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Arabian American Development CompanyTrecora Resources (the “Company”) was incorporated in the State of Delaware in 1967. The Company’s principal business activity isactivities are the manufacturing of various specialty petrochemical products. The Company also owns a 35% interest inproducts and synthetic waxes and the provision of custom processing services. Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” are intended to mean consolidated Trecora Resources and its subsidiaries.
This document includes the following abbreviations:
| (1) | TREC – Trecora Resources |
| (2) | TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC |
| (3) | SHR – South Hampton Resources, Inc. – Petrochemical segment and parent of GSPL |
| (4) | GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the petrochemical segment |
| (5) | TC – Trecora Chemical, Inc. – Specialty wax segment |
| (6) | AMAK – Al Masane Al Kobra Mining Company – Mining equity investment – 33% ownership |
| (7) | PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine - 55% ownership |
| (8) | Acquisition – October 1, 2014, purchase of TC |
On October 1, 2014, TOCCO, a Texas corporation, acquired 100% of the Class A common stock of SSI Chusei, Inc. (“SSI”), a Texas corporation and leading manufacturer of specialty synthetic waxes and custom toll processing services in Pasadena, Texas. On November 15, 2014, SSI’s name was changed to TC.
The Company also owns a 33% interest in AMAK, a Saudi Arabian closed joint stock mining company, (“AMAK”) which is engaged in the commercial production of copper and zinc concentrateconcentrates and silver and gold doré. Finally, we have a 55% interest in Pioche Ely Valley Mines, Inc. (“PEVM”),PEVM, a Nevada mining corporation, which presently does not conduct any substantial business activity but owns undeveloped properties in the United States. Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” are intended to mean consolidated Arabian American Development Company and its subsidiaries. There have been no significant changes during 2013 in the method of conducting our business.
The Company operatesBusiness Segments
In October 2014 with the completion of the Acquisition, we began operating in onetwo business segment;segments; the manufacturing of various specialty petrochemical products.
United Statesproducts and the manufacturing of specialty synthetic waxes.
Our domestic activities are primarilyspecialty petrochemical products segment is conducted through SHR, a wholly owned subsidiary, Texas Oil and Chemical Co. II, Inc. (the “Petrochemical Company”), which owns all of the capital stock of South Hampton Resources, Inc. (“South Hampton”). South Hamptoncorporation. SHR owns and operates a specialty petrochemical facility near Silsbee, Texas which produces high purity petrochemical solventshydrocarbons and other petroleum based products including isopentane, normal pentane, isohexane and hexane which may behexane. These products are used in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, crude oil infrom the Canadian tar sands, and in the catalyst support industry. Our petrochemical products are typically transported to customers by rail car, tank truck, iso-container, and iso-container. South Hamptonby ship. SHR owns all of the capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”)GSPL, a Texas corporation, which owns and operates pipelines that connect the South HamptonSHR facility to a natural gas line, to South Hampton’sSHR’s truck and rail loading terminal and to a major petroleum products pipeline owned by an unaffiliated third party. SHR also provides custom processing services.
Our specialty synthetic wax segment is conducted through TC, a Texas corporation, located in Pasadena, Texas which produces specialty polyethylene and poly alpha olefin waxes and provides custom processing services. The specialty polyethylene waxes are used in markets from paints and inks to adhesives, coatings, and PVC lubricants. The highly specialized synthetic poly alpha olefin waxes are used in applications such as toner in printers and as additives for candles providing rigidity and retention of fragrances. These waxes are sold in solid form as pastilles or, for large adhesive companies, in bulk liquid form.
United States Specialty Petrochemical Operations
South Hampton’sSHR’s specialty petrochemical facility is approximately 30 miles north of Beaumont and 90 miles east of Houston. The facility consists of eight operating units which, while interconnected, make distinct products through differing processes: (i) a Penhex Unit; (ii) a Reformer Unit; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics
Hydrogenation Unit; (vi) a White Oil Fractionation Unit; (vii) a Hydrocarbon Processing Demonstration Unit and (viii) a P-Xylene Unit. All of these units are currently in operation.
The Penhex Unit currently has the permitted capacity to process approximately 6,70011,000 barrels per day of fresh feed with the ReformingReformer Unit, the Aromax® Unit, and the Cyclo-Pentane Unit further processing streams produced by the Penhex Unit. The Aromatics Hydrogenation Unit has a capacity of approximately 400 barrels per day, and the White Oils Fractionation Unit has a capacity of approximately 3,000 barrels per day. The Hydrocarbon Processing Demonstration Unit has a capacity of approximately 300 gallons per day. The P-Xylene Unit has a capacity of approximately 20,000 pounds per year. The facility generally consists of equipment commonly found in most petrochemical facilities such as fractionation towers and hydrogen treaters except the facility is adapted to produce specialized products that are high purity and very consistent with precise specifications that are utilized in the petrochemical industry as solvents, additives, blowing agents and cooling agents. We produce eight distinct product streams and market several combinations of blends as needed in various customer applications. We do not produce motor fuel products or any other commodity type products commonly sold directly to retail consumers or outlets.
During 2015 we constructed a new unit which is part of the Penhex Unit, D Train, which began production in the fourth quarter of 2015. The D Train expansion increased our capacity by approximately 6,000 barrels per day of fresh feed. Our present total capacity is 13,000 barrels per day of fresh feed; however, we are currently only permitted to process 11,000 barrels per day. Products from the Penhex Unit, Reformer Unit, Aromax® Unit, and Cyclo-pentane Unit are marketed directly to the customer by our marketing personnel. The Penhex Unit had a utilization rate during 20132016 of approximately 70%48% based upon 11,000 barrels per day of capacity. The Penhex Unit had a utilization rate during 2015 of approximately 84% based upon 7,000 barrels per day. The Penhex Unit utilization rate for 2014 was approximately 84% based upon 6,700 barrels per day and a utilization rate during 2012 of approximately 72% based upon 6,000 barrels per day. This compares to a rate of 64% for 2011. During 2013 unit capacity was determined to be 6,700 barrels per day and therefore, the change in basis was initiated. The Penhex Unit capacity was essentially doubled in 2008 and is now configured in twothree independent process units. The twothree unit configuration also improves reliability by reducing the amount of total down time due to mechanical and other factors. We are in the planning stages for construction of a new
unit, known as “D-train” to increase Penhex Unit capacity by approximately 4,000 barrels per day. D-train is tentatively scheduled to begin operation in mid to late 2015.
The Reformer and Aromax® Units are operated as needed to support the Penhex and Cyclo-pentane Units. Consequently, utilization rates of these units are driven by production from the Penhex Unit. Operating utilization rates are affected by product demand, raw material composition, mechanical integrity, and unforeseen natural occurrences, such as weather events. The nature of the petrochemical process demands periodic shut-downs for de-coking and other mechanical repairs.
The Aromatics Hydrogenation Unit, White Oils Fractionation Unit, Hydrocarbon Processing Demonstration Unit and P-Xylene Unit are operated as independent and completely segregated processes. These units are dedicated to the needs of three different toll processing customers. The customers supply and maintain title to the feedstock, we process the feedstock into products based upon customer specifications, and the customers market the products. Products may be sold directly from our storage tanks or transported to the customers’ location for storage and marketing. The units have a combined capacity of approximately 3,400 BPD.barrels per day. Together they realized a utilization rate of 42%26% for 2013, 37%2016, 27% for 20122015, and 59%36% for 2011. The reduced utilization rate for 2012 is a reflection of raw material issues experienced by one of the tolling customers.2014. The units are operated in accordance with customer needs, and the contracts call for take or pay minimums of production.
In support of the petrochemical operation, we own approximately 93100 storage tanks with total capacity approaching 233,000 barrels, and 230127 acres of land at the plant site, 5992 acres of which are developed. We also own a truck and railroad loading terminal consisting of storage tanks, four rail spurs, and truck and tank car loading facilities on approximately 5655 acres of which 1325 acres are developed.
We obtain our feedstock requirements from a sole supplier. The agreement is primarily a logistics convenience. The supplier buys or contracts for material and utilizes their tank and pipeline connections to transport into our pipeline. The supplier’s revenue above feed cost is primarily related to the cost and operation of the tank, pipelines, and equipment. A contract was signed on June 1, 2004, between South Hampton and the supplier for the purchase of 65,000 barrels per month of natural gasoline onin August 2015 with a secured basis for the period from June 1, 2004 through May 31, 2006, subsequently extended to May 31, 2007, and annually thereafterseven year term with thirty days written notice of terminationsubsequent one year renewals unless cancelled by either party.party with 180 days’ notice. In December 20062015 a pipeline connection to the agreementsupplier’s dock was modified so that all purchases are on open account under normal credit terms and amounts owed are classified as current. The supplier built a tankadded to receive feedstock from a major pipeline system and provides storage for our use. The arrangement is viewed as agive alternative means of solidifying a dependable, long term supply ofreceiving feedstock. Prior to this addition, all feedstock for us. Storage fees for this arrangement were offset by the cancellation of tank rental fees in place with another party. The tank was completed in July 2007 and began full operation in October 2007.came from Mont Belvieu, Texas.
As a result of various expansion programs and the toll processing contracts, essentially all of the standing equipment at South HamptonSHR is operational. We have various surplus equipment stored on-site which may be used in the future to assemble additional processing units as needs arise.
Gulf State
GSPL owns and operates three (3) 8-inch diameter pipelines and five (5) 4-inch diameter pipelines aggregating approximately 70 miles in length connecting South Hampton’sSHR’s facility to: (1) a natural gas line, (2) South Hampton’sSHR’s truck and rail loading terminal and (3) a major petroleum products pipeline system owned by an unaffiliated third party. All pipelines are operated within Texas Railroad Commission and DOT regulations for maintenance and integrity.
We sell our products to predominantly Fortune 500 companies for use in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, crude oil from the Canadian tar sands, and in the catalyst support industries.companies. Products are marketed via personal contact and through continued long term relationships. Sales personnel visit customer facilities regularly and also attend various petrochemical conferences throughout the world. We also have an internet presence.a website with information about our products and services. We have adopted a strategy of moving our larger volume customers toutilize either formula based or spot pricing to reduce the effect of feedstock cost volatility.depending upon a customer’s requirements. Under formula pricing the price charged to the customer is based on a formula which includes as a component the average cost of feedstock over the prior month. As a result, withWith this pricing mechanism, product prices move in conjunction with feedstock prices without the necessity of announced price changes. However, because the formulas use an average feedstock price from the prior month, the movement of prices will trail the movement of costs, and formula prices may or may not reflect our actual feedstock cost for the month during which the product is actually sold. In addition, while formula pricing can benefitreduce product margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing will follow feed costs down but will retain higher margins during the period by trailing the movement of costs by approximately 30 days. We believe that the use of formula pricing helps reduce volatilityDuring 2016 and increase predictability of product margins. However, we continue to investigate alternative product pricing methods. During 2013 and 2012,
2015, sales to two customersone customer exceeded 10% of our consolidated revenues. Specifically, in 20132016 sales to ExxonMobil and their affiliates represented 16.2%20.1% of consolidated revenues and sales to Flint Hills Resources represented 16.5%. During 2012revenues. In 2015 sales to ExxonMobil and their affiliates also represented 13.2%20.1% of consolidated revenues and sales to Flint Hills Resources represented 12.1%. In both cases theserevenues. These sales represented multiple products atsold to multiple facilities. We believe that we should be able to place volumes lost to one particular customer with another customer without significantly impacting our operation. In fact, beginning in 2014, volumes to Flint Hills Resources have been greatly reduced; however, we were able to place those volumes with another customer without a material impact on business.
United States Specialty Synthetic Wax Operations
TC is a leading manufacturer of specialty synthetic waxes and also provides custom processing services from its 27.5 acre plant located in the heart of the petrochemical industry in Pasadena, Texas. TC provides custom manufacturing, distillation, blending, forming and packaging of finished and intermediate products and wax products for coatings, hot melt adhesives and lubricants. Situated near the Houston Ship Channel, the facility allows for easy access to international shipping and direct loading to rail or truck. The location is within reach of major chemical pipelines and on-site access to a steam pipeline and dedicated hydrogen line create a platform for expansion of both wax production capacity and custom processing capabilities. We manufacture a variety of hard, high melting point, low to medium viscosity polyethylene wax products along with a wide range of other waxes and lubricants. These products are used in a variety of applications including performance additives for hot melt adhesives; penetration and melting point modifiers for paraffin and microcrystalline waxes; lubrication and processing aides for plastics, PVC, rubber; and dry stir-in additives for inks. In oxidized forms, applications also include use in textile emulsions.
TC also provides turnkey custom manufacturing services including quality assurance, transportation and process optimization. The plant has high vacuum distillation capability for the separation of temperature sensitive materials. We have a fully equipped laboratory and pilot plant facility and a highly trained, technically proficient team of engineers and chemists suited to handle the rapid deployment of new custom processes and development of new wax products. TC’s custom manufacturing services provide a range of specialized capabilities to chemical and industrial customer including synthesis, distillation, forming and propoxylation in addition to a number of other chemical processes.
United States Mineral Interests
Our only mineral interest in the United States is our 55% ownership interest in an inactive corporation, PEVM. PEVM’s properties include 48 patented and 5 unpatented claims totaling approximately 1,500 acres. All of the claims are located in Lincoln County, NV. The recent real estate devaluation nation-wide caused the Company to re-evaluate the holdings and a write down of approximately $496,000 was recorded at the end of 2008. No additional impairment was recorded in 2013, 2012, or 2011.
In late 2008 PEVM commenced dialogue with the Bureau of Land Management (“BLM”) to determine how best to remedy a potential contamination claim on neighboring property. PEVM retained an environmental consultant to assist with the resolution of this matter and as of December 31, 2013, we had expended approximately $150,000 to cover actual remediation costs as PEVM had no other source of funds to manage the situation The remediation work was completed in 2013 with the exception of tidying up some haul ramps and brush piles on BLM land and covering the tailings repository with clean soil. This is expected to be completed in the spring of 2014. While we did not believe we had any liability for the contamination, it is not our culture to leave a situation such as this to the local community or adjacent landowners. We have liens on several of the patented claims to secure the funds which were advanced over time.
At this time, neither we nor PEVM have plans to develop the mining assets near Pioche, NV. Periodically proposals are received from outside parties who are interested in developing or using certain assets. We do not anticipate making any significant domestic mining capital expenditures.
General. Our operations are subjectMatters pertaining to stringent and complex federal, state, local and foreign laws and regulations relating to release of hazardous substances or wastes into the environment or otherwise relatingare discussed in Part I, Item 1A. Risk Factors; Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and Notes 2 and 15 to protection of the environment. As with the industry generally, compliance with existing and anticipated environmental laws and regulations increases our overall costs of doing business, including costs of planning, constructing, and operating plants, pipelines, and other facilities. Included in our construction and operation costs are capital cost items necessary to maintain or upgrade equipment and facilities. Similar costs are likely upon changes in laws or regulations and upon any future acquisition of operating assets.Consolidated Financial Statements.
Any failure to comply with applicable environmental laws and regulations, including those relating to equipment failures and obtaining required governmental approvals, may result in the assessment of administrative, civil or criminal penalties, imposition of investigatory or remedial activities and, in less common circumstances, issuance of injunctions or construction bans or delays. We believe that we currently hold all material governmental approvals required to operate our major facilities. As part of the regular overall evaluation of our operations, we have implemented procedures to review and update governmental approvals as necessary. We believe that our operations and facilities are in substantial compliance with applicable environmental laws and regulations and that the cost of compliance with such laws and regulations currently in effect will not have a material adverse effect on our operating results or financial condition.
The clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. Moreover, risks of process upsets, accidental releases, or spills are associated with our possible future operations, and we cannot assure you that we will not incur significant costs and liabilities, including those relating to claims for damage to property and persons as a result of any such upsets, releases, or spills. In the event of future increases in environmental costs, we may be unable to pass on those cost increases to customers. A
discharge of hazardous substances or wastes into the environment could, to the extent losses related to the event are not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and to pay fines or penalties that may be assessed and the cost related to claims made by neighboring landowners and other third parties for personal injury or damage to natural resources or property. We will attempt to anticipate future regulatory requirements that might be imposed and plan accordingly to comply with changing environmental laws and regulations and to minimize costs with respect to more stringent future laws and regulations of more rigorous enforcement of existing laws and regulations.
Hazardous Substance and Waste. 3To a large extent, the environmental laws and regulations affecting our operations relate to the release of hazardous substances or solid wastes into soils, groundwater and surface water, and include measures to prevent and control pollution. These laws and regulations generally regulate the generation, storage, treatment, transportation and disposal of solid and hazardous wastes, and may require investigatory and corrective actions at facilities where such waste may have been released or disposed. For instance, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, and comparable state laws, impose liability without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to a release of “hazardous substance” into the environment. Potentially liable persons include the owner or operator of the site where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the potentially responsible classes of persons the costs they incur. We have not received any notification that we may be potentially responsible for cleanup costs under CERCLA or any analogous federal or state laws, except as expressly provided herein.
