================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 51102-6000
Sioux City, Iowa (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 2002, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 76,478,183 shares
================================================================================
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
ASSETS
Cash and short-term investments $ 2,063 $ 7,125 $ 63,023
Accounts receivable, less allowance for
doubtful accounts of $978, $936, $868 84,044 101,363 99,864
Inventories 126,597 110,027 182,833
Other current assets 37,024 35,142 30,374
------------------------------------------------------------------------------------------------------------------
Total current assets 249,728 253,657 376,094
------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 806,748 824,982 872,946
Excess of cost over net assets of acquired businesses --- 206,209 219,920
Other assets 45,364 51,195 44,584
------------------------------------------------------------------------------------------------------------------
Total assets $ 1,101,840 $ 1,336,043 $ 1,513,544
==================================================================================================================
LIABILITIES
Debt due within one year $ 81 $ 68 $ 13,028
Accounts payable 67,472 75,077 89,904
Accrued and other liabilities 63,460 42,134 77,073
------------------------------------------------------------------------------------------------------------------
Total current liabilities 131,013 117,279 180,005
------------------------------------------------------------------------------------------------------------------
Long-term debt 400,291 436,534 456,332
Deferred income taxes 111,061 112,645 153,850
Other liabilities 67,993 69,639 41,072
Minority interest 99,713 99,167 102,958
------------------------------------------------------------------------------------------------------------------
Total liabilities $ 810,071 $ 835,264 $ 934,217
------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
Outstanding 76,476, 76,451 and 75,823 shares 128,388 128,363 128,289
Paid-in capital 554,864 554,850 554,752
Accumulated other comprehensive loss (72,454) (78,470) (74,354)
Retained deficit (319,029) (103,964) (29,360)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 291,769 500,779 579,327
------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,101,840 $ 1,336,043 $ 1,513,544
==================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 2
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
Three Months Ended
March 31,
2002 2001
--------- ----------
REVENUES
Net sales $ 213,290 $ 243,868
Other income, net 270 709
-------------------------------------------------------------------------------------------------------------------
Total revenues 213,560 244,577
-------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 206,140 233,871
Selling, general and administrative expense 8,788 7,356
-------------------------------------------------------------------------------------------------------------------
214,928 241,227
-------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,368) 3,350
Interest income 48 1,700
Interest expense (13,296) (12,582)
Minority interest (546) (528)
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes and
cumulative effect of change
in accounting principle (15,162) (8,060)
Income tax benefit 6,065 2,821
-------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect
of change in accounting principle (9,097) (5,239)
Cumulative effect of change in
accounting principle (205,968) ---
-------------------------------------------------------------------------------------------------------------------
NET LOSS $ (215,065) $ (5,239)
===================================================================================================================
Basic and diluted loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.12) $ (0.07)
Cumulative effect of change in
accounting principle (2.74) ---
-------------------------------------------------------------------------------------------------------------------
Net loss per share $ (2.86) $ (0.07)
===================================================================================================================
Basic and diluted weighted
average shares outstanding 75,200 75,094
===================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 3
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
--------------------------------------
2002 2001
----------- ------------
OPERATING ACTIVITIES
Net loss $ (215,065) $ (5,239)
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 23,399 29,090
Deferred income taxes (9,515) (2,703)
