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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 June 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 July 31, 2002, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 76,907,669 shares
================================================================================
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
June 30, December 31, June 30,
2002 2001 2001
-------------- -------------- --------------
ASSETS
Cash and short-term investments $ 12,718 $ 7,125 $ 12,080
Accounts receivable, less allowance for
doubtful accounts of $436, $936, $878 105,298 101,363 116,684
Inventories 91,986 110,027 156,519
Other current assets 22,680 35,142 29,877
- ------------------------------------------------------------------------------------------------------------
Total current assets 232,682 253,657 315,160
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 802,300 824,982 858,546
Excess of cost over net assets of acquired businesses --- 206,209 215,099
Other assets 47,317 51,195 41,967
- ------------------------------------------------------------------------------------------------------------
Total assets $ 1,082,299 $ 1,336,043 $ 1,430,772
============================================================================================================
LIABILITIES
Debt due within one year $ 135 $ 68 $ 5,047
Accounts payable 66,309 75,077 73,150
Accrued and other liabilities 36,454 42,134 47,763
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 102,898 117,279 125,960
- ------------------------------------------------------------------------------------------------------------
Long-term debt 400,432 436,534 455,273
Deferred income taxes 115,257 112,645 140,894
Other liabilities 65,734 69,639 48,936
Minority interest 100,453 99,167 101,732
- ------------------------------------------------------------------------------------------------------------
Total liabilities and minority interest 784,774 835,264 872,795
- ------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 76,420, 76,451 and 75,879 shares 128,652 128,363 128,356
Paid-in capital 555,164 554,850 554,854
Accumulated other comprehensive loss (58,777) (78,470) (74,287)
Retained deficit (327,514) (103,964) (50,946)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 297,525 500,779 557,977
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,082,299 $ 1,336,043 $ 1,430,772
============================================================================================================
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Net sales $ 299,516 $ 320,984 $ 512,806 $ 564,852
Other income (loss), net (18) (189) 252 520
- -----------------------------------------------------------------------------------------------------------------
Total revenues 299,498 320,795 513,058 565,372
- -----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 289,214 313,674 495,354 547,545
Selling, general and administrative expense 9,694 10,504 18,482 17,860
Product claim costs --- 14,023 --- 14,023
- ----------------------------------------------------------------------------------------------------------------
298,908 338,201 513,836 579,428
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 590 (17,406) (778) (14,056)
Interest income 113 175 161 1,875
Interest expense (13,348) (13,241) (26,644) (25,823)
Minority interest (739) 211 (1,285) (317)
- -----------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect
of change in accounting principle (13,384) (30,261) (28,546) (38,321)
Income tax benefit 4,899 8,675 10,964 11,496
- -----------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change
in accounting principle (8,485) (21,586) (17,582) (26,825)
Cumulative effect of change in accounting
principle --- --- (205,968) ---
- -----------------------------------------------------------------------------------------------------------------
NET LOSS $ (8,485) $ (21,586) $ (223,550) $ (26,825)
================================================================================================================
Basic and diluted loss per share:
Loss before cumulative effect of change
in accounting principle $ (0.11) $ (0.29) $ (0.23) $ (0.36)
Cumulative effect of change in accounting
principle --- --- (2.74) ---
- -----------------------------------------------------------------------------------------------------------------
Net loss per share $ (0.11) $ (0.29) $ (2.97) $ (0.36)
=================================================================================================================
Basic and diluted weighted
average shares outstanding 75,378 75,131 75,203 74,915
=================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 3
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
------------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $ (223,550) $ (26,825)
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 48,620 58,437
Deferred income taxes (951) (10,819)
Minority interest in earnings 1,285 317
Changes in current assets and liabilities:
Accounts receivable (2,146) (11,196)
Inventories 20,061 (57,873)
Other current assets 18,099 (19,133)
Accounts payable (10,076) 11,885
Accrued and other liabilities (4,573) (15,458)
Other 45 9,283
- -----------------------------------------------------------------------------------------------
Net cash flows from operating activities 52,782 (61,382)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (9,010) (8,364)
