================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number: 1-8520 TERRA INDUSTRIES INC. (Exact name of registrant as specified in its charter) Maryland 52-1145429 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Terra Centre 51102-6000 P.O. Box 6000 (Zip Code) 600 Fourth Street Sioux City, Iowa (Address of principal executive offices) Registrant's telephone number, including area code: (712) 277-1340 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of April 30, 2001, the following shares of the registrant's stock were outstanding: Common Shares, without par value 75,829,489 shares ================================================================================ PART I. FINANCIAL INFORMATION TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) (unaudited) March 31, December 31, March 31, 2001 2000 2000 ---------- ------------ ---------- ASSETS Cash and short-term investments $ 63,023 $ 101,425 $ 8,328 Accounts receivable, less allowance for doubtful accounts of $868, $889, $484 99,864 107,299 127,846 Inventories 182,833 101,526 118,546 Other current assets 30,374 17,448 43,786 ----------------------------------------------------------------------------------------------------- Total current assets 376,094 327,698 298,506 ----------------------------------------------------------------------------------------------------- Equity and other investments 1,956 1,865 1,991 Property, plant and equipment, net 872,946 902,801 973,847 Excess of cost over net assets of acquired businesses 219,920 231,372 247,431 Other assets 42,628 48,816 58,068 ----------------------------------------------------------------------------------------------------- Total assets $1,513,544 $1,512,552 $1,579,843 ===================================================================================================== LIABILITIES Debt due within one year $ 13,028 $ 5,546 $ 16,943 Accounts payable 89,904 62,820 91,417 Accrued and other liabilities 77,073 60,324 69,265 ----------------------------------------------------------------------------------------------------- Total current liabilities 180,005 128,690 177,625 ----------------------------------------------------------------------------------------------------- Long-term debt 456,332 467,808 469,152 Deferred income taxes 153,850 156,475 143,554 Other liabilities 41,072 43,508 59,608 Minority interest 102,958 105,274 104,666 ----------------------------------------------------------------------------------------------------- Total liabilities 934,217 901,755 954,605 ----------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Capital stock Common Shares, authorized 133,500 shares; outstanding 75,823, 75,885 and 75,874 shares 128,289 128,283 127,890 Paid-in capital 554,752 554,750 552,903 Accumulated other comprehensive loss (74,354) (48,115) (22,001) Retained deficit (29,360) (24,121) (33,554) ----------------------------------------------------------------------------------------------------- Total stockholders' equity 579,327 610,797 625,238 ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,513,544 $1,512,552 $1,579,843 ===================================================================================================== See Accompanying Notes to the Consolidated Financial Statements. 2 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per-share amounts) (unaudited) Three Months Ended March 31, 2001 2000 -------- -------- REVENUES Net sales $243,868 $237,605 Other income, net 709 1,983 ------------------------------------------------------------------ Total revenues 244,577 239,588 ------------------------------------------------------------------ COSTS AND EXPENSES Cost of sales 234,475 247,316 Selling, general and administrative expense 6,842 8,355 Equity in earnings of unconsolidated affiliates (90) (169) ------------------------------------------------------------------ 241,227 255,502 ------------------------------------------------------------------ Income (loss) from operations 3,350 (15,914) Insurance settlement costs --- (960) Interest income 1,700 772 Interest expense (12,582) (12,679) Minority interest (528) (1,397) ------------------------------------------------------------------ Loss before income taxes (8,060) (30,178) Income tax benefit 2,821 10,563 ------------------------------------------------------------------ NET LOSS $ (5,239) $(19,615) ================================================================== Basic loss per share $ (0.07) $ (0.26) ================================================================== Basic weighted average shares outstanding 75,094 74,704 ================================================================== See Accompanying Notes to the Consolidated Financial Statements. 