We also generate, and may in the future generate, both hazardous and nonhazardous solid wastes that are subject to requirements of the federal Resource Conservation and Recovery Act, or RCRA, and/or comparable state statutes. From time to time, the Environmental Protection Agency, or EPA, and state regulatory agencies have considered the adoption of stricter disposal standards for nonhazardous wastes, including crude oil and natural gas wastes. Moreover, it is possible that some wastes generated by us that are currently classified as nonhazardous may in the future be designated as “hazardous wastes,” resulting in the wastes being subject to more rigorous and costly management and disposal requirements.
Air Emissions. Our current and future operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including our facilities, and impose various monitoring and reporting requirements. Pursuant to these laws and regulations, we may be required to obtain environmental agency pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in an increase in existing air emissions, obtain and comply with the terms of air permits, which include various emission and operational limitations, or use specific emission control technologies to limit emissions. We will likely be required to incur certain capital expenditures in the future for air pollution control equipment in connection with maintaining or obtaining governmental approvals addressing air-emission related issues. Failure to comply with applicable air statutes or regulations may lead to the assessment of administrative, civil or criminal penalties, and may result in the limitation or cessation of construction or operation of certain air emission sources. We believe such requirements will not have a material adverse effect on our financial condition or operating results, and the requirements are not expected to be more burdensome to us than any similarly situated company.
Climate Change. In response to concerns suggesting that emissions of certain gases, commonly referred to as “greenhouse gases” (including carbon dioxide and methane), may be contributing to warming of the Earth’s atmosphere, the U.S. Congress is actively considering legislation to reduce such emissions. In addition, at least one-third of the states, either individually or through multi-state regional initiatives, have already taken legal measures intended to reduce greenhouse gas emissions, primarily through the planned development of greenhouse gas emission inventories and/or greenhouse gas cap and trade programs. In addition, EPA is taking steps that would result in the regulation of greenhouse gases as pollutants under the federal Clean Air Act. Furthermore, in September 2009 the EPA finalized regulations that require monitoring and reporting of greenhouse gas emissions on an annual basis including extensive greenhouse gas monitoring and reporting requirements beginning in 2010. Although the greenhouse gas reporting rule does not control greenhouse gas emission levels from any facilities, it will still cause us to incur monitoring and reporting costs for emissions that are subject to the rule. Some of our
facilities include source categories that are subject to the greenhouse gas reporting requirements included in the final rule. In December 2009 the EPA also issued findings that greenhouse gases in the atmosphere endanger public health and welfare and emissions from mobile sources cause or contribute to greenhouse gases in the atmosphere. The endangerment findings will not immediately affect our operations, but standards eventually promulgated pursuant to these findings could affect our operations and ability to obtain air permits for new or modified facilities. Legislation and regulations relating to control or reporting of greenhouse gas emissions are also in various stages of discussions or implementation in about one-third of the states. Lawsuits have been filed seeking to force the federal government to regulate greenhouse gases emissions under the Clean Air Act and to require individual companies to reduce greenhouse gas emissions from their operations. These and other lawsuits may result in decisions by state and federal courts and agencies that could impact our operations and ability to obtain certifications and permits to construct future projects.
Passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict emissions of greenhouse gases in areas in which we conduct business could adversely affect the demand for the products we store, transport, and process, and depending on the particular program adopted, could increase the costs of our operations including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our greenhouse gas emissions and/or administer and manage a greenhouse gas emissions program. We may be unable to recover any such lost revenues or increase costs in the rates we charge customers, and any such recovery may depend on events beyond our control. Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of operations and prospects.
Clean Water Act. The Federal Water Pollution Control Act, also known as the Clean Water Act, and comparable state laws impose restrictions and strict controls regarding the discharge of pollutants, including natural gas liquid related wastes, into state waters or waters of the United States. Regulations promulgated pursuant to these laws require that entities that discharge into federal and state waters obtain National Pollutant Discharge Elimination System, or NPDES, and/or state permits authorizing these discharges. The Clean Water Act and analogous state laws assess administrative, civil and criminal penalties for discharges of unauthorized pollutants into the water and impose substantial liability for the costs of removing spills from such waters. In addition, the Clean Water Act and analogous state laws require that individual permits or coverage under general permits be obtained by covered facilities for discharges of storm water runoff. We believe that we are in substantial compliance with Clean Water Act permitting requirements as well as the conditions imposed there under, and that continued compliance with such existing permit conditions will not have a material effect on our operations.
TCEQ.In 1993 during remediation of a small spill area, the Texas Commission on Environmental Quality (TCEQ) required South HamptonSHR to drill a well to check for groundwater contamination under the spill area. Two pools of hydrocarbons were discovered to be floating on the groundwater at a depth of approximately 25 feet. One pool is under the site of a former gas processing plant owned and operated by Sinclair, Arco and others before its purchase by South HamptonSHR in 1981. Analysis of the material indicates it entered the ground prior to South Hampton’sSHR’s acquisition of the property. The other pool is under the original South HamptonSHR facility and analysis indicates the material was deposited decades ago. Tests conducted have determined that the hydrocarbons are contained on the property and not migrating in any direction. The recovery process was initiated in June 1998 and approximately $53,000 was spent setting up the system. The recovery is proceeding as planned and is expected to continue for many years until the pools are reduced to acceptable levels. Expenses of recovery and periodic migration testing are being recorded as normal operating expenses. Expenses for future recovery are expected to stabilize and be less per annum than the initial set up cost, although there is no assurance of this effect. The light hydrocarbon recovered from the former gas plant site is compatible with our normal Penhex feedstock and is accumulated and transferred into the Penhex feedstock tank. The material recovered from under the original South HamptonSHR site is accumulated and sold as a by-product. Approximately 7170, 70, and 75 barrels were recovered during 20132016, 2015 and 70 barrels during 2012.2014, respectively. The recovered material had an economic value of approximately $7,000$3,200, $3,500, and $6,700 during 20132016, 2015, and $7,000 during 2012.2014, respectively. Consulting engineers estimate that as much as 20,000 barrels of recoverable material may be available to us for use in our process or for sale. At current market values this material, if fully recovered would be worth approximately $1.7$1.0 million. The final volume present and the ability to recover it are both highly speculative issues due to the area over which it is spread and the fragmented nature of the pockets of hydrocarbon. We have drilled additional wells periodically to further delineate the boundaries of the pools and to ensure that migration has not taken place. These tests confirmed that no migration of the hydrocarbon pools has occurred. The TCEQ has deemed the current action plan acceptable and reviews the plan on a semi-annual basis.
The Clean Air Act Amendments of 1990. The Clean Air Act Amendments of 1990 had a positive effect on our business as manufacturers search for ways to use more environmentally acceptable materials in their processes. There is a current trend among manufacturers toward the use of lighter and more recoverable C5 hydrocarbons (pentanes) which comprise a large part of our product line. We believe our ability to manufacture high quality solvents in the C5 hydrocarbon market will provide a basis for growth over the coming years. Also, as the use of C6 solvents is phased out in parts of the industry, several manufacturers of such solvents have opted to no longer market those products. As the number of producers has consolidated, we have increased our market share at higher sales prices from customers who still require C6 solvents in their business.
The number of our regular, U.S. based employees was approximately 166, 168310, 296, and 160 at271 for the years ended 2013, 2012December 31, 2016, 2015, and 2011,2014, respectively. Of these employees, none are covered by collective bargaining agreements. Regular employees are defined as active executive, management, professional, technical and wage employees who work full time or part time for the Company and are covered by our benefit plans and programs. Our workforce has increased primarily due to expansions at both facilities.
Mr. Ghazi Sultan, a director of the Company, is the Company’s representative in Saudi Arabia.Competition
The petrochemical, specialty wax, and mining industries are highly competitive. There is competition within the industries and also with other industries in supplying the chemical and mineral needs of both industrial and individual consumers. We compete with other firms in the sale or purchase of needed goods and services and employ all methods of competition which are lawful and appropriate for such purposes. See further discussion under “Intense competition” in Item 1a.
As of December 31, 2013,2016, we owned a 35%33% interest in AMAK. On
Location, Access and Transportation.
The facility site is located in Najran province in southwestern Saudi Arabia. Najran, the capital of the province of the same name, is approximately 700 km southeast of Jeddah. The site is located 145 km northwest of Najran, midway between the outpost of Rihab and the district town of Sufah. A modern, paved highway extends from Najran through the town of Habuna passing by the project site and on to Sufah. Another modern, paved highway extends west from the town of Tirima about 30 km to the Asir provincial line, becomes a four-lane divided highway, and intersects with a highway leading to Khamis Mushait and Abha. A joining highway then extends down the western slope of the Sarawat mountains to the coastal highway which follows the coast south to the Port of Jazan. The latter is the route AMAK’s trucks carry concentrate to the port for export.
Conditions to Retain Title.
The Saudi government granted the Company a mining lease for the Al Masane area comprising approximately 44 square kilometers or approximately 10,870 acres on May 22, 1993 (the “Lease”) under Royal Decree No. M/17. The Lease was
assigned to AMAK in December 9, 2012,2008. The initial term of the Lease is thirty years beginning May 22, 1993, with AMAK shareholders authorizedhaving the issuanceoption to renew or extend the term of the Lease for additional sharesperiods not to exceed twenty years. Under the Lease, AMAK is obligated to pay advance surface rental in anthe amount equalof 10,000 Saudi riyals (approximately $2,667 at the current exchange rate) per square kilometer per year (approximately $117,300 annually) during the term of the Lease. In addition, AMAK must pay income tax in accordance with the laws of Saudi Arabia and pay all infrastructure costs. The Lease gives the Saudi Arabian government priority to purchase any gold production from the project, as well as, the right to purchase up to 10% of the annual production of other minerals on the same terms and conditions then outstanding shares, equalingavailable to other similar buyers and at current prices then prevailing in the free market. Furthermore, the Lease contains provisions requiring that preferences be given to Saudi Arabian suppliers and contractors, that AMAK employ Saudi Arabian citizens and provide training to Saudi Arabian personnel. In November 2015 AMAK received notification of final approval for additional licenses and leases. The approval includes an additional 5 million shares, in151 square kilometers (km2) of territory contiguous to AMAK’s current 44 km2 mine. The new territory comprises the Guyan and Qatan exploration licenses covering 151 km2, and within the Guyan exploration license, a 10 km2 mining lease, which has potential for significant gold recovery. Under the new leases, AMAK is required to raise funds for working capital requirements and retirementpay surface rental of construction debt. On January 11, 2013, the Company entered into an agreement with AMAK to purchase an additional 937,500 shares of AMAK at 30 Saudi Riyals (USD $8.00) per share,SR 110,000 (approximately $29,333) for a totalperiod of USD $7.5 million. As20 years expiring in 2035.
Rock Formations and Mineralization.
Three mineralized zones, the Saadah, Al Houra and Moyeath, have been outlined by diamond drilling. The Saadah and Al Houra zones occur in a resultvolcanic sequence that consists of two mafic-felsic sequences with interbedded exhalative cherts and metasedimentary rocks. The Moyeath zone was discovered after the completion of underground development in 1980. It is located along an angular unconformity with underlying felsic volcanics and shales. The principle sulphide minerals in all of the zones are pyrite, sphalerite, and chalcopyrite. The precious metals occur chiefly in tetrahedrite and as tellurides and electrum.
Description of Current Property Condition.
The AMAK facility includes an underground mine, ore-treatment plant and related infrastructures. The ore-treatment plant is comprised of primary crushing, ore storage, SAG milling and pebble crushing, secondary ball milling, pre-flotation, copper and zinc flotation, concentrate thickening, tailings filtration, cyanide leaching, reagent handling, tailings dam and utilities. Related infrastructure includes a 300 man capacity camp for single status accommodation for expatriates and Saudi Arabian employees, an on-site medical facility, a service building for 300 employees, on-site diesel generation of 10 megawatts, potable water supply primarily from an underground aquifer, sewage treatment plant and an assay laboratory. The facilities at the Port of Jazan are comprised of unloading facilities, concentrate storage and reclamation and ship loading facilities. The above-ground ore processing facility became fully operational during the second half of 2012. Late in the fourth quarter of 2015 AMAK temporarily closed the operation to preserve the assets in the ground while initiating steps to improve efficiencies and optimize operations. AMAK took advantage of this purchase, our ownership percentageoutage to improve the gold and silver recovery process through the installation of SART modifications. This change allows improved precious metal recovery while also lowering chemical use, thereby reducing operating costs once processing resumes. AMAK also upgraded and refurbished other parts of the facility during the outage; therefore it remains in AMAK decreased from 37%relatively good condition. The plant resumed operation in the fourth quarter of 2016 and is scheduled to approximately 35% whenbe at full operating rates during the remaining authorized shares were subscribed to and issued in May 2013.second quarter of 2017.
AMAK commenced commercial operation in July 2012 and by the end of that year had shipped approximately 20,00016,000, 51,000, and 55,000 metric tons of copper and zinc concentrate to outside smelters during 2016, 2015, and 2014, respectively. In addition, in India, Korea2014 AMAK initiated operation of its precious metal recovery circuit at the mill and China. During 2013 AMAK shipped approximately 72,000 tonsproduced 4.1 kilograms of coppergold and zinc concentrate. AMAK owns115.6 kilograms of silver. In 2015, 46.2 kilograms of gold and 833.6 kilograms of silver were produced. Since the Al Masane mine, processing plantfacility was idle until December 2016, no gold or silver was produced in 2016.
Saudi Industrial Development Fund (“SIDF”) Loan and ancillary facilities located in Najran province, southwestern Saudi Arabia approximately 75 km northwest of the city of Najran.Guarantee
On October 24, 2010, we executed a limited guarantee in favor of the Saudi Industrial Development Fund (“SIDF”) guarantyingSIDF guaranteeing up to 41% of the SIDF loan to AMAK in the principal amount of 330,000,000 Saudi Riyals (US$88,000,000) (the “Loan”). As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate guarantees totaling 162.55% of the overall Loan amount. As ownership percentages have changed over time, the loan guarantee allocation has not changed. The other AMAK shareholders provided personal guarantees. We were the only AMAK shareholder providing a corporate guarantee. The Loanloan was required in order for AMAK to fund construction of the underground and above-ground portions of its mining project in southwest Saudi Arabia and to provide working capital for
commencement of operations. The SIDF reviewed the current AMAK strategy relating to the shutdown, modifications, and improvements and agreed that it was appropriate.
Accounting Treatment of Investment in AMAK.
During 2013 our participation inWe have significant influence over the operating and financial and operating decisionspolicies of AMAK has remained significant.and therefore, account for it using the equity method. One of our officers and directors is chairman of the Nomination, Reward and Compensation Committee of the Board of Directors and is an ex-officio member of the Executive Committee of the Board of Directors of AMAK. Another oneOne of our directors and officers is chairmanChair of the Audit Committee of the Board of Directors of AMAK. We also spearheadedhave two directors on the processCommercial Committee of locating, interviewingAMAK. We recently hired a director with extensive mining experience to serve as a third AMAK director representing TREC, and hiring ahe serves on the investment committee. A new chief executive officer for AMAK. The new chief executive officer is expected to beginCEO with significant mining experience has recently been hired by AMAK with full support of TREC. He began work at the site in March 2014. During 2013 AMAK’s chief operating officer announced his intention to retire for personal reasons effective March 2014.
During the quarter ended December 31, 2012, we reintroduced the resolution at a meeting of the AMAK Board of Directors that would require AMAK to produce annual and quarterly financial statements prepared in accordance with U. S. GAAP or IFRS. The resolution was approved on October 6, 2012. Subsequently, permission was granted to us and our representatives to have access to AMAK’s books and records to allow auditing of AMAK financial statements in accordance with the auditing standards of the PCAOB.
As a result of these developments we concluded that we have significant influence over the operating and financial policies of AMAK and accordingly we account for our investment in AMAK using the equity method.2017. See Note 811 to the Notes to the Consolidated Financial Statements.
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse effect onindicate that the fair valuecarrying amount of the investment.investment might not be recoverable. We consider recoverable ore reserves, mineral prices, operational costs, and the amount and timing of the cash flows to be generated by the production of those reserves, as well as recent equity transactions within AMAK.
