þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Maryland (State or other jurisdiction of incorporation or organization) |
52-1145429 (I.R.S. Employer Identification No.) |
|
Terra Centre P.O. Box 6000 600 Fourth Street Sioux City, Iowa (Address of principal executive offices) |
51102-6000 (Zip Code) |
Common Shares, without par value | 92,605,538 shares |
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
31 | ||||||||
38 | ||||||||
38 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
40 | ||||||||
41 | ||||||||
Amendment No.3 to Amended and Restated Credit Agreement | ||||||||
302 Certification of Chief Executive Officer | ||||||||
302 Certification of Chief Financial Officer | ||||||||
Section 906 Certification |
2
September 30, | December 31, | September 30, | ||||||||||
2006 | 2005 | 2005 | ||||||||||
Assets |
||||||||||||
Cash and cash equivalents |
$ | 122,170 | $ | 86,366 | $ | 166,704 | ||||||
Restricted cash |
| 8,595 | 8,861 | |||||||||
Accounts receivable, less allowance for
doubtful accounts of $371, $234 and $233 |
193,339 | 206,407 | 176,487 | |||||||||
Inventories |
160,191 | 190,314 | 144,963 | |||||||||
Other current assets |
26,158 | 54,578 | 84,792 | |||||||||
Total current assets |
501,858 | 546,260 | 581,807 | |||||||||
Property, plant and equipment, net |
722,952 | 733,536 | 764,737 | |||||||||
Equity method investments |
161,455 | 183,884 | 190,805 | |||||||||
Deferred plant turnaround costs, net |
40,577 | 27,447 | 22,272 | |||||||||
Intangible assets, net |
6,115 | 7,526 | 20,166 | |||||||||
Other assets |
27,164 | 24,972 | 5,316 | |||||||||
Total assets |
$ | 1,460,121 | $ | 1,523,625 | $ | 1,585,103 | ||||||
Liabilities |
||||||||||||
Accounts payable |
$ | 115,734 | $ | 125,863 | $ | 105,163 | ||||||
Customer prepayments |
27,949 | 52,913 | 34,081 | |||||||||
Accrued expenses and other current liabilities |
80,970 | 84,996 | 123,118 | |||||||||
Debt due within one year |
4 | 38 | 77 | |||||||||
Total current liabilities |
224,657 | 263,810 | 262,439 | |||||||||
Long-term debt and capital lease obligations |
331,300 | 331,300 | 331,304 | |||||||||
Deferred income taxes |
58,922 | 65,998 | 95,655 | |||||||||
Pension liabilities |
112,729 | 120,236 | 102,322 | |||||||||
Other liabilities |
37,619 | 41,320 | 51,138 | |||||||||
Minority interest |
95,014 | 92,258 | 95,698 | |||||||||
Total liabilities and minority interest |
860,241 | 914,922 | 938,556 | |||||||||
Preferred Stock liquidation value of $120,000 |
115,800 | 115,800 | 115,800 | |||||||||
Common Shareholders Equity |
||||||||||||
Capital stock |
||||||||||||
Common Shares, authorized 133,500 shares;
92,639 outstanding; 95,171 and 93,870 |
144,968 | 146,994 | 146,997 | |||||||||
Paid-in capital |
693,944 | 712,671 | 712,681 | |||||||||
Accumulated other comprehensive loss |
(52,362 | ) | (70,143 | ) | (48,003 | ) | ||||||
Unearned compensation |
| (5,369 | ) | (6,085 | ) | |||||||
Accumulated deficit |
(302,470 | ) | (291,250 | ) | (274,843 | ) | ||||||
Total common shareholders equity |
484,080 | 492,903 | 530,747 | |||||||||
Total liabilities and minority interest, preferred stock
and common shareholders equity |
$ | 1,460,121 | $ | 1,523,625 | $ | 1,585,103 | ||||||
3
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues |
||||||||||||||||
Product revenues |
$ | 461,533 | $ | 484,082 | $ | 1,381,084 | $ | 1,419,420 | ||||||||
Other income |
3,248 | 1,612 | 6,135 | 6,279 | ||||||||||||
Total revenues |
464,781 | 485,694 | 1,387,219 | 1,425,699 | ||||||||||||
Costs and Expenses |
||||||||||||||||
Cost of sales |
422,523 | 446,908 | 1,337,210 | 1,269,238 | ||||||||||||
Selling, general and administrative expense |
13,679 | 10,139 | 38,395 | 36,638 | ||||||||||||
Equity in earnings of unconsolidated affiliates |
(809 | ) | (3,330 | ) | (15,830 | ) | (12,737 | ) | ||||||||
435,393 | 453,717 | 1,359,775 | 1,293,139 | |||||||||||||
Income from operations |
29,388 | 31,977 | 27,444 | 132,560 | ||||||||||||
Interest income |
2,091 | 2,970 | 5,499 | 6,391 | ||||||||||||
Interest expense |
(11,786 | ) | (11,829 | ) | (35,340 | ) | (41,812 | ) | ||||||||
Loss on early retirement of debt |
| | | (27,193 | ) | |||||||||||
Change in fair value of warrant liability |
| | | 8,860 | ||||||||||||
Income (loss) before income taxes and
minority interest |
19,693 | 23,118 | (2,397 | ) | 78,806 | |||||||||||
Income tax benefit (provision) |
(6,000 | ) | (7,704 | ) | 2,002 | (25,864 | ) | |||||||||
Minority interest |
(3,352 | ) | (4,328 | ) | (7,000 | ) | (15,723 | ) | ||||||||
Net income (loss) |
10,341 | 11,086 | (7,395 | ) | 37,219 | |||||||||||
Preferred share dividends |
(1,275 | ) | (1,275 | ) | (3,825 | ) | (3,859 | ) | ||||||||
Net Income (Loss) Available to
Common Shareholders |
$ | 9,066 | $ | 9,811 | $ | (11,220 | ) | $ | 33,360 | |||||||
Basic and diluted income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.10 | $ | (0.12 | ) | $ | 0.36 | |||||||
Diluted |
$ | 0.10 | $ | 0.10 | $ | (0.12 | ) | $ | 0.35 | |||||||
Basic and diluted weighted average shares
outstanding: |
||||||||||||||||
Basic |
91,817 | 93,416 | 92,994 | 92,087 | ||||||||||||
Diluted |
93,405 | 95,219 | 92,994 | 106,942 |
4
Nine Months Ended | ||||||||
September 30, | ||||||||
2006 | 2005 | |||||||
Operating Activities |
||||||||
Net income (loss) |
$ | (7,395 | ) | $ | 37,219 | |||
Adjustments to reconcile net income (loss)
to net cash flows from operating activities: |
||||||||
Depreciation of property, plant and equipment and
amortization of deferred plant turnaround costs |
78,859 | 83,569 | ||||||
Deferred income taxes |
(2,002 | ) | 29,553 | |||||
Minority interest in earnings |
7,000 | 15,723 | ||||||
Equity in undistributed earnings |
9,135 | (12,737 | ) | |||||
Non-cash loss on derivatives |
2,775 | 8,057 | ||||||
Share-based compensation |
4,285 | 1,684 | ||||||
Amortization of intangible and other assets |
8,128 | 7,427 | ||||||
Non-cash loss on early retirement of debt |
| 22,543 | ||||||
Change in fair value of warrant liability |
| (8,860 | ) | |||||
Term loan discount accretion |
| 1,773 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
25,785 | (28,901 | ) | |||||
Inventories |
36,592 | (1,480 | ) | |||||
Accounts payable and customer prepayments |
(38,859 | ) | (92,737 | ) | ||||
Other assets and liabilities, net |
(21,029 | ) | 11,693 | |||||
Net cash flows from operating activities |
103,274 | 74,526 | ||||||
Investing Activities |
||||||||
Purchase of property, plant and equipment |
(40,785 | ) | (17,406 | ) | ||||
Plant turnaround expenditures |
(31,987 | ) | (9,677 | ) | ||||
Distributions received from unconsolidated affiliates |
9,660 | 33,125 | ||||||
Changes in restricted cash |
8,595 | (8,861 | ) | |||||
Proceeds from the sale of property, plant
and equipment |
9,666 | 6,485 | ||||||
Net cash flows from investing activities |
(44,851 | ) | 3,666 | |||||
Financing Activities |
||||||||
Payments under borrowings arrangements |
(34 | ) | (125,124 | ) | ||||
Preferred share dividends paid |
(3,825 | ) | (4,675 | ) | ||||
Payments under share repurchase program |
(18,796 | ) | | |||||
Proceeds from exercise of stock options |
363 | 160 | ||||||
Distributions to minority interests |
(4,244 | ) | (12,223 | ) | ||||
Net cash flows from financing activities |
(26,536 | ) | (141,862 | ) | ||||
Effect of exchange rate changes on cash |
3,917 | (3,424 | ) | |||||
Increase (decrease) to cash and cash equivalents |
35,804 | (67,094 | ) | |||||
Cash and cash equivalents at beginning of period |
86,366 | 233,798 | ||||||
Cash and cash equivalents at end of period |
$ | 122,170 | $ | 166,704 | ||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 21,394 | $ | 24,572 | ||||
Income tax refunds received |
$ | | $ | 11,049 | ||||
Income taxes paid |
$ | 1,569 | $ | 398 |
5
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Common | Paid-In | Comprehensive | Unearned | Accumulated | Comprehensive | |||||||||||||||||||||||
Stock | Capital | Loss | Compensation | Deficit | Total | Income | ||||||||||||||||||||||
Balance at January 1, 2006 |
$ | 146,994 | $ | 712,671 | $ | (70,143 | ) | $ | (5,369 | ) | $ | (291,250 | ) | $ | 492,903 | |||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||
Net loss |
| | | | (7,395 | ) | (7,395 | ) | $ | (7,395 | ) | |||||||||||||||||
Foreign currency
translation adjustment |
| | 22,638 | | | 22,638 | 22,638 | |||||||||||||||||||||
Change in fair value of
derivatives, net of taxes
of $2,589 |
| | (4,857 | ) | | | (4,857 | ) | (4,857 | ) | ||||||||||||||||||
Comprehensive income |
$ | 10,386 | ||||||||||||||||||||||||||
Preferred share dividends |
| | | | (3,825 | ) | (3,825 | ) | ||||||||||||||||||||
Exercise of stock options |
95 | 268 | | | | 363 | ||||||||||||||||||||||
Nonvested stock |
554 | 549 | | | | 1,103 | ||||||||||||||||||||||
Shares purchased and retired
under share repurchase
program |
(2,675 | ) | (16,121 | ) | | | | (18,796 | ) | |||||||||||||||||||
Reclassification for adoption
of FAS 123 R |
| (5,369 | ) | | 5,369 | | | |||||||||||||||||||||
Share-based compensation |
| 1,946 | | | | 1,946 | ||||||||||||||||||||||