Other items (2,782) (2,883)
- -----------------------------------------------------------------------------------------------
Net cash flows from investing activities (11,792) (11,247)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on long-term debt (36,035) (13,034)
Stock issuance-net 603 177
Repurchases of TNCLP common units --- (1,671)
Distributions to minority interests --- (2,028)
- -----------------------------------------------------------------------------------------------
Net cash flows from financing activities (35,432) (16,556)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 35 (160)
- -----------------------------------------------------------------------------------------------
Increase (decrease) to cash and short-term investments 5,593 (89,345)
Cash and short-term investments at beginning of period 7,125 101,425
- -----------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 12,718 $ 12,080
===============================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 4
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED June 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 --- --- --- (223,550) (223,550)
Foreign currency
translation adjustment --- --- 13,091 --- 13,091
Change in fair value of derivatives,
net of taxes of $4,155 --- --- 6,602 --- 6,602
------------
Comprehensive loss (203,857)
Exercise of stock options 289 314 --- --- 603
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 128,652 $ 555,164 $ (58,777) $ (327,514) $ 297,525
=========================================================================================================================
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 --- --- --- (26,825) (26,825)
Foreign currency
translation adjustment --- --- (18,844) --- (18,844)
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 $4,886 --- --- (27,738) --- (27,738)
------------
Comprehensive loss (52,997)
Exercise of stock options 73 104 --- --- 177
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 128,356 $ 554,854 $ (74,287) $ (50,946) $ 557,977
=========================================================================================================================
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:
June 30, December 31, June 30,
(in thousands) 2002 2001 2001
----------------------------------------------------------------------------
Raw materials $ 20,425 $ 27,904 $ 27,397
Supplies 27,240 21,471 21,534
Finished goods 44,321 60,652 107,588
----------------------------------------------------------------------------
Total $ 91,986 $ 110,027 $ 156,519
============================================================================
The components of accumulated other comprehensive loss at June 30, 2002
consisted of foreign currency translation adjustment, derivatives (net of
taxes) and minimum pension liability (net of taxes) in the amounts of $50.0
million, $(2.1) million and $10.9 million, respectively. At June 30, 2001,
accumulated other comprehensive loss consisted of foreign currency
translation adjustment and derivatives (net of taxes) in the amounts of
$67.0 million and $7.3 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 has not yet quantified the impact, if any, arising from the
adoption of this standard.
6
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 (Pounds)10 million, or $14 million. Terra has
established reserves to cover estimated losses.
In addition to Terra's plan to appeal the British court's decision, Terra's
management also 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 normal 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 June 30,
2002 to cover 14% of natural gas requirements for the succeeding twelve
months. The June 30, 2002 contracts covered 13% of Terra's expected North
American natural gas requirements and 25% of its expected U.K. natural gas
requirements. We also use basis swaps to manage some of the basis risk.
Unrealized gains from forward pricing positions in North America totaled
$0.5 million as of June 30, 2002. In addition, Terra had contracts which
would reduce, assuming no decrease in forward natural gas prices at June 30,
2002, the purchase price of about 7 percent of its next 12 months' natural
gas needs by $3.2 million. The amount ultimately recognized by Terra will be
dependent on published prices in effect at the time of settlement. Terra
also had purchase commitments for natural gas in the U.K. at prices $1.7
million lower than June 30, 2002 forward markets. Terra also had $0.4
million of realized gains on closed North America contracts relating to
future periods that have been deferred to the respective period.
7
On June 30, 2002, the fair value of derivatives resulted in a $5.3 million
increase to current assets, a $0.4 million reduction to current liabilities,
a $2.2 million increase in long-term liabilities and a $3.5 million
increase, before deferred taxes of $1.4 million to accumulated OCI, 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.
For the six months ended June 30, 2002, Terra recognized gains in cost of
sales of $4.3 million on closed forward contracts and contracts
de-designated as hedges from the date of de-designation. This was offset by
recognized losses in cost of sales of $4.2 million on derivative instruments
that do not qualify for hedge accounting treatment being marked to market.
