-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ws0+M+m8sjVVDa5N8ALKUSqiOeFrxgfWL0Du5IpIJsIu1397Kn1QG5uamNHVuAGM wTrca2B8SyOAMVn0ofF/YQ== 0000950131-02-004159.txt : 20021105 0000950131-02-004159.hdr.sgml : 20021105 20021105152536 ACCESSION NUMBER: 0000950131-02-004159 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA INDUSTRIES INC CENTRAL INDEX KEY: 0000722079 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 521145429 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08520 FILM NUMBER: 02809808 BUSINESS ADDRESS: STREET 1: 600 FOURTH ST STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: 600 FOURTH STREET STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 FORMER COMPANY: FORMER CONFORMED NAME: INSPIRATION RESOURCES CORP DATE OF NAME CHANGE: 19920517 10-Q 1 d10q.txt FORM 10-Q ================================================================================ 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 September 30, 2002 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 P.O. Box 6000 600 Fourth Street Sioux City, Iowa 51102-6000 (Address of principal executive offices) (Zip Code) 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 October 31, 2002, the following shares of the registrant's stock were outstanding: Common Shares, without par value 76,901,669 shares ================================================================================ PART I. FINANCIAL INFORMATION TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) (unaudited)
September 30, December 31, September 30, 2002 2001 2001 ------------- ------------ ------------- ASSETS Cash and short-term investments $ 41,879 $ 7,125 $ 44,132 Accounts receivable, less allowance for doubtful accounts of $191, $936, $879 97,455 101,363 97,947 Inventories 86,838 110,027 123,627 Other current assets 30,528 35,142 32,414 - --------------------------------------------------------------------------------------------------------------------- Total current assets 256,700 253,657 298,120 - --------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 792,182 824,982 849,188 Excess of cost over net assets of acquired businesses -- 206,209 211,098 Other assets 53,434 51,195 39,959 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 1,102,316 $ 1,336,043 $ 1,398,365 ===================================================================================================================== LIABILITIES Debt due within one year $ 140 $ 68 $ 5,108 Accounts payable 66,883 75,077 73,742 Accrued and other liabilities 54,555 42,134 53,435 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 121,578 117,279 132,285 - --------------------------------------------------------------------------------------------------------------------- Long-term debt 400,394 436,534 453,921 Deferred income taxes 99,626 112,645 121,537 Other liabilities 80,898 69,639 50,115 Minority interest 100,021 99,167 98,947 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and minority interest 802,517 835,264 856,805 - --------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Capital stock Common Shares, authorized 133,500 shares; outstanding 76,902, 76,451 and 76,441 shares 128,654 128,363 128,363 Paid-in capital 555,167 554,850 554,850 Accumulated other comprehensive loss (43,572) (78,470) (66,571) Retained deficit (340,450) (103,964) (75,082) - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 299,799 500,779 541,560 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,102,316 $ 1,336,043 $ 1,398,365 =====================================================================================================================
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 Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- REVENUES Net sales $ 257,875 $ 237,224 $ 770,681 $ 802,076 Other income, net 799 481 1,051 1,001 - ---------------------------------------------------------------------------------------------------------------------- Total revenues 258,674 237,705 771,732 803,077 - ---------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales 238,546 255,519 733,900 803,064 Selling, general and administrative expense 10,328 8,394 28,810 26,254 Product claim costs -- -- -- 14,023 - ---------------------------------------------------------------------------------------------------------------------- 248,874 263,913 762,710 843,341 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 9,800 (26,208) 9,022 (40,264) Interest income 116 977 277 2,852 Interest expense (13,408) (12,034) (40,052) (37,857) Minority interest (492) 2,785 (1,777) 2,468 - ---------------------------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (3,984) (34,480) (32,530) (72,801) Income tax benefit 2,048 10,344 13,012 21,840 - ---------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (1,936) (24,136) (19,518) (50,961) Discontinued operations, net of income taxes of $6.0 million (11,000) -- (11,000) -- Cumulative effect of change in accounting principle -- -- (205,968) -- - ---------------------------------------------------------------------------------------------------------------------- NET LOSS $ (12,936) $ (24,136) $ (236,486) $ (50,961) ====================================================================================================================== Basic and diluted loss per share: Loss from continuing operations $ (0.03) $ (0.32) $ (0.25) $ (0.68) Discontinued operations (0.15) (0.15) Cumulative effect of change in accounting principle -- -- (2.74) -- - ---------------------------------------------------------------------------------------------------------------------- Net loss per share $ (0.18) $ (0.32) $ (3.14) $ (0.68) ====================================================================================================================== Basic and diluted weighted average shares outstanding 75,468 75,175 75,276 75,033 ======================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 3 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, -------------------------------- 2002 2001 ------------ ------------- OPERATING ACTIVITIES Net loss $ (236,486) $ (50,961) Cumulative effect of change in accounting principle 205,968 -- Adjustments to reconcile net loss from operations to net cash flows from operating activities: Depreciation and amortization 73,109 84,870 Deferred income taxes (12,854) (31,080) Minority interest in earnings 1,777 (2,470) Discontinued operations 11,000 -- Changes in current assets and liabilities: Accounts receivable 5,931 8,221 Inventories 25,646 (23,652) Other current assets 12,989 (16,388) Accounts payable (9,733) 11,847 Accrued and other liabilities 15,136 (11,550) Other (98) 9,022 - ------------------------------------------------------------------------------------------------ Net