<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 November 30, 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 (I.R.S. Employer
of Incorporation) 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 JANUARY 14, 1999
----- ----------------------------------
Common Stock, $.01 par value 432,133 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 November 30, 1998 and
February 28, 1998 1
Condensed Consolidated Statements of Income for the three
months and nine months ended November 30, 1998 and November 30,
1997 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended November 30, 1998 and November 30, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
</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>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,070 $ 12,884
Receivables:
Trade, net of allowances of $559 and $527 as of
November 30, 1998 and February 28, 1998, respectively 62,857 52,709
Other 8,687 16,879
Inventories (Note 4) 33,359 36,399
Other current assets 1,903 1,162
--------- ---------
Total current assets 108,876 120,033
Investments and advances to affliates 54,217 50,428
Property, plant and equipment, at cost 343,167 321,685
Less accumulated depreciation (118,853) (105,561)
--------- ---------
Net property, plant and equipment 224,314 216,124
Other assets 18,280 18,829
--------- ---------
Total assets $ 405,687 $ 405,414
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 4
LaRoche Industries Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 5) $ 36,000 $ 22,000
Accounts payable 46,469 53,431
Accrued compensation 6,507 8,503
Other accrued liabilities 16,030 15,457
Current portion of long-term debt (Note 5) 2,917 7,657
Long term debt reclassified as current (Note 5) 213,077 --
--------- ---------
Total current liabilities 321,000 107,048
Long-term debt (Note 5) -- 207,418
Deferred income taxes 17,518 17,518
Other noncurrent liabilities 43,112 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 22,371 31,225
Foreign currency translation adjustment (884) (90)
Minimum pension liability (120) (121)
--------- ---------
Total stockholders' equity 22,001 31,648
--------- ---------
$ 405,687 $ 405,414
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 5
LaRoche Industries Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 82,470 $ 75,190 $ 294,764 $ 250,865
Cost of sales 75,996 62,074 256,300 214,289
-------- -------- --------- ---------
Gross profit 6,474 13,116 38,464 36,576
Selling, general and administrative
expenses 10,024 9,262 26,990 24,090
-------- -------- --------- ---------
(Loss) income from continuing
operations (3,550) 3,854 11,474 12,486
Interest and amortization of debt
expense (5,128) (3,730) (14,525) (10,086)
Income (loss) from equity investments 837 (515) 791 (454)
Other expense, net (1,324) (1,582) (3,700) (1,555)
-------- -------- --------- ---------
(Loss) income from continuing
operations before income taxes and
extraordinary charges (9,165) (1,973) (5,960) 391
Benefit (provision) for income taxes 3,188 789 200 (157)
-------- -------- --------- ---------
(Loss) income from continuing
operations before extraordinary charges (5,977) (1,184) (5,760) 234
(Loss) income from operations of
discontinued Alumina Chemical
division, net of tax (Note 6) (755) 481 (1,837) 611
-------- -------- --------- ---------
(Loss) income from operations
before extraordinary charges (6,732) (703) (7,597) 845
Extraordinary charge from debt
extinguishment, net of $7,740
tax benefit (Note 5) -- (12,018) -- (12,018)
-------- -------- --------- ---------
Net loss $ (6,732) $(12,721) $ (7,597) $ (11,173)
======== ======== ========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 6
LaRoche Industries Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
NOVEMBER 30, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,597) $ (11,173)
Depreciation and amortization 20,571 17,184
Net change in operating assets and liabilities (2,408) 4,156
Extraordinary charge -- 12,018
Loss (gain) on disposition of assets and other (153) 1,679
Equity income, net of distributions (972) 596
Deferred income taxes -- 382
-------- ---------
Net cash provided by operating activities 9,441 24,842
INVESTING ACTIVITIES
Capital expenditures (28,119) (25,474)
Investments in and advances to affliates (3,878) (37,097)
Proceeds from sales of facilities 1,991 --
-------- ---------
Net cash used by investing activities (30,006) (62,571)
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit facility 22,688 (37,605)
Sales of common stock with redemption features 128 176
Purchase of redeemable common stock (1,646) (750)
Additions to long-term debt -- 209,215
Repayments of long-term debt (7,808) (101,919)
Premium payments on the early extinguishment of debt -- (17,331)
Costs of refinancing -- (11,629)
Dividends paid (1,198) (767)
-------- ---------
Net cash provided by financing activities 12,164 39,390
-------- ---------
Effect of exchange rate changes on cash (2,413) --
-------- ---------
Net (decrease) increase in cash (10,814) 1,661
Cash at beginning of period 12,884 1,165
-------- ---------
Cash at end of period $ 2,070 $ 2,826
======== =========
</TABLE>
See accompanying notes
4
<PAGE> 7
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOVEMBER 30, 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 nine months ended November 30, 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, option spread "collar" arrangements and other instruments 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)
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.