Minority interest in earnings 546 528
Changes in current assets and liabilities:
Accounts receivable 16,696 5,597
Inventories (17,111) (84,427)
Other current assets 11,234 (13,273)
Accounts payable (7,079) 28,611
Accrued and other liabilities 26,922 13,508
Other (292) (91)
--------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 35,703 (28,399)
--------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,328) (3,730)
Other --- (337)
--------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (6,328) (4,067)
--------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on long-term debt (36,230) (3,994)
Stock issuance-net 39 8
Repurchases of TNCLP common units --- (1,671)
Distributions to minority interests --- (1,015)
Other 1,781 917
--------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (34,410) (5,755)
--------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (27) (181)
--------------------------------------------------------------------------------------------------------------------
Decrease to cash and short-term investments (5,062) (38,402)
Cash and short-term investments at beginning of period 7,125 101,425
--------------------------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 2,063 $ 63,023
====================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 4
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED March 31, 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 --- --- --- (215,065) (215,065)
Foreign currency
translation adjustment --- --- (6,055) --- (6,055)
Change in fair value of derivatives,
net of taxes --- --- 12,071 --- 12,071
------
Comprehensive loss (209,049)
Exercise of stock options 25 14 --- --- 39
-------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $ 128,388 $ 554,864 $ (72,454) $ (319,029) $ 291,769
=========================================================================================================================
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 128,283 $ 554,750 $ (48,115) $ (24,121) $ 610,797
Comprehensive loss:
Net loss --- --- --- (5,239) (5,239)
Foreign currency
translation adjustment --- --- (25,322) --- (25,322)
Cumulative effect of change in
accounting for derivative
financial instruments --- --- 31,400 --- 31,400
Change in fair value of
derivatives, net of taxes --- --- (32,317) --- (32,317)
----------
Comprehensive loss (31,478)
Exercise of stock options 6 2 --- --- 8
-------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $ 128,289 $ 554,752 $ (74,354) $ (29,360) $ 579,327
=========================================================================================================================
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:
March 31, December 31, March 31,
(in thousands) 2002 2001 2001
--------------------------------------------------------------------------------------------------------
Raw materials $ 36,577 $ 27,904 $ 20,299
Supplies 27,378 21,471 21,277
Finished goods 62,642 60,652 141,257
--------------------------------------------------------------------------------------------------------
Total $ 126,597 $ 110,027 $ 182,833
========================================================================================================
The components of accumulated other comprehensive loss at March 31, 2002
consisted of foreign currency translation adjustment, derivatives (net of
taxes) and minimum pension liability (net of taxes) in the amounts of $69.1
million, $(7.6) million and $10.9 million, respectively. At March 31, 2001,
accumulated other comprehensive loss consisted of foreign currency
translation adjustment and derivatives (net of taxes) in the amounts of
$73.4 million and $1.0 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") voted to
issue 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 (pound)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 will
vigorously pursue 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
March 31, 2002 to cover 15% of natural gas requirements for the succeeding
twelve months. The March 31, 2002 contracts covered 13% of Terra's expected
North American natural gas requirements and 28% of its expected U.K.
natural gas requirements.
Unrealized gains from forward pricing positions in North America totaled
$6.0 million as of March 31, 2002. In addition, Terra had purchase
commitments for natural gas in the U.K. at prices $1.2 million lower than
March 31, 2002 forward markets. The amount ultimately recognized by Terra
will be dependent on published prices in effect at the time of settlement.
Terra also had $4.6 million of realized gains on closed North America
contracts relating to future periods that have been deferred to the
respective period.