3 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, -------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net loss from operations $ (5,239) $(19,615) Adjustments to reconcile net loss from operations to net cash flows from operating activities: Depreciation and amortization 29,090 27,396 Deferred income taxes (2,703) (10,563) Minority interest in earnings 528 1,397 Changes in current assets and liabilities excluding working capital purchased/sold during the period: Accounts receivable 5,597 (26,408) Inventories (84,427) 14,004 Other current assets (13,273) (1,856) Accounts payable 28,611 2,444 Accrued and other liabilities 13,508 18,060 Other (91) (169) -------------------------------------------------------------------------------- Net cash flows from operating activities (28,399) 4,690 -------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property, plant and equipment (3,730) (4,692) Other items (337) --- -------------------------------------------------------------------------------- Net cash flows from investing activities (4,067) (4,692) -------------------------------------------------------------------------------- FINANCING ACTIVITIES Net changes in short-term borrowings --- 2,000 Principal payments on long-term debt (3,994) (2,366) Stock issuance-net 8 --- Repurchases of TNCLP common units (1,671) --- Distributions to minority interests (1,015) --- Other 917 (1,035) -------------------------------------------------------------------------------- Net cash flows from financing activities (5,755) (1,401) -------------------------------------------------------------------------------- Effect of exchange rate changes on cash (181) (59) -------------------------------------------------------------------------------- Increase (decrease) to cash and short-term investments (38,402) (1,462) Cash and short-term investments at beginning of period 101,425 9,790 -------------------------------------------------------------------------------- Cash and short-term investments at end of period $ 63,023 $ 8,328 ================================================================================ See Accompanying Notes to the Consolidated Financial Statements. 4 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED March 31, 2001 AND 2000 (in thousands) (unaudited) Accumulated Other Capital Paid-In Comprehensive Retained Stock Capital Loss Deficit Total ---------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 $128,283 $554,750 $ (48,115) $ (24,121) $610,797 Comprehensive loss: Net loss --- --- --- (5,239) (5,239) Foreign currency translation adjustment --- --- (25,322) --- (25,322) Cumulative effect of change in accounting for derivative financial instruments --- --- 31,400 --- 31,400 Change in fair value of derivatives --- --- (32,317) --- (32,317) -------- Comprehensive loss (31,478) Exercise of stock options 6 2 --- --- 8 ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $128,289 $554,752 $ (74,354) $ (29,360) $579,327 ================================================================================================================ Accumulated Other Capital Paid-In Comprehensive Retained Stock Capital Loss Deficit Total ---------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 $127,890 $552,903 $ (9,852) $ (13,939) $657,002 Comprehensive loss: Net loss --- --- --- (19,615) (19,615) Foreign currency translation adjustment --- --- (12,149) --- (12,149) -------- Comprehensive loss (31,764) ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 2000 $127,890 $552,903 $ (22,001) $ (33,554) $625,238 ================================================================================================================ See Accompanying Notes to the Consolidated Financial Statements. 5 TERRA INDUSTRIES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries ("Terra") and the results of Terra's operations for the periods presented. Because of the seasonal nature of Terra's operations and effects of weather-related conditions in several of its marketing areas, results of any single reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with Terra's 2000 Annual Report to Stockholders. Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. 2. Basic earnings per share data are based on the weighted-average number of Common Shares outstanding during the period. Diluted earnings per share data are based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, restricted shares and contingent shares. 3. Inventories consisted of the following: March 31, December 31, March 31, (in thousands) 2001 2000 2000 -------------------------------------------------------- Raw materials $ 20,299 $ 24,085 $ 38,010 Supplies 21,277 20,918 20,286 Finished goods 141, 257 56,523 60,250 ------------------------------------------------------- Total $ 182,833 $101,526 $118,546 ======================================================= 4. Four lawsuits by U.K. soft drink producers and distributors have been filed against Terra and other defendants seeking in excess of (Pounds)13.3 million in damages, plus costs and interest. The lawsuits seek to recover damages following a product recall the plaintiffs initiated in reaction to trace amounts of benzene allegedly found in carbon dioxide used as an ingredient in the recalled products. Terra produced the carbon dioxide at one of its U.K. plants. A fifth lawsuit seeking (Pounds)12.5 million and a sixth lawsuit seeking (Pounds)0.6 million in damages were settled by Terra's insurer in January 2000 and February 2001, respectively, with Terra making no contribution toward the settlements. In addition to the filed