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)
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>
NOVEMBER 30, 1998 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
Finished goods and in-progress... $17,923 $20,143
Inventory purchased for resale... 1,571 6,689
Raw materials.................... 2,035 1,277
Supplies and catalysts........... 12,445 8,905
------- -------
33,974 37,014
Less LIFO reserve................ (615) (615)
------- -------
$33,359 $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)
5. BORROWING ARRANGEMENTS
The Company's borrowings include the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, 1998 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
Revolving credit facility................... $ 36,000 $ 22,000
======== ========
Term debt:
9 1/2% senior subordinated notes........ $174,288 $174,248
13% senior subordinated notes........... 915 915
Term loan............................... 32,083 34,271
Other notes payable..................... 8,708 5,641
-------- --------
Total.............................. 215,994 215,075
Less current portion........................ (2,917) (7,657)
-------- --------
Long-term debt.............................. $213,077 $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 used to repurchase $99.1
million of the Company's 13% Senior Subordinated Notes due 2004 (the "13%
Notes") and 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 operations as an
extraordinary charge.
The Notes require semi-annual payments of interest 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 (the "Credit Facility"), which provides for a
$125.0 million revolving credit facility (the "Revolving Credit Facility") and
$35.0 million term loan (the "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 on outstanding borrowings 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
November 30, 1998 and February 28, 1998, $36.0 million and $22.0 million,
respectively, was outstanding under the Revolving Credit Facility. The weighted
average borrowing rate at November 30, 1998 and February 28, 1998
8
<PAGE> 11
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
was approximately 7.62% 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 7.31% and 7.62% at November 30,
1998 and February 28, 1998, respectively. Under the terms of the Credit
Agreement, the Company pays commitment fees, on a quarterly basis, ranging from
.25% to .50% per annum of average unused balances.
The Credit Facility includes financial covenants, which among other
things, require the Company to maintain certain debt to earnings and interest
coverage ratios and minimum net worth. At February 28, 1998, the Company was not
in compliance with certain of these covenants, and received amendments and
waivers with respect to such noncompliance. At November 30, 1998, the Company
again was not in compliance with the amended financial covenants of the Credit
Facility, and received a waiver with respect to such noncompliance to February
28, 1999. The Company is currently working with its creditors to obtain
additional modifications to the Credit Facility that should allow the Company to
remain in compliance with such modified terms through February 29, 2000 and
beyond. While there can be no assurances, the Company expects to have such
modifications in place on or before February 28, 1999. Current financial
projections do not support compliance with the Credit Facility without such
modifications. Accordingly, as required by SEC regulations and generally
accepted accounting principles, the Company has reclassified all amounts due
under the Credit Facility, as well as other long-term debt subject to cross
default provisions, to current liabilities in the accompanying November 30, 1998
balance sheet.
At November 30, 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. In addition, earnings were not
adequate to meet certain fixed charge coverage ratios under the Notes, which, as
a result of such deficiency, imposes restrictions on the Company's ability to
incur certain additional debt and enter other transactions.
6. DISCONTINUED OPERATIONS
During November 1998, the Company adopted plans for the sale of its
Alumina Chemicals business unit, which manufactures and sells activated and gel
alumina chemicals and alumina hydrate. This business unit is accounted for as a
discontinued operation, and accordingly, the results of its operations for
current and prior periods are segregated in the accompanying statements of
operations. Based on its estimates of sales proceeds, costs of disposition, and
expected results of operations from the measurement date through the expected
disposal date, the Company does not expect to record a loss from the sale of
this business unit. Accordingly, no gain or loss from the sale has been recorded
in the accompanying statements of operations. However, the Company is in the
preliminary stages of the selling process, and it is possible that the actual
selling price or costs of disposal could differ from the Company's current
estimates and result in a loss on the sale, which could be material to the
Company's results of operations and financial position.