We will provide paper copies of this Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports, all as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge upon written or oral request to Arabian American Development Company,Trecora Resources, P. O. Box 1636, Silsbee, TX 77656, (409) 385-8300. These reports are also available free of charge on our website, www.arabianamericandev.comwww.trecora.com, as soon as reasonably practicable after they are filed electronically with the SEC. South HamptonSHR also has a website at www.southhamptonr.com, TC has a website at TrecChem.com, and AMAK has a website at www.amak.com.sa.www.amak.com.sa. These websites and the information contained on or connected to them are not incorporated by reference herein to the SEC filings.
Our financial and operating results are subject to a variety of risks inherent in the global petrochemical, specialty wax and mining businesses (due to our investment in AMAK). Many of these risk factors are not within our control and could adversely affect our business, our financial and operating results or our financial condition. We discuss some of these risks in more detail below in no particular order of priority.
Dependence on a limited number of customers could adversely impact profitability
During 20132016 sales to two customers eachone customer exceeded 10 percent of the Company’sSHR’s revenues. See the information regarding dependence on a limited number of customers set forth in Part I, Item I Business under the caption “United States Specialty Petrochemical Operation”. The total loss of a large volume customer could adversely affect our ability to market products on a competitive basis and generate a profit.
Dependence on a limited number of products could adversely affect profitability
We produce high purity petrochemical solvents and other petroleum based products including isopentane, normal pentane, isohexane and hexane. Our dependence on a relatively limited number of products could adversely affect profitability if demand for one or more of the products decreases. One goal contained in our long-term strategic plan is to increase our product mix through internal development and/or outside acquisition.
Climate change and greenhouse gas restrictions
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy. These requirements could make our products more expensive, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward relatively lower-carbon sources such as natural gas. Current and pending greenhouse gas regulations may also increase our compliance costs, such as for monitoring or sequestering emissions.
Varying economic conditions could adversely impact demand for products and metals
The demand for petrochemicalsour products and metals correlates closely with general economic growth rates. The occurrence of recessions or other periods of low or negative growth will typically have a direct adverse impact on our results. Other factors that affect general economic conditions in the world or in a major region, such as changes in population growth rates or periods of civil unrest, also impact the demand for petrochemicalsour products and metals. Economic conditions that impair the functioning of financial markets and institutions also pose risks to us, including risks to the safety of our financial assets and to the ability of our partners and customers to fulfill their commitments to us. In addition, the revenue and profitability of our operations have historically varied, which makes future financial results less predictable. Our revenue, gross margin and profit vary among our products, customer groups and geographic markets; and therefore, will likely be different in future periods than currently. Overall gross margins and profitability in any given period are dependent partially on the product, customer and geographic mix reflected in that period’s net revenue. In addition, newer geographic markets may be relatively less profitable due to investments associated with entering those markets and local pricing pressures. Market trends, competitive pressures, increased raw material or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of certain segments in a given period which may necessitate adjustments to our operations.
Environmental regulation
The petrochemical industry isOur industries are subject to extensive environmental regulation pursuant to a variety of federal and state regulations. Such environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with storage, transportation, treatment and disposal of hazardous substances and waste. Legislation also requires us to operate and maintain our facilities to the satisfaction of applicable regulatory authorities. Costs to comply with these regulations are significant to our business. Failure to comply with these laws or failure to obtain permits may expose us to fines, penalties or interruptions in operations that could be material to our results of operations. In addition, some of the finished goods our customers produce, such as expandable polystyrene (EPS), are subject to increasing scrutiny and regulation, which could lead to a reduction in demand for our products.
Safety, business controls, environmental and cyber risk management
Our results depend upon management’s ability to minimize the inherent risks of petrochemicalour operations, to control effectively our business activities and to minimize the potential for human error. We apply rigorous management systems and continuous focus to workplace safety and to avoid spills or other adverse environmental events. Substantial liabilities and other adverse impacts could result if our systems and controls do not function as intended. Business risks also
include the risk of cyber security breaches. If our systems for protecting against cyber security risks prove to be insufficient, we could be adversely affected by having our business systems compromised, our proprietary information altered, lost or stolen, or our business operations disrupted.
The implementation of a new enterprise resource planning system could cause a financial statement error not to be detected
We are in the process of implementing a new enterprise resource planning (“ERP”) system to replace our current system. This is a complex process, and the new system will result in changes to our internal controls over financial reporting, including disclosure controls and procedures. The possibility exists that the migration to the new ERP system could adversely affect the effectiveness of our internal controls over financial reporting.
Regulatory and litigation
Even in countries with well-developed legal systems where we do business, we remain exposed to changes in law that could adversely affect our results, such as increases in taxes, price controls, changes in environmental regulations or other laws that increase our cost of compliance, and government actions to cancel contracts or renegotiate items unilaterally. We may also be adversely affected by the outcome of litigation or other legal proceedings, especially in countries such as the United States in which very large and unpredictable punitive damage awards may occur. AMAK’s mining lease for the Al Masane area in Saudi Arabia isand exploration leases are subject to the risk of termination if AMAK does not comply with its contractual obligations. Further, our investment in AMAK is subject to the risk of expropriation or nationalization. If a dispute arises, we may have to submit to the jurisdiction of a foreign court or panel or may have to enforce the judgment of a foreign court or panel in that foreign jurisdiction. Because of our substantial international investment, our business is affected by changes in foreign laws and regulations (or interpretation of existing laws and regulations) affecting both the mining and petrochemicalour industries, and foreign taxation. We will be directly affected by the adoption of rules and regulations (and the interpretations of such rules and regulations) regarding the exploration and development of mineral properties for economic, environmental and other policy reasons. We may be required to make significant capital expenditures to comply with non-U.S. governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly to our operating costs or may significantly limit our business activities. Additionally, our ability to compete in the international market may be adversely affected by non-U.S. governmental regulations favoring or requiring the awarding of leases, concessions and other contracts or exploration licenses to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
We are not currently aware of any specific situations of this nature, but there are always opportunities for this type of difficulty to arise in the international business environment.
Loss of key personnel and management effectiveness
In order to be successful, we must attract, retain and motivate executives and other key employees including those in managerial, technical, sales, and marketing positions. We must also keep employees focused on our strategies and goals. The failure to hire, or loss of, key employees could have a significant adverse impact on operations. An important component of our competitive performance is our ability to operate efficiently including our ability to manage expenses and minimize the production of low margin products on an on-going basis. This requires continuous management focus including technological improvements, cost control and productivity enhancements. The extent to which we manage these factors will impact our performance relative to competition.
Risk associated with extraordinary transactions
As part of our business strategy, we sometimes engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing transactions (“extraordinary transactions”) and enter into agreements relating to such extraordinary transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates for and successfully complete extraordinary transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks of extraordinary transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and complete successfully extraordinary transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue,
gross margin and profitability. Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:
Combining product offerings and entering into new markets in which we are not experienced;
Convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers (which could result in our incurring additional obligations in order to address customer uncertainty), and coordinating sales, marketing and distribution efforts;
Minimizing the diversion of management attention from ongoing business concerns;
Persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, engaging with employee works councils representing an acquired company’s non-U.S. employees, integrating employees into the Company, correctly estimating employee benefit costs and implementing restructuring programs;
Coordinating and combining administrative, manufacturing, and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures;
Achieving savings from supply chain integration; and
Managing integration issues shortly after or pending the completion of other independent transactions.
We periodically evaluate and enter into significant extraordinary transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any extraordinary transaction, and the timeframe for achieving benefits of an extraordinary transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for extraordinary transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate our costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable. Managing extraordinary transactions requires varying levels of management resources, which may divert our attention from other
business operations. These extraordinary transactions also have resulted and in the future may result in significant costs and expenses and charges to earnings. Moreover, we have incurred and will incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with extraordinary transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with an extraordinary transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating dilution for existing stockholders, or borrow, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing an extraordinary transaction and the risk that an announced extraordinary transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations in a given quarter.
Guaranteeing performance by others including third parties and others
From time to time, we may be required or determine it is advisable to guarantee performance of loan agreements by others in which we maintain a financial interest. In such instances, if the primary obligor is unable to perform its obligations, we might be forced to perform the primary obligor’s obligations which could negatively impact our financial interests.
Economic and political instability; terrorist acts; war and other political unrest
The U.S. military actionconflict and hostilities in Afghanistan,Yemen could disrupt or interfere with the terrorist attacks that took placeoperations of AMAK whose corporate offices and mining assets are located in the United States on September 11, 2001,Najran province of Saudi Arabia. In addition, the potential for additional future terrorist
acts and other recent events, including ISIS terrorist related activities and civil unrest in the Middle East, the on-going Iranian nuclear confrontation, as well as the European debt crisis, have caused uncertainty in the world’s financial markets and have significantly increased global political, economic and social instability, including in Saudi Arabia, a country in which we have a substantial investment. One significant political risk in Saudi Arabia concerns the issue of succession of the Al-Saud royal family. To date, transition to the next generation of the Al-Saud royal family has occurred in an orderly manner. However, there is a risk this will not continue. It is possible that further acts of terrorism may be directed against the United States domestically or abroad, and such acts of terrorism could be directed against our investment in those locations. Such economic and political uncertainties may materially and adversely affect our business, financial condition or results of operations in ways that cannot be predicted at this time. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions. We are predominantly uninsured for losses and interruptions caused by terrorist acts, conflicts and wars. Our future revenue, gross margin, expenses and financial condition also could suffer due to a variety of international factors, including:
• Ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts;
• Longer accounts receivable cycles and financial instability among customers;
• Trade regulations and procedures and actions affecting production, pricing and marketing of products;
• Local labor conditions and regulations;
• Geographically dispersed workforce;
• Changes in the regulatory or legal environment;
• Differing technology standards or customer requirements;
• Import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could affect our ability to obtain favorable terms for labor and raw materials or lead to penalties or restrictions;
• Difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; and
• Fluctuations in freight costs and disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments.
Business disruption
Business disruptions could harm our future revenue and financial condition and increase our costs and expenses. Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for some of which we may be self-insured. The occurrence of any of these business disruptions could harm our revenue and financial condition and increase our costs and expenses.
Dependence on AMAK management
We rely upon AMAK’s management and Board to employ various respected engineering and financial advisors to assist in the development and evaluation of the mining projects in Saudi Arabia. During 2013 AMAK utilized the services of Uhuru International Consulting Ltd. for guidance regarding plant operations and Ocean Partners for assistance regarding marketing of the copper and zinc concentrate. Additionally, AMAK hired two very experienced persons in 2011 to serve as Chief Operating Officer and Chief Financial Officer. A very experienced Chief Executive Officer is expected to join AMAK in March 2014. Notwithstanding the utilization of theseany outside consultants, or hiring of experienced personnel, our risk will continue to and will ultimately depend upon the AMAK’s ability to use consultants and experienced personnel to manage the operation in Saudi Arabia.
Inability to control AMAK activities
Although we believe that we have significant influence over the operating and financial policies of AMAK, we do not control AMAK’s activities. The extent to which we are able to influence specific operating and financial decisions depends on our ability to persuade other AMAK board members and management regarding these policies. Our ability
to persuade other AMAK board membersthem may be adversely affected by cultural differences, differing accounting and management practices, differing governmental laws and regulations, and the fact that the AMAK mining project is halfway around the world from the Company’sour main base of operations in the United States.
Inability to recoup investment in AMAK
We will only recover our investment in AMAK through the receipt of dividends from AMAK or the sale of part or all of our interest in AMAK. There is a risk that we will be unable to recover our investment in AMAK if AMAK is not profitable, or if AMAK’s Board of Directors chooses not to declare dividends even if AMAK is profitable. With respect to the sale of part or all of our interest in AMAK, under Saudi Arabian law, AMAK must sell a portion of its equity to the public once AMAK has been profitable for two years. While the proceeds of such a sale might allow us to recover our investment in AMAK, there is no assurance that AMAK will achieve the profitability required for such a public sale, or that the market conditions for any such public sale will be favorable enough to allow us to recover our investment.
AMAK’s inability to obtain sufficient fundingprovide timely financial information
In the event that AMAK is unable to continueprovide timely, accurate financial information to borrow fundsus, our ability to file reports with the Securities and Exchange Commission within required deadlines could be affected and our standing on the New York Stock Exchange and in an amount sufficient to fund operations, AMAK may be forced to take other less desirable methods to raise necessary capital such as selling additional equity in AMAK at a possible discount, operationsthe investment community could cease and the newly constructed assets could sit unused and deteriorate over time, or worst case the AMAK shareholders could lose their investment or be forced to sell for a significant loss.suffer.
Cancellation of the current mining leaseleases held by AMAK
In the event that the Saudi Ministry of Petroleum and Minerals cancels the current lease,leases, AMAK shareholders including us could lose their investment or be forced to sell for a loss.
AMAK could suffer sustained operational difficulties
Operating difficulties are many and various, ranging from unexpected geological variations that could result in significant ground or containment failure to breakdown of key capital equipment. Reliable roads, rail networks, ports, power generation and transmission, and water supplies are required to access and conduct AMAK’s operations. AMAK transports all of its products first by truck and then by sea. Limitations or interruptions in transport infrastructure could impede its ability to deliver products. TheAlthough going forward, operations contract for the mill terminateswill be owner-managed, availability of sufficiently skilled operators, engineers, geologists and maintenance technicians in November 2014. There is a risk that it might notSaudi Arabia can from time to time be renewed.severely limited.
AMAK may have fewer mineral reserves than its estimates indicate
AMAK’s reserves estimations may change substantially if new information subsequently becomes available. Fluctuations in the price of commodities, variation in production costs or different recovery rates may ultimately result in AMAK’s estimated reserves being revised. If such a revision were to indicate a substantial reduction in proven or probable reserves at one or more of AMAK’s projects, it could negatively affect our investment in AMAK.
AMAK may experience environmental issues thatCost pressures could negatively impact its operationsAMAK’s operating margins and expansion plans
The mining industry is subjectCost pressures may continue to extensive environmental regulation. Such environmental legislation imposes, among other things, restrictions, liabilities and obligationsoccur across the resources industry. As the prices for AMAK’s products are determined by the global commodity markets in connection with storage, transportation, treatment and disposal of hazardous substances and waste. Legislation also requireswhich it operates, AMAK does not generally have the ability to operate and maintain their facilities to the satisfaction of applicable regulatory authorities. Costs to comply withoffset these regulations may be significant to AMAK’s business. Failure to comply with these lawscost pressures through corresponding price increases, which can adversely affect its operating margins or failure to obtain permits may expose AMAK to fines, penalties or interruptionsrequire changes in operations, that could materially affect our investment in AMAK.including, but not limited to, temporary planned shutdowns. Notwithstanding AMAK’s efforts to reduce costs and a number of key cost inputs being commodity price-linked, the inability to reduce costs and a timing lag may adversely impact AMAK’s operating margins for an extended period.
Excess Productsproducts
As noted previously, an important component of our competitive performance is our ability to minimize the production of low margin products on an on-going basis. Although the hydrocarbon constituents comprising the petrochemical feedstock we use may vary somewhat over time, they tend to fall into relatively narrow percentage bands as compared to overall feedstock composition. By nature of the fractionation process that we utilize, if we make one product, we make them all; therefore, when we receive a significant order for a particular finished product, additional products may be
manufactured necessitating sales into secondary, lower margin markets. We continue to investigate options to maintain or improve margins. We are in the process of constructing an advanced reformer unit with a capacity of 4,000 barrels per day which will allow us to upgrade the value of our byproducts in order to maximize margins. The unit is expected to start up in the fourth quarter of 2017.
An impairment of goodwill could negatively impact our financial results
At least annually, we assess goodwill for impairment. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. We may also elect to skip the qualitative testing and proceed directly to quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value with a charge against earnings. Since we utilize a discounted cash flow methodology to calculate the fair value of our operating units, continued weak demand for a specific product line or business could result in an impairment. Accordingly, any determination requiring the write-off of a significant portion of goodwill could negatively impact our results of operations.
Item 1B. Unresolved Staff Comments.
None
United States Specialty Petrochemical Facility
South HamptonSHR owns and operates a specialty petrochemical facility near Silsbee, Texas which is approximately 30 miles north of Beaumont, Texas, and 90 miles east of Houston. The facility consists of eight operating units which, while interconnected, make distinct products through differing processes: (i) a Penhex Unit; (ii) a Reformer; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics Hydrogenation Unit; (vi) a White Oil Fractionation Unit; (vii) a Hydrocarbon Processing Demonstration Unit, and (viii) a P-Xylene Unit. All of these units are currently in operation.
Gulf StateGSPL owns and operates three (3) 8-inch diameter pipelines and five (5) 4-inch diameter pipelines aggregating approximately 70 miles in length connecting South Hampton’sSHR’s facility to: (1) a natural gas line, (2) South Hampton’sSHR’s truck and rail loading terminal and (3) a major petroleum products pipeline system owned by an unaffiliated third party. All pipelines are operated within Texas Railroad Commission and DOT regulations for maintenance and integrity.