cash flows from operating activities 92,385 (22,141) - ------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of property, plant and equipment (16,589) (11,136) Other items (4,780) (5,887) - ------------------------------------------------------------------------------------------------ Net cash flows from investing activities (21,369) (17,023) - ------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Principal payments on long-term debt (36,068) (14,325) Stock issuance-net 608 180 Repurchases of TNCLP common units -- (1,671) Distributions to minority interests (923) (2,028) - ------------------------------------------------------------------------------------------------ Net cash flows from financing activities (36,383) (17,844) - ------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 121 (285) - ------------------------------------------------------------------------------------------------ Increase (decrease) to cash and short-term investments 34,754 (57,293) Cash and short-term investments at beginning of period 7,125 101,425 - ------------------------------------------------------------------------------------------------ Cash and short-term investments at end of period $ 41,879 $ 44,132 ================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 4 TERRA INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (in thousands) (unaudited)
Accumulated Other Capital Paid-In Comprehensive Retained Stock Capital Loss Deficit Total - ------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2002 $ 128,363 $ 554,850 $ (78,470) $ (103,964) $ 500,779 Comprehensive loss: Net loss -- -- -- (236,486) (236,486) Foreign currency translation adjustment -- -- -- 25,131 25,131 Change in fair value of derivatives, net of taxes of $3,503 -- -- 9,767 -- 9,767 ----------- Comprehensive loss (201,588) Exercise of stock options 291 317 -- -- 608 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2002 $ 128,654 $ 555,167 $ (43,572) $ (340,450) $ 299,799 ========================================================================================================================= 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 -- -- -- (50,961) (50,961) Foreign currency translation adjustment -- -- (12,343) -- (12,343) Cumulative effect of change in accounting for derivatives, net of taxes of $10,990 -- -- 20,410 -- 20,410 Change in fair value of derivatives, net of taxes of $15,221 -- -- (26,523) -- (26,523) ----------- Comprehensive loss (69,417) Exercise of stock options 80 100 -- -- 180 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2001 $ 128,363 $ 554,850 $ (66,571) $ (75,082) $ 541,560 =========================================================================================================================
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 interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with Terra's 2001 Annual Report to Stockholders. Certain reclassifications have been made to prior years' financial statements to conform with current year presentation. Basic earning (loss) 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. Inventories consisted of the following: September 30, December 31, September 30, (in thousands) 2002 2001 2001 --------------------------------------------------------------------- Raw materials $ 21,619 $ 27,904 $ 28,696 Supplies 26,590 21,471 21,587 Finished goods 38,629 60,652 73,344 --------------------------------------------------------------------- Total $ 86,838 $ 110,027 $ 123,627 ===================================================================== The components of accumulated other comprehensive loss at September 30, 2002 consisted of foreign currency translation adjustment, derivatives (net of taxes) and minimum pension liability (net of taxes) in the amounts of $37.9 million, ($5.2) million and $10.9 million, respectively. At September 30, 2001, accumulated other comprehensive loss consisted of foreign currency translation adjustment and derivatives (net of taxes) in the amounts of $60.5 million and $6.1 million, respectively. Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenues include amounts paid by customers for shipping and handling. Realized gains and losses from hedging activities and premiums paid for option contracts are deferred and recognized in the month in which the hedged transactions closed. Swaps, options and other derivative instruments that do not qualify for hedge accounting treatment are marked to market each accounting period. Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". This standard requires Terra to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and is effective for Terra's fiscal year 2003. Terra does not expect the impact, if any, arising from the adoption of this standard to be material to our financial position. 6 In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard requires Terra to recognize a liability for a cost associated with an exit or disposal activity when the liability is incurred rather than recognition of the liability at the date of a commitment to an exit plan and is effective for exit or disposal activities that are initiated after December 31, 2002. 2. On July 13, 2001, a British court found Terra Nitrogen (U.K.) Ltd. liable for damages associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene, plus interest and attorney fees. In addition, there are two similar cases awaiting trial and certain other beverage manufacturers have indicated their intention to file claims for unspecified amounts. Management estimates total claims against Terra from these lawsuits may be (pound)10 million, or $14 million. Terra has established contingency reserves to cover estimated losses. Terra's management believes it has recourse for these claims against both its insurer and the previous owner of Terra's U.K. operations. Management is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. 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 these matters, or the U.K. benzene claims, will have a material adverse effect on the results of operations, financial position or net cash flows. 