17. 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. A reportable segment may include several business units that offer similar products and services. The reportable segments are managed separately from each other because they manufacture and distribute distinct products with different production processes.

We evaluate performance and allocate resources based on operating results. 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 the last three years, 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, unplanned downtime at the Cherokee Facility in December 2014, and numerous mechanical issues at the Pryor Facility, all resulting in lost production and causing an adverse effect on our sales and operating income for the periods presented. Also see footnotes (2) and (3) below and Note 20 – Property and Business Interruption Insurance Claims and Recoveries relating to business interruption and property insurance recoveries.

Other products relate to working interests in certain natural gas properties. In 2012 and 2013, a subsidiary within our Chemical Business acquired these working interests. 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, 2014, our Chemical Business employed 545 persons, with 166 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:

•

water source and geothermal 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, Oklahoma 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.


	2014			2013			2012
	(In Thousands)
Net sales:
Chemical (1):
Agricultural products	$	215,523		$	167,614		$	217,329
Industrial acids and other chemical products		160,104			141,936			162,498
Mining products		67,043			63,042			96,538
Other products		12,232			8,077			1,448

Total Chemical		454,902			380,669			477,813

Climate Control:
Water source and geothermal heat pumps		168,804			183,757			162,697
Hydronic fan coils		61,307			64,541			55,812
Other HVAC products		35,247			36,720			47,662

Total Climate Control		265,358			285,018			266,171
Other		12,250			13,600			15,047

	$	732,510		$	679,287		$	759,031

Gross profit:
Chemical (1) (2)	$	66,565		$	46,165		$	97,692
Climate Control		82,443			92,907			80,981
Other		4,347			4,484			5,063

	$	153,355		$	143,556		$	183,736

Operating income:
Chemical (1) (2) (3)	$	51,281		$	87,784		$	82,101
Climate Control		21,675			30,386			25,834
Other		1,771			1,699			2,091
General corporate expenses (4)		(21,365	)		(14,561	)		(14,371	)

		53,362			105,308			95,655
Interest expense, net (5)		21,599			13,986			4,237
Losses on extinguishment of debt		—			1,296			—
Non-operating expense (income), net:
Chemical		(249	)		(1	)		(1	)
Climate Control		—			(1	)		(1	)
Corporate and other business operations		(32	)		(98	)		(279	)
Provisions for income taxes		12,400			35,421			33,594
Equity in earnings of affiliate - Climate Control		(79	)		(436	)		(681	)

Income from continuing operations	$	19,723		$	55,141		$	58,786

(1)

As discussed above under “Chemical Business”, during the last three years, our Chemical Business encountered a number of significant issues at certain of our facilities resulting in lost production and adverse effects on operating results. However, some of these issues were covered by our business interruption and property insurance policies.

(2)	For 2014, 2013, and 2012, we recognized business interruption insurance recoveries, of which $22.9 million, $28.4 million, and $7.3 million, respectively, were classified as reductions to cost of sales.

(3)	For 2014 and 2013, we recognized property insurance recoveries, of which $5.1 million and $66.3 million, were classified as property insurance recoveries in excess of losses incurred (none for 2012).

(4)	General corporate expenses consist of the following:


	2014			2013			2012
	(In Thousands)
Selling, general and administrative:
Personnel costs	$	(8,434	)	$	(8,096	)	$	(8,110	)
Fees and expenses relating to certain activist shareholders’ proposals (A)	$	(4,163	)	$	—		$	—
Professional fees		(4,536	)		(4,813	)		(4,116	)
All other		(4,312	)		(2,208	)		(2,533	)

Total selling, general and adminsitrative		(21,445	)		(15,117	)		(14,759	)
Other income		97			584			388
Other expense		(17	)		(28	)		—

Total general corporate expenses	$	(21,365	)	$	(14,561	)	$	(14,371	)

(A)	During the first quarter of 2014, we incurred fees and expenses in evaluating and analyzing proposals received from certain activist shareholders and dealing, negotiating and settling with those shareholders in order to avoid a proxy contest in 2014.

(5)	For 2014, 2013 and 2012, interest expense is net of capitalized interest of $14.1 million, $4.0 million and $0.4 million, respectively.

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


	2014		2013		2012
	(In Thousands)
Depreciation, depletion and amortization of PP&E:
Chemical	$	30,364	$	23,497	$	16,355
Climate Control		4,946		4,707		4,250
Other		34		49		32
Corporate assets		320		57		44

Total depreciation, depletion and amortization of PP&E	$	35,664	$	28,310	$	20,681

Additions to PP&E:
Chemical	$	238,070	$	160,343	$	141,399
Climate Control		1,859		5,576		5,816
Other		27		65		889
Corporate		148		435		2,701

Total additions to PP&E	$	240,104	$	166,419	$	150,805

Total assets at December 31:
Chemical	$	929,745	$	842,725	$	394,479
Climate Control		133,183		159,960		139,526
Other		5,960		6,832		8,204
Corporate		68,117		73,580		34,403

Total assets	$	1,137,005	$	1,083,097	$	576,612

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	2014		2013		2012
			(In Thousands)
Canada	$	19,334	$	19,976	$	21,079
Other		12,642		14,178		11,091

	$	31,976	$	34,154	$	32,170

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