On March 31, 2002, the fair value of derivatives resulted in a $10.7
million increase to current assets, a $4.6 million reduction to current
liabilities, a $2.6 million increase in long-term liabilities and a
7
$12.7 million increase, before deferred taxes of $5.1 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 three months ended March 31, 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
losses 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
March 31
-------------------------------
(in thousands) 2002 2001
-------------------------------------------------------------------------------------------------------------------
Revenues - Nitrogen Products $ 184,987 $ 200,221
- Methanol 28,303 43,647
- Other 270 709
-------------------------------------------------------------------------------------------------------------------
Total revenues $ 213,560 $ 244,577
===================================================================================================================
Income (loss) from operations
- Nitrogen Products $ 666 $ 4,672
- Methanol (2,523) (2,007)
- Other 489 685
-------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ (1,368) $ 3,350
===================================================================================================================
5. In June 2001, the Financial Accounting Standards Board ("FASB") approved
the issuance of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 provides that
goodwill and other intangible assets with indefinite lives will not be
amortized, but will be tested for impairment on an annual basis. This
standard is effective for Terra beginning on January 1, 2002 and resulted
in the determination 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
March 31
-------------------------------
(in thousands) 2002 2001
-----------------------------------------------------------------------------------------------------------------
Reported net income $ (215,065) $ (5,239)
Goodwill amortization, net of tax --- 4,700
-----------------------------------------------------------------------------------------------------------------
Adjusted net income $ (215,065) $ (539)
=================================================================================================================
Reported basic and diluted loss per share $ (2.86) $ (0.07)
Goodwill amortization, net of tax per basic share --- 0.06
-----------------------------------------------------------------------------------------------------------------
Adjusted basic loss per share $ (2.86) $ (0.01)
=================================================================================================================
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 March 31,
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 March 31, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
Assets
Cash $ --- $ --- $ --- $ 44,622 $ (42,559) $ 2,063
Accounts Receivable --- 86 22,983 60,975 --- 84,044
Inventories --- --- 37,826 88,770 1 126,597
Other current assets 13,877 --- 8,234 17,521 (2,608) 37,024
---------------------------------------------------------------------------------------------------------------
Total current assets 13,877 86 69,043 211,888 (45,166) 249,728
---------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net --- --- 427,743 380,927 (1,922) 806,748
Investments in and advanced
to (from) affiliates 637,887 448,492 1,255,468 98,133 (2,439,980) ---
Other assets 698 11,733 7,530 25,402 1 45,364
---------------------------------------------------------------------------------------------------------------
Total assets $ 652,462 $ 460,311 $ 1,759,784 $ 716,350 $ (2,487,067) $ 1,101,840
===============================================================================================================
Liabilities
Debt due within one year $ --- $ --- $ 81 $ --- $ --- $ 81
Accounts payable 1 36,847 33,942 41,847 (45,165) 67,472
Accrued and other liabilities 8,793 13,621 19,021 18,599 3,426 63,460
---------------------------------------------------------------------------------------------------------------
Total current liabilities 8,794 50,468 53,044 60,446 (41,739) 131,013
---------------------------------------------------------------------------------------------------------------
Long-term debt 200,000 200,000 291 --- --- 400,291
Deferred income taxes 110,083 19,802 (7,257) (8,143) (3,424) 111,061
Other liabilities 41,816 13,189 2,423 10,567 (2) 67,993
Minority interest --- 19,504 80,209 --- --- 99,713
---------------------------------------------------------------------------------------------------------------
Total liabilities 360,693 302,963 128,710 62,870 (45,165) 810,071
---------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 128,388 --- 73 49,709 (49,782) 128,388
Paid in capital 554,864 150,218 1,756,742 899,962 (2,806,922) 554,864
Accumulated other
comprehensive loss (72,454) (72,454) --- (64,701) 137,155 (72,454)
Retained earnings (deficit) (319,029) 79,584 (125,741) (231,490) 277,647 (319,029)