9
<PAGE> 12
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Results from discontinued operations for the three months and nine
months ended November 30, 1998 and 1997 are as follows.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------- -----------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 5,816 $ 10,193 $ 21,947 $ 28,856
======= ======== ======== ========
(Loss) income from operations $(1,691) $ 923 $ (4,544) $ 455
Interest expense (741) (759) (2,126) (2,139)
Equity income 1,174 627 3,627 2,670
Other income(expense), net -- 10 (18) 32
------- -------- -------- --------
(Loss) income before income taxes (1,258) 801 (3,061) 1,018
Tax (provision) benefit 503 (320) 1,224 (407)
------- -------- -------- --------
Net (loss) income $ (755) $ 481 $ (1,837) $ 611
======= ======== ======== ========
</TABLE>
The components of net assets of discontinued operations included in the
consolidated balance sheets in the accompanying financial statements are set
forth below:
<TABLE>
<CAPTION>
November 30, February 28,
1998 1998
------------ ------------
<S> <C> <C>
Trade accounts and other receivables $ 6,568 $ 8,746
Inventories 8,837 8,786
Net property, plant and equipment 30,117 30,745
Investments and other assets 6,156 4,746
Accounts payable (4,994) (2,331)
Accrued payroll and other liabilities (265) (443)
-------- --------
Net assets $ 46,419 $ 50,249
======== ========
</TABLE>
10
<PAGE> 13
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. 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 damages 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 is
constructing a new pipeline to replace one of the existing pipelines due to past
operating difficulties and to provide additional raw material for capacity
expansion. A landowner recently filed a lawsuit alleging that one of the
existing pipelines is leaking brine. The lawsuit seeks monetary damages and a
prohibition of the Company's rights to transport brine through one of the
existing 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.
11
<PAGE> 14
LAROCHE INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. 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.
9. 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 NINE MONTHS
ENDED ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1997
----------------- -----------------
(unaudited)
<S> <C> <C>
Net sales.................. $ 103,170 $ 361,364
Net income................. $ (7,146) $ (8,839)
</TABLE>
12
<PAGE> 15
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
As of November 30, 1998, the Company was not in compliance with certain
financial covenants contained in its principal bank credit facility (the Credit
Facility). The Company has obtained a waiver with respect to such noncompliance
from its creditors effective to February 28, 1999. The Company is currently
negotiating with its creditors to obtain modifications of these financial
covenants, which will allow it to remain in compliance through February 29, 2000
and beyond. Although no assurances can be made, management expects to have such
modifications in place no later than February 28, 1999. Because such
modifications are not yet in place, and current projections do not support that
the Company will be in compliance with the existing covenants during fiscal
2000, all debt under the Credit Facility, as well as other long-term debt
subject to cross default provisions, has been reclassified as current as
required by SEC regulations and generally accepted accounting principals. See
Notes to the Consolidated Financial Statements for additional discussion.
In addition to addressing debt covenant compliance as described in the
preceding paragraph, the Company is addressing long-term profitability through a
systematic review of all its businesses. In November 1998, the Company announced
its intention to sell its Alumina Chemicals business unit as part of a strategic
realignment aimed to focus the Company's resources on its core commodity
chemicals businesses, rather than on specialty chemicals such as aluminas. The
plan includes selling the entire Alumina Chemicals business unit, which includes
a manufacturing facility in Baton Rouge, Louisiana, and an interest in a joint
venture that manufactures alumina hydrate. The Company is currently in the early
stages of the selling process, and expects the sale of this business to be
completed by February 28, 1999. On January 12, 1999, the Company announced a
corporate restructuring that will involve decentralizing certain corporate
functions and will reduce the workforce in the Atlanta office. Management
expects the restructuring to result in a more cost effective and responsive
organization. Costs associated with the restructuring have not yet been
determined.
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 from
continuing operations for the three months and nine months ended November 30,
1998 and 1997, respectively. The prior year figures presented have been
reclassified to conform to the current year reporting changes. In addition, net
sales and income from operations for the Alumina Chemicals business unit have
not been included in the Specialty Chemicals segment information to reflect its
status as a discontinued operation, as described in the preceding section
entitled "Significant Developments".