lawsuits, certain other soft drink producers have indicated their intention to file claims in unspecified amounts. Terra has denied liability for these lawsuits and claims and intends to vigorously defend its position. Terra believes it has insurance coverage for any damages. Its insurer is paying Terra's defense costs in all cases, has funded the January 2000 and February 2001 settlements, and has extended full coverage in the single case now before the court (wherein damages of (Pounds)9 million are sought), but currently continues to reserve the right to deny coverage in whole or in part for any adverse judgments in the remaining cases. Terra is involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. While it is not feasible to predict with certainty the final outcome of these proceedings, management does not believe that either these matters, or the U.K. benzene claims, will have an adverse effect on the results of operations, financial position or net cash flows. 6 5. Natural gas is the principal raw material used in Terra's production of nitrogen products and methanol. Terra enters into forward pricing arrangements for natural gas provided that such arrangements would not result in costs that would be greater than expected selling prices for nitrogen products and methanol. Terra's normal natural gas procurement policy is to effectively fix or cap the price of between 25% and 80% of its natural gas requirements for a one-year period and up to 50% of its natural gas requirements for the subsequent two-year period through supply contracts, financial derivatives and other forward pricing techniques. In response to extremely volatile natural gas costs during the last six months of 2000 and uncertainties regarding the ability of finished goods to recover the increases to gas costs, Terra amended its policy and eliminated the minimum hedge requirement through the end of 2001. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices are frequently based on prices at the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for the Corporation's facilities are purchased for each plant at locations other than reference points, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The Corporation has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2001 and part of 2002, consistent with its policy. As a result of its policies, the Corporation has reduced the potential adverse financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Corporation will incur higher costs. Contracts were in place at March 31, 2001 to cover 20% of natural gas requirements for the succeeding twelve months. The March 31, 2001 contracts covered 14% of Terra's expected North American natural gas requirements and 44% of its expected U.K. natural gas requirements. Unrealized losses from forward pricing positions totaled $.8 million as of March 31, 2001. In addition, Terra had purchase commitments for natural gas at prices $17.0 million lower than March 31, 2001 forward markets. The amount ultimately recognized by the Corporation will be dependent on published prices in effect at the time of settlement. Terra also had $2.4 million of realized gains on closed contracts relating to future periods that have been deferred to the respective period. 6. On November 30, 2000, Terra announced it would not restart its Blytheville, Arkansas ammonia and urea production facility as the result of high natural gas costs. The plant resumed production in March 2001, when natural gas prices declined. On January 2, 2001, Terra announced that it would idle its Beaumont, Texas, Woodward, Oklahoma, Port Neal, Iowa, and one of two sets of ammonia and upgrading plants at its Verdigris, Oklahoma due to high natural gas costs. The Port Neal plant resumed production on January 8, 2001, the Woodward and Verdigris plants resumed production on January 23, 2001 and Beaumont plant resumed production on February 6, 2001. 7. Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments be recorded in the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. On January 1, 2001, Terra adopted SFAS 133 which resulted in a $23.3 million increase in current assets to recognize the value of open natural gas contracts, a $9.2 million reduction in current liabilities to reclassify gains on closed contracts relating to future periods, a $1.1 million increase in long-term debt related to interest rate hedges and a $31.4 million increase to stockholders' equity as a reduction 7 in accumulated other comprehensive losses. Management does not expect the adoption of SFAS 133 to have a material impact on Terra's results of operations or cash flows. 