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 291,769 157,348 1,631,074 653,480 (2,441,902) 291,769
---------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 652,462 $ 460,311 $ 1,759,784 $ 716,350 $ (2,487,067) $ 1,101,840
===============================================================================================================
10
Condensed Consolidating Statement of Operations for the three months ended March
31, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ --- $ --- $ 71,846 $ 137,533 $ 3,911 $ 213,290
Other income, net --- --- 837 3,343 (3,910) 270
----------------------------------------------------------------------------------------------------------------
--- --- 72,683 140,876 1 213,560
----------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales --- --- 75,580 131,453 (893) 206,140
Selling, general and
administrative expenses 626 (470) 5,605 2,413 614 8,788
Equity in the (earnings) loss
of subsidiaries 215,271 208,868 (1,368) (2,504) (420,267) ---
----------------------------------------------------------------------------------------------------------------
215,897 208,398 79,817 131,362 (420,546) 214,928
----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (215,897) (208,398) (7,134) 9,514 420,547 (1,368)
Interest income 19 1,052 1,351 23 (2,397) 48
Interest expense (5,465) (7,818) (12) (2,396) 2,395 (13,296)
Minority interest --- (107) (439) --- --- (546)
----------------------------------------------------------------------------------------------------------------
Income (loss) from operations
before taxes and cumulative
effect of change in
accounting principle (221,343) (215,271) (6,234) 7,141 420,545 (15,162)
Income tax (provision) benefit 6,278 --- --- (213) --- 6,065
----------------------------------------------------------------------------------------------------------------
Income (loss) cumulative effect
of change in accounting
principle (215,065) (215,271) (6,234) 6,928 420,545 (9,097)
Cumulative effect of change
in accounting principle --- --- (189,971) (15,996) (1) (205,968)
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (215,065) $ (215,271) $ (196,205) $ (9,068) $ 420,544 $(215,065)
================================================================================================================
11
Condensed Consolidating Statement of Cash Flows for the three months ended March
31, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (215,065) $ (215,271) $ (196,205) $ (9,068) $ 420,544 $(215,065)
Cumulative effect of change --- --- 189,971 15,996 1 205,968
in accounting principle
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization --- 566 12,712 10,121 --- 23,399
Deferred income taxes (6,835) --- (3,887) 129 1,078 (9,515)
Minority interest in earnings --- 107 439 --- --- 546
Equity in earnings (loss)
of subsidiaries 215,271 208,868 (1,368) (2,504) (420,267) ---
Change in operating assets
and liabilities (313) 7,649 5,782 13,493 4,051 30,662
Other --- --- --- --- (292) (292)
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities (6,942) 1,919 7,444 28,167 5,115 35,703
-----------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment --- --- (1,048) (5,280) --- (6,328)
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities --- --- (1,048) (5,280) --- (6,328)
-----------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on
long-term debt --- (36,278) 48 --- --- (36,230)
Change in investments and
advances from (to) affiliates 4,830 37,426 (24,116) (5,284) (12,856) ---
Stock (repurchase) issuance - net 39 --- --- --- --- 39
Other 2,073 (3,067) 739 2,274 (238) 1,781
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities 6,942 (1,919) (23,329) (3,010) (13,094) (34,410)
-----------------------------------------------------------------------------------------------------------------
Effect of Foreign Exchange
Rate on Cash --- --- --- --- (27) (27)
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments --- --- (16,933) 19,877 (8,006) (5,062)
-----------------------------------------------------------------------------------------------------------------
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 $ --- $ --- $ --- $ 44,622 $ (42,559) $ 2,063
=================================================================================================================
12
Condensed Consolidating Statement of Financial Position as of March 31, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
Assets
Cash $ --- $ 26,312 $ 78,646 $ --- $ (41,935) $ 63,023
Accounts Receivable --- --- 40,354 59,885 (375) 99,864
Inventories --- --- 63,564 119,269 --- 182,833
Other current assets 6,133 2,654 12,646 20,404 (11,463) 30,374
-------------------------------------------------------------------------------------------------------------------
Total current assets 6,133 28,966 195,210 199,558 (53,773) 376,094
-------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net --- --- 469,152 407,350 (3,556) 872,946
Excess of cost over net assets