12United States Specialty Polyethylene Wax Facility
TableTC owns and operates a specialty synthetic wax facility from its 27.5 acre plant site located in Pasadena, Texas. After the recent acquisition of Contentsthe adjacent BASF facility the plant now contains several stainless steel reactors ranging in size from 3,300 to 16,000 gallons with overhead condensing systems, two 4,000 gallon glass line reactors; 5 Sandvik forming belts with pastillating capabilities, five high vacuum wiped film evaporators varying in size from 12 to 20 m2, steel batch column with 10,000 gallon still pot and 20 theoretical stages of structured packing. The plant also now has the ability to crystallize and recover solids from the crystallization process. There are also three fully equipped laboratories onsite. With a base product offering polyethylene waxes, TC is well suited to manage high molecular weight materials that must be managed in the molten state. TC offers pastillating for waxes, polymers and resins, flaking capabilities, as well as solids packaging services.
Investment in AMAK
As of December 31, 2016, we owned a 33% interest in AMAK.
Prior to December 2008, we held a thirty (30) year mining lease (which commenced on May 22, 1993) covering an approximate 44 square kilometer area in the Najran Province in southwestern Saudi Arabia. The lease carried an option to renew or extend the term of the lease for additional periods not to exceed twenty (20) years. The lease and other related assets located in Saudi Arabia were contributed to AMAK in December 2008. The above-ground ore processing facility is currently in production and underground work on the mine is progressing. The facility became fully operational during the second half of 2012. Late in the fourth quarter of 2015 AMAK temporarily closed the operation to preserve the assets in the ground while initiating steps to improve efficiencies and optimize operations. AMAK took advantage of this outage to improve the gold and silver recovery process through the installation of SART
modifications. This change allows improved precious metal recovery while also lowering chemical use, thereby reducing operating costs once processing resumes. The facility resumed operation in the fourth quarter of 2016 and is scheduled to be at full operating rates during the second quarter of 2017.
AMAK shipped approximately 16,000, 51,000, and 55,000 metric tons of copper and zinc concentrate to outside smelters during 2016, 2015 and 2014, respectively. In addition, in 2014 AMAK initiated operation of its precious metal recovery circuit at the mill and produced 4.1 kilograms of gold and 115.6 kilograms of silver. In 2015, 46.2 kilograms of gold and 833.6 kilograms of silver were produced. Since the facility was idle until December 2016, no gold or silver was produced in 2016.
The facility includes an underground mine, ore-treatment plant and related infrastructures. The ore-treatment plant is comprised of primary crushing, ore storage, SAG milling and pebble crushing, secondary ball milling, pre-flotation, copper and zinc flotation, concentrate thickening, tailings filtration, cyanide leaching, reagent handling, tailings dam and utilities. Related infrastructure includes a 300 men capacity camp for single status accommodation for expatriates and Saudi employees, an on-site medical facility, a service building for 300 employees, on-site diesel generation of 10 megawatts, potable water supply, sewage treatment plant and an assay laboratory. The facilities at the Port of Jazan are comprised of unloading facilities, concentrate storage and reclamation and ship loading facilities.
Metal price assumptions follow U. S. Securities and Exchange Commission guidance not to exceed a three year trailing average. The following chart illustrates the change in metal prices from the previous three year average to current levels:
| Average Price | Spot Price as of | | Percentage | |
| For 2011-2013 | 12/31/13 | | Increase (Decrease) | |
Gold | $1,577.00 per ounce | $1,204.00 per ounce | | | (23.65 | )% |
Silver | $ 28.45 per ounce | $ 19.50 per ounce | | | (31.46 | )% |
Copper | $ 3.55 per pound | $ 3.34 per pound | | | (5.92 | )% |
Zinc | $ 0.89 per pound | $ 0.95 per pound | | | 6.74 | % |
| | | Average Price | | | Spot Price as of | | | Percentage | |
| | | For 2014-2016 | | | 12/31/16 | | | Increase (Decrease) | |
| Gold per ounce | | $ | 1,224.96 | | | $ | 1,159.10 | | | | (5.38 | )% |
| Silver per ounce | | $ | 17.29 | | | $ | 16.24 | | | | (6.07 | )% |
| Copper per pound | | $ | 2.60 | | | $ | 2.50 | | | | (3.85 | )% |
| Zinc per pound | | $ | 0.94 | | | $ | 1.16 | | | | 23.40 | % |
Three mineralized zones, the Saadah, Al Houra and Moyeath, were outlined by initial diamond drilling. The following tables set forth a summary of the diluted recoverable, proven and probable mineralized materials of AMAK in the Al Masane area along with the estimated average grades of these mineralized materials but have not beenas adjusted to reflect production that began in July 2012:
| Zone | | Proven Reserves (Tonnes) (000’s) | | | Copper (%) | | | Zinc (%) | | | Gold (g/t) | | | Silver (g/t) | | | Proven Reserves (Tonnes) (000’s) | Copper (%) | | Zinc (%) | | Gold
(g/t) | | Silver
(g/t) | |
| Saadah | | | 448 | | | | 1.5 | | | | 3.7 | | | | 0.8 | | | | 21.0 | | | | 448 | | 1.5 | | | 3.7 | | | 0.8 | | | 21.0 | |
| Al Houra | | | 29 | | | | 0.8 | | | | 3.8 | | | | 0.7 | | | | 21.0 | | | | 29 | | 0.8 | | | 3.8 | | | 0.7 | | | 21.0 | |
| Moyeath | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | - | | | - | | | - | | | - | |
Total | | | 477 | | | | 1.4 | | | | 3.7 | | | | .8 | | | | 21.0 | | | | 477 | | 1.4 | | | 3.7 | | | .8 | | | 21.0 | |
| | | | | | | | | | | | | | | | | |
| Zone | | | Probable Reserves (Tonnes) (000’s) | Copper (%) | | Zinc (%) | | Gold
(g/t) | | Silver
(g/t) | |
| Saadah | | | | 5,193 | | 1.2 | | | 3.4 | | | 0.8 | | | 23.0 | |
| Al Houra | | | | 1,894 | | 0.9 | | | 3.8 | | | 1.2 | | | 39.0 | |
| Moyeath | | | | 702 | | 0.8 | | | 7.2 | | | 1.0 | | | 55.0 | |
| Total | | | | 7,789 | | 1.1 | | | 3.9 | | | 0.9 | | | 29.0 | |
| | | | | | | | | | | | | | | | | |
| Total proven and probable reserves | | | | 8,266 | | | | | | | | | | | | |
| Less production through December 31, 2016 | | | | 2,371 | | | | | | | | | | | | |
| Remaining proven and probable reserves | | | | 5,895 | | | | | | | | | | | | |
| Zone | | Probable Reserves (Tonnes) (000’s) | | | Copper (%) | | | Zinc (%) | | | Gold (g/t) | | | Silver (g/t) | |
| Saadah | | | 5,193 | | | | 1.2 | | | | 3.4 | | | | 0.8 | | | | 23.0 | |
| Al Houra | | | 1,894 | | | | 0.9 | | | | 3.8 | | | | 1.2 | | | | 39.0 | |
| Moyeath | | | 702 | | | | 0.8 | | | | 7.2 | | | | 1.0 | | | | 55.0 | |
Total | | | 7,789 | | | | 1.1 | | | | 3.9 | | | | 0.9 | | | | 29.0 | |
Rights relatedOur rights to obtain additional mining licenses into other adjoining areas were also transferred to AMAK in December 2008 as part of our initial capital contributioncontribution. AMAK received formal approval in November 2015 of an additional 151 square kilometers or 37,313 acres of territory relatively close to AMAK. Becausethe current mine. The new territory comprises the
Guyan and Qatan exploration licenses covering 151 square kilometers and within the Guyan exploration license, a 10 square kilometers or 2,471 acre mining lease which has potential for significant gold recovery. Although some exploration holes were drilled in both Guyan and Qatan up to 40 years ago, no reserves are attributable to these areas. Exploration activities were restarted in both of these areas during 2016, and results are being evaluated.
For purposes of calculating proven and probable mineralized materials, a dilution of 5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra and Moyeath zones was assumed. A mining recovery of 80% was used for the Saadah zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the amount of wallrack adjacent to the ore body that is included in the Saudi mining codeore extraction process. Base case cutoffs used were 5.0% zinc equivalent. Ore reserves were estimated using metal prices of USD $0.85 per pound for zinc, $2.50 per pound for copper, $800 per ounce for gold and $12.0 per ounce for silver. Resource estimates are exclusive of reserve estimates.
Historic three-year average commodity prices are shown in 2004, the rights to these licenses hadfollowing table:
| | | Average Price in USD | |
| | | | 2012-2014 | | | | 2013-2015 | | | | 2014-2016 | |
| Gold per ounce | | $ | 1,448.33 | | | $ | 1,278.98 | | | $ | 1,224.96 | |
| Silver per ounce | | $ | 24.67 | | | $ | 19.53 | | | $ | 17.29 | |
| Copper per pound | | $ | 3.25 | | | $ | 2.98 | | | $ | 2.60 | |
| Zinc per pound | | $ | 0.88 | | | $ | 0.91 | | | $ | 0.94 | |
Proven mineralized materials are those mineral deposits for which quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, and grade is computed from results of detailed sampling. For ore deposits to be reappliedproven, the sites for inspection, sampling and measurement must be spaced so closely and the geologic character must be so well defined that the size, shape, depth and mineral content of reserves are well established. Probable mineralized materials are those for which quantity and grade are computed from information similar to that used for proven mineralized materials, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. However, the degree of assurance, although lower than that for proven mineralized materials, must be high enough to assume continuity between points of observation.
The metallurgical studies conducted on the ore samples taken from the zones indicated that 87.7% of the copper and 82.6% of the zinc could be recovered in copper and zinc concentrates. Overall, gold and silver recovery from the ore was estimated to be 77.3% and 81.3%, respectively, partly into copper concentrate and partly as bullion through cyanide processing of zinc concentrates and mine tailings. Further studies recommended by AMAK.consultants may improve those recoveries and thus the potential profitability of the project; however, there can be no assurances of this effect.
In the 1994 feasibility study the geologists and engineers stated that there is potential to find more reserves within the Lease area, as the ore zones are all open at depth. Further diamond drilling is required to quantify the additional mineralization associated with these zones. An extensive underground and surface diamond drilling exploration program commenced in late 2016. A significant feature of the Al Masane ore zones is that they tend to have a much greater vertical plunge than strike length; relatively small surface exposures such as the Moyeath zone may be developed into sizeable ore tonnages by thorough and systematic exploration. Similarly, systematic prospecting of the small surface indicators of mineralization in the area could yield significant tonnages of new ore. Updates to the feasibility study were completed in 1996, 2005 and July 2009.
An updated reserve study or audit has not been performed over the last three years. AMAK has contracted with SRK Consulting to provide an update on reserves which is scheduled to be completed during the second quarter of 2017.
The following table sets forth tonnage mined with average assay values per year:
| Year | | Mine Head Grade | | | Mill Throughput | |
| | | %Cu | | | %Zn | | | dmt | |
| 2011 | | | 1.26 | | | | 3.02 | | | | 9,460 | |
| 2012 | | | 1.18 | | | | 3.39 | | | | 399,892 | |
| 2013 | | | 1.48 | | | | 3.19 | | | | 699,316 | |
| 2014 | | | 1.22 | | | | 3.15 | | | | 670,812 | |
| 2015 | | | 1.11 | | | | 3.69 | | | | 591,419 | |
| 2016 | | | - | | | | - | | | | - | |
The following table sets forth tonnage milled with average assay values and metallurgical recoveries per year:
| Year | | Copper Concentrate | | | Zinc Concentrate | |
| | | dmt | | | %Cu | | | %Zn | | | Recovery | | | dmt | | | %Zn | | | %Cu | | | Recovery | |
| 2011 | | | 443 | | | | 16.51 | | | | 7.51 | | | | 61.64 | | | | 377 | | | | 40.69 | | | | 3.56 | | | | 53.64 | |
| 2012 | | | 15,944 | | | | 23.91 | | | | 5.46 | | | | 80.62 | | | | 20,738 | | | | 50.03 | | | | 1.16 | | | | 76.54 | |
| 2013 | | | 35,140 | | | | 25.20 | | | | 4.73 | | | | 85.68 | | | | 33,460 | | | | 49.82 | | | | 0.83 | | | | 74.62 | |
| 2014 | | | 28,476 | | | | 24.20 | | | | 4.31 | | | | 84.24 | | | | 31,600 | | | | 51.02 | | | | 0.70 | | | | 76.26 | |
| 2015 | | | 24,218 | | | | 22.70 | | | | 5.13 | | | | 84.12 | | | | 35,447 | | | | 48.46 | | | | 0.62 | | | | 78.63 | |
| 2016 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
The following table sets forth tonnage sold with concentrate assay values and value received per year:
| Year | | Copper Concentrate | | | Zinc Concentrate | |
| | | dmt | | | %Cu | | | Value received (in USD millions) | | | dmt | | | %Zn | | | Value received (in USD millions) | |
| 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| 2012 | | | 5,488 | | | | 23.51 | | | $ | 6.9 | | | | 15,193 | | | | 47.53 | | | $ | 8.7 | |
| 2013 | | | 35,908 | | | | 23.86 | | | $ | 80.8 | | | | 38,430 | | | | 47.79 | | | $ | 24.2 | |
| 2014 | | | 25,691 | | | | 24.20 | | | $ | 42.3 | | | | 29,326 | | | | 50.52 | | | $ | 21.0 | |
| 2015 | | | 26,378 | | | | 23.50 | | | $ | 34.6 | | | | 24,547 | | | | 49.68 | | | $ | 16.0 | |
| 2016 | | | - | | | | - | | | | - | | | | 15,845 | | | | 48.28 | | | $ | 9.5 | |
United States Mineral Interest
Our only mineral interest in the United States is its ownership interest in PEVM. See Item 1 – Business – United States Mineral Interests.
Offices
South HamptonOutside of the facilities that we own, SHR has a leased corporate and sales office in Sugar Land, Texas.
Item 3. Legal Proceedings.
On May 9, 2010, after numerous attempts to resolve certain issues with Mr. Hatem El Khalidi, the Board of Directors terminated the retirement agreement, options, retirement bonuses, and all outstanding directors’ fees due to Mr. El Khalidi, former CEO, President and Director of the Company. In June 2010 Mr. El Khalidi filed suit against the Company in the labor courts of Saudi Arabia alleging additional compensation owed to him for holidays and overtime. The Company believes that the claims are unsubstantiated and continues to vigorously defend the case.
In September 2010 Mr. El Khalidi threatened suit against the Company in the U.S. alleging breach of contract under the above agreements and other claims. In late 2010 the Company filed suit against Mr. El Khalidi in the United States District Court in the Eastern District of Texas, Beaumont Division, seeking a declaratory judgment that all monies allegedly owed to Mr. El Khalidi are terminated (the “Federal Court Case”). On March 21, 2011, Mr. El Khalidi filed suit against the Company in the 14th Judicial District Court of Dallas County, Texas foralleging breach of contract and defamation (the “State Court Case”). On July 1, 2011, the Company and Mr. El Khalidi entered into an agreement to dismiss the Federal Court Case and transfer venue for the State Court Case from Dallas County, Texas to Hardin County, Texas. Pursuant to this agreement, the Federal Court Case was dismissed on July 13, 2011, and the State Court Case was transferred to the 88th Judicial Court of Hardin County, Texas on July 15, 2011. On July 24, 2013, theother claims. The 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution.prosecution in this matter on July 24, 2013. The Ninth Court of Appeals subsequently affirmed the dismissal for want of prosecution and the Supreme Court of Texas denied Mr. El Khalidi’s petition for review. On May 1, 2014, Mr. El Khalidi subsequentlyrefiled his lawsuit against the Company for breach of contract and defamation in the 356th Judicial District Court of Hardin County, Texas. The case was transferred to the 88th Judicial District Court of Hardin County, Texas. On September 1, 2016, the Court dismissed all of Mr. El Khalidi’s claims and causes of action with prejudice. Mr. El Khalidi has filed a notice of intent to appeal the dismissal with the Ninth Court of Appeals of Texas.
appeal. Liabilities of approximately $1.1$1.0 million remain recorded, and the options will continue to accrue in accordance with their own terms until all matters are resolved.
On September 14, 2010, South HamptonApril 30, 2015, TC and TREC received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas which was subsequently transferred to the 11th152nd Judicial District Court of Harris County, Texas. The suit alleges that the plaintiff, became ill from exposurean independent contractor employee, was injured while working on a
product line at TC. On March 31, 2016, plaintiff agreed to asbestos. There are approximately 44 defendants named in the suit. South Hampton has placed its insurers on notice of the claimsettle all claims against TC and plans to vigorously defend the case. TREC for an insignificant amount.