Balance at September 30, 2006 |
$ | 144,968 | $ | 693,944 | $ | (52,362 | ) | $ | | $ | (302,470 | ) | $ | 484,080 | ||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Common | Paid-In | Comprehensive | Unearned | Accumulated | Comprehensive | |||||||||||||||||||||||
Stock | Capital | Loss | Compensation | Deficit | Total | Income | ||||||||||||||||||||||
Balance at January 1, 2005 |
$ | 144,531 | $ | 681,639 | $ | (55,994 | ) | $ | (2,568 | ) | $ | (308,203 | ) | $ | 459,405 | |||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||
Net income |
| | | | 37,219 | 37,219 | $ | 37,219 | ||||||||||||||||||||
Foreign currency
translation adjustment |
| | (20,924 | ) | | | (20,924 | ) | (20,924 | ) | ||||||||||||||||||
Change in fair value of
derivatives, net of taxes
of $5,691 |
| | 28,915 | | | 28,915 | 28,915 | |||||||||||||||||||||
Comprehensive income |
$ | 45,210 | ||||||||||||||||||||||||||
Preferred share dividends |
| | | | (3,859 | ) | (3,859 | ) | ||||||||||||||||||||
Conversion of preferred shares |
2,069 | 14,650 | | | | 16,719 | ||||||||||||||||||||||
Reclassification of warrant
liability |
| 12,240 | | | | 12,240 | ||||||||||||||||||||||
Exercise of stock options |
57 | 103 | | | | 160 | ||||||||||||||||||||||
Nonvested stock |
340 | 4,049 | | (4,800 | ) | | (411 | ) | ||||||||||||||||||||
Amortization of unearned
compensation |
| | | 1,283 | | 1,283 | ||||||||||||||||||||||
Balance at September 30, 2005 |
$ | 146,997 | $ | 712,681 | $ | (48,003 | ) | $ | (6,085 | ) | $ | (274,843 | ) | $ | 530,747 | |||||||||||||
6
1. | Financial Statement Presentation | |
Basis of Presentation | ||
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, the Company and it) and the results of operations for the periods presented. Because of the seasonal nature of Terras operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with the Companys 2005 Annual Report on Form 10-K to Shareholders. | ||
Revenue Recognition | ||
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable. | ||
Revenues are primarily comprised of sales of the Companys nitrogen- and methanol-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. Revenues also include profit sharing revenue under the Methanex supply contract when the estimated margin on an annualized basis is probable. Revenues include amounts related to shipping and handling charges to the Companys customers. | ||
Cost of Sales | ||
Costs of sales are primarily related to manufacturing costs related to the Companys nitrogen- and methanol-based products, including any realized hedging gains or losses related to natural gas derivatives. Cost of sales includes amounts related to shipping and handling charges to the Companys customers. | ||
Derivatives and Financial Instruments | ||
The Company enters into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs, to manage the prices of its nitrogen products and to manage foreign currency risk. The Company reports the fair value of the derivatives on its balance sheet. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in earnings in the period of change. If the derivative is designated as a hedge, and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability, or (b) reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in cost of sales in the period the offsetting hedged transaction occurs. If an instrument is settled early, any gains or losses are immediately recognized in cost of sales. |
7
Share-Based Compensation | ||
During the 2006 first quarter, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123 R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123 R supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123 R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123 R. The Company adopted SFAS 123 R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006 (See Note 11). | ||
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 123 R-3, Transition Election Related to Accounting for Tax Effects of Share-Based Awards. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123 R. | ||
Plant Turnaround Costs | ||
Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround , generally two years. | ||
Impairment of Long-Lived Assets | ||
Terra reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset. | ||
Use of Estimates in Preparation of the Financial Statements | ||
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
8
2. | Income (Loss) Per Share | |
Basic income (loss) per share data is based on the weighted-average number of Common Shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share. | ||
The following table provides a reconciliation between basic and diluted income (loss) per share for the three- and nine-month periods ended September 30, 2006 and 2005: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except per-share amounts) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Basic income (loss) per share
computation: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 10,341 | $ | 11,086 | $ | (7,395 | ) | $ | 37,219 | |||||||
Less: Preferred share dividends |
(1,275 | ) | (1,275 | ) | (3,825 | ) | (3,859 | ) | ||||||||
Income (loss) available to
common shareholders |
$ | 9,066 | $ | 9,811 | $ | (11,220 | ) | $ | 33,360 | |||||||
Weighted average shares outstanding |
91,817 | 93,416 | 92,994 | 92,087 | ||||||||||||
Basic income (loss) per common share |
$ | 0.10 | $ | 0.10 | $ | (0.12 | ) | $ | 0.36 | |||||||
Diluted income (loss) per share computation: |
||||||||||||||||
Income (loss) available to
common shareholders |
$ | 9,066 | $ | 9,811 | $ | (11,220 | ) | $ | 33,360 | |||||||
Add: Preferred share dividends |
| | | 3,859 | ||||||||||||
Income (loss) available to common
shareholders and assumed conversions |
$ | 9,066 | $ | 9,811 | $ | (11,220 | ) | $ | 37,219 | |||||||
Weighted average shares outstanding |
91,817 | 93,416 | 92,994 | 92,087 | ||||||||||||
Add incremental shares from
assumed conversions: |
||||||||||||||||
Preferred shares |
| | | 13,450 | ||||||||||||
Nonvested stock |
596 | 518 | | 610 | ||||||||||||
Common stock warrants |
846 | 1,093 | | 598 | ||||||||||||
Common stock options |
146 | 192 | | 197 | ||||||||||||
Dilutive potential common shares |
93,405 | 95,219 | 92,994 | 106,942 | ||||||||||||
Diluted income (loss) per common share |
$ | 0.10 | $ | 0.10 | $ | (0.12 | ) | $ | 0.35 | |||||||
For the three- and nine-month periods ended September 30, 2006 and 2005, common stock options totaling 0.1 million shares were excluded from the computation of diluted income per share because the exercise prices of these options exceeded the average market price of the Companys stock for the respective periods, and the effect of their inclusion would have been antidilutive. |
9
For the three-month periods ending September 30, 2006 and 2005, preferred shares of 0.1 million were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method. | ||
For the nine-month period ended September 30, 2006, all preferred shares, nonvested stock, common stock warrants and common stock options were antidilutive because the Company was in a net loss position. As such, these instruments were excluded from the computation of the diluted income (loss) per share for the nine-month period ended September 30, 2006. | ||
3. | Inventories | |
Inventories consisted of the following: |
September 30, | December 31, | September 30, | ||||||||||
(in thousands) | 2006 | 2005 | 2005 | |||||||||
Raw materials |
$ | 29,679 | $ | 22,487 | $ | 21,593 | ||||||
Supplies |
53,642 | 55,647 | 53,763 | |||||||||
Finished goods |
76,870 | 112,180 | 69,607 | |||||||||
Total |
$ | 160,191 | $ | 190,314 | $ | 144,963 | ||||||
Inventory is valued at actual first in first out cost. Costs include raw material, labor and overhead. | ||
4. | Derivative Financial Instruments | |
Terra manages risk using derivative financial instruments for (a) changes in natural gas supply prices (b) interest rate fluctuations (c) changes in nitrogen prices and (d) currency. Derivative financial instruments have credit risk and market risk. | ||
To manage credit risk, Terra enters into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. Terra will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles. | ||
Terra classifies a derivative financial instrument as a hedge if all of the following conditions are met: |
1. | The item to be hedged must expose Terra to currency, interest or price risk. | ||
2. | It must be probable that the results of the hedge position substantially offset the effects of currency, interest or price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item). | ||
3. | The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge. |
Natural gas supplies to meet production requirements at Terras North American and United Kingdom (U.K.) production facilities are purchased at market prices. Natural gas market prices are volatile and Terra effectively fixes prices for a portion of its natural gas production requirements and inventory through the use of futures contracts, swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for Terras North American production facilities are purchased at |