of acquired businesses --- --- 203,231 16,689 --- 219,920
Investments in and advanced
to (from) affiliates 1,116,634 451,506 1,247,610 307,057 (3,122,807) ---
Other assets 2,683 4,379 8,513 24,918 4,091 44,584
-------------------------------------------------------------------------------------------------------------------
Total assets $ 1,125,450 $ 484,851 $ 2,123,716 $ 955,572 $ (3,176,045) $ 1,513,544
===================================================================================================================
Liabilities
Debt due within one year $ --- $ --- $ 8,028 $ 5,000 $ --- $ 13,028
Accounts payable --- 3,879 35,024 92,936 (41,935) 89,904
Accrued and other liabilities 14,675 112 30,089 28,661 3,536 77,073
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 14,675 3,991 73,141 126,597 (38,399) 180,005
-------------------------------------------------------------------------------------------------------------------
Long-term debt 358,755 --- 797 96,780 --- 456,332
Deferred income taxes 150,289 9,682 --- 5,129 (11,250) 153,850
Other liabilities 22,404 12,986 669 5,013 --- 41,072
Minority interest --- 20,180 82,778 --- --- 102,958
-------------------------------------------------------------------------------------------------------------------
Total liabilities 546,123 46,839 157,385 233,519 (49,649) 934,217
-------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 128,289 --- 73 49,709 (49,782) 128,289
Paid in capital 554,752 150,218 1,856,742 927,153 (2,934,113) 554,752
Accumulated other
comprehensive loss (74,354) (74,354) 835 (73,184) 146,703 (74,354)
Retained earnings (deficit) (29,360) 362,148 108,681 (181,625) (289,204) (29,360)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 579,327 438,012 1,966,331 722,053 (3,126,396) 579,327
-------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 1,125,450 $ 484,851 $ 2,123,716 $ 955,572 $ (3,176,045) $ 1,513,544
===================================================================================================================
13
Condensed Consolidating Statement of Operations for the three months ended March
31, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ --- $ --- $ 88,579 $ 155,669 $ (380) $ 243,868
Other income, net --- --- 854 (397) 252 709
-----------------------------------------------------------------------------------------------------------------
--- --- 89,433 155,272 (128) 244,577
-----------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales --- --- 93,257 139,819 795 233,871
Selling, general and
administrative expenses 399 988 5,176 1,809 (1,016) 7,356
Equity in the (earnings)
loss of subsidiaries (1,422) (1,738) (6,677) (2,231) 12,068 ---
-----------------------------------------------------------------------------------------------------------------
(1,023) (750) 91,756 139,397 11,847 241,227
-----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,023 750 (2,323) 15,875 (11,975) 3,350
Interest income 5 1,382 3,072 160 (2,919) 1,700
Interest expense (10,750) (606) (92) (4,055) 2,921 (12,582)
Minority interest --- (104) (424) --- --- (528)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (9,722) 1,422 233 11,980 (11,973) (8,060)
Income tax (provision) benefit 4,483 --- --- (1,662) --- 2,821
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (5,239) $ 1,422 $ 233 $ 10,318 $ (11,973) $ (5,239)
=================================================================================================================
14
Condensed Consolidating Statement of Cash Flows for the three months ended March
31, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (5,239) $ 1,422 $ 233 $ 10,318 $ (11,973) $ (5,239)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization --- 978 16,959 11,153 --- 29,090
Deferred income taxes (432) (7,500) --- 1,174 4,055 (2,703)
Minority interest in earnings --- 104 424 --- --- 528
Equity in earnings (loss)
of subsidiaries (1,422) (1,738) (6,677) (2,231) 12,068 ---
Change in operating assets
and liabilities 7,211 (4,237) (26,967) 20,713 (46,704) (49,984)
Other --- --- --- --- (91) (91)
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities 118 (10,971) (16,028) 41,127 (42,645) (28,399)
-----------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment --- --- (2,204) (1,526) --- (3,730)
Other --- --- --- --- (337) (337)
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities --- --- (2,204) (1,526) (337) (4,067)
-----------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on
long-term debt --- --- (149) (3,845) --- (3,994)
Change in investments and
advances from (to) affiliates 281 (38,982) 86,110 (65,797) 18,388 ---
Stock issuance - net 8 --- --- --- --- 8
Distributions to minority interests --- (337) (678) --- --- (1,015)
Repurchase of TNLP common
Units --- (1,671) --- --- --- (1,671)
Other (407) 1314 (249) 17,419 (17,160) 917
-----------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities (118) (39,676) 85,034 (52,223) 1,228 (5,755)
-----------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash --- --- --- --- (181) (181)