On December 20, 2010, South Hamptonor about August 3, 2015, SHR received notice of a lawsuit filed in the 88th14th Judicial District Court of HardinCalcasieu Parish, Louisiana. The suit alleges that the plaintiff became ill from exposure to benzene. SHR placed its insurers on notice. Its insurers retained a law firm based in Louisiana to defend SHR.
On or about March 18, 2016, SHR received notice of a lawsuit filed in the 172nd Judicial District Court of Jefferson County, Texas. The suit alleges that the plaintiff sustained injuries when he fell off his employer’s truck while in South Hampton’s facility. South Hamptonbecame ill from exposure to benzene. SHR placed its insurers on notice of the claim and itsnotice. Its insurers are defending the case. retained a law firm based in Texas to defend SHR.
On February 26, 2014, South Hampton’s insurer settled the case.
On April 14, 2011, and April 27, 2011, South Hamptonor about August 2, 2016, SHR received notice of three lawsuitsa lawsuit filed in the 58th, 172nd, and 136th Judicial District CourtsCourt of Jefferson County, Texas. The suits allegesuit alleges that the plaintiffsplaintiff became ill from benzene exposure during their employment with Goodyear Tire and Rubber Company, an alleged customerto benzene. SHR placed its insurers on notice. Its insurers retained a law firm based in Texas to defend SHR.
On or about November 5, 2016, SHR received notice of South Hampton. There are numerous defendants nameda lawsuit filed in the suits. On April 10, 2013, South Hampton entered into agreements with counsel for plaintiffs172nd Judicial District Court of Jefferson County, Texas. The suit alleges that the plaintiff became ill from exposure to settle the 3 lawsuits for an amount not significantbenzene. SHR placed its insurers on notice. Its insurers retained a law firm based in Texas to the financial statements.defend SHR.
No accruals have been recorded for these last 5 claims. We are involved in various claims and lawsuits incidental to our business.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Our common stock traded on the New York Stock Exchange (“NYSE”) beginning on April 2, 2012 and prior to that the Nasdaq Stock Market LLC (“Nasdaq”) during the last two fiscal years under the symbol: ARSD.symbol “TREC”. The following table sets forth the high and low bid prices for each quarter as reported by NYSE or Nasdaq as appropriate.NYSE. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| | | NYSE/Nasdaq | |
| | | High | | | Low | |
| Fiscal Year Ended December 31, 2013 | | | | | | |
Fourth Quarter ended December 31, 2013 | | $ | 12.85 | | | $ | 8.41 | |
Third Quarter ended September 30, 2013 | | $ | 9.40 | | | $ | 7.57 | |
Second Quarter ended June 30, 2013 | | $ | 8.90 | | | $ | 7.07 | |
First Quarter ended March 31, 2013 | | $ | 8.64 | | | $ | 7.01 | |
| | | | | | | | | |
| Fiscal Year Ended December 31, 2012 | | | |
Fourth Quarter ended December 31, 2012 | | $ | 9.91 | | | $ | 6.81 | |
Third Quarter ended September 30, 2012 | | $ | 10.34 | | | $ | 8.62 | |
Second Quarter ended June 30, 2012 | | $ | 10.95 | | | $ | 8.10 | |
First Quarter ended March 31, 2012 | | $ | 10.06 | | | $ | 7.30 | |
| | | NYSE | |
| | | High | | | Low | |
| Fiscal Year Ended December 31, 2016 | | | | | | |
| Fourth Quarter ended December 31, 2016 | | $ | 14.55 | | | $ | 9.75 | |
| Third Quarter ended September 30, 2016 | | $ | 11.74 | | | $ | 9.81 | |
| Second Quarter ended June 30, 2016 | | $ | 12.03 | | | $ | 8.17 | |
| First Quarter ended March 31, 2016 | | $ | 12.33 | | | $ | 8.75 | |
| | | | | | | | | |
| Fiscal Year Ended December 31, 2015 | | | | | | | | |
| Fourth Quarter ended December 31, 2015 | | $ | 14.96 | | | $ | 11.79 | |
| Third Quarter ended September 30, 2015 | | $ | 16.50 | | | $ | 11.50 | |
| Second Quarter ended June 30, 2015 | | $ | 15.48 | | | $ | 11.00 | |
| First Quarter ended March 31, 2015 | | $ | 15.25 | | | $ | 11.36 | |
At March 7, 2014,2017, there were approximately 454381 recorded holders (including brokers’ accounts) of the Company’s common stock. We have not paid any dividends since our inception and, at this time, do not have any plans to pay dividends in the foreseeable future. The current lender allows the petrochemical subsidiaries to pay dividends to the parent company of up to 30% of EBITDA. We were in compliance with this restriction as of December 31, 2013.2016. See Note 1013 to the Consolidated Financial Statements.
Total Stockholder Return
The following graph compares the cumulative total stockholder return on our common stock against the NYSE Composite Index and the S&P Specialty Chemical Index, for the five years ending December 31, 2013.2016. The graph was constructed on the assumption that $100 was invested in our common stock and each comparative on December 31, 2008,2011, and that any dividends were fully reinvested.
Item 6. Selected Financial Data.
The following is a five-year summary of selected financial data (in thousands, except per share amounts):
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Revenues | | $ | 212,399 | | | $ | 241,976 | | | $ | 289,643 | | | $ | 236,227 | | | $ | 222,858 | |
| Net Income | | | 19,428 | | | | 18,598 | | | | 15,571 | | | | 19,498 | | | | 10,321 | |
| Net Income Per Share-Diluted | | | 0.78 | | | | 0.74 | | | | 0.63 | | | | 0.79 | | | | 0.42 | |
| EBITDA | | | 41,694 | | | | 39,639 | | | | 29,814 | | | | 32,505 | | | | 20,704 | |
| Adjusted EBITDA | | | 31,008 | | | | 47,317 | | | | 33,027 | | | | 25,020 | | | | 21,430 | |
| Total Assets (at December 31) | | | 292,099 | | | | 257,791 | | | | 230,782 | | | | 143,652 | | | | 120,358 | |
Current Portion of Long-Term Debt (at December 31) | | | 10,145 | | | | 8,061 | | | | 6,728 | | | | 1,397 | | | | 1,497 | |
Total Long-Term Debt Obligations (at December 31) | | | 73,107 | | | | 73,169 | | | | 72,430 | | | | 11,827 | | | | 14,224 | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 236,227 | | | $ | 222,858 | | | $ | 199,517 | | | | 139,110 | | | $ | 117,587 | |
| Net Income | | | 19,498 | | | | 10,321 | | | | 13,884 | | | | 2,075 | | | | 6,627 | |
| Net Income Per Share-Diluted | | | 0.79 | | | | 0.42 | | | | 0.57 | | | | 0.09 | | | | 0.28 | |
| Total Assets (at December 31) | | | 143,667 | | | | 120,376 | | | | 117,833 | | | | 91,916 | | | | 90,487 | |
| Notes Payable (at December 31) | | | 12 | | | | 12 | | | | 12 | | | | 12 | | | | 12 | |
| Current Portion of Long-Term Debt (at December 31) | | | 1,400 | | | | 1,500 | | | | 1,500 | | | | 1,865 | | | | 1,400 | |
| Total Long-Term Debt Obligations (at December 31) | | | 11,839 | | | | 14,239 | | | | 22,739 | | | | 20,836 | | | | 23,439 | |
The acquisition of TC was completed in the fourth quarter of 2014 as reflected in the table above.
Non-GAAP Financial Measures
We include in this Annual Report the non-GAAP financial measures of EBITDA, Adjusted EBITDA, and Adjusted Net Income and provide reconciliations from our most directly comparable financial measures to those measures.
We define EBITDA as net income plus interest expense including derivative gains and losses, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus share-based compensation, plus or minus equity in AMAK’s earnings and losses or gains from equity issuances, and plus or minus gains or losses on acquisitions. We define Adjusted Net Income as net income plus or minus tax effected equity in AMAK’s earnings and losses or gains from equity issuances, and plus or minus tax effected gains or losses on acquisitions. These measures are not measures of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), nor as an indicator of cash flows reported in accordance with U.S. GAAP. These measures are used as supplemental financial measures by management and external users of our financial statements such as investors, banks, research analysts and others. We believe that these non-GAAP measures are useful as they exclude transactions not related to our core cash operating activities.
The following table presents a reconciliation of net income, our most directly comparable GAAP financial performance measure for each of the periods presented, to EBITDA, Adjusted EBITDA, and Adjusted Net Income.
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Net Income | | $ | 19,428 | | | $ | 18,598 | | | $ | 15,571 | | | $ | 19,498 | | | $ | 10,321 | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | 1,981 | | | | 2,232 | | | | 1,042 | | | | 520 | | | | 547 | |
| Derivative (gains) losses on interest rate swap | | | 4 | | | | (15 | ) | | | 378 | | | | 301 | | | | 359 | |
| Depreciation and amortization | | | 9,777 | | | | 9,060 | | | | 5,676 | | | | 4,039 | | | | 3,573 | |
| Income tax expense | | | 10,504 | | | | 9,764 | | | | 7,147 | | | | 8,147 | | | | 5,904 | |
| EBITDA | | | 41,694 | | | | 39,639 | | | | 29,814 | | | | 32,505 | | | | 20,704 | |
| | | | | | | | | | | | | | | | | | | | | |
| Share-based compensation | | | 2,552 | | | | 2,353 | | | | 2,141 | | | | 1,215 | | | | 515 | |
| Bargain purchase gain on BASF acquisition | | | (11,549 | ) | | | - | | | | - | | | | - | | | | - | |
| Equity in (earnings) losses of AMAK | | | 1,479 | | | | 5,325 | | | | 1,072 | | | | (4,703 | ) | | | 211 | |
| Gain from additional equity issuance by AMAK | | | (3,168 | ) | | | - | | | | - | | | | (3,997 | ) | | | - | |
| Adjusted EBITDA | | $ | 31,008 | | | $ | 47,317 | | | $ | 33,027 | | | $ | 25,020 | | | $ | 21,430 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Income | | $ | 19,428 | | | $ | 18,598 | | | $ | 15,571 | | | $ | 19,498 | | | $ | 10,321 | |
| | | | | | | | | | | | | | | | | | | | | |
| Bargain purchase gain on BASF acquisition | | | (11,549 | ) | | | - | | | | - | | | | - | | | | - | |
| Equity in (earnings) losses of AMAK | | | 1,479 | | | | 5,325 | | | | 1,072 | | | | (4,703 | ) | | | 211 | |
| Gain from additional equity issuance by AMAK | | | (3,168 | ) | | | - | | | | - | | | | (3,997 | ) | | | - | |
| Total of adjustments | | | (13,238 | ) | | | 5,325 | | | | 1,072 | | | | (8,700 | ) | | | 211 | |
| Taxes at statutory rate of 35% | | | 4,633 | | | | (1,864 | ) | | | (375 | ) | | | 3,045 | | | | (74 | ) |
| Tax effected adjustments | | | (8,605 | ) | | | 3,461 | | | | 697 | | | | (5,655 | ) | | | 137 | |
| Adjusted Net Income | | $ | 10,823 | | | $ | 22,059 | | | $ | 16,268 | | | $ | 13,843 | | | $ | 10,458 | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
Statements in Items 7 and 7A, as well as elsewhere in or incorporated by reference in, this Annual Report on Form 10-K regarding the Company’s financial position, business strategy and plans and objectives of the Company’s management for future operations and other statements that are not historical facts, are “forward-looking statements” as that term is defined under applicable Federal securities laws. In some cases, “forward-looking statements” can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “contemplates,” “proposes,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such statements. Such risks, uncertainties and factors include, but are not limited to, general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; lawsuits; competition; industry cycles; feedstock, specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company’s filings with the U.S. Securities and Exchange Commission, including this Annual Report on Form 10-K, all of which are difficult to predict and many of which are beyond the Company’s control.
The following discussion and analysis of our financial results, as well as the accompanying consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of the Company. Our accounting and financial reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products.products and specialty waxes. Our business model involves the manufacture and sale of tangible products.products and providing custom processing services. Our consistent approach to providing high purity products and quality services to our customers has helped to sustain our current position as a preferred supplier of various petrochemical products.
Certain reclassifications have been made to the Statements of Income for the years ended December 31, 2015, and 2014, in order to conform with the presentation of the year ended December 31, 2016. These reclassifications had no effect on the previously reported net income for those periods.
Business Environment and Risk Assessment
Petrochemical Operations
Worldwide petrochemical demand improved during 2013, and we benefitted from continued operational excellence and competitive advantages achieved through our business mix and focus on producing high quality products and outstanding customer service.
During 2013 feedstock prices fluctuated within a $0.10 per gallon range allowing us to maintain better margins.
During the past several years we have employed a strategy of moving larger volume customers to formula based pricing to reduce the effect of feedstock cost volatility. Under formula pricing, the price charged to the customer is based on a formula which includes, as a component the average cost of feedstock over the prior month. Product prices move in
conjunction with feedstock prices without the necessity of announced price changes. Because the formulas use an average feedstock price from the prior month, the movement of prices trails the movement of costs, and formula pricing may or may not reflect South Hampton’s actual feedstock cost for the month during which the product is actually sold. In addition, while formula pricing can benefit product margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing may actually improve margins as formula prices trail feed costs downward by approximately 30 days. The use of formula pricing has helped reduce volatility and increase the predictability of product margins. Now that the volatility of feedstock prices appears to be tapering somewhat, we continue to investigate alternative product pricing methods.
We believe we are well-positioned to participate in new investments to grow the Company. While petrochemical prices are volatile on a short-term basis and depend on the demand of our customers’ products, our investment decisions are based on our long-term business outlook using a disciplined approach in selecting and pursuing the most attractive investment opportunities.
Petrochemical Operations
SHR’s worldwide petrochemical demand declined during 2016, primarily due to reduced volumes at four significant customers. We continued to emphasize operational excellence and our competitive advantages achieved through our high quality products and outstanding customer service and responsiveness.
During 2016 feedstock prices continued the decline which began in the fourth quarter of 2014; however, prices began rising in the third quarter of 2016. During 2016 average feedstock price fell $0.10 per gallon from 2015’s average but the 2016 year end price was approximately $.03 per gallon higher than 2015 year end. Typically, when prices start climbing, we experience lower margins since almost 60% of our selling prices are on formula pricing which follows market prices calculated upon the prior month. During 2016 margins declined as a result of greater competitive pricing pressure on some of our products. In addition, financial penalties that we incurred due to feedstock purchases below minimum amounts as prescribed by our agreement with suppliers impacted margins.
Specialty Wax Operations
Most wax markets are mature. Key applications for our polyethylene waxes are in hot melt adhesives (“HMA”), plastic processing, PVC lubricants and inks, paints and coatings, where they act as surface or rheology modifiers. The HMA market is expected to grow at a higher rate than GDP growth due to growth in the developing markets and increases in packaging requirements due to changes in consumer purchasing (shift to home deliveries via the internet) in developed economies. Road marking paints are also expected to grow at rates exceeding GDP growth based upon an expectation that there will be infrastructure investment in the U. S. The PVC market is expected to grow at GDP rates; however, we expect to get more traction of our products within this market with acceptance of our new PVC grade waxes. The global wax market is being impacted by the reduction of paraffin wax availability from large refiners as they move toward more hydrocracking and hydroisomerization to produce group III lube oils and distillate. Our wax sales volume increased nearly 40% in 2016 from 2015 growing to almost 34 million pounds.
Liquidity and Capital Resources
Working Capital
Our approximate working capital days are summarized as follows:
| | | December 31, 2013 | | | December 31, 2012 | | | December 31, 2011 | |
| Days sales outstanding in accounts receivable | | | 34.1 | | | | 25.9 | | | | 42.4 | |
| Days sales outstanding in inventory | | | 18.6 | | | | 16.1 | | | | 17.3 | |
| Days sales outstanding in accounts payable | | | 11.4 | | | | 10.3 | | | | 10.7 | |
| Days of working capital | | | 41.4 | | | | 31.7 | | | | 49.0 | |
| | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| Days sales outstanding in accounts receivable | 38.2 | 29.4 | 35.6 |
| Days sales outstanding in inventory | 30.2 | 23.8 | 16.1 |
| Days sales outstanding in accounts payable | 22.9 | 12.2 | 12.0 |
| Days of working capital | 45.5 | 41.0 | 39.8 |
Our days sales outstanding in accounts receivable increased from 2015 to 2016 due to an increase in wax sales in December and longer payment terms for some foreign customers because of increased shipping times.
Our days sales outstanding in inventory and ourincreased from 2015 to 2016 due to additional inventory on hand at SHR because of a decrease in demand.