10
locations other than Henry Hub, 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 U.K. contracts are based on the Intercontinental Exchange (ICE) index price. Physical delivery prices in the U.K. are based on the ICE index. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. | ||
A swap is a contract between Terra and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of the contract value and option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from Terra for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements. | ||
Terra will also use a collar structure where it will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes Terra to large price increases. | ||
The following summarizes open natural gas derivative contracts at September 30, 2006 and 2005: |
Other | Other | |||||||||||||||
Current | Current | Deferred | Net | |||||||||||||
(in thousands) | Assets | Liabilities | Taxes | Asset (Liability) | ||||||||||||
September 30, 2006 |
$ | 7,050 | $ | (22,129 | ) | 5,365 | $ | (9,714 | ) | |||||||
December 31, 2005 |
22,152 | (34,213 | ) | 2,861 | (9,200 | ) | ||||||||||
September 30, 2005 |
61,734 | (45,419 | ) | (5,691 | ) | 10,624 |
Certain derivatives outstanding at September 30, 2006 and 2005, which settled during October 2006 and 2005, respectively, are included in the position of open natural gas derivatives in the table above. The October 2006 derivatives settled for an approximate $14.5 million loss. All open derivatives will settle during the next 12 months. | ||
At September 30, 2006, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a charge of $1.2 million and $2.8 million to cost of sales for the three- and nine-month periods ending September 30, 2006, respectively. Derivatives outstanding at September 30, 2005 included gains of $0.5 million and $1.0 million that were recorded as an ineffective position and credited to cost of sales for the three- and nine-month periods ending September 30, 2005, respectively. | ||
The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX and ICE natural gas contract prices. | ||
The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended September 30, 2006 and 2005 follows: |
11
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(in thousands) | Gross | Net of tax | Gross | Net of tax | ||||||||||||
Beginning accumulated gain (loss) |
$ | (7,034 | ) | $ | (4,578 | ) | $ | 9,049 | $ | 6,135 | ||||||
Net increase (decrease) in
market value |
(8,263 | ) | (5,374 | ) | 20,697 | 12,835 | ||||||||||
Reclassification into earnings |
(34 | ) | (14 | ) | (14,406 | ) | (9,362 | ) | ||||||||
Ending accumulated gain (loss) |
$ | (15,331 | ) | $ | (9,966 | ) | $ | 15,340 | $ | 9,608 | ||||||
The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the nine-month periods ended September 30, 2006 and 2005 follows: |
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(in thousands) | Gross | Net of tax | Gross | Net of tax | ||||||||||||
Beginning accumulated loss |
$ | (7,886 | ) | $ | (5,109 | ) | $ | (16,829 | ) | $ | (19,307 | ) | ||||
Net increase (decrease) in
market value |
(50,001 | ) | (32,454 | ) | 38,256 | 32,884 | ||||||||||
Reclassification into earnings |
42,556 | 27,597 | (6,087 | ) | (3,969 | ) | ||||||||||
Ending accumulated gain (loss) |
$ | (15,331 | ) | $ | (9,966 | ) | $ | 15,340 | $ | 9,608 | ||||||
Approximately $10.0 million of the accumulated other comprehensive loss, net of tax, at September 30, 2006 will be reclassified into earnings during the next twelve-month period ending September 30, 2007. | ||
At times, the Company uses forward derivative instruments to fix or set floor prices for a portion of its nitrogen sales volumes. At September 30, 2006, the Company had no open nitrogen sales swap contracts. | ||
5. | Equity Investments | |
Terras investments in companies that are accounted for on the equity method of accounting consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (PLNL) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO2 at Terras nitrogen plant. These investments were $161,455 at September 30, 2006. Terra includes the net earnings of these investments as an element of income from operations since the investees operations provide additional capacity to Terra. |
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The combined results of operations and financial position of Terras equity method investments are summarized below: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Condensed income statement
information: |
||||||||||||||||
Net sales |
$ | 28,078 | $ | 45,726 | $ | 129,943 | $ | 125,462 | ||||||||
Net income |
$ | 4,483 | $ | 13,752 | $ | 32,964 | $ | 43,521 | ||||||||
Terras equity in earnings of
unconsolidated affiliates |
$ | 809 | $ | 3,330 | $ | 15,830 | $ | 12,737 | ||||||||
September 30, | September 30, | |||||||
(in thousands) | 2006 | 2005 | ||||||
Condensed balance sheet information: |
||||||||
Current assets |
$ | 45,964 | $ | 64,646 | ||||
Long-lived assets |
194,549 | 199,878 | ||||||
Total assets |
$ | 240,513 | $ | 264,524 | ||||
Current liabilities |
$ | 26,473 | $ | 22,999 | ||||
Long-term liabilities |
| 188 | ||||||
Equity |
214,040 | 241,337 | ||||||
Total liabilities and equity |
$ | 240,513 | $ | 264,524 | ||||
The carrying value of these investments at September 30, 2006 was $54.4 million more than Terras share of the affiliates book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately 15 years. | ||
Terra has transactions in the normal course of business with PLNL whereby Terra is obliged to purchase 50 percent of the ammonia produced by PLNL at current market prices. During the nine-month period ending September 30, 2006, Terra purchased approximately $63.4 million of ammonia from PLNL. As of September 30, 2006 PLNL made cash distributions to its shareholders, of which Terras portion was $33.8 million during the nine-month period. During the first nine months of 2005, Terra purchased approximately $59.1 million of ammonia from PLNL. During the first nine months of 2005, Terras portion of cash distributions from PLNL was $31.3 million. | ||
The total distributions from all investments were $34.6 million and $33.1 million for the nine-month periods ended September 30, 2006 and 2005, respectively. |
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6. | Long-term Debt and Capital Lease Obligation | |
Long-term debt and capital lease obligations consisted of the following: |
September 30, | December 31, | September 30, | ||||||||||
(in thousands) | 2006 | 2005 | 2005 | |||||||||
Secured Senior Notes, 12.875%
due 2008 |
$ | 200,000 | $ | 200,000 | $ | 200,000 | ||||||
Second Priority Senior Secured
Notes, 11.5%, due 2010 |
131,300 | 131,300 | 131,300 | |||||||||
Other |
4 | 38 | 81 | |||||||||
Total long-term debt and
capital lease obligations |
331,304 | 331,338 | 331,381 | |||||||||
Less current maturities |
4 | 38 | 77 | |||||||||
Total long-term debt and
capital lease obligations |
$ | 331,300 | $ | 331,300 | $ | 331,304 | ||||||
The Company has revolving credit facilities totaling $200 million that expire September 30, 2008. The revolving credit facility is secured by substantially all of the assets of the Company other than the assets collateralizing the Senior Secured Notes. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. As of September 30, 2006, the Company had borrowing availability of $200 million. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of the Companys consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at the Companys option, a London Interbank Offered Rate (LIBOR). At September 30, 2006, the LIBOR rate was 5.32%. The base rate is the highest of (1) Citibank, N.A.s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margin for base rate loans and LIBOR loans are 0.50% and 1.75%, respectively, at September 30, 2006. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed. | ||
At September 30, 2006, the Company had no outstanding revolving credit borrowings and $17.6 million in outstanding letters of credit. The $17.6 million in outstanding letters of credit reduced the Companys borrowing availability to $182.4 million at September 30, 2006. The credit facilities require that the Company adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. If the Companys borrowing availability falls below $60 million, the Company is required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters. | ||
In March 2005, Terra repaid $50.0 million of the term loan. The discounted book value of debt prior to repayment was $41.9 million. As a result, Terra recognized a loss on the repayment of $8.1 million and other related prepayment charges of $2.7 million during the first quarter of 2005. |
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In June 2005, the Company repaid the remaining $75.0 million of the term loan. The discounted book value of the debt prior to repayment was $63.7 million. As a result, the Company recognized a loss on the repayment of $11.3 million and other prepayment charges of $5.1 million during the second quarter of 2005. | ||