13
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------------------- -----------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997 NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------------- ------------------------ -------------------------- -------------------------
PERCENT PERCENT PERCENT OF PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ ---------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Nitrogen products $ 39,135 47.4% $ 52,250 69.5% $ 148,946 50.5% $ 183,977 73.3%
Electrochemical
products 38,324 46.5 14,576 19.4 127,043 43.1 39,867 15.9
Specialty chemicals 5,011 6.1 8,364 11.1 18,775 6.4 27,021 10.8
-------- ----- -------- ----- --------- ----- --------- -----
Total $ 82,470 100.0% $ 75,190 100.0% $ 294,764 100.0% $ 250,865 100.0%
======== ===== ======== ===== ========= ===== ========= =====
INCOME (LOSS) FROM
CONTINUING
OPERATIONS:
Nitrogen products $ 1,078 30.4% $ 3,371 87.5% $ 10,730 93.5% $ 12,778 102.3%
Electrochemical
products (1,622) (45.7) 1,722 44.7 6,738 58.7 3,600 28.8
Specialty chemicals (731) (20.6) (690) (17.8) (872) (7.6) (330) (2.6)
Corporate expense (2,275) (64.1) (549) (14.2) (5,122) (44.6) (3,562) (28.5)
-------- ----- -------- ----- --------- ----- --------- -----
Total $ (3,550) (100.0)% $ 3,854 100.0% $ 11,474 100.0% $ 12,486 100.0%
======== ===== ======== ===== ========= ===== ========= =====
</TABLE>
RESULTS OF CONTINUING OPERATIONS
Comparison of Three Months Ended November 30, 1998 and November 30, 1997
The Company reported a loss from continuing operations before
extraordinary charges of $6.0 million for the three months ended November 30,
1998, compared to a loss before extraordinary charges of $1.2 million for the
same period in fiscal 1998. As more fully described in the following paragraphs,
fiscal 1999 losses are primarily attributable to falling prices in the Company's
domestic markets and unrealized losses recorded on certain forward exchange
contracts and oil swap contracts that were designed to hedge the Company's
exposure to foreign exchange rate risk and gas price increases. These losses
have been partially offset by profitable results from the Company's French and
German operations, which were acquired in the third and fourth quarters of
fiscal 1998.
Net Sales. Net sales for the quarter ended November 30, 1998 increased
$7.3 million (9.7%) to $82.5 million from $75.2 million for the quarter ended
November 30, 1997.
Nitrogen products' net sales for the quarter ended November 30, 1998
decreased $13.2 million (25.1%) compared to the corresponding quarter in the
preceding year. Decreased volumes at the Company's warehouse facilities
resulting from the sale of two warehouses, and the inclusion of sales from a
newly formed joint venture arrangement with the Jefferson River Terminal ("JRT")
in income from equity investments, accounted for $6.7 million of the reduction.
Lower agricultural prices caused by increases in global ammonia production
capacity reduced net sales by $4.3 million. In addition, decreased sales volumes
in industrial ammonia and agricultural products as a result of substitute
products and poor market conditions reduced sales for the period by $3.0 million
compared to the prior year. The reductions in net sales were partially offset by
increased production and sales of low density nitrogen.
Electrochemical products' net sales for the quarter ended November 30,
1998 increased $23.7 million (262.9%) compared to the corresponding quarter in
the preceding year. The increase was primarily due to the inclusion of
14
<PAGE> 17
$29.1 million in net sales from 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. This increase was offset by a $5.4 million decrease in third quarter
domestic sales compared to the prior year. Domestic sales were impacted by lost
production caused by a hurricane and a major scheduled plant turnaround ($3.5
million), and falling ECU prices. Domestic ECU prices averaged $257 per ECU for
the quarter compared to $322 per ECU for the same period in 1997.
Specialty chemicals' net sales for the quarter ended November 30, 1998
decreased $3.4 million (40.4%) compared to the corresponding quarter in the
preceding year. The decrease resulted primarily from lower sales volume due to
overcapacity in the fluorocarbon market. In addition, the absence of sales from
LaRoche Air Systems, Inc. ("LASI") of $.6 million, which was shutdown at the end
of fiscal 1998, contributed to the reduction in net sales. Both periods reflect
reclassification of Alumina Chemicals to discontinued operations.
Income from Continuing Operations. The Company reported a loss from
operations of $3.6 million for the three months ended November 30, 1998 compared
to income from operations of $3.9 million for the same period last year.
Nitrogen products' income from operations decreased by $2.3 million for
the quarter ended November 30, 1998 as compared to the corresponding quarter in
fiscal 1998. The decrease was primarily due to lower selling prices and volumes
previously discussed. These decreases were partially offset by improved margins
resulting from lower purchased ammonia costs, lower natural gas costs and
precious metal recoveries.