3. Natural gas is the principal raw material used in Terra's production of nitrogen products and methanol. Natural gas prices are volatile and we manage this volatility through the use of derivative commodity instruments. Terra's policy is to hedge 20-80% of our natural gas requirements for the upcoming 12 months and up to 50% of the requirements for the following 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract 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 Terra'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. Terra has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2002 and part of 2003, consistent with its policy. As a result of its policies, Terra 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, Terra will incur higher costs. Contracts were in place at September 30, 2002 to cover 11% of natural gas requirements for the succeeding twelve months. We also use basis swaps to manage some of the basis risk. Unrealized gains from forward pricing positions in North America totaled $3.1 million as of September 30, 2002. In addition, Terra had contracts which would reduce, assuming no decrease in forward natural gas prices at September 30, 2002, the purchase price of about 4 percent of its next 12 months' natural gas needs by $1.3 million. The amount ultimately recognized by Terra will be dependent on published prices in effect at the time of settlement. Terra also had $2 million of realized gains on closed North America contracts relating to future periods that have been deferred to the respective period. 7 On September 30, 2002, the fair value of derivatives resulted in a $7.9 million increase to current assets, a $2.0 million reduction to current liabilities, a $1.1 million increase in long-term liabilities and a $8.8 million increase, before deferred taxes of $3.5 million to Accumulated Other Comprehensive Loss, which reflected the effective portion of the derivatives designated as cash flow hedges. The increase to current assets was to recognize the value of open natural gas contracts; the reduction to current liabilities was to reclassify deferred gains on closed contracts relating to future periods and the increase to long-term debt related to interest rate hedges. 4. Terra classifies its continuing 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 Nine Months Ended September 30 September 30 --------------------------- --------------------------- (in thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- Revenues - Nitrogen Products $ 211,103 $ 209,224 $ 653,753 $ 661,065 - Methanol 46,772 28,000 116,928 141,011 - Other 799 481 1,051 1,001 - -------------------------------------------------------------------------------------------------- Total revenues $ 258,674 $ 237,705 $ 771,732 $ 803,077 ================================================================================================== Income (loss) from operations - Nitrogen Products $ 4,241 $ (21,328) $ 7,111 $ (35,176) - Methanol 6,696 (5,109) 3,782 (6,082) - Other (1,137) 229 (1,871) 994 - -------------------------------------------------------------------------------------------------- Total income (loss) from operations $ 9,800 $ (26,208) $ 9,022 $ (40,264) ==================================================================================================
5. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," Terra determined that $206.0 million of assets classified as "Excess of cost over net assets of acquired businesses" suffered impairment and had no value. Consequently, these assets were written off through a charge that is reported as a change in accounting principle during the 2002 first quarter. 8 A reconciliation of the historical impact of the change in accounting principle to earnings per share follows:
Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- (in thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- Reported net loss $ (12,936) $ (24,136) $ (236,486) $ (50,961) Goodwill amortization, net of taxes -- 4,704 -- 14,120 - -------------------------------------------------------------------------------------------------- Adjusted net loss $ (12,936) $ (19,432) $ (236,486) $ (36,841) ================================================================================================== Reported basic and diluted loss per share $ (0.18) $ (0.32) $ (3.14) $ (0.68) Goodwill amortization, net of taxes -- .06 -- .19 - -------------------------------------------------------------------------------------------------- Adjusted basic and diluted loss per share $ (0.18) $ (0.26) $ (3.14) $ (0.49) ==================================================================================================
6. The third quarter results include an $11 million charge to increase reserves for expected future cash payments related to retained liabilities of discontinued operations. The charge consists of a $17 million increase to reserve balances less income tax benefits totaling $6 million. Approximately $13 million of the increase to reserve balances is related primarily to higher-than-expected future retiree health care costs of the coal operations that Terra sold in 1992. The remaining $4 million represents the estimated costs to settle remaining obligations of the distribution operations that Terra sold in 1999. Including the $17 million third quarter charge, Terra's discontinued operations reserves at September 30, 2002 totaled approximately $30 million, of which $26 million is attributable to expected future payments for the coal operation's retirees and other former employees. Payments for retiree health care and other benefits for former coal employees were $2.3 million in 2001 and are expected to total $2.5 million in 2002 and less than $3 million in 2003. Terra may recover a portion of these payments through its rights in bankruptcy against Harman Coal Company (a former coal subsidiary), and subject to damages received by Harman Coal Company through its on-going litigation with Massey Energy Company. No provision for such recoveries has been made in Terra's financial statements. 7. Condensed consolidating financial information regarding the Parent, Terra Capital, Inc. ("TCAPI"), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes for September 30, 2002 and 2001 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. 9 Condensed Consolidating Statement of Financial Position as of September 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ ASSETS Cash $ -- $ 35,702 $ -- $ 57,889 $ (51,712) $ 41,879 Accounts Receivable -- 1,019 33,544 62,891 1 97,455 Inventories -- -- 23,159 63,678 1 86,838 Other current assets 9,427 -- 5,509 17,462 (1,870) 30,528 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 9,427 36,721 62,212 201,920 (53,580) 256,700 - ------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net -- -- 406,228 390,453 (4,499) 792,182 Investments in and advanced to (from) affiliates 656,334 396,235 1,224,495 136,664 (2,413,728) -- Other assets 22 14,558 13,221 25,634 (1) 53,434 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 665,783 $ 447,514 $ 1,706,156 $ 754,671 $ (2,471,808) $ 1,102,316 ======================================================================================================================== LIABILITIES Debt due within one year $ -- $ -- $ 86 $ 54 $ -- $ 140 Accounts payable 19 2,372 80,307 37,769 (53,584) 66,883 Accrued and other liabilities 8,442 13,602 19,628 