Our days sales outstanding in accounts receivable bothpayable increased over 2012 due to an increase in deferred sales. Deferred sales increased by approximately $1.8 million from year end 2012 to 2013. Deferred sales are not recognized until the customer accepts deliverypayables because of the productongoing capital construction projects at both TC and title has transferred. The majority of these sales are to foreign customers with longer payment terms due to increased shipping times.SHR.
Sources and Uses of Cash
Cash and cash equivalents decreased by $1.9$10.2 million during the year ended December 31, 2013.2016. The change in cash and cash equivalents is summarized as follows:
| | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | |
| Net cash provided by (used in) | | (in thousands) | | | (in thousands) | |
| Operating activities | | $ | 13,242 | | | $ | 21,373 | | | $ | 4,056 | | | $ | 28,514 | | | $ | 39,565 | | | $ | 23,205 | |
| Investing activities | | | (12,702 | ) | | | (10,185 | ) | | | (6,638 | ) | | | (40,509 | ) | | | (31,294 | ) | | | (88,942 | ) |
| Financing activities | | | (2,440 | ) | | | (8,354 | ) | | | 1,646 | | | | 1,761 | | | | 1,846 | | | | 66,635 | |
| Increase (decrease) in cash and equivalents | | $ | (1,900 | ) | | $ | 2,834 | | | $ | (936 | ) | | $ | (10,234 | ) | | $ | 10,117 | | | $ | 898 | |
| Cash and cash equivalents | | $ | 7,608 | | | $ | 9,508 | | | $ | 6,674 | | | $ | 8,389 | | | $ | 18,623 | | | $ | 8,506 | |
Operating Activities
Operating activities generated cash of $13.2$28.5 million during fiscal 20132016 as compared to $21.4with $39.6 million of cash provided during fiscal 2012. Although our net2015. Net income increased by $9.2$0.8 million from 20122015 to 2013,2016; however, cash provided by operations decreased by $8.1$11.1 million due primarily to the following factors:
| · | Net income for 20132016 included a non-cash equity in earningsloss from AMAK of $4.7$1.5 million and a $3.2 million gain onfrom additional equity issued inissuance by AMAK of $4.0 million as compared to equity in losslosses from AMAK $0.9 million and gain on equity issued in AMAK of $0.7$5.3 million in 2012;2015; |
| · | Net income for 20132016 included a non-cash charge for an unrealized loss on financial contractsbargain purchase gain from the BASF acquisition of approximately $0.1$11.5 million as compared to 20122015 which included a non-cash charge for an unrealized loss on financial contracts of $0.2 million;had no gain; |
| · | Trade receivables increased approximately $6.3$2.8 million in 20132016 (due to a 40.1%an increase in volume sold during fourth quarter 2013)wax sales in December and longer payment terms for some foreign customers because of increased shipping times) as compared to a decrease of approximately $7.4$8.8 million (due to a 2.4%27.1% decrease in pricethe average per gallon and a 16.8% decreaseselling price of petrochemical products) in volume sold during the fourth quarter) in 2012;2015; |
| · | Notes receivablePrepaid expenses and other assets increased approximately $0.9$1.0 million (duein 2016 (primarily due to additional notes receivable from tolling customerslicense fees for the advanced reformer unit improvements)being constructed) as compared to an increasea decrease of approximately $0.1$0.9 million in 2012;2015 (primarily due to expensing of loan fees and disbursement of the prepayment of a lawsuit settlement); and |
| · | Inventory increased approximately $2.2Other liabilities decreased $0.2 million in 20132016 (due to a 58.8% increase in deferred sales at the endrecognition of 2013)revenue from customer funding of capital projects) as compared to an increase of approximately $0.4$2.2 million in 2015 (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost per gallon) in 2012.customer funding of capital projects for custom processing). |
These sourcessignificant uses of cash were partially offset by the following increases in cash provided by operations:
| · | Net income for 20132016 included a non-cash depreciation and amortization charge of $4.0$9.8 million as compared to 20122015 which included a non-cash depreciation and amortization charge of $3.6$9.1 million; |
| · | Net income for 2016 included non-cash deferred income tax benefits of $8.7 million as compared to $5.6 million in 2015; |
| · | Net income for 2013 included a non-cash share based compensation charge of $1.2 million (due to options being awarded to a new director and a new officer) as compared to 2012 which included a non-cash share based compensation charge of $0.5 million; |
· | Net income for 2013 included a non-cash charge for deferred incomeIncome taxes of $1.5 million as compared to 2012 which included a non-cash charge for deferred income taxes of $0.5 million; |
· | Prepaid expenses and other assets increased $0.3receivable decreased $3.7 million in 20132016 (primarily due to an increase in prepaid insurance)overpayments being applied to 2016 estimated taxes) as compared to an increase of $0.9$7.2 million in 2012 (also primarily2015 (primarily due to an increaseestimated tax payments being made prior to the update of tax laws passed in prepaid insurance)December 2015); |
| · | Income tax receivable decreased approximately $0.6Inventory increased $2.1 million in 20132016 (due to the overpayment of 2012 estimated taxes being applied to 2013)lower sales volume) as compared to an increase of $1.2 million in 2012 ( due to overpayment of 2012 estimated taxes); |
· | Other liabilities increased $3.0 million in 2013 as compared2015 (due to anTC’s increase of $0.4 million in 2012 (both years due to the receipt of fundsraw material receipts from toll processing customers for modifications of toll processing facilities within the plant)their primary supplier which translated into additional finished goods production); and |
| · | Accounts payable and accrued liabilities increased approximately $1.4$3.2 million in 20132016 (primarily due to an increaseincreased construction expenditures) as compared to a decrease of $2.4 million in the accrual for raw materials) while in 2012 the same accounts increased by $0.2 million2015 (primarily due to decreases in accruals for freight and utilities partially offset by an increase inconstruction projects being completed during the accrual for derivative settlements and raw material purchases)year). |
Operating activities generated cash of $21.4$39.6 million during fiscal 20122015 as compared with $4.1$23.2 million of cash provided during fiscal 2011. Although the2014. The Company’s net income decreasedincreased by $3.6$3.0 million from 20112014 to 2012, the2015 and cash provided by operations increased by $17.3$16.4 million due primarily to the following factors:
| · | Net income for 20122015 included a non-cash equity in loss from AMAK of $0.9 million and gain on equity issued in AMAK of $0.7$5.3 million as compared to equity in loss from AMAK $1.0 million and gain on equity issued in AMAK of $8.9$1.1 million in 2011;2014; |
| · | Net income for 20122015 included a non-cash depreciation and amortization charge of $3.6$9.1 million (due to the incorporation of TC’s charges for a full year) as compared to 2014 which included a charge of $5.7 million (included only one quarter of TC’s charges); |
| · | Net income for 2015 included a non-cash deferred income tax charge of $5.6 million as compared to 20112014 which included a non-cash depreciation chargedeferred income tax benefit of $3.2$1.9 million; |
| · | Net income for 2012 included a non-cash charge for an unrealized loss on financial contracts of approximately $0.2 million as compared to 2011 which included a non-cash charge for an unrealized gain on financial contracts of $0.2 million; |
· | Trade receivables decreased approximately $7.4$8.8 million in 20122015 (due to a 2.4%27.1% decrease in pricethe average per gallon and a 16.8% decrease in volume sold during the fourth quarter)selling price) as compared to an increase of approximately $12.0 |
· | $3.4 million in 2014 (due to a 63.3%9.9% increase in volume and a 13.8% increase in price per gallon insold during the fourth quarter)quarter and receivables acquired from the Acquisition); |
| · | Prepaid expenses and other assets decreased $1.2 million in 2011;2015 (primarily due to expensing of loan fees and disbursement of the prepayment of a lawsuit settlement) as compared to an increase of $1.4 million in 2014 (primarily due to prepaid loan fees associated with the debt from the Acquisition, prepayment of a lawsuit settlement, and prepaids acquired from the Acquisition); and |
| · | InventoryOther liabilities increased approximately $0.4$2.2 million in 20122015 (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost per gallon)customer funding of capital projects for custom processing) as compared to an increase of approximately $3.5$0.1 million in 2014 (due to a 27.5% increase in volume and a 12.4% increase in cost per gallon) in 2011.deferred revenue acquired from the Acquisition offset by recognition of deferred revenue during 2014). |
These significant sources of cash were partially offset by the following decreases in cash provided by operations:
| · | Net income for 2012 included non-cash compensation charges of $0.5 million as compared to $0.9Income tax receivable increased $7.2 million in 2011; |
· | Prepaid expenses and other assets increased $0.9 million in 20122015 (primarily due to an increaseestimated tax payments being made prior to the update of tax laws passed in prepaid insurance)December 2015) as compared to a decrease of $0.1 million in 2011 (due to expensing of prepaid pipeline services, marketing and insurance);2014; |
| · | Income tax receivableInventory increased approximately $1.2$3.0 million in 20122015 (due to an overpayment of estimated taxes)TC’s increase in raw material receipts from their primary supplier which translated into additional finished goods production) as compared to a decrease of $0.2$2.6 million in 2011; |
· | Other liabilities increased $0.4 million in 20122014 (due to the receipt of funds from toll processing customers for modifications of toll processing facilities within the plant) as compared to an increase of $1.6 milliona 31.9% decrease in 2011 (due to the receipt of funds from a toll processing customer for construction of a pilot plant)cost per gallon); and |
| · | Accounts payable and accrued liabilities decreased approximately $0.2$2.4 million in 20122015 (primarily due to decreases in accruals for freight and utilities partially offset byconstruction projects being completed during the year) as compared to an increase of $1.8 million in the accrual for derivative settlements and raw material purchases) while in 2011 the same accounts increased by $4.2 million2014 (primarily due to an increase in accrualsthe working capital adjustment payable for raw material purchases, freight, and compensation)the Acquisition). |
Investing Activities
Cash used by investing activities during fiscal 20132016 was approximately $12.7$40.5 million, representing an increase of approximately $2.5$9.2 million over the corresponding period of 2012.2015. The majority of the increase was due to the construction projects for the hydrogenation/distillation unit and the advanced reformer unit. During 20132016 we purchased an additional $7.5expended $15.5 million of stock in AMAK as discussed in Note 8, expended $0.3on the hydrogenation/distillation project, $3.9 million to debottleneck our Penhex Unit, $1.6purchase and upgrade B Plant, $11.6 million to construct the advanced reformer unit, $1.9 million for expansion of the sales loading rack facility, $0.9tank farm improvements, $1.2 million for high purity hexane productions, $0.8 million for cooling tower construction, of a new control room and lab, $0.4$0.6 million for transport trucks, and approximately $2.1$0.5 million for a new tolling unit (which will be reimbursed by the customer). These uses of cash were partially offset by the return of approximately $2.0loading rack expansion capabilities, and $4.5 million from AMAK which was previously advanced.on various plant improvements and equipment.
Cash used by investing activities during fiscal 20122015 was approximately $10.2$31.3 million, representing an increasea decrease of approximately $3.5$57.6 million over the corresponding period of 2011. During 2012 we advanced $2.0 million to AMAK for interim, short-term funding which was subsequently repaid in 2013. In May and June 2011 we advanced $0.8 million for the same purpose which was subsequently repaid in August 2011.
During fiscal 2012 we purchased transport trucks and trailers for $1.0 million, land surrounding the facility for $0.2 million, increased/improved tankage for $0.4 million, made various facility improvements for $0.8 million, converted a processing tower for $0.5 million, made purchases for expansion2014. The majority of the decrease was due to the 2014 Acquisition for $74.8 million, net of $0.1 million in cash acquired. During 2015 we expended $13.3 million on the D Train expansion, $1.8 million on tank farm improvements, $0.6 million on spare equipment, $2.8 on pipeline of $4.2upgrades, $1.5 million on transportation equipment, $2.2 million on the Oligomerization project (costs fully paid by the customer), $2.1 million on the hydrogenation/distillation project, $1.3 million on a wax stripping column, and purchased other equipment for $1.0 million.$5.6 million on various plant improvements and equipment.
Financing Activities
Cash usedprovided by financing activities during fiscal 20132016 was approximately $2.4$1.8 million versus cash usedprovided of $8.4$1.8 million during the corresponding period of 2012.2015. During 20132016 we made principal payments of $5.3 million on our acquisition loan and $1.0 million on our term debt. We drew $6.0$8.0 million on our line of credit for working capital purposes and to help fund our expansion projects.
Cash provided by financing activities during fiscal 2015 was approximately $1.8 million versus cash provided of $66.6 million during the capital contribution to AMAK. We alsocorresponding period of 2014. During 2015 we made principal payments of $1.5$7.0 million on our term debt and $7.0$6.2 million on our line of credit.
Cash used by financing activities during fiscal 2012 was approximately $8.4 million versus cash provided of $1.6 million during the corresponding period of 2011. During 2012 we We drew $2.0$15.0 million on our lineterm debt at year end 2015 to pre-fund the new advanced reformer project approved for 2016 since borrowing availability for that particular financing was set to expire on December 31, 2015.
On October 1, 2014, TOCCO, SHR, GSPL, and TC (SHR, GSPL and TC collectively the “Guarantors”) entered into an Amended and Restated Credit Agreement (“ARC Agreement”) with the lenders which from time to time are parties to the ARC Agreement (collectively, the “Lenders”) and Bank of creditAmerica, N.A., a national banking association, as Administrative Agent for working capital purposesthe Lenders, and made principal paymentsMerrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger.
Subject to the terms and conditions of $10.5the ARC Agreement, TOCCO may (a) borrow, repay and re-borrow revolving loans (collectively, the “Revolving Loans”) from time to time during the period ending September 30, 2019, up to but not exceeding at any one time outstanding $40.0 million on our line(the “Revolving Loan Commitment”) and (b) request up to $5.0 million of letters of credit and term debt.
Credit Agreement
On May 25, 2006, South Hampton entered into a Credit Agreement, as amended, with Bankswingline loans. Each of America.the issuance of letters of credit and the advance of swingline loans shall be considered usage of the Revolving Loan Commitment. All of our obligationsoutstanding loans under the Credit Agreement are fully and unconditionally secured pursuant to a perfected first priority security interestRevolving Loans must be repaid on all of South Hampton’s assets.October 1, 2019. As of December 31, 2013,2016, and 2015, TOCCO had long-term outstanding borrowings of $9.0 million and $1.0 million, respectively under the CreditRevolving Loans.
Under the ARC Agreement, provided for an aggregate principalTOCCO also borrowed $70.0 million in a single advance term loan (the “Acquisition Term Loan”) to partially finance the Acquisition. At December 31, 2016, there was a short-term amount of up to $32$8.8 million available through the following facilities: (i) $18 million revolving credit facility which includes a $3 million sublimit for use in the hedging program and a $9long-term amount of $47.3 million sublimit for the issuanceoutstanding. At December 31, 2015, there was a short-term amount of standby or commercial letters of credit; and (ii) $14$7.0 million term loan (advanced as a $10 million loan and a $4long-term amount of $54.3 million loan) obtained in 2007 to finance the expansion of South Hampton’s petrochemical facility. The revolving credit facility matures on June 30, 2015, and the term loan matures on October 31, 2018.
outstanding.
Under the termsARC Agreement, TOCCO also had the right to borrow $25.0 million in a multiple advance loan (the “Term Loans,” together with the Revolving Loans and Acquisition Term Loan, collectively the “Loans”). Borrowing availability under the Term Loans ended on December 31, 2015. The Term Loans converted from a multiple advance loan to a “mini-perm” loan once TOCCO had fulfilled certain obligations such as certification that construction of D Train was completed in a good and workmanlike manner, receipt of applicable permits and releases from governmental authorities, and receipt of releases of liens from the contractor and each subcontractor and supplier. At December 31, 2016, there was a short-term amount of $1.7 million and a long-term amount of $17.3 million outstanding. At December
31, 2015, there was a short-term amount of $1.3 million and a long-term amount of $18.7 million outstanding. The Loans also include a $40,000,000 uncommitted increase option (the “Accordion Option”).