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 June 30 Six Months Ended June 30
--------------------------- ----------------------------
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Revenues - Nitrogen Products $ 257,663 $ 251,620 $ 442,650 $ 451,841
- Methanol 41,853 69,364 70,156 113,011
- Other (18) (189) 252 520
- ---------------------------------------------------------------------------------------------------
Total revenues $ 299,498 $ 320,795 $ 513,058 $ 565,372
===================================================================================================
Income (loss) from operations
- Nitrogen Products $ 2,204 $ (18,520) $ 2,870 $ (13,848)
- Methanol (391) 1,034 (2,914) (973)
- Other (1,223) 80 (734) 765
- ---------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 590 $ (17,406) $ (778) $ (14,056)
===================================================================================================
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 June 30 Six Months Ended June 30
--------------------------- ----------------------------
(in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Reported net loss $ (8,485) $ (21,586) $ (223,550) $ (26,825)
Goodwill amortization, net of taxes --- 4,716 --- 9,416
- ----------------------------------------------------------------------------------------------------------
Adjusted net loss $ (8,485) $ (17,409) $ (223,500) $ (16,870)
==========================================================================================================
Reported basic and diluted loss
per share $ (0.11) $ (0.29) $ (2.97) $ (0.36)
Goodwill amortization, net of taxes --- .05 --- .13
- ----------------------------------------------------------------------------------------------------------
Adjusted basic and diluted loss per share $ (0.11) $ (0.24) $ (2.97) $ (0.23)
==========================================================================================================
6. 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 June 30, 2002
and 2001 are presented below for purposes of complying with the reporting
requirements of the Guarantor Subsidiaries.
9
Condensed Consolidating Statement of Financial Position as of June 30, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash $ --- $ --- $ --- $ 78,133 $ (65,415) $ 12,718
Accounts Receivable --- 1,019 37,840 66,439 --- 105,298
Inventories --- --- 27,549 64,437 --- 91,986
Other current assets 8,521 --- 5,782 11,016 (2,639) 22,680
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 8,521 1,019 71,171 220,025 (68,054) 232,682
- ----------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net --- --- 417,330 389,970 (5,000) 802,300
Investments in and advanced
to (from) affiliates 649,742 431,680 1,193,110 113,850 (2,388,382) ---
Other assets 698 15,173 5,640 25,806 --- 47,317
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 658,961 $ 447,872 $ 1,687,251 $ 749,651 $ (2,461,436) $ 1,082,299
============================================================================================================================
Liabilities
Debt due within one year $ --- $ --- $ 82 $ 53 $ --- $ 135
Accounts payable --- 25,951 68,285 40,129 (68,056) 66,309
Accrued and other liabilities 5,639 6,002 16,907 3,817 4,089 36,454
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,639 31,953 85,274 43,999 (63,967) 102,898
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt 200,000 200,000 270 161 1 400,432
Deferred income taxes 115,481 19,802 (7,257) (8,682) (4,087) 115,257
Other liabilities 40,316 13,330 1,909 (10,179) --- 65,734
Minority interest --- 19,649 80,804 --- --- 100,453
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 361,436 284,734 161,000 45,657 (68,053) 784,447
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 128,652 --- 73 49,709 (49,782) 128,652
Paid in capital 555,164 150,218 1,656,742 899,962 (2,706,922) 555,164
Accumulated other
comprehensive loss (58,777) (58,777) --- (22,473) 81,250 (58,777)
Retained earnings (deficit) (327,514) 71,697 (130,564) (223,204) 282,071 (327,514)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 297,525 163,138 1,526,251 703,994 (2,393,383) 297,525
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 658,961 $ 447,872 $ 1,687,251 $ 749,651 $ (2,461,436) $ 1,082,299
============================================================================================================================
10
Condensed Consolidating Statement of Operations for the six months ended June
30, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ --- $ --- $ 182,476 $ 325,653 $ 4,677 $ 512,806
Other income, net --- --- 1,415 3,516 (4,679) 252
- ----------------------------------------------------------------------------------------------------------------------------
--- --- 183,891 329,169 (2) 513,058