Electrochemical products' income from operations decreased by $3.3
million for the quarter ended November 30, 1998 as compared to the corresponding
quarter in the previous year, resulting in a loss from operations of $1.6
million. The decrease was primarily the result of falling ECU prices and lost
contribution margin due to lower volume in the U.S. facility. Domestic losses
were offset by income of $1.2 million from the German facilities. In addition,
increased legal expenses of $.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 $.5 million resulting from production
downtime associated with scheduled plant maintenance also contributed to current
year loss.
Corporate Expenses. Corporate expenses for the quarter ended November
30, 1998 increased $1.8 million to $2.3 million from $.5 million for the quarter
ended November 30, 1997. The increase in corporate expenses for the quarter is
primarily due to severance payments accrued in the current period, and an
adjustment recorded in the third quarter of the prior year to reduce expenses
accrued for the Company's performance based incentive plan.
Income from Equity Investments. Income from equity investments for the
quarter ended November 30, 1998 totaled $.8 million compared to a loss of $.5
million for the quarter ended November 30, 1997. Income from equity investments
reflects equity income attributable to several joint ventures. The increase in
equity income was primarily due to the Company's $.8 million share of income
from the ChlorAlp joint venture.
Other (Expense) Income, Net. For the quarter ended November 30, 1998,
other expense, net was $1.3 million compared to other income of $1.6 million for
the quarter ended November 30, 1997. Other expense, net for the quarter ended
November 30, 1998 includes $1.0 million of unrealized losses on the fair value
of natural gas exchange contracts and unrealized losses on foreign currency
transactions, discussed below, of $3.3 million. A $2.0 million gain on the sale
of two Nitrogen warehouses, and unrealized foreign currency translation gains of
$1.4 million, partially offset these losses.
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 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 quarter ended
November 30, 1998, interest and amortization of debt expense increased $1.4
million to $5.1 million compared to $3.7 million for the quarter ended November
30, 1997. The increase was primarily due to the Company's higher average debt
balances resulting from the previously discussed acquisitions. At November 30,
1998 the Company's total debt was $252.0 million
15
<PAGE> 18
compared to $237.1 million at November 30, 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 November 30, 1998 was $3.2 million compared to a benefit of $.8 million
for the quarter ended November 30, 1997. The effective tax benefit rate was
34.8% and 40.0%, respectively, at November 30, 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%).
Comparison of Nine Months Ended November 30, 1998 and November 30, 1997
The Company reported a loss from continuing operations before
extraordinary items of $5.8 million for the nine months ended November 30, 1998,
compared to income from continuing operations before extraordinary items of $.2
million for the same period in 1997. As more fully described in the following
paragraphs, 1998 losses are primarily attributable to falling prices in the
Company's domestic markets and unrealized losses recorded on certain forward
exchange contracts and oil swap contracts that were designed to hedge the
Company's exposure to foreign exchange rate risk and gas price increases. These
losses have been partially offset by profitable operating results from the
Company's French and German operations, which were acquired in the third and
fourth quarters of the fiscal 1998.
Net Sales. Net sales for the nine months ended November 30, 1998
increased $43.9 million (17.5%) to $294.8 million from $250.9 million for the
nine months ended November 30, 1997.
Nitrogen products' net sales for the nine months ended November 30,
1998 decreased $35.0 million (19.0%) compared to the corresponding period in the
preceding year. Decreased volumes at the Company's warehouse facilities
resulting from the sale of two warehouses, and the inclusion of sales from a
newly formed joint venture arrangement with JRT in income from equity, reduced
net sales by $13.8 million. Lower agricultural prices caused by increases in
global ammonia production capacity reduced net sales by $13.2 million. In
addition, decreased sales volumes in industrial ammonia and agricultural
products as a result of substitute products and competitive market conditions
had a $6.5 million negative impact on net sales in the current year.
Electrochemical products' net sales for the nine months ended November
30, 1998 increased $87.2 million (218.7%) compared to the corresponding nine
month period in the preceding year. The increase was primarily due to the
inclusion of $92.3 million in net sales from the German Facility. This increase
was offset by a $7.1 million decrease in third quarter domestic sales compared
to the prior year. Domestic sales were primarily impacted by lost production
caused by a hurricane, a major scheduled plant turnaround, and brine pipeline
failures. Domestic ECU prices averaged $302 per ECU for the nine months ended
November 30, 1998 compared to $305 per ECU for the same period in 1997.