7. | Pension Plans | |
Terra maintains defined benefit and defined contribution pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans assets consist principally of equity securities and corporate and government debt securities. The Company also has certain non-qualified pension plans covering executives, which are unfunded. Terra accrues pension costs based upon annual actuarial valuations for each plan and funds these costs in accordance with statutory requirements. | ||
The estimated components of net periodic pension expense follow: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Service cost |
$ | 744 | $ | 683 | $ | 2,232 | $ | 2,048 | ||||||||
Interest cost |
5,888 | 3,917 | 17,664 | 11,752 | ||||||||||||
Expected return on plan assets |
(5,394 | ) | (3,070 | ) | (16,182 | ) | (9,210 | ) | ||||||||
Amortization of prior service cost |
(7 | ) | 6 | (21 | ) | 16 | ||||||||||
Amortization of actuarial loss |
1,408 | 1,222 | 4,224 | 3,667 | ||||||||||||
Amortization of net assets |
| 12 | | 37 | ||||||||||||
Termination charge |
291 | | 873 | | ||||||||||||
Pension Expense |
$ | 2,930 | $ | 2,770 | $ | 8,790 | $ | 8,310 | ||||||||
Cash contributions to the defined benefit pension plans for the three months ended September 30, 2006 and 2005 were $8.8 million and $15.1 million, respectively. Cash contributions to the defined benefit pension plans for the nine months ended September 30, 2006 and 2005 were $12.3 million and $19.4 million, respectively. | ||
In the 2006 third quarter, the Pension Protection Act (PPA) was signed into law. Beginning in 2008, the PPA requires the Companys qualified pension plans to meet a funding target over seven years. Annual cash funding is expected to equal the value of benefits accrued during the year plus one-seventh of any under-funded amount. The Company is currently evaluating the effects of this legislation. | ||
Terra also sponsors defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of the Company contributions to these plans for the three-month periods ending September 30, 2006 and 2005 totaled $1.2 million and $1.4 million, respectively. Contributions to these plans for the nine-month periods ending September 30, 2006 and 2005 were $4.0 million and $3.7 million, respectively. | ||
Terra provides health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid. |
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8. | Accumulated other comprehensive income (loss) | |
Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders equity but are excluded from net (loss) income. Terras accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of Terras foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in Terras financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as hedged relationships) recorded on the balance sheet, and (d) minimum pension liability adjustments. | ||
The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2006 and 2005 follow: |
Foreign | Minimum | |||||||||||||||
Currency | Fair Value of | Pension | ||||||||||||||
Translation | Derivatives, | Liability, net of | ||||||||||||||
(in thousands) | Adjustment | net of taxes | taxes | Total | ||||||||||||
Balance December 31, 2005 |
$ | (9,100 | ) | $ | (5,109 | ) | $ | (55,934 | ) | $ | (70,143 | ) | ||||
Change in foreign translation
adjustment |
22,638 | | | 22,638 | ||||||||||||
Reclassification to earnings |
| 27,597 | | 27,597 | ||||||||||||
Change in fair value of derivatives |
| (32,454 | ) | | (32,454 | ) | ||||||||||
Balance September 30, 2006 |
$ | 13,538 | $ | (9,966 | ) | $ | (55,934 | ) | $ | (52,362 | ) | |||||
Balance December 31, 2004 |
$ | 14,287 | $ | (19,307 | ) | $ | (50,974 | ) | $ | (55,994 | ) | |||||
Change in foreign translation
adjustment |
(20,924 | ) | | | (20,965 | ) | ||||||||||
Reclassification to earnings |
| 3,192 | | 3,192 | ||||||||||||
Change in fair value of derivatives |
| 25,723 | | 25,764 | ||||||||||||
Balance September 30, 2005 |
$ | (6,637 | ) | $ | 9,608 | $ | (50,974 | ) | $ | (48,003 | ) | |||||
9. | Industry Segment Data | |
Terra classifies its operations into two business segments: nitrogen products and methanol. The nitrogen products business produces and distributes ammonia, urea, nitrogen solutions, ammonium nitrate and other products 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 corporate-related charges to business segments. Included in Other are general corporate activities not attributable to a specific industry segment. |
16
The following summarizes operating results by business segment: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Revenues Nitrogen Products |
$ | 442,612 | $ | 478,118 | $ | 1,355,574 | $ | 1,393,503 | ||||||||
Methanol |
18,921 | 5,964 | 25,510 | 25,917 | ||||||||||||
Other |
3,248 | 1,612 | 6,135 | 6,279 | ||||||||||||
Total revenues |
$ | 464,781 | $ | 485,694 | $ | 1,387,219 | $ | 1,425,699 | ||||||||
Income (loss) from operations |
||||||||||||||||
Nitrogen Products |
$ | 20,409 | $ | 38,971 | $ | 25,098 | $ | 144,469 | ||||||||
Methanol |
9,405 | (6,673 | ) | 3,363 | (9,762 | ) | ||||||||||
Other |
(426 | ) | (321 | ) | (1,017 | ) | (2,147 | ) | ||||||||
Income from operations |
$ | 29,388 | $ | 31,977 | $ | 27,444 | $ | 132,560 | ||||||||
The following summarizes geographic revenues information for the three- and nine-month period ending September 30: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
United States |
$ | 337,958 | $ | 353,188 | $ | 1,048,142 | $ | 1,084,112 | ||||||||
Canada |
12,874 | 11,632 | 48,755 | 42,107 | ||||||||||||
United Kingdom |
113,949 | 120,874 | 290,322 | 299,480 | ||||||||||||
$ | 464,781 | $ | 485,694 | $ | 1,387,219 | $ | 1,425,699 | |||||||||
10. | Commitments and Contingencies | |
The Company is involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on the Companys consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote. | ||
The Company has entered into natural gas supply agreements through December 31, 2007 for approximately 49.7 million MMBtus. As of September 30, 2006, these natural gas commitments were $1.3 million above market prices. | ||
11. | Share-based Compensation | |
The Company sponsors three share-based compensation plans the Inspiration Resources Corporation 1992 Stock Incentive Plan (the 1992 Plan), the Terra Industries Inc. 1997 Stock Incentive Plan (the 1997 Plan) and the Terra Industries Inc. Stock Incentive Plan of 2002 (the 2002 Plan). Upon the adoption of the 2002 Plan, the Company no longer issues share-based awards from the 1992 Plan or the 1997 Plan, however, approximately 497,000 authorized shares have been reserved for awards that were issued prior to the adoption of the 2002 plan. As of September 30, 2006, there were approximately 3,997,000 shares of common stock authorized for issuance under the plans, including approximately 3,500,000, 464,000 and 33,000 authorized for the 2002 Plan, 1997 Plan and 1992 Plan, respectively. Shares for approximately 1,540,000 and 2,000,000 were available and reserved, respectively, for share-based compensation grants as of September 30, 2006. |
17
Awards granted under the plans may consist of incentive stock options (ISOs) or non-qualified stock options (NQSOs), stock appreciation rights (SARs), nonvested stock awards or other share-based awards (i.e. performance shares), with the exception that non-employee directors may not be granted SARs and only employees of the Company may be granted ISOs. | ||
The Compensation Committee of the Companys Board of Directors administers the plans and determines the exercise price, exercise period, vesting period and all other terms of the grant. All share-based awards to directors, officers and employees expire ten years after the date of grant. ISOs and NQSOs, which are not exercised after vesting, expire ten years after the date of the award. The vesting period for nonvested stock is determined at the grant date of the award; the vesting period is usually three years. The vesting date for other share-based awards is also set at the time of the award but can vary in length; there is usually no expiration date for other share-based awards. | ||
The Company also issues phantom share awards to certain employees. The phantom share awards settle in cash based on the stock price on the vesting date, which is usually three years after the grant date. The Company has recorded a liability for the phantom share awards. For the three- and nine-month periods ended September 30, 2006, the Company recorded $0.5 million and $1.1 million, respectively, of expense related to the phantom share awards. | ||
Prior to January 1, 2006, the Company accounted for awards issued under its share-based compensation plans using the intrinsic-value method. The Company did not recognize compensation expense on stock options in the three- and nine-month periods ended September 30, 2005 as all options granted under the Companys plans had an exercise price equal to the market price of the Companys stock on the date of grant and were fully vested. The Company did recognize compensation expense of $0.7 million and $1.7 million on nonvested stock awards and phantom share awards in the three- and nine-month periods ended September 30, 2005, respectively, based on intrinsic value, which was equal to the market price of the Companys stock on the date of grant. | ||