- ----------------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales --- --- 187,800 308,837 (1,283) 495,354
Selling, general and
administrative expenses 1,501 (498) 12,118 4,732 629 18,482
Equity in the (earnings) loss
of subsidiaries 223,153 210,251 (3,219) (5,862) (424,323) ---
- ----------------------------------------------------------------------------------------------------------------------------
224,654 209,753 196,699 307,707 (424,977) 513,836
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (224,654) (209,753) (12,808) 21,462 424,975 (778)
Interest income 12 92 --- 56 1 161
Interest expense (10,929) (13,241) 2,772 (5,247) 1 (26,644)
Minority interest --- (251) (1,034) --- --- (1,285)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
before taxes and cumulative
effect of change in
accounting principle (235,571) (223,153) (11,070) 16,271 424,977 (28,546)
Income tax (provision) benefit 12,021 --- --- (1,057) --- 10,964
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in
accounting principle (223,550) (223,153) (11,070) 15,214 424,977 (17,582)
Cumulative effect of change
in accounting principle --- --- (189,971) (15,997) --- (205,968)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (223,550) $ (223,153) $ (201,041) $ (783) $ 424,977 $ (223,550)
============================================================================================================================
11
Condensed Consolidating Statement of Cash Flows for the six months ended June
30, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (223,550) $ (223,153) $ (201,041) $ (783) $ 424,977 $ (223,550)
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 --- 1,217 25,354 22,049 --- 48,620
Deferred income taxes (1,437) --- (3,887) (410) 4,783 (951)
Minority interest in earnings --- 251 1,034 --- --- 1,285
Equity in earnings (loss)
of subsidiaries 223,153 210,251 (3,219) (5,862) (424,323) ---
Change in operating assets
and liabilities 1,888 (11,799) 35,369 22,367 (26,460) 21,365
Other --- --- --- --- 45 45
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities 54 (23,233) 43,581 53,358 (20,978) 52,782
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment --- --- (1,352) (7,658) --- (9,010)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities --- --- (1,352) (7,658) --- (9,010)
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on
long-term debt --- (36,277) 28 214 --- (36,035)
Change in investments and
advances from (to) affiliates (1,230) 66,526 (59,894) 24,586 (29,988) ---
Stock (repurchase) issuance - net 603 --- --- --- --- 603
Other 573 (7,016) 704 (17,112) 20,069 (2,782)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities (54) 23,233 (59,162) 7,688 (9,919) (38,214)
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Foreign Exchange
Rate on Cash --- --- --- --- 35 35
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments --- --- (16,933) 53,388 (30,862) 5,593
- -------------------------------------------------------------------------------------------------------------------------------
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 $ --- $ --- $ --- $ 78,133 $ (65,415) $ 12,718
===============================================================================================================================
12
Condensed Consolidating Statement of Financial Position as of June 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Cash $ --- $ 5,008 $ 62,216 $ --- $ (55,144) $ 12,080
Accounts Receivable --- 5 52,821 63,858 --- 116,684
Inventories --- --- 49,087 107,432 --- 156,519
Other current assets (5,328) 10,167 2,938 22,800 (700) 29,877
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets (5,328) 15,180 167,062 194,090 (55,844) 315,160
- -------------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net 32 --- 458,847 402,840 (3,173) 858,546
Excess of cost over net assets
of acquired businesses --- --- 198,812 16,287 --- 215,099
Investments in and advanced
to (from) affiliates 1,082,662 478,964 1,253,816 262,512 (3,077,954) ---
Other assets 5,042 3,854 10,987 22,084 --- 41,967
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,082,408 $ 497,998 $ 2,089,524 $ 897,813 $ (3,136,971) $ 1,430,772
===============================================================================================================================
Liabilities
Debt due within one year $ --- $ --- $ 47 $ 5,000 $ --- $ 5,047
Accounts payable 1 36,673 28,802 62,818 (55,144) 73,150
Accrued and other liabilities 8,140 324 21,408 18,591 (700) 47,763
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,141 36,997 50,257 86,409 (55,844) 125,960
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt 358,755 --- 962 95,556 --- 455,273
Deferred income taxes 135,873 5,242 (1,820) (2,841) 4,440 140,894
Other liabilities 21,662 14,281 589 12,404 --- 48,936
Minority interest --- 19,939 81,793 --- --- 101,732