13,036 (153) 54,555 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 8,461 15,974 100,021 50,859 (53,737) 121,578 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt 200,000 200,000 247 147 -- 400,394 Deferred income taxes 102,059 19,802 (7,257) (15,132) 154 99,626 Other liabilities 55,464 13,247 2,031 10,153 3 80,898 Minority interest -- 19,564 80,457 -- -- 100,021 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 365,984 268,587 175,499 46,027 (53,580) 802,517 - ------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock 128,654 -- 73 49,709 (49,782) 128,654 Paid in capital 555,167 150,218 1,656,742 892,448 (2,699,408) 555,167 Accumulated other comprehensive loss (43,572) (43,572) -- (16,335) 59,907 (43,572) Retained earnings (deficit) (340,450) 72,281 (126,158) (217,178) 271,055 (340,450) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 299,799 178,927 1,530,657 708,644 (2,418,228) 299,799 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders equity $ 665,783 $ 447,514 $ 1,706,156 $ 754,671 $ (2,471,808) $ 1,102,316 ========================================================================================================================
10 Condensed Consolidating Statement of Operations for the nine months ended September 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ REVENUES Net sales $ -- $ -- $ 287,417 $ 477,365 $ 5,899 $ 770,681 Other income, net -- -- 2,969 3,980 (5,898) 1,051 - ------------------------------------------------------------------------------------------------------------------------ -- -- 290,386 481,345 1 771,732 - ------------------------------------------------------------------------------------------------------------------------ COST AND EXPENSES Cost of sales -- -- 285,198 450,643 (1,941) 733,900 Selling, general and administrative expenses 2,219 (464) 18,942 7,650 463 28,810 Equity in the (earnings) loss of subsidiaries 222,575 202,382 (4,450) (7,996) (412,511) -- - ------------------------------------------------------------------------------------------------------------------------ 224,794 201,918 299,690 450,297 (413,989) 762,710 - ------------------------------------------------------------------------------------------------------------------------ Income (loss) from operations (224,794) (201,918) (9,304) 31,048 413,990 9,022 Interest income 36 191 -- 50 -- 277 Interest expense (16,393) (20,500) 4,070 (7,205) (24) (40,052) Minority interest -- (348) (1,429) -- -- (1,777) - ------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations (241,151) (222,575) (6,663) 23,893 413,966 (32,530) Income tax benefit (provision) 15,665 -- -- (2,653) -- 13,012 - ------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations (225,486) (222,575) (6,663) 21,240 413,966 (19,518) Discontinued operations, net of income taxes (11,000) -- -- -- -- (11,000) Cumulative effect of change in accounting principle -- -- (189,971) (15,997) -- (205,968) - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ (236,486) $ (222,575) $ (196,634) $ 5,243 $ 413,966 $ (236,486) ========================================================================================================================
11 Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2002:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income (loss) $ (236,486) $ (222,575) $ (196,634) $ 5,243 $ 413,966 $ (236,486) Cumulative effect of change in accounting principle -- -- 189,971 15,997 -- 205,968 Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization -- 2,085 38,224 32,800 -- 73,109 Deferred income taxes (8,859) -- (3,887) (6,860) 6,752 (12,854) Minority interest in earnings -- 348 1,429 -- -- 1,777 Discontinued operations 11,000 -- -- -- -- 11,000 Equity in earnings (loss) of subsidiaries 222,575 202,382 (4,450) (7,996) (412,511) -- Change in operating assets and liabilities 3,804 (27,778) 59,194 27,087 (12,338) 49,969 Other -- -- -- -- (98) (98) - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from operating activities (7,966) (45,538) 83,847 66,271 (4,229) 92,385 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of property, plant and equipment -- -- (2,239) (14,350) -- (16,589) Other -- -- -- -- (4,780) (4,780) - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from investing activities -- -- (2,239) (14,350) (4,780) (21,369) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Principal payments on long-term debt -- (36,277) 9 201 (1) (36,068) Change in investments and advances from (to) affiliates 7,961 125,051 (90,049) 2,530 (45,493) -- Stock (repurchase) issuance - net 608 -- -- -- -- 608 Distributions to minority interests -- (220) (703) -- -- (923) Other (603) (7,314) (7,798) (21,508) 37,223 -- - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from financing activities 7,966 81,240 (98,541) (18,777) (8,271) (36,383) - ------------------------------------------------------------------------------------------------------------------------ Effect of foreign exchange rate on cash -- -- -- -- 121 121 - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and short-term investments -- 35,702 (16,933) 33,144 (17,159) 34,754 - ------------------------------------------------------------------------------------------------------------------------ Cash and short-term investments at beginning of period -- -- 16,933 24,745 (34,553) 7,125 - ------------------------------------------------------------------------------------------------------------------------ Cash and short-term investments at end of period $ -- $ 35,702 $ -- $ 57,889 $ (51,712) $ 41,879 ========================================================================================================================
12 Condensed Consolidating Statement of Financial Position as of September 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ ASSETS Cash $ -- $ 29,590 $ 16,017 $ 1,916 $ (3,391) $ 44,132 Accounts Receivable -- -- 34,939 63,008 -- 97,947 Inventories -- -- 35,417 88,210 -- 123,627 Other current assets 5,568 4,215 6,871 25,777 (10,017) 32,414 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 5,568 33,805 93,244 178,911 (13,408) 298,120 - ------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net -- -- 448,789 403,138 (2,739) 849,188 Excess of cost over net assets of acquired businesses -- -- 194,391 16,707 -- 211,098 Investments in and advanced to (from) affiliates 1,064,912 414,516 1,315,157 240,188 (3,034,773) -- Other assets 775 7,005 7,233 24,592 354 39,959 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,071,255 $ 455,326 $ 2,058,814 $ 863,536 $ (3,050,566) $ 1,398,365 ======================================================================================================================== LIABILITIES Debt due within one year $ -- $ -- $ 47 $ 5,061 $ -- $ 