All of the CreditLoans under the ARC Agreement accrued and unpaidwill accrue interest is due and payable in arrears on the first business day of each month on any outstanding borrowings at the lower of:of (i) a London interbank offered rate (“Eurodollar Rate”) plus a margin of between 2.00% and 2.50% based on the highertotal leverage ratio of TOCCO and its subsidiaries on a consolidated basis, or (ii) a base rate (“Base Rate”) equal to the highest of the federal funds rate plus 0.50% or, the rate announced by Bank of America, N.A. as its prime rate, and Eurodollar Rate plus applicable1.0%, plus a margin or (ii)of between 1.00% to 1.50% based on the total leverage ratio of TOCCO and its subsidiaries on a consolidated basis. The Revolving Loans will accrue a commitment fee on the unused portion thereof at a rate between 0.25% and 0.375% based on the total leverage ratio of TOCCO and its subsidiaries on a consolidated basis. Interest on the Revolving Loans will be payable quarterly, with principal due and payable at maturity. Interest on the Acquisition Term Loan became payable quarterly using a ten year commercial style amortization, commencing on December 31, 2014. The Acquisition Term Loan was also payable as to principal beginning on December 31, 2014, and continuing on the last business day of each March, June, September and December thereafter, each payment in an amount equal to $1,750,000, provided that the final installment on the September 30, 2019, maturity date shall be in an amount equal to the British Bankers Association LIBOR plusthen outstanding unpaid principal balance of the applicable margin. The applicable margin is determined from TOCCO’s most recent compliance certificate and current financials basedAcquisition Term Loan. Interest on the following:Term Loans is payable quarterly using a fifteen year commercial style amortization, with interest only through December 31, 2015, and principal payments commenced on March 31, 2016. Interest on the Loans is computed (i) in the case of Base Rate Loans, on the basis of a 365-day or 366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues.
Level | Leverage Ratio | Applicable Margin for Base Rate Loans | Applicable Margin for LIBOR Loans | Applicable Margin for Commitment Fee |
| I | Greater than or equal to 1.5:1.0 | (0.50%) | 2.00% | 0.25% |
| II | Less than 1.5:1.0 but greater than or equal to 1.0:1.0 | (0.75%) | 1.75% | 0.25% |
| III | Less than 1.0:1.0 | (1.00%) | 1.50% | 0.25% |
In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with respect to the $10.0 million floating rate term loanAll amounts owing under the credit facility. The notional amountARC Agreement and all obligations under the guarantees will be secured in favor of the interest rate swapLenders by substantially all of the assets of TOCCO and its subsidiaries and guaranteed by its subsidiaries.
The ARC Agreement contains, among other things, customary covenants, including restrictions on the incurrence of additional indebtedness, the granting of additional liens, the making of investments, the disposition of assets and other fundamental changes, the transactions with affiliates and the declaration of dividends and other restricted payments. The ARC Agreement also includes the following financial covenants, each tested on a quarterly basis for TOCCO and its subsidiaries on a consolidated basis: a maximum total leverage ratio of 3.25 to 1, a minimum fixed charge coverage ratio of 1.25 to 1, and an asset coverage test of greater than 1.1 to 1. The ARC Agreement further includes customary representations and warranties and events of default, and upon occurrence of such events of default the outstanding obligations under the ARC Agreement may be accelerated and become immediately due and payable and the commitment of the Lenders to make loans under the ARC Agreement may be terminated. TOCCO was $4,250,000in compliance with all covenants at December 31, 2013. We receive credit for payments of variable rate interest made on the term loan at the loan’s variable rates which are based upon the London InterBank Offered Rate (LIBOR), and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap. The swap agreement terminates on December 15, 2017. We designated the interest rate swap agreement as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging. The derivative instrument is reported at fair value with any changes in fair value reported within other comprehensive income (loss) in our Statement of Stockholders’ Equity. At December 31, 2013, Accumulated Other Comprehensive Loss net of $197,148 tax was $366,131 related to this transaction.2016.
Our average floating interest rate on debt outstanding under our credit facility at December 31, 2013,2016, was 3.25%3.27%. The Credit Agreement includes customary representations and warranties made by us to Bank of America.
The Credit Agreement contains customary, affirmative and negative covenants requiring us to take certain actions and restricting us from taking others. Such covenants include but are not limited to (i) restrictions on certain payments, including dividends, (ii) the use of the loan proceeds only for certain purposes, and (iii) limitations on the occurrence of liens, certain investments, and/or subsidiary indebtedness (subject to certain exceptions).
In addition the Credit Agreement contains certain financial covenants, which include but are not limited to:
● | Maintaining a minimum EBITDA of $8.5 million at end of each trailing four fiscal quarter period;
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● | Maintaining a maximum leverage ratio of 2.0:1.0 measured at end of each fiscal quarter; |
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● | Prohibition of unfinanced capital expenditures in excess of $6.0 million for trailing four fiscal quarter period; and
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● | Limitations on dividends paid to the parent company of 30% of EDITDA. |
The Credit Agreement contains standard default triggers, which include but are not limited to (i) default on certain of our other indebtedness, (ii) the entry of certain judgments against South Hampton and its subsidiaries, and (iii) a change in the control of the Company. Upon the occurrence of any event of default Bank of America may take certain actions including declaring any outstanding amount due and payable. We were in compliance with all covenants at December 31, 2013.
Anticipated Cash Needs
We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with debt.borrowings under our credit facility.
Comparison of Years 2013, 2012, 20112016, 2015, 2014
The tables containing financial and operating information set forth below are presented to facilitate the discussion of the results of operations, and should not be considered a substitute for, and should be read in conjunction with, the audited consolidated financial statements. Certain reclassifications have been made to the Statements of Income for the years ended December 31, 2015, and 2014, in order to conform with the presentation of the year ended December 31, 2016. These reclassifications flow into the tables below but had no effect on previously reported net income for the periods.
Specialty Petrochemical Segment
| | | | | | | | | | | | | | | 2016 | | | 2015 | | | Change | | | %Change | |
| | | (in thousands) | | | | | | (in thousands) | | | | |
| Petrochemical Product Sales | | $ | 230,643 | | | $ | 218,512 | | | $ | 12,131 | | | | 5.6 | % | | $ | 173,262 | | | $ | 212,431 | | | $ | (39,169 | ) | | | (18.4 | %) |
| Processing | | | 5,584 | | | | 4,346 | | | | 1,238 | | | | 28.5 | % | |
| Processing Fees | | | | 8,766 | | | | 5,802 | | | | 2,964 | | | | 51.1 | % |
| Gross Revenue | | $ | 236,227 | | | $ | 222,858 | | | $ | 13,369 | | | | 6.0 | % | | $ | 182,028 | | | $ | 218,233 | | | $ | (36,205 | ) | | | (16.6 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Volume of sales (thousand gallons) | | | 67,066 | | | | 63,553 | | | | 3,513 | | | | 5.5 | % | |
| Volume of petrochemical sales (thousand gallons) | | | | 76,372 | | | | 86,908 | | | | (10,536 | ) | | | (12.1 | %) |
| Volume of prime product sales (thousand gallons) | | | | 58,441 | | | | 64,103 | | | | (5,662 | ) | | | (8.8 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Sales | | $ | 201,064 | | | $ | 192,100 | | | $ | 8,964 | | | | 4.7 | % | | $ | 146,159 | | | $ | 165,448 | | | $ | (19,289 | ) | | | (11.7 | %) |
| Gross Margin | | | | 19.7 | % | | | 24.2 | % | | | | | | | (4.5 | %) |
| Total Operating Expense* | | | 44,158 | | | | 39,532 | | | | 4,626 | | | | 11.7 | % | | | 58,536 | | | | 56,659 | | | | 1,877 | | | | 3.3 | % |
| Natural Gas Expense* | | | 5,204 | | | | 3,914 | | | | 1,290 | | | | 33.0 | % | | | 3,301 | | | | 4,190 | | | | (889 | ) | | | (21.2 | %) |
| Operating Labor Costs* | | | 10,624 | | | | 10,437 | | | | 187 | | | | 1.8 | % | | | 16,094 | | | | 16,124 | | | | (30 | ) | | | (0.2 | %) |
| Transportation Costs* | | | 18,398 | | | | 15,881 | | | | 2,517 | | | | 15.8 | % | | | 24,138 | | | | 24,836 | | | | (698 | ) | | | (2.8 | %) |
| General & Administrative Expense | | | 14,672 | | | | 12,782 | | | | 1,890 | | | | 14.8 | % | | | 9,172 | | | | 9,092 | | | | 80 | | | | 0.9 | % |
| Depreciation** | | | 4,039 | | | | 3,573 | | | | 466 | | | | 13.0 | % | | | 5,825 | | | | 4,484 | | | | 1,341 | | | | 29.9 | % |
| Equity in Earnings (Losses) of AMAK | | | 4,703 | | | | (211 | ) | | | 4,914 | | | | 2,328.9 | % | |
| Gain on Equity Issuance AMAK | | | 3,997 | | | | - | | | | 3,997 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Expenditures | | $ | 6,828 | | | $ | 8,143 | | | $ | (1,315 | ) | | | (16.1 | %) | | $ | 22,948 | | | $ | 24,358 | | | | (1,410 | ) | | | (5.8 | %) |
*Included in cost of sales
**Includes $3,518$5,187 and $3,053$3,872 for 20132016 and 2012 which is included in cost of sales and operating expenses
| | | | | | | | | | | | | |
| | | (in thousands) | | | | |
| Petrochemical Product Sales | | $ | 218,512 | | | $ | 194,620 | | | $ | 23,892 | | | | 12.3 | % |
| Processing | | | 4,346 | | | | 4,897 | | | | (551 | ) | | | (11.3 | %) |
| Gross Revenue | | $ | 222,858 | | | $ | 199,517 | | | $ | 23,341 | | | | 11.7 | % |
| | | | | | | | | | | | | | | | | |
| Volume of sales (thousand gallons) | | | 63,553 | | | | 54,256 | | | | 9,297 | | | | 17.1 | % |
| | | | | | | | | | | | | | | | | |
| Cost of Sales | | $ | 192,100 | | | $ | 173,600 | | | $ | 18,500 | | | | 10.7 | % |
| Total Operating Expense* | | | 39,532 | | | | 35,314 | | | | 4,218 | | | | 11.9 | % |
| Natural Gas Expense* | | | 3,914 | | | | 5,266 | | | | (1,352 | ) | | | (25.7 | %) |
| Operating Labor Costs* | | | 10,437 | | | | 8,764 | | | | 1,673 | | | | 19.1 | % |
| Transportation Costs* | | | 15,881 | | | | 13,234 | | | | 2,647 | | | | 20.0 | % |
| General & Administrative Expense | | | 12,782 | | | | 11,778 | | | | 1,004 | | | | 8.5 | % |
| Depreciation** | | | 3,573 | | | | 3,220 | | | | 353 | | | | 11.0 | % |
| Equity in Losses of AMAK | | | (211 | ) | | | (1,018 | ) | | | 807 | | | | 79.3 | % |
| Gain on Equity Issuance AMAK | | | - | | | | 8,850 | | | | 8,850 | | | | | |
| | | | | | | | | | | | | | | | | |
| Capital Expenditures | | $ | 8,143 | | | $ | 6,518 | | | $ | 1,625 | | | | 24.9 | % |
*Included in cost of sales
**Includes $3,053 and $2,744 for 2012 and 20112015 which is included in cost of sales and operating expenses
| | | 2015 | | | 2014 | | | Change | | | %Change | |
| | | (in thousands) | | | | |
| Petrochemical Product Sales | | $ | 212,431 | | | $ | 277,623 | | | $ | (65,192 | ) | | | (23.5 | %) |
| Processing Fees | | | 5,802 | | | | 6,722 | | | | (920 | ) | | | (13.7 | %) |
| Gross Revenue | | $ | 218,233 | | | $ | 284,345 | | | $ | (66,112 | ) | | | (23.3 | %) |
| | | | | | | | | | | | | | | | | |
| Volume of petrochemical sales (thousand gallons) | | | 86,908 | | | | 82,785 | | | | 4,123 | | | | 5.0 | % |
| Volume of prime product sales (thousand gallons) | | | 64,103 | | | | 62,159 | | | | 1,944 | | | | 3.1 | % |
| | | | | | | | | | | | | | | | | |
| Cost of Sales | | $ | 165,448 | | | $ | 240,695 | | | $ | (75,247 | ) | | | (31.3 | %) |
| Gross Margin | | | 24.2 | % | | | 15.4 | % | | | | | | | 8.8 | % |
| Total Operating Expense* | | | 56,659 | | | | 54,515 | | | | 2,144 | | | | 3.9 | % |
| Natural Gas Expense* | | | 4,190 | | | | 6,362 | | | | (2,172 | ) | | | (34.1 | %) |
| Operating Labor Costs* | | | 16,124 | | | | 14,478 | | | | 1,646 | | | | 11.4 | % |
| Transportation Costs* | | | 24,836 | | | | 23,176 | | | | 1,660 | | | | 7.2 | % |
| General & Administrative Expense | | | 9,092 | | | | 10,090 | | | | (998 | ) | | | (9.9 | %) |
| Depreciation** | | | 4,484 | | | | 4,064 | | | | 420 | | | | 10.3 | % |
| | | | | | | | | | | | | | | | | |
| Capital Expenditures | | $ | 24,358 | | | $ | 13,987 | | | | 10,371 | | | | 74.1 | % |
*Included in cost of sales
**Includes $3,872 and $3,523 for 2015 and 2014 which is included in cost of sales and operating expenses
Gross Revenue
2012-20132015-2016
Revenues increaseddecreased from 20122015 to 20132016 by approximately 6.0% primarily16.6% due to an increasea decrease in sales volume of 5.5%12.1% and a decrease in average selling price of 7.2% partially offset by an increase in processing fees of 28.5%51.1%.
2011-20122014-2015
Revenues increaseddecreased from 20112014 to 20122015 by approximately 11.7%23.3% primarily due to an increasea decrease in the average selling price per gallon of 27.1% and a decrease in processing fees of 13.7%.
Petrochemical Product Sales
2015-2016
Petrochemical product sales decreased 18.4% from 2015 to 2016 due to a decrease in total sales volume of 17.1% offset12.1% and a decrease in average selling price of 7.2%. Our average selling price decreased because a large portion of our sales are contracted with pricing formulas which are tied to prior month Natural Gas Liquid (NGL) prices which is our primary feedstock. Our average selling prices for our non-formula priced customers also declined approximately 10.5% primarily due to competitive pressure on pricing. Average delivered feedstock price for 2016 was 7.4% lower than 2015. We also saw a significant decrease in our margin on byproduct sales from 2015 to 2016. Prime product sales volume (total petrochemical product sales volume less byproduct sales volume) decreased 8.8% from 2015 to 2016 primarily due to lower demand in North America. Margins on our petrochemical products were also negatively impacted by financial penalties that we incurred due to feedstock purchases below minimum amounts as prescribed by our agreement with suppliers.
Foreign sales volume accounted for approximately 22.7% of volume and 26.3% of revenue for petrochemical product sales during 2016 as compared to 25.2% of volume and 27.9% of revenue during 2015.
2014-2015
Petrochemical product sales revenue decreased 23.5% from 2014 to 2015 due to a decrease in the average selling price of 4.1% and an 11.3% decrease27.1%. We saw a significant decline in processing revenue.
Petrochemical Product Sales
2012-2013
Petrochemical product sales increased 5.6% from 2012 to 2013 due to an increaseraw material prices beginning in total sales volumethe fourth quarter of 5.5% as noted above while average2014 which continued throughout 2015. Since our selling price remained stable. Even though approximately 50% of our salesprices are based upon formulas derived from marketon raw material prices, of raw materials and those pricesthey declined in 2013, we were able to maintain our average selling price. We shipped a record number of isocontainers during 2013 which is the method most frequently used to ship product overseas.as well. Deferred sales volume increased 58.8%remained steady from the end of 20122014 to 2013 which delayed recognition until 2014.
2011-2012
Petrochemical product2015; however, deferred sales increased 12.3% from 2011 to 2012revenue declined 19.8% due to an increase in total sales volume of 17.1% as noted above offset by athe decrease in the average selling price of 4.1%.price. Prime product sales volume increased 3.1% from 2014 to 2015.
Processing
2012-2013Foreign sales volume accounted for approximately 25.2% of volume and 27.9% of revenue for petrochemical product sales during 2015 as compared to 27.7% of volume and 30.8% of revenue during 2014.
Processing revenuesFees
2015-2016
Processing fees increased 28.5%51.1% from 20122015 to 20132016 primarily due to renegotiationfees associated with a customer who reimbursed us for installation expenses plus a markup. We were successful in negotiating a contract extension with one of our tolling contracts. We remain dedicatedprocessing customers whose contract was set to maintaining a certain level of toll processing businessexpire in the facility and continue2016.
2014-2015
Processing fees decreased 13.7% from 2014 to pursue opportunities.2015 due to lower run rates being required by our customers.
2011-2012
Processing revenues decreased 11.3% from 2011 to 2012 due to one of our tolling customer’s inability to obtain raw material which impacted their run rates.