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 524,431 76,459 131,781 191,528 (51,404) 872,795
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 128,356 --- 73 49,710 (49,783) 128,356
Paid in capital 554,854 150,218 1,856,742 918,888 (2,925,848) 554,854
Accumulated other
comprehensive loss (74,287) (74,287) (2,729) (71,558) 148,574 (74,287)
Retained earnings (deficit) (50,946) 345,608 103,657 (190,755) (258,510) (50,946)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 557,977 421,539 1,957,743 706,285 (3,085,567) 557,977
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 1,082,408 $ 497,998 $ 2,089,524 $ 897,813 $ (3,136,971) $ 1,430,772
===============================================================================================================================
13
Condensed Consolidating Statement of Operations for the six months ended June
30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ --- $ --- $ 229,346 $ 335,506 $ --- $ 564,852
Other income, net --- --- 940 (420) --- 520
- -------------------------------------------------------------------------------------------------------------------------------
--- --- 230,286 335,086 --- 565,372
- -------------------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales --- --- 234,897 312,648 --- 547,545
Selling, general and
administrative expenses 1,077 2,109 11,852 2,822 --- 17,860
Product claim costs --- --- --- 14,023 --- 14,023
Equity in the (earnings)
loss of subsidiaries 10,678 13,532 (7,831) (1,284) (15,095) ---
- -------------------------------------------------------------------------------------------------------------------------------
11,755 15,641 238,918 328,209 (15,095) 579,428
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (11,755) (15,641) (8,632) 6,877 15,095 (14,056)
Interest income 41 1,657 4,233 --- (4,056) 1,875
Interest expense (20,184) (1,072) (135) (8,488) 4,056 (25,823)
Minority interest --- (62) (255) --- --- (317)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (31,898) (15,118) (4,789) (1,611) 15,095 (38,321)
Income tax (provision) benefit 5,073 4,440 --- 1,983 --- 11,496
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (26,825) $ (10,678) $ (4,789) $ 372 $ 15,095 $ (26,825)
===============================================================================================================================
14
Condensed Consolidating Statement of Cash Flows for the six months ended June
30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (26,825) $ (10,678) $ (4,789) $ 372 $ 15,095 $ (26,825)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization 4 1,919 30,147 26,367 --- 58,437
Deferred income taxes (14,848) (11,940) (1,820) (6,796) 24,585 (10,819)
Minority interest in earnings --- 62 255 --- --- 317
Equity in earnings (loss)
of subsidiaries 10,678 13,532 (7,831) (1,284) (15,095) ---
Change in operating assets
and liabilities 8,521 21,014 (30,232) (6,616) (84,462) (91,775)
Other --- --- 1,935 7,348 --- 9,283
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities (22,470) 13,909 (12,335) 19,391 (59,877) (61,382)
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment --- --- (2,190) (6,174) --- (8,364)
Other --- --- --- (2,883) --- (2,883)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities --- --- (2,190) (9,057) --- (11,247)
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on
long-term debt --- --- (7,965) (5,069) --- (13,034)
Change in investments and
advances from (to) affiliates 22,380 (85,923) 77,492 (27,861) 13,912 ---
Stock issuance - net 177 --- --- --- --- 177
Distributions to minority interests --- (337) (1,691) --- --- (2,028)
Repurchase of TNLP common
Units --- (1,671) --- --- --- (1,671)
Other 73 2,231 (2,939) 10,134 (9,499) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities 22,630 (85,700) 64,897 (22,796) 4,413 (16,556)
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (160) (160) --- (160) 320 (160)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments --- (71,951) 50,372 (12,622) (55,144) (89,345)
- -------------------------------------------------------------------------------------------------------------------------------
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 $ --- $ 5,008 $ 62,216 $ --- $ (55,144) $ 12,080
===============================================================================================================================
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 JUNE 30, 2002 COMPARED WITH
QUARTER ENDED JUNE 30, 2001
Consolidated Results
Terra reported a net loss of $8.5 million for the 2002 second quarter compared
with a net loss of $21.6 million in 2001. The reduced 2002 loss was primarily
related to increased operating income as the result of higher sales volumes and
2001 charges for product claim costs.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced by Terra's two methanol manufacturing plants.