On January 1, 2006, the Company adopted SFAS 123 R using the modified prospective method. This Statement requires the Company to recognize in net income an estimate of expense for stock awards and options over their vesting periods, typically determined as of the date of grant. Under the modified prospective application, this Statement applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, the Company recognized compensation cost for the portion of awards for which the requisite service has not been rendered that were outstanding on January 1, 2006. The compensation cost for that portion of awards was based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS No. 123. The unearned compensation related to the unvested awards was reclassified against paid-in capital as of January 1, 2006. The cumulative effect of the adoption of SFAS 123 R related to estimating forfeitures of outstanding awards was not significant. Results for prior periods have not been restated. |
18
The following table illustrates the effect on net income and net income per share if the Company had accounted for share-based compensation using the fair value method in the nine months ended September 30, 2005: |
Three Months Ended | Nine Months Ended | |||||||
(in thousands, except per-share amounts) | September 30, 2005 | September 30, 2005 | ||||||
Net income available to common shareholders |
$ | 9,811 | $ | 33,360 | ||||
Add: Share based employee compensation expense
included in reported net income, net of
related tax effects |
743 | 1,684 | ||||||
Deduct: Share based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects |
(743 | ) | (1,684 | ) | ||||
Pro forma net income available to
common shareholders |
$ | 9,811 | $ | 33,360 | ||||
Income per share: |
||||||||
Basic as reported |
$ | 0.10 | $ | 0.36 | ||||
Basic pro forma |
0.10 | $ | 0.36 | |||||
Diluted as reported |
$ | 0.10 | $ | 0.35 | ||||
Diluted pro forma |
$ | 0.10 | $ | 0.35 | ||||
Compensation cost charged against income and the total income tax benefit recognized for share-based compensation arrangements is included below: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Compensation cost charged to SG&A expense |
$ | 1,968 | $ | 743 | $ | 4,285 | $ | 1,684 | ||||||||
Total compensation cost charged to income |
$ | 1,968 | $ | 743 | $ | 4,285 | $ | 1,684 | ||||||||
Income tax benefit |
$ | 419 | $ | 223 | $ | 913 | $ | 505 | ||||||||
Stock options | ||
The Company has stock options with service conditions. No compensation cost is recognized for the stock options as these instruments were fully vested upon adoption of SFAS 123 R. | ||
A summary of stock option activity as of September 30, 2006, and changes during the nine months then ended is presented below: |
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
(options in thousands) | Number | Price | ||||||
Outstanding
beginning of period |
592 | $ | 5.24 | |||||
Expired/terminated |
| | ||||||
Exercised |
(95 | ) | 3.82 | |||||
Outstanding
end of period |
497 | $ | 5.51 | |||||
19
The following table summarizes information about stock options outstanding and exercisable at September 30, 2006: | ||
(options in thousands) |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Average | Average | Average | ||||||||||||||||||
Range of | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||
Exercise Prices | Outstanding | Life (years) | Price | Exercisable | Price | |||||||||||||||
$1.43 - $3.88 |
399 | 2.9 | $ | 3.72 | 399 | $ | 3.72 | |||||||||||||
7.81 - 7.81 |
6 | 1.8 | 7.81 | 6 | 7.81 | |||||||||||||||
12.13 - 14.75 |
92 | 0.8 | 13.04 | 92 | 13.04 | |||||||||||||||
Total |
497 | 2.5 | $ | 5.51 | 497 | $ | 5.51 | |||||||||||||
No options were granted during 2006. | ||
Nonvested Stock Shares and Phantom Share Awards | ||
The Company currently has outstanding nonvested shares with both service conditions and performance conditions. Nonvested stock shares and phantom share awards with service and performance conditions usually cliff vest in three years from the grant date. If the financial performance conditions are not satisfied, the grant will be forfeited. | ||
The Company recognizes compensation expense for nonvested stock share awards over the vesting periods based on fair value, which is equal to the market price of the Companys stock on the date of grant. The Company recognizes compensation expense for the phantom share awards over the vesting periods based on fair value, which is equal to the market price of the Companys stock at each reporting period date. Compensation costs for nonvested stock shares and phantom share awards are discounted for estimated forfeitures and then amortized to expense using the straight-line method. | ||
A summary of the status of the Companys nonvested share awards as of September 30, 2006, and changes during the nine months then ended, is: |
Weighted- | ||||||||
Average | ||||||||
Grant-Date | ||||||||
(in thousands, except fair values) | Shares | Fair Value | ||||||
Outstanding at January 1, 2006 |
1,590 | $ | 5.12 | |||||
Granted |
662 | 6.67 | ||||||
Vested |
(687 | ) | 2.01 | |||||
Forfeited |
(111 | ) | 6.88 | |||||
Outstanding at September 30, 2006 |
1,454 | $ | 7.16 | |||||
At September 30, 2006, the total unrecognized compensation cost related to all nonvested share awards was $6.0 million. That cost is expected to be recognized over a weighted-average period of 1.7 years. |
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12. | Share Information | |
On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to September 30, 2008, and at such prices, as determined appropriate by the Company. Purchases may be commenced or suspended at any time without notice. During 2006, the Companys repurchases under the stock buyback program were: |
Number of | Average Price | Total Cost | ||||||||||
(in thousands, except average | Shares | of Shares | of Shares | |||||||||
price of shares repurchased) | Repurchased | Repurchased | Repurchased | |||||||||
April 2006 |
| $ | | $ | | |||||||
May 2006 |
488 | 7.49 | 3,655 | |||||||||
June 2006 |
1,557 | 6.92 | 10,767 | |||||||||
July 2006 |
| | | |||||||||
August 2006 |
560 | 6.93 | 3,879 | |||||||||
September 2006 |
70 | 7.03 | 495 | |||||||||
2,675 | $ | 7.03 | $ | 18,796 |
During 2004 and in connection with the MCC acquisition, Terra issued warrants to purchase 4.0 million of its common shares at $5.48 per share. These warrants were valued at $21.1 million at the MCC closing. At December 31, 2004, the value of the warrants was carried as a current liability pending shareholder approval to issue the underlying shares. During 2005, shareholders approved the issuance of the underlying shares and the warrant value was reclassified to common stockholders equity. | ||
13. | New Accounting Pronouncements | |
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48 requires that realization of an uncertain income tax position must be more likely than not (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective in the first quarter 2007 for the Company. The Company plans to adopt FIN 48 when required. FIN 48 is currently being evaluated by the Company for its full impact. At this time, the Company believes it has properly and adequately provided for all income tax positions and therefore expects minimal impact from adopting the Interpretation. | ||
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurement (SFAS 157). SFAS 157 is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by generally accepted accounting principles (GAAP); it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and input used in valuations. SFAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and |
21
disclosure and requirements of SFAS 157 are effective for the Company in the 2008 first quarter and the Company expects no significant impact from adopting the Standard. | ||
In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 focuses primarily on balance sheet reporting for the funded status of benefit plans and requires recognition of benefit liabilities for under-funded plans and benefit assets for over-funded plans, with offsetting impacts to shareholders equity. These changes are required to be adopted prospectively, effective with the Companys December 31, 2006 financial statements. The Company is in a net under-funded position for its pension and retiree health care plans and will therefore recognize incremental retirement benefit liabilities on adoption. The Company has not yet quantified these amounts. The new rules will also require companies to measure benefit plan assets and liabilities and determine the discount rate for subsequent year expense recognition as of the balance sheet date for financial reporting purposes, thus eliminating the opportunity to use a measurement of date up to 90 days prior to the balance sheet date. The effective date for this change is delayed until year-end 2008. The Company currently uses an October 1 measurement date and will adopt a December 31 measurement date in 2008 as required. Switching to the new measurement date will require a one-time adjustment to retained earnings per the transition guidance in SFAS 158. None of the changes prescribed by SFAS 158 will impact the Companys results of operations or cash flows. | ||
