18. Segment Information

Factors Used by Management to Identify the Enterprise’s Reportable Segments and Measurement of Segment Income or Loss and Segment Assets

We have three operating segments (business segments) but only two reportable segments: the Chemical Business and the Climate Control Business. Our reportable segments are based on business units that offer similar products and services. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.

We evaluate performance and allocate resources based on operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

Description of Each Reportable Segment

Chemical Business—The Chemical Business segment primarily manufactures and sells:

•

anhydrous ammonia, fertilizer grade AN, UAN, and AN ammonia solution for agricultural applications,

•

high purity and commercial grade anhydrous ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids, carbon dioxide, and diesel exhaust fluid for industrial applications, and

•

industrial grade AN and solutions for the mining industry.

Our chemical production facilities are located in El Dorado, Arkansas; Cherokee, Alabama; Pryor, Oklahoma; and Baytown, Texas. Sales to customers of this segment primarily include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the United States; industrial users of acids throughout the United States and parts of Canada; and explosive manufacturers in the United States.

During 2012 and 2013, our Chemical Business encountered a number of significant issues including an explosion in one of our nitric acid plants at the El Dorado Facility in May 2012, a pipe rupture that damaged the ammonia plant at the Cherokee Facility in November 2012 and numerous mechanical issues at the Pryor Facility during 2012 and 2013, all resulting in lost production and causing an adverse effect on 2012 and 2013 sales and operating income. Also see Note 16 – Property and Business Interruption Insurance Claims and Recoveries and Note 21 – Subsequent Events.

In October 2012 and August 2013, a subsidiary within our Chemical Business acquired working interests in certain natural gas properties. Since our Chemical Business purchases a significant amount of natural gas as a feedstock for the production of anhydrous ammonia, management considers these acquisitions as economic hedges against a portion of a potential rise in natural gas prices in the future for a portion of our future natural gas production requirements. We report the working interests as part of the Chemical Business reportable segment. All of our natural gas producing activities are within the United States (in Pennsylvania).

As of December 31, 2013, our Chemical Business employed 530 persons, with 156 represented by unions under agreements, which will expire in November of 2016 through October of 2018.

Climate Control Business—The Climate Control Business segment manufactures and sells the following variety of heating, ventilation, and air conditioning (“HVAC”) products:

•

geothermal and water source heat pumps,

•

hydronic fan coils, and

•

other HVAC products including large custom air handlers, modular geothermal and other chillers and other products and services.

These HVAC products are primarily for use in commercial/institutional and residential new building construction, renovation of existing buildings and replacement of existing systems. Our various facilities located in Oklahoma City comprise substantially all of the Climate Control segment’s operations. Sales to customers of this segment primarily include original equipment manufacturers, contractors and independent sales representatives located throughout the world.

Other—The business operation classified as “Other” primarily sells industrial machinery and related components to machine tool dealers and end users located primarily in North America.

Information about our continuing operations in different business segments is detailed below.


	2013			2012			2011
	(In Thousands)
Net sales:
Chemical:
Agricultural products	$	167,614		$	217,329		$	231,599
Industrial acids and other chemical products		141,936			162,498			161,776
Mining products		63,042			96,538			118,479
Natural gas		8,077			1,448			—

Total Chemical		380,669			477,813			511,854
Climate Control:
Geothermal and water source heat pumps		183,757			162,697			183,789
Hydronic fan coils		64,541			55,812			54,379
Other HVAC products		36,720			47,662			43,397

Total Climate Control		285,018			266,171			281,565
Other		13,600			15,047			11,837

	$	679,287		$	759,031		$	805,256

Gross profit:
Chemical	$	46,165		$	97,692		$	130,687
Climate Control		92,907			80,981			88,178
Other		4,484			5,063			4,153

	$	143,556		$	183,736		$	223,018

Operating income:
Chemical	$	87,784		$	82,101		$	116,503
Climate Control		30,386			25,834			32,759
Other		1,699			2,091			1,584
General corporate expenses (1)		(14,561	)		(14,371	)		(14,403	)

		105,308			95,655			136,443
Interest expense, net		13,986			4,237			6,658
Losses on extinguishment of debt		1,296			—			136
Non-operating expense (income), net:
Chemical		(1	)		(1	)		(1	)
Climate Control		(1	)		(1	)		(2	)
Corporate and other business operations		(98	)		(279	)		3
Provisions for income taxes		35,421			33,594			46,208
Equity in earnings of affiliate—Climate Control		(436	)		(681	)		(543	)

Income from continuing operations	$	55,141		$	58,786		$	83,984

(1)	General corporate expenses consist of the following:


	2013			2012			2011
	(In Thousands)
Selling, general and administrative:
Personnel costs	$	(8,096	)	$	(8,110	)	$	(6,791	)
Professional fees		(4,813	)		(4,116	)		(3,804	)
All other		(2,208	)		(2,533	)		(3,404	)

Total selling, general and administrative		(15,117	)		(14,759	)		(13,999	)
Other income		584			388			226
Other expense		(28	)		—			(630	)

Total general corporate expenses	$	(14,561	)	$	(14,371	)	$	(14,403	)

Information about our PP&E and total assets by business segment is detailed below:


	2013		2012		2011
	(In Thousands)
Depreciation, depletion and amortization of PP&E:
Chemical	$	23,497	$	16,355	$	14,659
Climate Control		4,707		4,250		3,853
Other		49		32		107
Corporate assets		57		44		143

Total depreciation, depletion and amortization of PP&E	$	28,310	$	20,681	$	18,762

Additions to PP&E:
Chemical	$	160,343	$	141,399	$	39,835
Climate Control		5,576		5,816		5,746
Other		65		889		54
Corporate assets		435		2,701		2,322

Total additions to PP&E	$	166,419	$	150,805	$	47,957

Total assets at December 31:
Chemical	$	842,725	$	394,479	$	294,886
Climate Control		159,960		139,526		160,515
Other		6,832		8,204		7,857
Corporate assets		73,580		34,403		38,751

Total assets	$	1,083,097	$	576,612	$	502,009

Net sales by business segment include net sales to unaffiliated customers as reported in the consolidated financial statements. Net sales classified as “Other” consist of sales of industrial machinery and related components. Intersegment net sales are not significant.

Gross profit by business segment represents net sales less cost of sales. Gross profit classified as “Other” relates to the sales of industrial machinery and related components.

Our chief operating decision makers use operating income by business segment for purposes of making decisions that include resource allocations and performance evaluations. Operating income by business segment represents gross profit by business segment less SG&A incurred by each business segment plus other income and other expense earned/incurred by each business segment before general corporate expenses. General corporate expenses consist of SG&A, other income and other expense that are not allocated to one of our business segments.

Identifiable assets by business segment are those assets used in the operations of each business. Corporate assets are those principally owned by LSB or by subsidiaries not involved in the three business segments.

All net sales and long-lived assets relate to domestic operations for the periods presented.

Net sales to unaffiliated customers are to U.S. customers except foreign export sales as follows:


Geographic Area	2013		2012		2011
	(In Thousands)
Canada	$	19,976	$	21,079	$	23,765
Other		14,178		11,091		12,450

	$	34,154	$	32,170	$	36,215

In general, foreign export sales are attributed based upon the location of the customer.

Major Customer

Net sales to one customer, Orica, of our Chemical Business segment represented approximately 6%, 9% and 11% of our total net sales for 2013, 2012 and 2011, respectively. See discussion concerning the supply agreement in Note 11 – Commitments and Contingencies.