Total revenues and operating income (loss) by segment for the three-month period
ended June 30, 2002 and 2001 follow:
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 257,663 $ 251,620
Methanol 41,853 69,364
Other (18) (189)
- ---------------------------------------------------------------------------------------
$ 299,498 $ 320,795
=======================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products, before product claim costs $ 2,204 $ (4,497)
Less product claim costs --- (14,023)
- ---------------------------------------------------------------------------------------
Net nitrogen products 2,204 (18,520)
Methanol (391) 1,034
Other income - net (1,223) 80
- ---------------------------------------------------------------------------------------
$ 590 $ (17,406)
=======================================================================================
Nitrogen Products
Volumes and prices for the six-month periods ended June 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 452 $ 149 357 $ 221
Nitrogen solutions 1,301 73 801 124
Urea 166 119 139 147
Ammonium nitrate 208 116 115 128
- --------------------------------------------------------------------------------------------
17
Nitrogen products segment revenues increased $6.1 million to $257.7 million in
the 2002 second quarter compared with $251.6 million in the 2001 second quarter.
The effects of higher 2002 sales volumes were mostly offset by lower selling
prices. Sales volumes in 2001 were unusually low because of production
curtailments in response to natural gas costs, record levels of imported
nitrogen products and reduced nitrogen fertilizer demand. The decline to selling
prices from last year reduced 2002 second quarter revenues by $105.2 million
primarily as the result of an higher industry-wide inventories at the start of
the 2002 planting season as compared to serious supply concerns in 2001 created
by North American production curtailments in response to natural gas costs.
The nitrogen products segment had operating income of $2.2 million for the
second quarter of 2002 compared with an operating loss of $4.5 million before
product claim costs for the 2001 second quarter. The effect of lower selling
prices on 2002 operating income was partly offset by higher sales volumes and
lower natural gas costs. Natural gas costs decreased $55 million from the 2001
second quarter as unit costs, net of forward pricing gains and losses, were
$2.86/MMBtu during the 2002 second quarter compared to $4.45/MMBtu during the
same 2001 period. As a result of forward price contracts, second quarter 2002
natural gas costs for the nitrogen products segment were $6.9 million lower than
spot prices.
Methanol
For the three months ended June 30, 2002 and 2001 the Methanol segment had
revenues of $41.9 million and $69.4 million, respectively. Sales volumes
decreased 9% from prior year levels and selling prices declined from $.71/gallon
in 2001 to $.47/gallon in 2002.
The methanol segment had an operating loss of $0.4 million for the 2002 second
quarter compared to operating income of $1.0 million for the 2001 second
quarter. The decrease to operating income was due to lower prices and volumes.
These factors were partially offset by lower natural gas costs, which net of
forward pricing gains and losses, were $3.07/MMBtu during the 2002 second
quarter compared to $4.83/MMBtu during the 2001 period. As a result of forward
pricing contracts, second quarter 2002 natural gas costs for the methanol were
$2.1 million lower than spot prices.
Other Income - Net
Terra had other operating losses of $1.2 million in the 2002 second quarter
compared to $0.1 million operating income in the 2001 second quarter. The
increase to expenses relate primarily to fees associated with credit agreement
amendments and 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.
18
Interest Expense - Net
Interest expense, net of interest income, totaled $13.2 million during the 2002
second quarter compared with $13.1 million for the prior year period.
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $0.7 million were recorded for the 2002 second 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
second quarter reflected higher nitrogen earnings for TNCLP.