In September 2006, the SEC issued SFAS 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years financial statements are not restated, the cumulative effect adjustment is recorded in opening accumulated deficit as of the beginning of the fiscal year of adoption. SAB 108 is effective for the Company at the end of 2006. The Company is currently assessing the impact the adoption of SAB 108 will have on its Consolidated Financial Statements. | ||
14. | Subsequent Event | |
On October 19, 2006, the Company entered into a Memorandum of Understanding with Kemira GrowHow Oyj to create a joint venture to operate the fertilizer and associated process chemicals businesses of both companies in the United Kingdom. | ||
The Memorandum of Understanding is a non-legally binding agreement and is subject, inter alia, to clearance from the UK competition authorities, negotiation of definitive documents and lender consent. It is not subject to approval of shareholders in either Terra Industries Inc. or Kemira GrowHow Oyj. | ||
The proposed joint venture is expected to be held 50/50 by Terra Industries Inc. and Kemira GrowHow and to own and operate the sites of Terra Nitrogen (UK) Limiteds facilities on Teeside and Severnside and the site of Kemira GrowHow UK Limited at Ince. |
22
15. | Guarantor Subsidiaries | |
The consolidating statement of financial position of Terra Industries Inc. (the Parent),
Terra Capital, Inc. (TCAPI), the Guarantor Subsidiaries and subsidiaries of the Parent that
are not guarantors of the Senior Secured Notes due 2008 for September 30, 2006; December 31,
2005; and September 30, 2005 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations for the three- and nine months and statements of cash flows for the nine months ended September 30, 2006 and 2005 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. |
||
Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa and Beaumont, Texas plants as well as the corporate headquarters facility in Sioux City, Iowa. All other company facilities are owned by non-guarantor subsidiaries. |
23
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1 | $ | (17,081 | ) | $ | 89,612 | $ | 49,639 | $ | (1 | ) | $ | 122,170 | ||||||||||
Accounts receivable, net |
| | 89,173 | 104,166 | | 193,339 | ||||||||||||||||||
Inventories |
| | 62,019 | 98,172 | | 160,191 | ||||||||||||||||||
Other current assets |
(857 | ) | 10,863 | 7,461 | 5,368 | 3,323 | 26,158 | |||||||||||||||||
Total current assets |
(856 | ) | (6,218 | ) | 248,265 | 257,345 | 3,322 | 501,858 | ||||||||||||||||
Property, plant and
equipment, net |
| | 389,524 | 333,429 | (1 | ) | 722,952 | |||||||||||||||||
Equity method investments |
| | 7,193 | 154,262 | | 161,455 | ||||||||||||||||||
Intangible assets, other assets
and deferred plant
turnaround costs |
| 8,314 | 23,898 | 41,644 | | 73,856 | ||||||||||||||||||
Investments in and advanced
to (from) affiliates |
727,320 | 551,576 | 1,453,292 | 437,194 | (3,169,382 | ) | | |||||||||||||||||
Total assets |
$ | 726,464 | $ | 553,672 | $ | 2,122,172 | $ | 1,223,874 | $ | (3,166,061 | ) | $ | 1,460,121 | |||||||||||
Liabilities |
||||||||||||||||||||||||
Debt due within one year |
$ | | $ | | $ | 4 | $ | | $ | | $ | 4 | ||||||||||||
Accounts payable |
107 | 900 | 36,015 | 78,712 | | 115,734 | ||||||||||||||||||
Accrued expenses and
other current liabilities |
7,904 | 100,512 | 48,556 | 28,237 | (76,290 | ) | 108,919 | |||||||||||||||||
Total current liabilities |
8,011 | 101,412 | 84,575 | 106,949 | (76,290 | ) | 224,657 | |||||||||||||||||
Long-term debt and capital
lease obligations |
| 331,300 | | | | 331,300 | ||||||||||||||||||
Deferred income taxes |
| | 18,608 | 40,314 | | 58,922 | ||||||||||||||||||
Pension and other liabilities |
140,659 | (509 | ) | 9,127 | 1,071 | | 150,348 | |||||||||||||||||
Minority interest |
| 18,564 | 76,450 | | | 95,014 | ||||||||||||||||||
Total liabilities and
minority interest |
148,670 | 450,767 | 188,760 | 148,334 | (76,290 | ) | 860,241 | |||||||||||||||||
Preferred stock |
115,800 | | | | | 115,800 | ||||||||||||||||||
Common Shareholders Equity |
||||||||||||||||||||||||
Common stock |
144,968 | | 73 | 49,709 | (49,782 | ) | 144,968 | |||||||||||||||||
Paid-in capital |
693,944 | 150,218 | 2,026,502 | 1,265,009 | (3,441,729 | ) | 693,944 | |||||||||||||||||
Accumulated other
comprehensive income
(loss) compensation |
(63,636 | ) | | | 30,080 | (18,806 | ) | (52,362 | ) | |||||||||||||||
Retained earnings (deficit) |
(313,282 | ) | (47,313 | ) | (93,163 | ) | (269,258 | ) | 420,546 | (302,470 | ) | |||||||||||||
Common shareholders equity |
461,994 | 102,905 | 1,933,412 | 1,075,540 | (3,089,771 | ) | 484,080 | |||||||||||||||||
Total liabilities and
minority interest,
preferred stock and common
shareholders equity |
$ | 726,464 | $ | 553,672 | $ | 2,122,172 | $ | 1,223,874 | $ | (3,166,061 | ) | $ | 1,460,121 | |||||||||||
24
Consolidating Statement of Operations for the three months ended September 30, 2006: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net sales |
$ | | $ | | $ | 375,329 | $ | 86,204 | $ | | $ | 461,533 | ||||||||||||
Other income |
| | 747 | 2,500 | 1 | 3,248 | ||||||||||||||||||
| | 376,076 | 88,704 | 1 | 464,781 | |||||||||||||||||||
Cost and Expenses |
||||||||||||||||||||||||
Cost of sales |
| | 370,874 | 65,206 | (13,557 | ) | 422,523 | |||||||||||||||||
Selling, general and
administrative expenses |
616 | (2,286 | ) | (6,206 | ) | 7,996 | 13,559 | 13,679 | ||||||||||||||||
Equity in the (earnings) loss
of subsidiaries |
8,658 | (26,829 | ) | (16,848 | ) | 14,949 | 19,261 | (809 | ) | |||||||||||||||
Total cost and expenses |
9,274 | (29,115 | ) | 347,820 | 88,151 | 19,263 | 435,393 | |||||||||||||||||
Income (loss) from operations |
(9,274 | ) | 29,115 | 28,256 | 553 | (19,262 | ) | 29,388 | ||||||||||||||||
Interest income |
| (1,274 | ) | 5,194 | (3,576 | ) | 1,747 | 2,091 | ||||||||||||||||
Interest expense |
(465 | ) | (10,024 | ) | (3,357 | ) | 2,809 | (749 | ) | (11,786 | ) | |||||||||||||
Income (loss) before income
taxes and minority interest |
(9,739 | ) | 17,817 | 30,093 | (214 | ) | (18,264 | ) | 19,693 | |||||||||||||||
Income tax provision |
(5,657 | ) | | | (343 | ) | | (6,000 | ) | |||||||||||||||
Minority interest |
| (647 | ) | (2,706 | ) | | 1 | (3,352 | ) | |||||||||||||||
Net (loss) income |
$ | (15,396 | ) | $ | 17,170 | $ | 27,387 | $ | (557 | ) | $ | (18,263 | ) | $ | 10,341 | |||||||||
Consolidating Statement of Operations for the nine months ended September 30, 2006: |
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Product revenues |
$ | | $ | | $ | 645,275 | $ | 735,809 | $ | | $ | 1,381,084 | ||||||||||||
Other revenues |
| | 4,328 | 1,807 | | 6,135 | ||||||||||||||||||
Total revenues |
| | 649,603 | 737,616 | | 1,387,219 | ||||||||||||||||||
Cost and Expenses |
||||||||||||||||||||||||
Cost of sales |
| | 675,913 | 701,056 | (39,759 | ) | 1,337,210 | |||||||||||||||||
Selling, general and
administrative expenses |
1,623 | (6,848 | ) | (8,317 | ) | 12,177 | 39,760 | 38,395 | ||||||||||||||||
Equity in the (earnings) loss
of subsidiaries |
27,336 | (66,108 | ) | (16,848 | ) | (43,459 | ) | 83,249 | (15,830 | ) | ||||||||||||||
Total cost & expenses |
28,959 | (72,956 | ) | 650,748 | 669,774 | 83,250 | 1,359,775 | |||||||||||||||||
Income (loss) from operations |
(28,959 | ) | 72,956 | (1,145 | ) | 67,842 | (83,250 | ) | 27,444 | |||||||||||||||
Interest income |
| (224 | ) | 5,194 | (1,218 | ) | 1,747 | 5,499 | ||||||||||||||||
Interest expense |
(1,395 | ) | (33,610 | ) | (6 | ) | (3,745 | ) | 3,416 | (35,340 | ) | |||||||||||||
Income (loss) before income
taxes and minority interest |
(30,354 | ) | 39,122 | 4,043 | 62,879 | (78,087 | ) | (2,397 | ) | |||||||||||||||
Income tax benefit |
(2,835 | ) | | | 4,835 | 2 | 2,002 | |||||||||||||||||
Minority interest |
| (1,351 | ) | (5,649 | ) | | | (7,000 | ) | |||||||||||||||
Net (loss) income |
$ | (33,189 | ) | $ | 37,771 | $ | (1,606 | ) | $ | 67,714 | $ | (78,085 | ) | $ | (7,395 | ) | ||||||||
25
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities |
||||||||||||||||||||||||
Net income (loss) |
$ | (33,189 | ) | $ | 37,771 | $ | (1,606 | ) | $ | 67,714 | $ | (78,085 | ) | $ | (7,395 | ) | ||||||||
Adjustments to reconcile net
income (loss) to net cash
flows from operating
activities: |
||||||||||||||||||||||||
Depreciation and amortization |
| 2,196 | 44,488 | 40,302 | 1 | 86,987 | ||||||||||||||||||
Deferred income taxes |
| | 18,608 | (20,610 | ) | | (2,002 | ) | ||||||||||||||||
Minority interest in earnings |
| 515 | 6,485 | | | 7,000 | ||||||||||||||||||
Equity in undistributed
earnings |
(27,336 | ) | 66,108 | 16,848 | 43,459 | (89,944 | ) | 9,135 | ||||||||||||||||