8. Terra classifies its operations into two business segments: Nitrogen Products and Methanol. The Nitrogen Products business produces and distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farm distributors and industrial users. The Methanol business manufactures and distributes methanol which is used in the production of a variety of chemical derivatives and in the production of methyl tertiary butyl ether (MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not allocate interest, income taxes or infrequent items to continuing business segments. Included in Other are general corporate activities not attributable to a specific industry segment. The following summarizes operating results by business segment. Three Months Ended March 31 ------------------- (in thousands) 2001 2000 ----------------------------------------------------------- Revenues - Nitrogen Products $200,221 $215,626 - Methanol 43,647 21,102 - Other 709 2,860 ----------------------------------------------------------- Total revenues $244,577 $239,588 =========================================================== Income (loss) from operations - Nitrogen Products $ 4,672 $(10,286) - Methanol (2,007) (5,819) - Other 685 191 ----------------------------------------------------------- Total income (loss) from operations $ 3,350 $(15,914) =========================================================== 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS --------------------- QUARTER ENDED MARCH 31, 2001 COMPARED WITH QUARTER ENDED MARCH 31, 2000 Consolidated Results Terra reported a net loss of $5.2 million for the 2001 first quarter compared with a net loss of $19.6 million in 2000. The decrease in the 2001 loss was primarily related to increased operating income as the result of higher product prices offset partly by higher natural gas costs. Terra classifies its operations into two business segments: Nitrogen Products and Methanol. The Nitrogen Products segment represents operations directly related to the wholesale sales of nitrogen products from Terra's ammonia production and upgrading facilities. The Methanol segment represents wholesale sales of methanol produced at Terra's two methanol manufacturing facilities. Total revenues and operating income (loss) by segment for the three-month periods ended March 31, 2001 and 2000 follows: (in thousands) 2001 2000 ------------------------------------------------------------------------------------- REVENUES: Nitrogen Products $200,221 $ 215,626 Methanol 43,647 21,102 Other 709 2,860 -------------------------------------------------------------------------------------- $244,577 $ 239,588 ====================================================================================== OPERATING INCOME (LOSS): Nitrogen Products $ 4,672 $ (10,286) Methanol (2,007) (5,819) Other income - net 685 191 -------------------------------------------------------------------------------------- $ 3,350 $ (15,914) ====================================================================================== Nitrogen Products Volumes and prices for the three-month periods ended March 31, 2001 and 2000 follow: VOLUMES AND PRICES 2001 2000 ------------------------------------------------------------------------------------------ Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price ------------------------------------------------------------------------------------------ Ammonia 182 $ 258 367 $ 132 Nitrogen solutions 534 136 882 61 Urea 90 195 178 124 Ammonium nitrate 118 141 354 105 ------------------------------------------------------------------------------------------ Nitrogen revenues decreased $15.4 million to $200.2 million in the 2001 first quarter compared with $215.6 million in the 2000 quarter. Lower sales volumes reduced 2001 revenues $81.3 million primarily 9 as the result of wet field conditions that delayed the application of nitrogen fertilizer in most of Terra's market areas. Sales volumes of ammonium nitrate, which is the primary form of fertilizer sold by Terra in the United Kingdom, were also limited as the result of British transportation restrictions in response to the outbreak of foot and mouth disease. Most of the revenue shortfall from lower sales volumes was offset by higher 2001 prices as compared to last year's first quarter. Price increases in excess of $70 million were realized in response to lower nitrogen supplies as high natural gas costs resulted in industry-wide production curtailments and permanent closure of marginal facilities since the middle of last year. The Nitrogen segment had operating income of $4.7 million for the first quarter of 2001 compared with operating loss of $10.3 million for the 2000 first quarter. The increase in operating income was primarily related to higher selling prices offset partly by higher natural gas costs. Natural gas costs increased almost $52 million over the 2000 first quarter as unit costs, net of forward pricing gains and losses, increased to $5.69/MMBtu, during the 2001 first quarter compared to $2.54/MMBtu during the same 2000 period. First quarter 2001 natural gas costs were reduced $5.0 million from spot prices as the result of forward price contracts. Methanol For the three months ended March 31, 2001 and 2000, respectively, the Methanol segment had revenues of $43.6 million and $21.1 million. Sales volumes decreased 9.8% from prior year levels, but selling prices increased from $.33/gallon in 2000 to $.75/gallon in 2001 as the result of more balanced industry inventories in relation to demand than was the case in the 2000 first quarter. The Methanol segment generated a $2.0 million operating loss in the 2001 first quarter compared to a $5.8 million operating loss in 