Income Taxes
Income taxes for the second quarter 2002 were recorded at an effective tax rate
of 40%, Terra's estimated annual effective tax rate.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 2001
Consolidated Results
Terra reported a net loss before cumulative effect of change in accounting
principle of $17.6 million for the six months ended June 30, 2002 with a net
loss of $26.8 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.
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 six-month periods
ended June 30, 2002 and 2001 follows:
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 442,650 $ 451,841
Methanol 70,156 113,011
Other 252 520
- ---------------------------------------------------------------------------------------
$ 513,058 $ 565,372
=======================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products, before product claim costs $ 2,870 $ 175
Less product claim costs --- (14,023)
- ---------------------------------------------------------------------------------------
Net nitrogen products 2,870 (13,848)
Methanol (2,914) (973)
Other income - net (734) 765
- ---------------------------------------------------------------------------------------
$ (778) $ (14,056)
=======================================================================================
19
Nitrogen Products
Volumes and prices for the six-month periods ended June 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 793 $ 142 540 $ 234
Nitrogen solutions 1,937 71 1,335 129
Urea 344 113 229 166
Ammonium nitrate 451 119 233 135
- ----------------------------------------------------------------------------------------------
Nitrogen products segment revenues declined $9.1 million to $442.7 million in
the 2002 first half compared with $451.8 million in the 2001 first half. Selling
prices declined $143 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 half. Sales volumes in 2001 were
depressed due to lower production rates, reduced demand in response to high
prices and increased competition from imports.
The nitrogen products segment had operating income of $2.9 million for the first
half of 2002 compared with operating income of $0.2 million before product claim
costs for the 2001 first half. 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 $159 million over the 2001
first half as unit costs, net of forward pricing gains and losses, increased to
$2.79/MMBtu, during the 2002 first half. As a result of forward price contracts,
first half 2002 natural gas costs for the nitrogen products segment were $4.3
million lower than spot prices as the result of forward price contracts.
Methanol
For the six months ended June 30, 2002 and 2001 the methanol segment had
revenues of $70 million and $113.0 million, respectively. Sales volumes
increased 10% from prior year levels, but selling prices declined from
$.72/gallon in 2001 to $.41/gallon in 2002.
The methanol segment generated a $2.9 million operating loss in the 2002 first
half compared to a $1.0 million operating loss in the 2001 first half. The
higher operating loss reflects lower selling prices that were only partly 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 $2.80/MMBtu,
during the 2002 first half compared to $5.06/MMBtu during the 2001 period. First
half 2002 natural gas costs were $0.7 million lower than spot prices as a result
of forward pricing contracts.
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.
20
Other Income - Net
Terra had other operating losses of $0.8 million in the 2002 first half compared
to $0.8 million operating income in the 2001 first half. 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 $26.5 million during the 2001
first half compared with $23.9 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 $1.3 million were recorded for the 2002 first half 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 half 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 six months of 2002 was $52.8
million, composed of $31.4 million of cash provided from operating activities
and $21.4 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 June 30, 2002, we had no outstanding revolving credit
borrowings and $19.0 million in outstanding letters of credit, resulting in
remaining borrowing availability of approximately $108 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
$45 million for the four quarters ending June 30, 2002 and $50 million for the
four quarters ending September 30, 2002.
21
During the first half of 2002 and 2001, we funded plant and equipment purchases
of $9 million and $8.4 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. 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.
During the first six months of 2001 we distributed $2.0 million to the minority
TNCLP common unitholders. TNCLP distributions are based on "Available Cash" (as
defined in the Partnership Agreement). On July 22, 2002, the Partnership
declared a $3.8 million distribution ($0.20 per common unit) payable August 26
to record holders as of August 5, 2002.
Cash balances at June 30, 2002 were $12.7 million, all of which is unrestricted.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 49.1% 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.
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1340 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K dated June 28, 2002, announcing amendment of the Company's
bank credit facility maturing on June 30, 2005.
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: August 8, 2002 /s/ Francis G. Meyer
------------------------------------------
Francis G. Meyer
Senior Vice President and Chief Financial
Officer and a duly authorized signatory
23