5,108 Accounts payable -- 7,164 17,227 56,540 (7,189) 73,742 Accrued and other liabilities 14,675 629 19,271 7,873 10,987 53,435 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 14,675 7,793 36,546 69,474 3,798 132,285 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt 358,755 -- 947 94,219 -- 453,921 Deferred income taxes 134,882 9,682 (4,232) (121) (18,674) 121,537 Other liabilities 21,383 13,841 510 13,454 927 50,115 Minority interest -- 19,394 79,553 -- -- 98,947 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 529,695 50,710 113,323 177,026 (13,949) 856,805 - ------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock 128,363 -- 73 49,709 (49,782) 128,363 Paid in capital 554,850 150,218 1,856,742 918,886 (2,925,846) 554,850 Accumulated other comprehensive loss (66,571) (66,571) 2,204 (69,543) 133,910 (66,571) Retained earnings (deficit) (75,082) 320,969 86,472 (212,542) (194,899) (75,082) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 541,560 404,616 1,945,491 686,510 (3,036,617) 541,560 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders equity $ 1,071,255 $ 455,326 $ 2,058,814 $ 863,536 $ (3,050,566) $ 1,398,365 ========================================================================================================================
13 Condensed Consolidating Statement of Operations for the nine months ended September 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ REVENUES Net sales $ -- $ -- $ 328,408 $ 473,592 $ 76 $ 802,076 Other income, net (2) -- 1,369 (291) (75) 1,001 - ------------------------------------------------------------------------------------------------------------------------ (2) -- 329,777 473,301 1 803,077 - ------------------------------------------------------------------------------------------------------------------------ Cost and Expenses Cost of sales -- -- 343,802 445,225 14,037 803,064 Selling, general and administrative expenses 1,827 2,804 19,087 16,666 (14,130) 26,254 Product claim costs -- -- -- 14,023 -- 14,023 Equity in the (earnings) loss of subsidiaries 39,757 36,736 (3,436) 10,000 (83,057) -- - ------------------------------------------------------------------------------------------------------------------------ 41,584 39,540 359,453 485,914 (83,150) 843,341 - ------------------------------------------------------------------------------------------------------------------------ Loss from operations (41,586) (39,540) (29,676) (12,613) 83,151 (40,264) Interest income 69 2,085 5,861 511 (5,674) 2,852 Interest expense (29,326) (2,786) (147) (11,268) 5,670 (37,857) Minority interest -- 484 1,984 -- -- 2,468 - ------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (70,843) (39,757) (21,978) (23,370) 83,147 (72,801) Income tax benefit 19,882 -- -- 1,958 -- 21,840 - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961) ========================================================================================================================
14 Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2001:
Guarantor Non-Guarantor (in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization -- 2,779 50,911 31,180 -- 84,870 Deferred income taxes (15,839) (7,500) (4,232) (4,076) 567 (31,080) Minority interest in earnings -- (484) (1,984) -- (2) (2,470) Equity in earnings (loss) of subsidiaries 39,758 36,736 (3,436) 9,453 (82,511) -- Change in operating assets and liabilities 7,776 (2,002) (16,404) (5,466) (15,426) (31,522) Other -- -- -- -- 9,022 9,022 - ------------------------------------------------------------------------------------------------------------------------ Net Cash Flows from Operating Activities (19,266) (10,228) 2,877 9,679 (5,203) (22,141) - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of property, plant and equipment -- -- (2,272) (8,864) -- (11,136) Other -- -- -- -- (5,887) (5,887) - ------------------------------------------------------------------------------------------------------------------------ Net Cash Flows from Investing Activities -- -- (2,272) (8,864) (5,887) (17,023) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Principal payments on long-term debt -- -- (7,980) (6,345) -- (14,325) Change in investments and advances from (to) affiliates 19,013 (30,669) 16,693 (14,424) 9,387 -- Stock issuance - net 180 -- -- -- -- 180 Distributions to minority interests -- (337) (1,691) -- -- (2,028) Repurchase of TNLP common Units -- (1,671) -- -- -- (1,671) Other 73 (4,464) (3,454) 9,249 (1,404) -- - ------------------------------------------------------------------------------------------------------------------------ Net Cash Flows from Financing Activities 19,266 (37,141) 3,568 (11,520) 7,983 (17,844) - ------------------------------------------------------------------------------------------------------------------------ Effect of exchange rates on cash -- -- -- -- (285) (285) - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in Cash and Short-term Investments -- (47,369) 4,173 (10,705) (3,392) (57,293) - ------------------------------------------------------------------------------------------------------------------------ Cash and Short-term Investments at Beginning of Period -- 76,959 11,844 12,622 -- 101,425 - ------------------------------------------------------------------------------------------------------------------------ Cash and Short-term Investments At End of Period $ -- $ 29,590 $ 16,017 $ 1,917 $ (3,392) $ 44,132 ========================================================================================================================
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim reporting purposes. The preparation of these financial statements requires us to make estimates and judgments that affect the amount of assets, liabilities, revenues and expenses at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are described below. Impairments of long-lived assets - We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. Pension assets and liabilities - Pension assets and liabilities are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. Post-retirement benefits - Post-retirement benefits are determined on an actuarial basis and are affected by assumptions including the discount rate and expected trends in health care costs. Changes in the discount rate and differences between actual and expected health care costs will affect the recorded amount of post-retirement benefits expense ultimately recognized. Revenue recognition - Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenue includes amounts paid by customers for shipping and handling. Deferred income taxes - Deferred income tax assets and liabilities are based on the differences between the financial statement carrying amounts and the tax bases as well as temporary differences resulting from differing treatment of items for tax and accounting purposes. Deferred tax assets are regularly reviewed for recoverability and a valuation allowance is established based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, a valuation allowance against all or a significant portion of our deferred tax assets may be required. Inventory valuation - Inventories are stated at the lower of cost or estimated net realizable value. The average cost of inventories is determined using the first-in, first-out method. The nitrogen and methanol 16 industries are characterized by rapid change in both demand and pricing. Rapid declines in demand could result in temporary or permanent curtailment of production, while rapid declines in price could result in a lower of cost or market adjustment. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2001 CONSOLIDATED RESULTS The loss for the three months ending September 30, 2002 was $12.9 million and included an $11 million loss on discontinued operations. The loss from discontinued operations is due to a $17 million increase to our reserves for contingent liabilities related to discontinued operations. Approximately $13 million of the charge is attributable to discontinued coal operations in response to higher-than-expected retiree health care costs and increased payments to UMWA funds for which the company is contingently liable under the Coal Industry Retiree Health Benefit Act of 1992. In response to recent benefit cost increases, we revised our future cost projections. The remaining $4 million was provided to cover estimated litigation damages and to provide reserves against notes receivable and other assets associated with previously discontinued operations. The $11 million charge represents the $17 million increase to reserve balances net of $6 million income tax benefit. Terra reported a net loss from continuing operations of $1.9 million for the 2002 third quarter compared with a 2001 net loss of $24.1 million. The reduced 2002 loss was primarily related to increased operating income as the result of lower natural gas costs. Goodwill amortization was $4.7 million during the 2001 third quarter and zero in 2002 due to the January 1, 2002 goodwill accounting change. 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 by Terra's two methanol manufacturing plants. Total revenues and operating income (loss) by segment for the three-month period ended September 30, 2002 and 2001 follow: (in thousands) 2002 2001 - ----------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 211,103 $ 209,224 Methanol 46,772 28,000 Other 799 481 - ----------------------------------------------------------------------------- $ 258,674 $ 237,705 ============================================================================= OPERATING INCOME (LOSS): Nitrogen Products, before product claim costs $ 4,241 $ (21,328) Methanol 6,696 (5,109) Other income - net (1,137) 229 - ----------------------------------------------------------------------------- $ 9,800 $ (26,208) ============================================================================= 17 NITROGEN PRODUCTS Volumes and prices for the three-month periods ended September 30, 2002 and 2001 follow: VOLUMES AND PRICES
2002 2001 - -------------------------------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - -------------------------------------------------------------------------------------------------------- Ammonia 354 $ 140 315 $ 154 Nitrogen solutions 967 73 989 80 Urea 138 126 65 128 Ammonium nitrate 239 118 257 124 - --------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues increased $1.9 million to $211.1 million in the 2002 third quarter compared with $209.2 million in the 2001 third quarter. The effects of higher 2002 sales volumes were mostly offset by lower selling prices. Sales volumes in 2002 were affected by the availability of product due to the plant turnarounds. Selling prices in the third quarter approximated the second quarter of 2002, but declined from last year as the result of increased global nitrogen supplies. The nitrogen products segment had operating income of $4.2 million for the third quarter of 2002 compared with an operating loss of $21.3 million for the 2002 third quarter. The effect of lower selling prices on 2002 operating income was more than offset by higher sales volumes and lower product costs. Third quarter 2002 product costs were lower due to lower natural gas costs during the 2002 second and third quarters. Third quarter natural gas costs declined $10.6 million from the 2001 third quarter as unit costs, net of forward pricing gains and losses, were $2.81/MMBtu during the 2002 third quarter compared to $3.11/MMBtu during the same 2001 period. In addition, a considerable amount of 2001 third quarter product costs represented products manufactured during the 2001 second quarter when gas costs averaged $4.45/MMBtu; in contrast, during 2002 there was substantially less second quarter carryover inventory and most sales were sourced from current production. As a result of forward price contracts, third quarter 2002 natural gas costs for the nitrogen products segment were $2.5 million lower than spot prices. During the 2001 third quarter, $4.2 million of goodwill amortization was charged to the nitrogen products segment. METHANOL For the three months ended September 30, 2002 and 2001 the Methanol segment had revenues of $46.8 million and $28.0 million, respectively. Sales volumes increased 29% from prior year levels and selling prices increased from $.43/gallon in 2001 to $.56/gallon in 2002. The methanol segment had operating income of $6.7 million for the 2002 third quarter compared to an operating loss of $5.1 million for the 2001 third quarter. The increase to operating income was due to higher prices and volumes and lower natural gas costs, which net of forward pricing gains and losses, were $3.06/MMBtu during the 2002 third quarter compared to $3.31/MMBtu during the 2001 period. As a result of forward pricing contracts, third quarter 2002 natural gas costs for the methanol were $1.1 million lower than spot prices. During the 2001 third quarter, $544,000 of goodwill amortization was charged to the methanol segment. 