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments --- (50,647) 66,802 (12,622) (41,935) (38,402)
-----------------------------------------------------------------------------------------------------------------
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 $ --- $ 26,312 $ 78,646 $ --- $ (41,935) $ 63,023
=================================================================================================================
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
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. We believe that
our critical accounting policies are limited to those 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 MARCH 31, 2002 COMPARED WITH
QUARTER ENDED MARCH 31, 2001
CONSOLIDATED RESULTS
Terra reported a net loss before cumulative effect of change in accounting
principle of $9.1 million for the 2002 first quarter compared with net loss of
$5.2 million in 2001. The increase in the 2002 loss was primarily related to
decreased operating income as the result of lower sales prices only partly
offset by higher sales volumes and lower raw material costs.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced at Terra's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three-month
periods ended March 31, 2002 and 2001 follow:
(in thousands) 2002 2001
------------------------------------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 184,987 $ 200,221
Methanol 28,303 43,647
Other 270 709
------------------------------------------------------------------------------------------------------------------
$ 213,560 $ 244,577
==================================================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ 666 $ 4,672
Methanol (2,523) (2,007)
Other income - net 489 685
------------------------------------------------------------------------------------------------------------------
$ (1,368) $ 3,350
==================================================================================================================
17
NITROGEN PRODUCTS
Volumes and prices for the three-month periods ended March 31, 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 341 $ 133 182 $ 258
Nitrogen solutions 636 66 534 136
Urea 178 108 90 195
Ammonium nitrate 243 121 118 141
------------------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues declined $15.2 million to $185.0 million in
the 2002 first quarter compared with $200.2 million in the 200 1 first quarter.
Lower sales prices reduced 2002 revenues by approximately $107.5 million
primarily as the result of an over supply of nitrogen products in most of
Terra's North American markets. During the 2001 first quarter, high natural gas
prices forced industry wide production curtailments, which reduced supplies and
caused unusually high prices.
The nitrogen products segment had operating income of $0.7 million for the first
quarter of 2002 compared with operating income of $4.7 million for the 2001
first quarter. Lower sales prices reduced 2002 operating income by approximately
$107.5 million from last year and was mostly offset by natural gas costs that
were $103.8 million lower than the 2001 first quarter. Natural gas unit costs,
net of forward pricing gains and losses, declined to $2.72/MMBtu during the 2002
first quarter from $5.69/MMBtu during the same 2001 period. First quarter 2002
natural gas costs for the nitrogen products segment were $2.6 million higher
than spot prices as a result of Terra's forward price contracts.
METHANOL
For the three months ended March 31, 2002 and 2001 the Methanol segment had
revenues of $28.3 million and $43.6 million, respectively. Sales volumes
increased 41% from prior year levels and selling prices decreased from
$.75/gallon in 2001 to $.34/gallon in 2002.
The methanol segment had an operating loss of $2.5 million for the 2002 first
quarter compared to an operating loss of $2.0 million for the 2001 first
quarter. The decrease in the operating income was due primarily to lower prices,
which reduced 2002 earnings by approximately $33.9 million. The lower prices
were partially offset by lower unit costs. Natural gas costs, net of forward
pricing gains and losses, averaged $2.53/MMBtu, during the 2002 first quarter
compared to $5.44/MMBtu during the 2001 period. As a result of forward pricing
contracts, first quarter 2002 natural gas costs for the methanol segment were
$1.3 million higher than spot prices.
OTHER INCOME - NET
Terra had other operating income of $0.5 million in the 2002 first quarter
compared to other operating income of $0.7 million in the 2001 first quarter.
INTEREST EXPENSE - NET
Interest expense, net of interest income, totaled $13.2 million during the 2002
first quarter compared with $10.9 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.
18
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 $0.5 million were recorded for the 2002 first quarter as the
result of TNCLP income, which were included in their entirety in consolidated
operating results.