2000. The decrease in the operating loss was primarily related to higher selling prices offset partly by higher natural gas costs. Natural gas costs increased almost $14 million over the first quarter as unit costs, net of forward pricing gains and losses, increased to $5.44/MMbtu, during the 2001 first quarter compared to $2.36/MMBtu during the 2000 period First quarter 2001 natural gas costs were reduced $1.1 million by forward pricing contracts. Other Income - Net Other operating income of $.7 million in the 2001 first quarter was $.5 million favorable to 2000 due primarily to reduced compensation costs. Interest Expense - Net Interest expense, net of interest income, totaled $10.9 million during the 2001 first quarter compared with $11.9 million for the prior year period. Minority Interest Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest charges of $.5 million were recorded for the 2001 first quarter as the result of TNCLP earnings that were included in their entirety in consolidated operating results. The decreased charge as compared to the 2000 first quarter reflected lower nitrogen earnings for TNCLP. 10 Income Taxes Income taxes for the first quarter 2001 were recorded at an effective tax rate of 35%, Terra's estimated annual effective tax rate. LIQUIDITY AND CAPITAL RESOURCES The Corporation's primary uses of funds will be to fund its working capital requirements, make payments on its indebtedness and other obligations, make capital expenditures and acquisitions and fund repurchases of TNCLP common units. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities. Net cash flows used in operations in the first three months of 2001 were $28.4 million comprised of $50.0 million used by increases to net working capital balances, net of $21.6 million in operating profits after non-cash charges. Working capital increases during the 2001 first quarter are primarily related to seasonal changes in inventory balances. Working capital changes include $28.6 million of customer prepayments received since the beginning of the quarter that were included in current liabilities at March 31, 2001. Terra expects substantially all customer prepayment balances will be utilized during the 2001 second quarter. Terra management believes that cash from operations and available financing sources will be sufficient to meet anticipated cash requirements. The Corporation funded plant and equipment expenditures of $3.7 million during the first three months of 2001. The Corporation expects remaining 2001 capital expenditures to be less than $30 million consisting principally of routine equipment replacements. Cash balances at March 31,2001, were $63.0 million, none of which was used to collateralize letters of credit. POTENTIAL CHANGE OF CONTROL Anglo American plc, through its wholly-owned subsidiaries, owns 49.5% of the Corporation's outstanding shares. Anglo American has made public its intention to dispose of its interest in the Corporation with the timing based on market and other conditions. FORWARD LOOKING PRECAUTIONS Information contained in this report, other than historical information, may be considered forward looking. Forward looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: changes in financial markets, general economic conditions within the agricultural industry, competitive factors and price changes (principally, sales prices of nitrogen and methanol products and natural gas costs), changes in product mix, changes in the seasonality of demand patterns, changes in weather conditions, changes in agricultural regulations, and other risks detailed in the "Factors that Affect Operating Results" section of the Corporation's most recent Form 10-K. 11 PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2001 Annual Meeting of stockholders was held on April 26, 2001, in Sioux City, Iowa. At the meeting, a total of 67,419,869 votes were cast by stockholders. The following directors were elected to hold office until the next Annual Meeting or until their successors are duly elected and qualified, and received the votes set forth opposite their respective name: NAME FOR WITHHELD ---- --- -------- Edward G. Beimfohr 67,053,635 366,234 Carole L. Brookins 67,052,579 367,290 Edward M. Carson 67,012,945 406,924 Thomas H. Claiborne 67,059,126 360,743 Eric K. Diack 67,059,275 360,594 David E. Fisher 67,055,215 364,654 Burton M. Joyce 66,979,591 440,278 William R. Loomis, Jr. 67,056,729 363,140 John R. Norton III 67,018,736 401,133 Henry R. Slack 67,056,717 363,152 The stockholders ratified the selection by the Corporation's Board of Directors of Deloitte & Touche LLP as independent accountants for the Corporation for 2001. The number of votes cast for such proposal was 67,064,007, the number against was 292,461, and the number of abstentions was 63,401. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1.19 2001 Incentive Award Program for Officers and Key Employees (b) Reports on Form 8-K None 12 SIGNATURE 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. TERRA INDUSTRIES INC. Date: April 30, 2001 /s/ Francis G. Meyer -------------------- Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory 13