18 OTHER INCOME - NET Terra had other operating losses of $1.1 million in the 2002 third quarter compared to $0.2 million operating income in the 2001 third quarter. The increase to expenses relate primarily to legal expenses related to discontinued operations. PRODUCT CLAIM COSTS During the 2001 second quarter, and based on the finding of a British court, Terra recorded a $14 million charge to reflect the estimated value of claims (plus interest and attorney fees) associated with recalls of carbonated beverages containing carbon dioxide tainted with benzene. Terra's management believes it has recourse for these claims against its insurer and the previous owner of Terra's U.K. operations. Management is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. INTEREST EXPENSE - NET Interest expense, net of interest income, totaled $13.3 million during the 2002 third quarter compared with $11.1 million for the prior year period. The increase is attributable to the higher cost of borrowing related to the October 2001 issuance of Senior Secured Notes. 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 2002 third quarter as the result of TNCLP income, which were included in their entirety in consolidated operating results. The increased charge as compared to the 2001 third quarter reflected higher nitrogen earnings for TNCLP. INCOME TAXES Income taxes for the third quarter 2002 were recorded at an effective tax rate of 40%, Terra's estimated annual effective tax rate. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 CONSOLIDATED RESULTS The loss for the nine months ending September 30, 2002 was $236.5 million, which included a $206 million charge for the cumulative effect of a change in accounting for goodwill and an $11 million loss on discontinued operations. In accordance with our implementation of Statement of Financial Accounting Standards (SFAS") No. 142, "Goodwill and Other Intangible Assets," we determined that $206 million of assets classified as "Excess of cost over net assets of acquired businesses" suffered impairment and had no value. These assets were written off during the 2002 first quarter. The loss from discontinued operations is due to a $17 million increase to our reserves for contingent liabilities related to discontinued operations taken during the third quarter. This $11 million charge represents the $17 million increase to reserve balances net of $6 million income tax benefit. 19 Terra reported a net loss from continuing operations of $19.5 million for the nine months ended September 30, 2002 compared with a net loss of $51.0 million in 2001. The reduction in the 2002 loss was primarily related to higher operating income as the result of lower natural gas costs, higher sales volumes, and 2001 product claim costs, partially offset by lower product prices. Goodwill amortization was $14.1 million during the first nine months of 2001 and zero in 2002 due to the January 1, 2002 goodwill accounting change. 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 by Terra's two methanol manufacturing plants. Total revenues and operating income (loss) by segment for the nine-month periods ended September 30, 2002 and 2001 follows: (in thousands) 2002 2001 - ----------------------------------------------------------------------------- REVENUES: Nitrogen Products $ 653,753 $ 661,065 Methanol 116,928 141,011 Other 1,051 1,001 - ----------------------------------------------------------------------------- $ 771,732 $ 803,077 ============================================================================= OPERATING INCOME (LOSS): Nitrogen Products, before product claim costs $ 7,111 $ (21,153) Less product claim costs -- (14,023) - ----------------------------------------------------------------------------- Net nitrogen products 7,111 (35,176) Methanol 3,782 (6,082) Other income - net (1,871) 994 - ----------------------------------------------------------------------------- $ 9,022 $ (40,264) ============================================================================= NITROGEN PRODUCTS Volumes and prices for the nine-month periods ended September 30, 2002 and 2001 follow: VOLUMES AND PRICES
2002 2001 - --------------------------------------------------------------------------------------------------------- Sales Average Sales Average (quantities in thousands of tons) Volumes Unit Price Volumes Unit Price - --------------------------------------------------------------------------------------------------------- Ammonia 1,147 $ 141 854 $ 204 Nitrogen solutions 2,904 72 2,324 108 Urea 482 117 294 157 Ammonium nitrate 690 119 490 129 - ---------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues declined $7.3 million to $653.8 million in the 2002 first nine months compared with $661.1 million in the 2001 first nine months. Selling prices declined $154 million as the result of increased nitrogen fertilizer supplies in contrast to the previous year when high natural gas costs resulted in industry-wide production curtailments leading up to the 2001 planting season. Most of the revenue shortfall from lower sales prices was offset by higher 2002 volumes as compared to last year's first nine months. Sales volumes in 2001 were depressed due to lower production rates, reduced demand in response to high prices and increased competition from imports. 20 The nitrogen products segment had operating income of $7.1 million for the first nine months of 2002 compared with an operating loss of $21.2 million before product claim costs for the 2001 first nine months, before product claim costs (discussed below). The increase in operating income was primarily related to lower natural gas costs and higher selling volumes, offset in part by lower sales prices. Natural gas costs declined almost $167 million over the 2001 first nine months as unit costs, net of forward pricing gains and losses, decreased to $2.80/MMBtu during the 2002 first nine months compared to $4.40/MMBtu during the 2001 period. Lower natural gas costs also reduced the need to curtail production rates, as was the case in 2001 until nitrogen prices rose to levels covering the higher gas costs. As a result of forward price contracts, the first nine months 2002 natural gas costs for the nitrogen products segment were $6.8 million lower than spot prices. Goodwill amortization during the first nine months of 2001 was $12.5 million. METHANOL For the nine months ended September 30, 2002 and 2001 the methanol segment had revenues of $116.9 million and $141 million, respectively. Sales volumes increased 16% from prior year levels, but selling prices declined from $.63/gallon in 2001 to $.46/gallon in 2002. The methanol segment generated $3.8 million operating income in the 2002 first nine months compared to a $6.1 million operating loss in the 2001 first nine months. The higher operating income reflects lower selling prices that were more than offset by lower costs and increased volumes. The major cost decrease was to natural gas costs which, net of forward pricing gains and losses, decreased to $2.89/MMBtu, during the 2002 first nine months compared to $4.41/MMBtu during the 2001 period. Lower natural gas costs also reduced the need to curtail production rates, as was the cases in 2001 until methanol prices were below