Specialty chemicals' net sales for the nine months ended November 30,
1998 decreased $8.2 million (30.5%) compared to the corresponding period in the
preceding year. The decrease resulted primarily from lower sales volume due to
overcapacity in the fluorocarbon market. In addition, the absence of sales from
LaRoche Air Systems, Inc. ("LASI") of $1.5 million, which was shutdown at the
end of fiscal 1998, contributed to the reduction in net sales. Both periods
reflect the reclassification of the Alumina Chemical business unit to
discontinued operations.
Income (Loss) from Continuing Operations. Income from operations for
the nine months ended November 30, 1998 decreased $1.0 million (8.0%) to $11.5
million from $12.5 million for the nine months ended November 30, 1997.
Nitrogen products' income from operations decreased by $2.0 million for
the nine months ended November 30, 1998 as compared to the corresponding quarter
in the prior year. The decrease was primarily due to lower selling prices and
volumes previously discussed. These decreases were partially offset by improved
margins resulting from lower purchased ammonia costs, lower natural gas costs,
and precious metal recoveries.
16
<PAGE> 19
Electrochemical products' income from operations increased by $3.1
million to $6.7 million for the nine months ended November 30, 1998, as compared
to the same period in the previous year. The increase was primarily the result
of a $7.1 million contribution to operating profits for the period from the
German facility. This increase was offset by a decrease in domestic operating
profits of $4.0 million compared to the same nine month period in the prior
year. The decrease in domestic operating profits are the result of falling ECU
prices and lost contribution margin due to lower volume in the U.S. facility,
offset by lower energy and fixed manufacturing costs than in the prior year.
Specialty chemicals' loss from operations for the nine months ended
November 30, 1998 increased by $.5 million compared to the prior year, resulting
in a loss from operations of $.9 million. The increased loss from operations on
fluorocarbon products was primarily the result of lower sales volumes from
competitive market conditions.
Corporate Expenses. Corporate expenses for the nine months ended
November 30, 1998 increased $1.5 million to $5.1 million, compared to $3.6
million for the nine months ended November 30, 1997. The increase in corporate
expenses for the period is primarily due to severance and other costs incurred
as a result of management restructuring during fiscal 1999.
Income from Equity Investments. Income from equity investments for the
nine months ended November 30, 1998 totaled $.8 million compared to a loss of
$.5 million for the nine months ended November 30, 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 $.8 million.
Other (Expense) Income, Net. For the nine months ended November 30,
1998, other expense, net was $3.7 million compared to $1.6 million for the nine
months ended November 30, 1997. The increase was primarily due to the unrealized
losses on the fair value of foreign natural gas exchange contracts of $3.1
million and unrealized losses on the foreign currency transactions, discussed
below, of $5.2 million. These losses were offset by a $2.0 million gain on the
sale of two Nitrogen warehouses and foreign currency translation gains of $2.4
million.
Interest and Amortization of Debt Expense. For the nine months ended
November 30, 1998, interest and amortization of debt expense increased $4.4
million to $14.5 million compared to $10.1 million for the nine months ended
November 30, 1997. The increase was primarily due to the Company's higher
average debt balances resulting from the previously discussed acquisitions.
Provision for Income Taxes. The Company recorded an income tax benefit
for the nine months ended November 30, 1998 of $.2 million compared to a
provision of $.2 million for the nine months ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of Nine Months Ended November 30, 1998 and November 30, 1997
For the nine months ended November 30, 1998, net cash provided by
operating activities decreased to $9.4 million compared to $24.8 million for the
nine months ended November 30, 1997. The decrease was primarily the result of
operating losses incurred in the current year and the timing of working capital
requirements as compared to the prior year. In fiscal 1998, the increase in 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 nine
month period in the prior year.
Cash used by investing activities was $30.0 million for the nine months
ended November 30, 1998 compared to $62.6 million in the nine months ended
November 30, 1997. The primary reason for the decrease in investing activities
during the current year was due to the acquisition of an equity interest in
ChlorAlp, which occurred in the third quarter of fiscal 1998. The primary use of
cash for the nine months ended November 30, 1998 was capital expenditures of
$28.1 million. Major capital expenditures during the nine months ended November
30, 1998
17
<PAGE> 20
included a powerhouse project and new brine line at the Gramercy facility; plant
upgrades at the Nitrogen division's Cherokee, Crystal City, and Geneva plants;
and additional expenditures 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 future completion of
projects mentioned above.