INCOME TAXES
Income taxes for the first quarter 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 quarter of 2002 was $35.7
million, composed of $5.3 million of cash provided from operating activities and
$30.4 million of decreases to working capital balances. The decrease in working
capital primarily consisted of lower accounts receivable and $19.4 million of
customer prepayments that were included in March 31, 2002 current liabilities.
We expect substantially all customer prepayment balances will be utilized during
the 2002 second quarter. Increases to inventory balances during the first
quarter are typical in preparation for the second quarter planting season.
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 March 31, 2002, we had no outstanding revolving credit
borrowings and $16.8 million in outstanding letters of credit, resulting in
remaining borrowing availability of approximately $96 million under the
facility. We are required under the credit facility to maintain $30 million
minimum borrowing availability at all times. 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
addition, we are required to maintain minimum levels of earnings before
interest, income taxes, depreciation, amortization ("EBITDA") and other non-cash
items (as defined in the credit facility) for the preceding 12 months (LTM)
computed on a quarterly basis. The minimum LTM requirement under the facility is
$60 million at June 30, 2002, $75 million at September 30, 2002 and $90 million
at December 31, 2002 and each quarter thereafter. During 2001, Terra Industries
Inc. realized $66 million of earnings before interest, income taxes,
depreciation, amortization and other non-cash items (as defined in the financing
agreement); consequently, 2002 amounts will need to be $24 million higher than
in 2001 to meet the credit facility covenants. Based on these requirements, we
compute our EBITDA for the nine-month period July 2001-March 2002 at $38
million. Therefore, our EBITDA requirement for the second quarter 2002 is $22
million. Failure to meet these covenants would require us to incur additional
costs to amend the bank facilities or could result in termination of the
facilities.
During the first quarter of 2002 and 2001, we funded plant and equipment
purchases of $6.3 million and $3.7 million, respectively, primarily for
replacement or stay-in-business capital needs. We expect
19
2002 plant and equipment purchases to approximate $30 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 quarter of 2001 we distributed $1.0 million to the minority
TNCLP common unitholders. TNCLP distributions are based on "Available Cash" (as
defined in the Partnership Agreement).
Cash balances at March 31, 2002 were $2.1 million, all of which is unrestricted.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 49.5% 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.
20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2002 Annual Meeting of stockholders was held on April 30, 2002, in
New York, New York. At the meeting, a total of 66,867,637 votes were cast by
stockholders.
The following directors were elected to hold office until the next
Annual Meeting or until their successors are duly elected and qualified, and
received the votes set forth opposite their respective name:
NAME FOR WITHHELD
---- --- --------
Edward G. Beimfohr 65,996,778 870,859
Michael L. Bennett 65,373,393 1,494,244
Edward M. Carson 65,996,635 871,002
Thomas H. Claiborne 66,004,328 863,309
Eric K. Diack 66,004,828 862,809
David E. Fisher 66,004,628 863,009
Martha O. Hesse 65,988,136 879,501
Burton M. Joyce 65,897,763 969,874
William R. Loomis, Jr. 66,008,055 859,582
John R. Norton III 65,997,921 869,716
Henry R. Slack 66,007,521 860,116
The stockholders ratified the selection by the Corporation's Board of
Directors of Deloitte & Touche LLP as independent accountants for the
Corporation for 2002. The number of votes cast for such proposal was 66,334,025,
the number against was 429,659, and the number of abstentions was 103,953.
The stockholders approved the Terra Industries Inc. Stock Incentive
Plan of 2002. The number of votes cast for this proposal was 62,718,747, the
number against was 3,014,744, and the number of abstentions was 1,134,146.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K dated January 31, 2002, announcing completion of
the work required to adopt Financial Accounting Standards
Board Statement of Financial Accounting Standard ("SFAS")
No. 142, Goodwill and Other Intangible Assets for 2002.
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: May 10, 2002 /s/ Francis G. Meyer
------------------------------------
Francis G. Meyer
Senior Vice President and Chief
Financial Officer and a duly
authorized signatory
22