cash production costs. The first nine months 2002 natural gas costs were $1.8 million lower than spot prices as a result of forward pricing contracts. Goodwill amortization during the first nine months of 2001 was $1.6 million. PRODUCT CLAIM COSTS Based on the finding of British court, during the 2001 first half Terra recorded a $14 million charge to reflect the estimated value of claims (plus interest and attorney fees) associated with recalls of carbonated beverages containing carbon dioxide tainted with benzene. Terra's management believes it has recourse for these claims against its insurer and the previous owner of Terra's U.K. operations. Management is pursuing Terra's rights against these parties, but there will be no income recognition for those rights until settlements are finalized. OTHER INCOME - NET Terra had other operating losses of $1.9 million in the 2002 first nine months compared to $1.0 million operating income in the 2001 first nine months. The increase in expenses primarily related to fees associated with credit agreement amendments and legal expenses related to discontinued operations. INTEREST EXPENSE - NET Interest expense, net of interest income, totaled $39.8 million during the 2002 first nine months compared with $35 million for the prior year period. The increase is attributable to the higher cost of borrowing related to the October 2001 issuance of Senior Secured Notes. 21 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 $1.8 million were recorded for the 2002 first nine months as the result of TNCLP earnings, which were included in their entirety in consolidated operating results. The increased charge as compared to the 2001 first half reflected higher nitrogen earnings for TNCLP. INCOME TAXES Income taxes for the first nine months of 2002 were recorded at an effective tax rate of 40%, Terra's estimated annual effective tax rate. LIQUIDITY AND CAPITAL RESOURCES Our primary uses of funds will be to fund our working capital requirements, make payments on our debt and other obligations and make capital expenditures. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities. Net cash generated from operations in the first nine months of 2002 was $92.4 million, composed of $42.5 million of cash provided from operating activities and $49.9 million of decreases to working capital balances. The decrease in working capital primarily consisted of lower accounts receivable, inventories and other current assets. We have a $175 million revolving credit facility that expires in June 2005. Borrowing availability under the credit facility is generally based on 85% of eligible accounts receivable and 65% of eligible inventory, less outstanding letters of credit. At September 30, 2002, we had no outstanding revolving credit borrowings and $18.8 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $117.4 million under the facility. We expect the facility to be adequate to meet our operating cash needs. The credit facility also requires that we 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. In June, 2002 our credit facility was amended to remove the required minimum level of earnings before interest, income taxes, depreciation, amortization and other non-cash items ("EBITDA") as long as our borrowing availability is $60 million or more. If our borrowing availability falls below $60 million after December 31, 2002, we are required to have achieved minimum EBITDA of $60 million during the most recent four quarters. Prior to December 31, 2002, a reduced EBITDA requirement is in effect, which is $50 million for the four quarters ending September 30, 2002. During the first nine months of 2002 and 2001, we funded plant and equipment purchases of $16.6 million and $11.1 million, respectively, primarily for replacement or stay-in-business capital needs. We expect 2002 plant and equipment purchases to approximate $25 million consisting primarily of the expenditures for routine replacement of equipment at manufacturing facilities. In addition, a turnaround is scheduled for our Billingham facility with estimated cash expenditures of $5 million. On December 17, 1997, we announced that we were resuming purchases of common units of TNCLP on the open market and through privately negotiated transactions. We acquired 183,500 common units during the first quarter of 2001 at a cost of $1.7 million. Additional purchases of TNCLP common units are restricted under the terms of our revolving credit agreement as described therein. Additional 22 purchases of common units by the General Partner are restricted under the terms of Terra's bank credit agreement as described therein. During the first nine months of 2002 and 2001 we distributed $0.9 million and $2 million, respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on "Available Cash" (as defined in the Partnership Agreement). On October 24, 2002, the Partnership declared a $3.8 million distribution ($0.20 per common unit) payable November 22 to record holders as of November 1, 2002. Cash balances at September 30, 2002 were $41.9 million, all of which is unrestricted. POTENTIAL CHANGE OF CONTROL Anglo American plc, through its wholly-owned subsidiaries, owns 48.8% of Terra Industries' outstanding shares. Anglo American has made public its intention to dispose of its interest in Terra Industries 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 Terra's most recent Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 23 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) REPORTS ON FORM 8-K None 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: November 1, 2002 /s/ Francis G. Meyer ----------------------------------------- Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory 24 CERTIFICATIONS I, Michael L. Bennett, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Terra Industries Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/ Michael L. Bennett ----------------------------------------- Michael L. Bennett President and Chief Executive Officer 25 I, Francis G. Meyer, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Terra Industries Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 /s/ Francis G. Meyer ----------------------------------------- Francis G. Meyer Senior Vice President and Chief Financial Officer 26 EX-99.1 3 dex991.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Terra Industries Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that based on their best knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. /s/ MICHAEL L. BENNETT - --------------------------------------------- Michael L. Bennett, Chief Executive Officer /s/ FRANCIS G. MEYER - --------------------------------------------- Francis G. Meyer, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----