Net cash provided by financing activities was $12.2 million and $39.4
million for the nine months ended November 30, 1998 and 1997, respectively. Cash
provided by financing activities for the nine months ended November 30, 1998
included net borrowings of $22.7 million of outstanding indebtedness under the
Company's Revolving Credit Facility and repayments of $7.8 million of long-term
debt. Additionally, the Company purchased $1.6 million of its redeemable common
stock from former executives and paid dividends of $1.2 million to its
shareholders. Cash provided by financing activities for the nine months ended
November 30, 1997 included the proceeds of $209.2 million from a subordinated
bond offering and a term loan, offset by repayments of existing bonds and
outstanding debt under a prior credit facility, together with refinancing costs
and prepayment fees.
As described in the second paragraph of the section entitled
"Significant Developments and in the Notes to the Consolidated Financial
Statements", as of November 30, 1998, the Company was not in compliance with
certain financial covenants of the Credit Facility. In addition, because
earnings during the period were not sufficient to meet certain fixed charge
ratios under the Notes, certain limitations on borrowings and investments are in
effect. Management has obtained a waiver with respect to noncompliance with the
Credit Facility effective to February 28, 1999, and expects to obtain
modifications to the Credit Facility before the expiration of the waiver that
will allow the Company to have continued access to this facility. Accordingly,
management anticipates that the Company's existing capital resources, cash flow
generated from future operations and drawings under the 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. EBITDA for all periods below
includes EBITDA from the Company's discontinued Alumina Chemical operations.
Comparison of Three Months Ended November 30, 1998 and November 30, 1997
EBITDA for the quarters ended November 30, 1998 and 1997 was $5.5
million and $11.2 million, respectively. These amounts included EBITDA of $4.0
million and $6.8 million, respectively, for the Nitrogen products segment; $3.4
million and $2.8 million, respectively, for the Electrochemical products
segment; $.2 million and $2.1 million, respectively, for the Specialty chemicals
segment, including discontinued operations; and ($2.2 million) and ($.5
million), respectively, for the corporate segment. The decrease in EBITDA for
the Nitrogen Products segment of $2.8 million was due primarily to lower
agricultural prices caused by global increases in ammonia production capacity,
decreased volumes at the Company's warehouses due to a slow planting season and
higher 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 $0.6 million was primarily the result of the contribution of
results from the German Facility and ChlorAlp, which were acquired during the
third and fourth quarters of fiscal 1998, of $4.6 million. The increase in
EBITDA from European operations was offset by lower prices and volume in U.S.
operations. The decrease in EBITDA for the Specialty chemicals segment of $1.9
million was due primarily to a decreased sales volume and selling price of
Active alumina products, decreased sales volumes of Versal alumina products, and
decreased sales volume of HCFC's due to increased competition and substitute
products. The decrease in corporate segment's EBITDA for the
18
<PAGE> 21
quarter is primarily due to severance costs incurred in the third quarter of
fiscal 1999 and adjustments to incentive compensation accruals made in the third
quarter of fiscal 1998.
Comparison of Nine Months Ended November 30, 1998 and November 30, 1997
EBITDA for the nine months ended November 30, 1998 and 1997 was $34.9
million and $35.0 million, respectively. These amounts included EBITDA of $20.1
million and $25.4 million, respectively, for the Nitrogen products segment;
$17.1 million and $6.3 million, respectively, for the Electrochemical products
segment; $2.0 million and $6.8 million, respectively, for the Specialty
chemicals segment, including discontinued operations; and ($4.3 million) and
($3.6 million), respectively, for the corporate segment. The decrease in EBITDA
for the Nitrogen products segment of $5.3 million was due primarily to lower
agricultural prices caused by global increases in ammonia production capacity
and decreased volumes at the Company's warehouses due the sale of a warehouse.
These decreases were offset partially by improved margins primarily due to
decreased ammonia raw material and natural gas costs. The increase in the
Electrochemical Products EBITDA of $10.8 million was primarily due to the
results from operations of the German Facility and ChlorAlp of $13.8 million.
