the
quarter ended May 31, 1997. For the quarters ended May 31, 1998 and 1997, as a
percentage of net sales, corporate expenses were 1.4% and 1.2%, respectively.
The increase in corporate expenses for the quarter is primarily due to expenses
associated with the Company's recent hiring of its vice president of the U.S.
Chlor-Alkali business during fiscal 1999.
The Company continues its policy of entering into fixed price forward
purchase contracts and option spread ("collar") arrangements in order
13
<PAGE> 16
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 enter into cross-currency interest rate swap agreements to hedge the
Company's investment in its foreign assets.
Income From Equity Investments. Income from equity investments for the
quarter ended May 31, 1998 totaled $1.8 million compared to $1.2 million for
the quarter ended May 31, 1997. Income from equity investments reflects equity
income attributable to several joint ventures. The increase in equity income
was primarily due to the contribution of the Company's share of income from the
ChlorAlp joint venture, which was entered into in October 1997, of $0.5 million
and an increase in the Company's share of income from the CRILAR joint venture
of $0.1 million.
Other Expense, Net. For the quarter ended May 31, 1998, other expense, net
was $0.4 million compared to other expense, net of $39,000 for the quarter
ended May 31, 1997. The increase was primarily due to the loss on the foreign
currency transaction discussed above of $1.3 million offset by an insurance
recovery of $0.4 million for property damage at the Crystal City plant and
foreign currency translation gains of $0.5 million.
Interest and Amortization of Debt Expense. For the quarter ended May 31,
1998, interest and amortization of debt expense increased $1.5 million to $5.4
million compared to $3.9 million for the quarter ended May 31, 1997. The
increase was primarily due to the Company's higher debt balances resulting from
the previously discussed acquisitions. At May 31, 1998 the Company's total debt
was $212.6 million compared to $106.0 million at May 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 quarter
ended May 31, 1998 was $3.1 million compared to a provision of $2.0 million for
the quarter ended May 31, 1997. The increase in the provision resulted from the
higher tax rates in Europe (55%) and reflects the increase in income before
taxes as compared to the corresponding quarter in the preceding year. The
Company's effective tax rate was 48.5% and 40.0% for the quarters ended May 31,
1998 and 1997, respectively.
Net Income. As a result of the factors described above, net income for the
quarter ended May 31, 1998 was $3.3 million compared to $3.0 million for the
quarter ended May 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used) provided by operating activities was ($4.2 million) and $22.9
million for the quarter ended May 31, 1998 and 1997, respectively. The decrease
was primarily the result of net decreases in the Company's operating
liabilities. Specifically, accrued liabilities decreased $6.3 million as a
result of the payment of interest on the Company's debt agreements and the
timing of working capital requirements. In fiscal 1998, the increase in net
cash provided by operating activities was primarily the result of more
significant reductions in working capital of $4.3 million than the
corresponding quarter in the prior year.
Cash used by investing activities was $9.0 million for the quarter ended May
31, 1998 compared to $8.3 million in the quarter ended May 31, 1997. The
primary use of cash for the quarter ended May 31, 1998 was capital expenditures
of $8.9 million. Major capital expenditures during the quarter ended May 31,
1998 included $1.2 million, $0.5 million and $0.4 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; and $1.3 million for the Company's
ongoing software implementation project. Major capital expenditures during the
quarter ended May 31, 1997 included $1.4 million for the Cherokee expansion,
$1.3 million for the Gramercy powerhouse improvement projects, $0.4 million for
health and safety upgrades in Aluminas and $1.2 million for the Company's
ongoing software implementation project. The Company intends to use cash flows
from operations and borrowings under the Credit Facility as the source of funds
for the projects mentioned above.
14
<PAGE> 17
Net cash provided (used) by financing activities was $6.2 million and ($11.3
million) for the quarter ended May 31, 1998 and 1997, respectively. Cash used
by financing activities of $6.2 million for the quarter ended May 31, 1998
included borrowings, net, of $9.0 million of outstanding indebtedness under the
Company's Revolving Credit Facility and repayments of $2.5 million of long-term
debt. Cash used by financing activities of $11.3 million for the quarter ended
May 31, 1997 included repayments, net, of $9.9 million of outstanding
indebtedness under the Company's Old Facility and repayments of $1.4 million of
long-term debt, which constituted the Company's final payment on the USX Notes.
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 for the quarters ended May 31, 1998 and 1997 was $20.3 million and $14.9
million, respectively. These amounts, for the quarters ended May 31, 1998 and
1997, included EBITDA of $10.4 million and $12.4 million, respectively, for the
Nitrogen Products segment; $9.4 million and $2.2 million, respectively, for the
Electrochemical Products segment; $2.2 million and $1.6 million, respectively,
for the Specialty Chemicals segment; and ($1.7 million) and ($1.3 million),
respectively, for the corporate segment. The decrease in EBITDA for the Nitrogen
Products segment of $2.0 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. The increase in the Electrochemical Products EBITDA of $7.2
million was primarily the result of the contribution of results from the German
Facility and the Company's 50% interest in ChlorAlp, which were acquired during
the third and fourth quarters of fiscal 1998, respectively. The increase in
EBITDA for the Specialty Chemicals segment of $0.5 million was due primarily to
a decrease in fixed manufacturing spending resulting from the absence of
expenses related to labor difficulties and the reduction of research and
development expenses caused by the discontinuation of development work on the
next generation of foam blowing agents. EBITDA represents income from operations
plus cash received from equity investments plus depreciation, amortization and
non-cash long-term asset writedowns 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.
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. 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 United States government's 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.
15
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
No. Description of Exhibit
- ------- -------------------------------------------
27 Financial Data Schedule (for SEC use only).
(B) REPORTS ON FORM 8-K
None
17
<PAGE> 20
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: July 15, 1998 By: /s/ Grant O. Reed
----------------------------------------
Grant O. Reed
President, Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1998 By: /s/ Harold W. Ingalls
----------------------------------------
Harold W. Ingalls
Vice President, Chief Financial Officer
(Principal Accounting Officer)
18
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS, MAY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q, FIRST QUARTER FISCAL 1999, LAROCHE INDUSTRIES.
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<PERIOD-START> MAR-01-1998
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<RECEIVABLES> 64,067
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<INVENTORY> 31,597
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