Non-cash loss on derivatives |
| | 1,703 | 1,072 | | 2,775 | ||||||||||||||||||
Share-based compensation |
4,285 | | | | | 4,285 | ||||||||||||||||||
Change in operating assets
and liabilities |
90 | 11,674 | (71,167 | ) | 48,279 | 13,613 | 2,489 | |||||||||||||||||
Net Cash Flows from
Operating Activities |
(56,150 | ) | 118,264 | 15,359 | 180,216 | (154,415 | ) | 103,274 | ||||||||||||||||
Investing Activities |
||||||||||||||||||||||||
Purchase of property,
plant and equipment |
| | (25,549 | ) | (15,236 | ) | | (40,785 | ) | |||||||||||||||
Plant turnaround expenditures |
| | (13,458 | ) | (18,529 | ) | | (31,987 | ) | |||||||||||||||
Distributions received from
unconsolidated affiliates |
| | | 9,660 | | 9,660 | ||||||||||||||||||
Changes in restricted cash |
| | 8,595 | | | 8,595 | ||||||||||||||||||
Proceeds from the sale of
property, plant and
equipment |
| | 7,544 | 2,122 | | 9,666 | ||||||||||||||||||
Net Cash Flows from
Investing Activities |
| | (22,868 | ) | (21,983 | ) | | (44,851 | ) | |||||||||||||||
Financing Activities |
||||||||||||||||||||||||
Principal payments under
borrowing arrangements |
| | (22 | ) | (12 | ) | | (34 | ) | |||||||||||||||
Preferred share dividends paid |
(3,825 | ) | | | | | (3,825 | ) | ||||||||||||||||
Proceeds from exercise of
stock options |
363 | | | | | 363 | ||||||||||||||||||
Payments under share
repurchase program |
(18,796 | ) | | | | | (18,796 | ) | ||||||||||||||||
Distributions to minority interests |
| | (4,244 | ) | | | (4,244 | ) | ||||||||||||||||
Change in investments and
advances from (to) affiliates |
78,408 | (146,853 | ) | 34,015 | (119,985 | ) | 154,415 | | ||||||||||||||||
Net Cash Flows from
Financing Activities |
56,150 | (146,853 | ) | 29,749 | (119,997 | ) | 154,415 | (26,536 | ) | |||||||||||||||
Effect of Foreign Exchange
Rate on Cash |
| | | 3,917 | | 3,917 | ||||||||||||||||||
Increase (decrease) in Cash
and Cash Equivalents |
| (28,589 | ) | 22,240 | 42,153 | | 35,804 | |||||||||||||||||
Cash and Cash Equivalents
at Beginning of Year |
1 | 11,508 | 67,372 | 7,486 | (1 | ) | 86,366 | |||||||||||||||||
Cash and Cash Equivalents
at End of Year |
$ | 1 | $ | (17,081 | ) | $ | 89,612 | $ | 49,639 | $ | (1 | ) | $ | 122,170 | ||||||||||
26
Guarantor | Non-Guarantor | |||||||||||||||||||||||
Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash, cash equivalents and
restricted cash |
$ | 1 | $ | 11,508 | $ | 75,967 | $ | 7,486 | $ | (1 | ) | $ | 94,961 | |||||||||||
Accounts receivable, net |
| 1,563 | 54,486 | 150,357 | 1 | 206,407 | ||||||||||||||||||
Inventories |
| | 60,350 | 119,061 | 10,903 | 190,314 | ||||||||||||||||||
Other current assets |
9,198 | 12,704 | 9,720 | 22,763 | 193 | 54,578 | ||||||||||||||||||
Total current assets |
9,199 | 25,775 | 200,523 | 299,667 | 11,096 | 546,260 | ||||||||||||||||||
Property, plant and
equipment, net |
| | 275,223 | 458,313 | | 733,536 | ||||||||||||||||||
Equity investments |
| | | 183,884 | | 183,884 | ||||||||||||||||||
Deferred plant turnaround
costs, intangible and
other assets |
| 10,861 | 7,299 | 42,139 | (354 | ) | 59,945 | |||||||||||||||||
Investments in and advances
to (from) affiliates |
747,233 | 536,937 | 1,358,920 | 618,155 | (3,261,245 | ) | | |||||||||||||||||
Total Assets |
$ | 756,432 | $ | 573,573 | $ | 1,841,965 | $ | 1,602,158 | $ | (3,250,503 | ) | $ | 1,523,625 | |||||||||||
Liabilities |
||||||||||||||||||||||||
Debt due within one year |
$ | | $ | | $ | 26 | $ | 12 | $ | | $ | 38 | ||||||||||||
Accounts payable |
210 | | 48,501 | 77,152 | | 125,863 | ||||||||||||||||||
Accrued and other
liabilities |
3,119 | 92,984 | 54,855 | 63,670 | (76,719 | ) | 137,909 | |||||||||||||||||
Total current liabilities |
3,329 | 92,984 | 103,382 | 140,834 | (76,719 | ) | 263,810 | |||||||||||||||||
Long-term debt and capital
Lease obligations |
| 331,300 | | | | 331,300 | ||||||||||||||||||
Deferred income taxes |
| | | 70,088 | (4,090 | ) | 65,998 | |||||||||||||||||
Pension and other liabilities |
148,793 | | 11,173 | 1,591 | (1 | ) | 161,556 | |||||||||||||||||
Minority interest |
| 18,049 | 74,209 | | | 92,258 | ||||||||||||||||||
Total liabilities and
minority interest |
152,122 | 442,333 | 188,764 | 212,513 | (80,810 | ) | 914,922 | |||||||||||||||||
Preferred stock |
115,800 | | | | | 115,800 | ||||||||||||||||||
Stockholders equity |
||||||||||||||||||||||||
Common stock |
146,994 | | 73 | 49,709 | (49,782 | ) | 146,994 | |||||||||||||||||
Paid in capital |
712,671 | 150,218 | 1,741,688 | 1,473,065 | (3,364,971 | ) | 712,671 | |||||||||||||||||
Accumulated other
comprehensive income
income (loss) and
unearned compensation |
(63,728 | ) | | | 5,232 | (17,016 | ) | (75,512 | ) | |||||||||||||||
Retrained earnings (deficit) |
(307,427 | ) | (18,978 | ) | (88,560 | ) | (138,361 | ) | 262,076 | (291,250 | ) | |||||||||||||
Total stockholders equity |
488,510 | 131,240 | 1,653,201 | 1,389,645 | (3,169,693 | ) | 492,903 | |||||||||||||||||
Total liabilities and
stockholders equity |
$ | 756,432 | $ | 573,573 | $ | 1,841,965 | $ | 1,602,158 | $ | (3,250,503 | ) | $ | 1,523,625 | |||||||||||
27
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Cash and short-term
investments and
restricted cash |
$ | 1 | $ | 89,016 | $ | 71,722 | $ | 14,826 | $ | | $ | 175,565 | ||||||||||||
Accounts receivable, net |
| 162 | 38,997 | 137,327 | 1 | 176,487 | ||||||||||||||||||
Inventories |
| | 31,702 | 101,341 | 11,920 | 144,963 | ||||||||||||||||||
Other current assets |
28,842 | 3,051 | 10,117 | 42,780 | 2 | 84,792 | ||||||||||||||||||
Total current assets |
28,843 | 92,229 | 152,538 | 296,274 | 11,923 | 581,807 | ||||||||||||||||||
Property, plant and
equipment, net |
| | 283,422 | 484,754 | (3,439 | ) | 764,737 | |||||||||||||||||
Equity method investments |
| | | 190,805 | | 190,805 | ||||||||||||||||||
Intangible other assets and
deferred plant turnaround
costs |
2,650 | 11,400 | 8,680 | 21,583 | 3,441 | 47,754 | ||||||||||||||||||
Investments in and advanced
to (from) affiliates |
770,571 | 602,874 | 1,312,399 | 795,170 | (3,481,014 | ) | | |||||||||||||||||
Total assets |
$ | 802,064 | $ | 706,503 | $ | 1,757,039 | $ | 1,788,586 | $ | (3,469,089 | ) | $ | 1,585,103 | |||||||||||
Liabilities |
||||||||||||||||||||||||
Debt due within one year |
$ | | $ | | $ | 49 | $ | 28 | $ | | $ | 77 | ||||||||||||
Accounts payable |
69 | 268 | 26,022 | 78,805 | (1 | ) | 105,163 | |||||||||||||||||
Accrued and other liabilities |
14,961 | 101,773 | 56,014 | 58,900 | (74,449 | ) | 157,199 | |||||||||||||||||
Total current liabilities |
15,030 | 102,041 | 82,085 | 137,733 | (74,450 | ) | 262,439 | |||||||||||||||||
Long-term debt and capital
lease obligations |
| 331,300 | 4 | | | 331,304 | ||||||||||||||||||
Deferred income taxes |
(2,044 | ) | | | 91,802 | 5,897 | 95,655 | |||||||||||||||||
Pension and other liabilities |
104,431 | (501 | ) | 13,722 | 35,805 | 3 | 153,460 | |||||||||||||||||
Minority interest |
| 18,718 | 76,979 | | 1 | 95,698 | ||||||||||||||||||
Total liabilities and
minority interest |
117,417 | 451,558 | 172,790 | 265,340 | (68,549 | ) | 938,556 | |||||||||||||||||
Preferred stock |
115,800 | | | | | 115,800 | ||||||||||||||||||
Stockholders Equity |
||||||||||||||||||||||||
Common stock |
146,997 | | 73 | 49,709 | (49,782 | ) | 146,997 | |||||||||||||||||
Paid-in capital |
712,681 | 150,218 | 1,747,295 | 1,478,729 | (3,376,242 | ) | 712,681 | |||||||||||||||||
Accumulated other
comprehensive income
(loss) and unearned
compensation |
(57,834 | ) | | | 22,022 | (18,276 | ) | (54,088 | ) | |||||||||||||||
Retained earnings (deficit) |
(232,997 | ) | 104,727 | (163,119 | ) | (27,214 | ) | 43,760 | (274,843 | ) | ||||||||||||||
Total stockholders equity |
568,847 | 254,945 | 1,584,249 | 1,523,246 | (3,400,540 | ) | 530,747 | |||||||||||||||||
Total liabilities and
stockholders equity |
$ | 802,064 | $ | 706,503 | $ | 1,757,039 | $ | 1,788,586 | $ | (3,469,089 | ) | $ | 1,585,103 | |||||||||||
28
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net sales |
$ | | $ | | $ | 144,002 | $ | 342,864 | $ | (2,784 | ) | $ | 484,082 | |||||||||||
Other income, net |
| | (1,809 | ) | 637 | 2,784 | 1,612 | |||||||||||||||||
Total revenues |
| | 142,193 | 343,501 | | 485,694 | ||||||||||||||||||
Cost and Expenses |
||||||||||||||||||||||||
Cost of sales |
| | 169,523 | 311,470 | (34,085 | ) | 446,908 | |||||||||||||||||
Selling, general and
administrative expenses |
795 | (1,136 | ) | (17,779 | ) | (3,532 | ) | 31,791 | 10,139 | |||||||||||||||
Equity in the (earnings) loss
of subsidiaries |
(49,221 | ) | (59,410 | ) | | (11,694 | ) | 116,995 | (3,330 | ) | ||||||||||||||
Total cost & expenses |
(48,426 | ) | (60,546 | ) | 151,744 | 296,244 | 114,701 | 453,717 | ||||||||||||||||
Income from operations |
48,426 | 60,546 | (9,551 | ) | 47,257 | (114,701 | ) | 31,977 | ||||||||||||||||
Interest income |
| 382 | 1,390 | (2,001 | ) | 3,199 | 2,970 | |||||||||||||||||
Interest expense |
(491 | ) | (10,860 | ) | (10 | ) | 4,513 | (4,981 | ) | (11,829 | ) | |||||||||||||
Income before income taxes
and minority interest |