The increase in EBITDA from European operations was offset by lower prices and
volume in U.S. operations. The decrease in EBITDA for the Specialty chemicals
segment of $4.8 million was due primarily to a decreased sales volume and
selling price of Active alumina products, decreased sales volumes of Versal
alumina products, the timing of the receipt of equity cash distributions from
joint ventures, and decreased sales volume of HCFC's due to increased
competition and substitute products.
YEAR 2000 COMPLIANCE
The Company is continuing a review and evaluation of its business and
operating computer systems, for the purpose of identifying ways in which these
systems and the Company could be adversely affected by incorrectly processing
date information on and after January 1, 2000. The Company is conducting its
review and evaluation in four main areas: Business Systems, Manufacturing
Controllers and Processors, Third Party Compliance, and Hardware. The process
includes assessing all systems used by the Company for Year 2000 impacts and the
associated upgrade costs, upgrading systems that are not Year 2000 ready, and
testing and monitoring systems for Year 2000 readiness. A summary of the
Company's progress in each of these areas follows.
Business Systems - The Company believes that its implementation of a
new enterprise-wide financial and operational computer system during the past
two years, completed in November 1998, has effectively eliminated its exposure
to any negative impact that Year 2000 may have had on the Company's ability to
produce reliable information needed to run its business. These systems are
critical for, among other things, purchasing activities and payment, order
processing and billing, production management and inventory, payroll, and
financial reporting.
Manufacturing Controllers and Processors - Certain of the Company's
manufacturing processes are dependent upon microprocessors and controllers, and
related software, to regulate and monitor the production of its principal
products. The Company is about 50% complete with an assessment of these items at
its manufacturing facilities, and has not discovered any material instances of
noncompliance. Any instances of noncompliance will be corrected as they are
discovered. The Company has a plan in place to complete its assessment and
correct any noncompliance on or before August 1999.
Third Party - The Company has sent surveys to all significant vendors
inquiring about their Year 2000 readiness, and has received responses from
approximately 78% of them. Additional follow up procedures are planned for the
first half of 1999 to follow up on critical raw material and utility suppliers
to verify their compliance and to develop contingency plans if necessary. The
Company has not yet surveyed its key customers, but plans to begin this
assessment in early 1999.
Hardware - Hardware includes the Company's computers, laptops,
terminals, and communications hardware such as routers and switches. In the
course of replacing its main business systems, the Company has upgraded much
19
<PAGE> 22
of its hardware with systems that are Year 2000 compliant. The Company has
completed its assessment of the remaining hardware, and expects to be completed
with necessary replacement and upgrades by June 1999.
Through November 30, 1998, costs of approximately $35,000 have been
incurred in identifying and correcting Year 2000 problems. The Company currently
estimates that the total cost of making its systems Year 2000 compliant will not
exceed $450,000.
Based on preliminary findings, work already completed, and its current
plans for addressing the remaining systems, management believes that it will be
able to identify and correct any systems that are not Year 2000 compliant before
they have a material adverse effect on the Company. However, until all
assessments are completed, there can be no assurance that the Company will
identify all date-handling problems in its business and 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. The Company does not yet have a
contingency plan to deal with any adverse effect of noncompliance with Year
2000, but it expects to begin such a plan by April 1999.
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 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.
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<PAGE> 23
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
None
21
<PAGE> 24
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: January 14, 1999 By: /s/ Harold W. Ingalls
---------------- ---------------------------------------
Harold W. Ingalls
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 14, 1999 By: /s/ Gerald B. Curran
---------------- ---------------------------------------
Gerald B. Curran
Vice President, Chief Financial Officer
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q-3RD QUARTER FISCAL 1999-LAROCHE INDUSTRIES, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,070
<SECURITIES> 0
<RECEIVABLES> 62,857
<ALLOWANCES> 559
<INVENTORY> 33,309
<CURRENT-ASSETS> 108,876
<PP&E> 343,167
<DEPRECIATION> (118,853)
<TOTAL-ASSETS> 405,687
<CURRENT-LIABILITIES> 321,000
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 21,997
<TOTAL-LIABILITY-AND-EQUITY> 405,687
<SALES> 294,764
<TOTAL-REVENUES> 294,764
<CGS> 256,300
<TOTAL-COSTS> 256,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,525
<INCOME-PRETAX> (5,960)
<INCOME-TAX> 200
<INCOME-CONTINUING> (5,760)
<DISCONTINUED> (1,837)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,597)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