47,935 | 50,068 | (8,171 | ) | 49,769 | (116,483 | ) | 23,118 | ||||||||||||||||
Income tax provision |
3,688 | | | (5,494 | ) | (5,898 | ) | (7,704 | ) | |||||||||||||||
Minority interest |
| (847 | ) | (3,481 | ) | | | (4,328 | ) | |||||||||||||||
Net Income |
$ | 51,623 | $ | 49,221 | $ | (11,652 | ) | $ | 44,275 | $ | (122,381 | ) | $ | 11,086 | ||||||||||
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net sales |
$ | | $ | | $ | 423,563 | $ | 994,377 | $ | 1,480 | $ | 1,419,420 | ||||||||||||
Other income, net |
| | 6,318 | 1,441 | (1,480 | ) | 6,279 | |||||||||||||||||
Total revenues |
| | 429,881 | 995,818 | | 1,425,699 | ||||||||||||||||||
Cost and Expenses |
||||||||||||||||||||||||
Cost of sales |
| | 425,415 | 878,700 | (34,877 | ) | 1,269,238 | |||||||||||||||||
Selling, general and
administrative expenses |
1,892 | (5,319 | ) | 981 | 4,206 | 34,878 | 36,638 | |||||||||||||||||
Equity in the (earnings) loss
of subsidiaries |
(82,905 | ) | (112,456 | ) | | (46,166 | ) | 228,790 | (12,737 | ) | ||||||||||||||
Total cost & expenses |
(81,013 | ) | (117,775 | ) | 426,396 | 836,740 | 228,791 | 1,293,139 | ||||||||||||||||
Income from operations |
81,013 | 117,775 | 3,485 | 159,078 | (228,791 | ) | 132,560 | |||||||||||||||||
Interest income |
| 1,886 | 3,754 | (84 | ) | 835 | 6,391 | |||||||||||||||||
Interest expense |
(1,472 | ) | (33,680 | ) | (20 | ) | (4,595 | ) | (2,045 | ) | (41,812 | ) | ||||||||||||
Loss on early retirement
of debt |
| | | (27,193 | ) | | (27,193 | ) | ||||||||||||||||
Change in fair value of
warrant liability |
8,860 | | | | | 8,860 | ||||||||||||||||||
Income before income taxes
and minority interest |
88,401 | 85,981 | 7,219 | 127,206 | (230,001 | ) | 78,806 | |||||||||||||||||
Income tax provision |
(10,645 | ) | | | (9,321 | ) | (5,898 | ) | (25,864 | ) | ||||||||||||||
Minority interest |
| (3,076 | ) | (12,648 | ) | | 1 | (15,723 | ) | |||||||||||||||
Net Income |
$ | 77,756 | $ | 82,905 | $ | (5,429 | ) | $ | 117,885 | $ | (235,898 | ) | $ | 37,219 | ||||||||||
29
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities |
||||||||||||||||||||||||
Net income (loss) |
$ | 77,756 | $ | 82,905 | $ | (5,429 | ) | $ | 117,885 | $ | (235,898 | ) | $ | 37,219 | ||||||||||
Adjustments to reconcile net
income (loss) to net cash
flows from operating
activities: |
||||||||||||||||||||||||
Noncash loss on early
retirement of debt |
| | | 22,543 | | 22,543 | ||||||||||||||||||
Change in fair value of
warrant liability |
(8,860 | ) | | | | | (8,860 | ) | ||||||||||||||||
Depreciation and amortization |
| | 32,413 | 51,156 | | 83,569 | ||||||||||||||||||
Deferred taxes |
17,278 | | | 16,314 | (4,039 | ) | 29,553 | |||||||||||||||||
Minority interest in earnings |
| 3,076 | 12,648 | | (1 | ) | 15,723 | |||||||||||||||||
Equity earnings of
unconsolidated affiliates |
(82,905 | ) | (112,456 | ) | | (46,166 | ) | 228,790 | (12,737 | ) | ||||||||||||||
Noncash loss on derivatives |
| | 8,057 | | | 8,057 | ||||||||||||||||||
Amortization of unearned
compensation |
1,684 | | | | | 1,684 | ||||||||||||||||||
Term loan discount accretion |
| | | 1,773 | | 1,773 | ||||||||||||||||||
Change in operating assets
and liabilities |
(47,745 | ) | 166,146 | 11,028 | (60,890 | ) | (172,537 | ) | (103,998 | ) | ||||||||||||||
Net Cash Flows from
Operating Activities |
(42,792 | ) | 139,671 | 58,717 | 102,615 | (183,685 | ) | 74,526 | ||||||||||||||||
Investing Activities |
||||||||||||||||||||||||
Purchase of property, plant
and equipment |
| | (2,047 | ) | (15,359 | ) | | (17,406 | ) | |||||||||||||||
Plant turnaround expenditures |
| | | (9,677 | ) | | (9,677 | ) | ||||||||||||||||
Distributions received from
unconsolidated affiliates |
| | | 33,125 | | 33,125 | ||||||||||||||||||
Restricted cash |
| | (8,861 | ) | | | (8,861 | ) | ||||||||||||||||
Proceeds from the sale of
property, plant and
equipment |
168 | | | 6,485 | (168 | ) | 6,485 | |||||||||||||||||
Net Cash Flows from
Investing Activities |
168 | | (10,908 | ) | 14,574 | (168 | ) | 3,666 | ||||||||||||||||
Financing Activities |
||||||||||||||||||||||||
Payments under borrowings
arrangements |
| | (77 | ) | (125,047 | ) | | (125,124 | ) | |||||||||||||||
Preferred share dividends paid |
(4,675 | ) | | | | | (4,675 | ) | ||||||||||||||||
Change in investments and
advances from (to) affiliates |
47,139 | (252,954 | ) | | 22,121 | 183,694 | | |||||||||||||||||
Proceeds from exercise of
stock options |
160 | | | | | 160 | ||||||||||||||||||
Stock issuance |
| | (3,583 | ) | | 3,583 | | |||||||||||||||||
Distributions to minority interests |
| (2,392 | ) | (9,831 | ) | | | (12,223 | ) | |||||||||||||||
Net Cash Flows from
Financing Activities |
42,624 | (255,346 | ) | (13,491 | ) | (102,926 | ) | 187,277 | (141,862 | ) | ||||||||||||||
Effect of Foreign Exchange
Rate on Cash |
| | | | (3,424 | ) | (3,424 | ) | ||||||||||||||||
Increase (decrease) in Cash
and Short-term Investments |
| (115,675 | ) | 34,318 | 14,263 | | (67,094 | ) | ||||||||||||||||
Cash and Short-term Investments
at Beginning of Year |
1 | 204,691 | 28,543 | 563 | | 233,798 | ||||||||||||||||||
Cash and Short-term Investments
at End of Year |
$ | 1 | $ | 89,016 | $ | 62,861 | $ | 14,826 | $ | | $ | 166,704 | ||||||||||||
30
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
31
(in thousands) | 2006 | 2005 | ||||||
REVENUES: |
||||||||
Nitrogen Products |
$ | 442,612 | $ | 478,118 | ||||
Methanol |
18,921 | 5,964 | ||||||
Other |
3,248 | 1,612 | ||||||
$ | 464,781 | $ | 485,694 | |||||
INCOME (LOSS) FROM OPERATIONS: |
||||||||
Nitrogen Products |
$ | 20,409 | $ | 38,971 | ||||
Methanol |
9,405 | (6,673 | ) | |||||
Other |
(426 | ) | (321 | ) | ||||
$ | 29,388 | $ | 31,977 | |||||
2006 | 2005 | |||||||||||||||
Sales | Average | Sales | Average | |||||||||||||
(quantities in thousands of tons) | Volumes | Unit Price* | Volumes | Unit Price* | ||||||||||||
Ammonia |
466 | $ | 281 | 428 | $ | 293 | ||||||||||
Nitrogen solutions |
1,031 | $ | 129 | 1,120 | $ | 154 | ||||||||||
Urea |
32 | $ | 236 | 38 | $ | 257 | ||||||||||
Ammonium nitrate |
323 | $ | 226 | 461 | $ | 204 | ||||||||||
* | After deducting outbound freight costs |
32
33
(in thousands) | 2006 | 2005 | ||||||
REVENUES: |
||||||||
Nitrogen Products |
$ | 1,355,574 | $ | 1,393,503 | ||||
Methanol |
25,510 | 25,917 | ||||||
Other |
6,135 | 6,279 | ||||||
$ | 1,387,219 | $ | 1,425,699 | |||||
INCOME (LOSS) FROM OPERATIONS: |
||||||||
Nitrogen Products |
$ | 25,098 | $ | 144,469 | ||||
Methanol |
3,363 | (9,762 | ) | |||||
Other |
(1,017 | ) | (2,147 | ) | ||||
$ | 27,444 | $ | 132,560 | |||||
34
2006 | 2005 | |||||||||||||||
Sales | Average | Sales | Average | |||||||||||||
(quantities in thousands of tons) | Volumes | Unit Price* | Volumes | Unit Price* | ||||||||||||
Ammonia |
1,417 | $ | 320 | 1,446 | $ | 286 | ||||||||||
Nitrogen solutions |
2,799 | $ | 143 | 3,305 | $ | 150 | ||||||||||
Urea |
116 | $ | 267 | 124 | $ | 252 | ||||||||||
Ammonium nitrate |
879 | $ | 226 | 1,199 | $ | 198 | ||||||||||
* | After deducting outbound freight costs |
35
36
Number of | Average Price | Total Cost | ||||||||||
(in thousands, except average | Shares | of Shares | of Shares | |||||||||
price of shares repurchased) | Repurchased | Repurchased | Repurchased | |||||||||
April 2006 |
| $ | | $ | | |||||||
May 2006 |
488 | 7.49 | 3,655 | |||||||||
June 2006 |
1,557 | 6.92 | 10,767 | |||||||||
July 2006 |
| | | |||||||||
August 2006 |
560 | 6.93 | 3,879 | |||||||||
September 2006 |
70 | 7.03 | 495 | |||||||||
2,675 | $ | 7.03 | $ | 18,796 |
37
38
39
Total Number of | ||||||||||||||||
Total | Shares Purchased as | Maximum Number of | ||||||||||||||
Month of | Number of | Average | Part of Publicly | Shares that May Yet Be | ||||||||||||
Share | Shares | Price Paid | Announced Plans or | Purchased Under the | ||||||||||||
Purchases | Purchased | per Share | Programs | Plans or Programs | ||||||||||||
April 2006 |
| $ | | | 9,516,817 | |||||||||||
May 2006 |
488,100 | 7.49 | 488,100 | 9,028,717 | ||||||||||||
June 2006 |
1,556,500 | 6.92 | 2,044,600 | 7,472,217 | ||||||||||||
July 2006 |
| | 2,044,600 | 7,472,217 | ||||||||||||
August 2006 |
560,000 | 6.93 | 2,604,600 | 6,912,217 | ||||||||||||
September 2006 |
70,500 | 7.03 | 2,675,100 | 6,841,717 |
40
Exhibit *4.1
|
Amendment No. 3 to the Amended and Restated Credit Agreement dated July 29, 2005, among Terra Capital, Inc., Terra Mississippi Holdings Corp. (f/k/a Mississippi Chemical Corporation) and Terra Nitrogen (U.K.) Limited (collectively Borrowers), Terra Industries Inc., Terra Capital Holdings, Inc., the Lenders party hereto and Citicorp USA, Inc. as administrative agent for the Lenders and issuers. | |
Exhibit *31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit *31.2
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit *32
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | filed herewith |
41
TERRA INDUSTRIES INC. |
||||
Date: November 1, 2006 | /s/ Francis G. Meyer | |||
Francis G. Meyer | ||||
Senior Vice President and Chief Financial Officer and a duly authorized signatory | ||||
42