Cost of Sales (includes but is not limited to raw materials, total operating expense, natural gas, operating labor and transportation)
2012-20132015-2016
Cost of Sales increased 4.7%decreased 11.7% from 20122015 to 20132016 primarily due in part to a 38.6% increase in volumes processed partially offset by a 2.3%the decrease in thesales volume. Our average delivered feedstock cost per gallon of feedstock.decreased 7.4% over 2015 while volume processed decreased 10.9%. We use natural gasoline as feedstock which is the heavier liquid remaining after butaneethane, propane and propanebutanes are removed from liquids produced by natural gas wells. The material is a commodity product in the oil/petrochemical markets and generally is readily available. The price of natural gasoline is correlated with the price of crude oil with an R-squared value of approximately 90%. We are investigating alternative feedstock sourcesexpect our advanced reformer unit which contain lower percentagesis due online in the fourth quarter of 2017, to enable us to convert the less desirable components in an effortour feed into higher value products, thereby allowing us to reduce the amount of byproduct sold into secondary marketssell our byproducts at lower margins, thereby increasing overall profitability.higher prices than are currently realized.
2011-20122014-2015
Cost of Sales increased 10.7%decreased 31.3% from 20112014 to 20122015 due in partprimarily to a 13.3% increase in volumes processed and hedging losses of $1.8 million partially offset by a 6.8%46.9% decrease in the average cost per gallon of feedstock. This was offset slightly by higher raw material volumes being processed in order to support the 5.0% increase in sales volume.
Changes in other components of Cost of Sales are detailed below. See Note 19 of Notes to the Consolidated Financial Statements.
Total Operating Expense (includes but is not limited to natural gas, operating labor, depreciation, and transportation)
2012-20132015-2016
Total Operating Expense increased 11.7%3.3% from 20122015 to 2013.2016. Natural gas, labor, depreciation and transportation are the largest individual expenses in this category; however, not all of these increased.
Natural gas expense decreased 21.2% from 2015 to 2016 due to a decrease in the average per unit cost and volume consumed. The average price per MMBTU for 2016 was $2.61 whereas, for 2015 the average per unit cost was $2.94. Volume consumed decreased to approximately 1,294,000 MMBTU from about 1,402,000 MMBTU.
Labor costs declined 0.2% from 2015 to 2016. Profit sharing distributions were lower and employee headcount decreased approximately 2.7% from year end 2015 to year end 2016.
Depreciation expense increased 29.9% from 2015 to 2016 primarily due to D Train coming online, and depreciation being recorded on it for a full year. Higher depreciation expense accounted for approximately 70.1% of the increase in operating expense.
Transportation costs were lower by 2.8% primarily due to the decrease in sales volume.
2014-2015
Total Operating Expense increased 3.9% from 2014 to 2015. Natural gas, labor and transportation are the largest individual expenses in this category.category; however, not all of these increased.
The cost of natural gas purchased increased 33.0%decreased 34.1% from 20122014 to 20132015 due to an increasea decrease in the average per unit cost and additionallower volume used. The average price per MMBTU for 20132015 was $3.89$2.94 whereas, for 20122014 the average per unit cost was $3.03.$4.49. Volume consumed increaseddecreased to approximately 1,342,0001,402,000 MMBTU from about 1,285,0001,417,000 MMBTU.
Operating labor costs were slightly higher by 1.8%11.4% mainly due to a cost of living adjustment that was givenmade at mid-year 2013. Our2015, additional profit sharing distributions based upon profitability, and an increase in our employee count remained relatively stable year-over-year.for the petrochemical segment. Employee count increased approximately 9.5% from year end 2014 to year end 2015 to support the D Train expansion and in preparation for construction of the new reformer unit.
Depreciation expense increased 10.3% from 2014 to 2015 primarily due to D Train coming online in the fourth quarter of 2015.
Transportation costs were higher by 15.8%7.2% primarily due to an increase in rail freight and isocontainer shipments.which includes car rental. The number of cars in our rail fleet was significant during 2015 in support of our oil sands customer. As we approached year end, we began trading some of the smaller railcars which were on lease for larger railcars which are more acceptable to our customers. These costs are typically recovered through our selling price. Higher transportation costs accounted for 54.4% of the increase in operating expense.
2011-2012
Total Operating Expense for the Petrochemical Company increased 11.9% from 2011 to 2012. Natural gas, labor and transportation are the largest individual expenses in this category.
The cost of natural gas purchased decreased 25.7% from 2011 to 2012 due to a decrease in the average per unit cost. The average price per MMBTU for 2012 was $3.03 whereas, for 2011 the average per-unit cost was $4.32. The decreased cost was partially offset by increased volume which increased to approximately 1,285,000 MMBTU from about 1,224,000 MMBTU.
Operating labor costs were higher by 19.1% because we added approximately 8 employees year over year. Increased manpower was required by increases in production, product shipments, and loading of iso-containers for foreign sales which require special handling. Some of the cost of additional personnel was borne by a tolling customer per the toll processing arrangement which became operational in the fourth quarter of 2011. Additionally, a number of temporary
personnel were hired to allow the maintenance department to accomplish budgeted maintenance and capital projects in a timely manner.
Transportation costs were higher by 20.0% primarily due to an increase in rail freight. These costs are recovered through our selling price. Higher transportation costs accounted for 62.8%82.0% of the increase in operating expense.
General and Administrative Expense
2012-20132015-2016
General and Administrative costs remained stable from 2015 to 2016 with less than a 1% increase.
2014-2015
General and Administrative costs decreased from 2014 to 2015 due primarily to management expenses being recorded at the corporate level instead of at the petrochemical level and a decrease in consulting fees. During 2014 consulting fees were higher than normal due to costs associated with the Acquisition.
2015-2016
As mentioned above, depreciation expense increased 29.9% from 2015 to 2016 primarily due to D Train coming online, and depreciation being recorded on it for a full year.
2014-2015
Depreciation expense increased 10.3% from 2014 to 2015 primarily due to D Train coming online during the fourth quarter of 2015.
2015-2016
Capital expenditures decreased 5.8% from 2015 to 2016. See discussion under “Capital Resources and Requirements” below for more detail.
2014-2015
Capital expenditures increased 74.1% from 2014 to 2015. See discussion under “Capital Resources and Requirements” below for more detail.
Specialty Wax Segment
| | | 2016 | | | 2015 | | | Change | | | %Change | |
| | | (thousands of dollars) | |
| Product Sales | | $ | 20,319 | | | $ | 15,506 | | | $ | 4,813 | | | | 31.0 | % |
| Processing Fees | | | 10,052 | | | | 8,237 | | | | 1,815 | | | | 22.0 | % |
| Gross Revenue | | $ | 30,371 | | | $ | 23,743 | | | $ | 6,628 | | | | 27.9 | % |
| | | | | | | | | | | | | | | | | |
| Volume of wax sales (thousand pounds) | | | 33,891 | | | | 24,268 | | | | 9,623 | | | | 39.7 | % |
| | | | | | | | | | | | | | | | | |
| Cost of Sales | | $ | 26,338 | | | $ | 19,519 | | | $ | 6,819 | | | | 34.9 | % |
| Gross Margin | | | 13.3 | % | | | 17.8 | % | | | | | | | (4.5 | %) |
| General & Administrative Expense | | | 4,818 | | | | 4,138 | | | | 680 | | | | 16.4 | % |
| Depreciation and Amortization* | | | 3,908 | | | | 4,550 | | | | (642 | ) | | | (14.1 | %) |
| Capital Expenditures | | $ | 17,547 | | | $ | 6,889 | | | $ | 10,658 | | | | 154.7 | % |
*Includes $3,828 and $4,464 for 2016 and 2015, respectively, which is included in cost of sales
Due to the Acquisition on October 1, 2014, the following table only includes fourth quarter 2014 results as compared to full year 2015; therefore, no variances are displayed or explained.
| | | 2015 | | | 2014 | |
| Product Sales | | $ | 15,506 | | | $ | 3,242 | |
| Processing Fees | | | 8,237 | | | | 2,056 | |
| Gross Revenue | | | 23,743 | | | | 5,298 | |
| | | | | | | | | |
| Cost of Sales* | | | 19,519 | | | | 5,444 | |
| General & Administrative Expense | | | 4,138 | | | | 958 | |
| Depreciation and Amortization | | | 4,550 | | | | 1,612 | |
| | | | | | | | | |
| Capital Expenditures | | $ | 6,889 | | | $ | 780 | |
*Includes depreciation and amortization of $4,464 and $1,122, respectively
Product Sales
Product sales revenue increased 31.0% and product sales volume increased 39.7% from 2015 to 2016. Polyethylene wax sales saw volume increases of approximately 53.8%; however, due to competitive situations, a soft market, and to minimize finished product inventories, revenue from these sales only increased 12.1%. In striving to work down wax inventories, we continue to increase sales volumes of our low quality wax (which requires significantly less processing and carries a positive gross margin). As we gain additional approvals of our new, higher quality wax products, we will substitute the low quality wax sales with these higher value products. We continue to make good progress in our target markets. We shipped several orders of our new HMA product as well as, had independent laboratory results showing that our new product performs as well as the leading product in metallocene based HMA applications (in some parameters our product performed better). Our new powdered PVC lubricant wax has been trialed successfully, and a commercial trial is expected in the first quarter 2017 of molten wax. Other wax based product sales increased from 2015 to 2016 primarily due to on-purpose PE wax sales which we distributed in Latin America for a third party at lower margins.
Processing Fees
Processing fees increased 22.0% from 2015 to 2016 primarily due to the addition of new customers and an increase in existing customer volumes.
B Plant revenues for 2016 totaled approximately $903,000. This consisted of approximately $596,000 in processing fees and approximately $307,000 in product sales. B Plant which is adjacent to TC was acquired from BASF in May 2016. Production at B Plant started in June 2016.
Cost of Sales
Cost of Sales increased 34.9% from 2015 to 2016 due to increases in labor, freight, utilities and storage partially driven by the increased on-purpose polyethylene wax distributed in Latin America. Labor increased approximately 16.3% due to increased overtime and addition of personnel to produce more product in B Plant and ensure we have personnel trained to operate the new hydrogenation/distillation project when it starts up in early 2017. Freight increased approximately 79.1% due to the increase in shipments and a change in our shipping terms. Utilities increased approximately 85.4% due to expenses associated with B plant. Storage fees increased approximately 168.9% due to the increase in inventory which is stored offsite in third-party warehouses. We were able to find an alternative storage location that is expected to reduce our storage fees in 2017.
General and Administrative Expense
General and Administrative costs increased 14.8%16.4% from 20122015 to 20132016 primarily due primarily to expenses recorded for administrative payroll costs, officers’ compensation, directors’ fees, insurance premiums, property taxes,an increase in sales personnel, accounting fees, consultinglegal fees, bad debt expense, investor relations’management fees, miscellaneous employee expenses, travel, and property taxes.
Depreciation and Amortization
Depreciation and amortization decreased 14.1% from 2015 to 2016 primarily due to some of the assets which were near end of life at purchase becoming fully depreciated. Most of the capital expenditures during 2016 were being recorded to construction in progress for which depreciation will begin when complete.
Capital Expenditures
Capital expenditures increased 154.7% from 2015 to 2016 primarily due to expenditures for the hydrogenation/distillation project, B Plant purchase and various other smaller projects.
Corporate Segment
| | | 2016 | | | 2015 | | | Change | | | %Change | |
| | | (in thousands) | | | | |
| General & Administrative Expense | | $ | 6,445 | | | $ | 7,011 | | | $ | (566 | ) | | | (8.1 | %) |
| Depreciation | | | 43 | | | | 25 | | | | 18 | | | | 72.0 | % |
| Equity in losses of AMAK | | | 1,479 | | | | 5,325 | | | | (3,846 | ) | | | (72.2 | %) |
| Gain from additional equity issuance by AMAK | | | (3,168 | ) | | | - | | | | (3,168 | ) | | | 100 | % |
| | | 2015 | | | 2014 | | | Change | | | %Change | |
| | | (in thousands) | | | | |
| General & Administrative Expense | | $ | 7,011 | | | $ | 6,413 | | | $ | 598 | | | | 9.3 | % |
| Depreciation | | | 25 | | | | - | | | | 25 | | | | 100.0 | % |
| Equity in losses of AMAK | | | 5,325 | | | | 1,072 | | | | 4,253 | | | | 396.7 | % |
General and Administrative Expenses
2015-2016
General corporate expenses decreased from 2015 to 2016 primarily due to a decrease in officer compensation because targets were not met; therefore, no executive bonuses were awarded. This decrease of approximately $0.9 million was partially offset by increases in directors’ fees, post-retirement benefits, and expenses in Saudi Arabia. Payroll costsaccounting and audit fees. Directors’ fees increased approximately $.03 million because of the addition of two directors and a restricted stock grant to directors. Post-retirement benefits increased approximately $0.2 million due to a cost of living adjustmentan agreement with the former CEO to provide health benefits. Accounting and an increase in management and officer compensation. Officer compensation increased due to the addition of a new executive position which occurred at the end of the third quarter 2012. Directors’audit fees increased $0.1 million due to the addition of a new director in the fourth quarter of 2012. Group health insurance premiums increased 11.4% due to the health insurance environment. Property insurance premiums increased 25.9% due to an increase in the insured basis. Investor relations expense increased 75.2% due to the granting of warrants to the new investor relations consultants. Property taxes increased 18.8% due to the increase in the taxable basis because of recent expansions and additions. Accounting fees increased 49.3% due to the addition of a formal internal audit program, the PCAOB audits of AMAK for 2012, 2011, and 2010 and our corresponding amended filings during 2013. Consulting fees increased $0.3 million due to the hiring of a consultant to assist with marketing efforts in the People’s Republic of China and consultants for marketing surveys and acquisition efforts. Post-retirement fees increased due to the expense associated with options. In 2012 there was a reversal of these costs due to the expiration of some of those stock options. Expenses in Saudi Arabia increased due to an increase in contractors utilized by the Company in Saudi Arabia. These increases were partially offset by decreases in Saudi expenses which will be reimbursed by AMAK, travel costs, and legal fees.
2011-2012
General and Administrative costs increased 8.5% from 2011 to 2012 due primarily to expenses recorded for administrative payroll costs, officers’ compensation, directors’ fees, insurance premiums, travel costs, property taxes, accounting fees, investor relations’ expenses, and expenses in Saudi Arabia. Payroll costs increased approximately $0.2 million due to a cost of living adjustment and an increase in management and officer compensation. Officer compensation increased due to the award of bonus compensation upon meeting target performance as outlined in the executive compensation policy and the addition of a new executive position. Directors’ fees increased $0.1 million due to the addition of a new director. Group health insurance premiums increased 21.6% due to the health insurance environment. General liability and property insurance premiums increased 37.9% due to the insurance market and an increase in the insured basis. Travel and investor relations’ expenses increased due to an increase in the number of trips to Saudi Arabia, the investor trip to the mine and investor conferences. Property taxes increased due to the increase in the taxable basis because of recent expansions. Accounting fees increased due to the addition of a formal internal audit program. Expenses in Saudi Arabia increased due to an increase in the Company’s presence in Saudi Arabia and the investor trip to the mine. These increases were offset by decreases in consulting fees, post-retirement benefits, bad debt expense and legal fees. Consulting fees decreased approximately $0.1 million, post-retirement fees dropped $0.4 million due to the expiration of stock options, bad debt expense decreased $0.1 million due to no additional allowance being necessary, and legal fees declined about $0.1 million due to decreased assistance provided by outside parties.
Our general and administrative expenses have two principle components; general and administrative expenses for our petrochemical operation and general corporate expenses.
General & Administrative Expenses for our Specialty Petrochemicals Operations
| | | | | | | | | | | | | |
| Petrochemical Company | | (in thousands) | | | | |
| General & Administrative Expense | | $ | 10,971 | | | $ | 9,658 | | | $ | 1,313 | | | | 13.6 | % |
General and Administrative costs increased from 2012 to 2013 due primarily to expenses recorded for administrative payroll costs, insurance premiums, office rent, subscriptions, consulting fees and property taxes. Payroll costs increased
approximately $0.1 million due to a cost of living adjustment. Group health insurance premiums increased 11.4% due to the health insurance environment. Property insurance premiums increased 25.9% due to an increase in the insured basis. Office rent increased $0.1 million due to relocation to a new, larger office space in Sugar Land, Texas. Subscriptions increased $46,000 due to additional publications required for market development purposes. Consulting fees increased $0.3 million due to the hiring of a consultant to assist with marketing efforts in the People’s Republic of China and consultants for marketing surveys and acquisition efforts. Property taxes increased 18.8% due to the increase in the taxable basis because of recent expansions and additions.
| | | | | | | | | | | | | |
| Petrochemical Company | | (in thousands) | | | | |
| General & Administrative Expense | | $ | 9,658 | | | $ | 8,593 | | | $ | 1,065 | | | | 12.4 | % |
General and Administrative costs increased from 2011 to 2012 due primarily to expenses recorded for administrative and management payroll costs, insurance premiums, travel costs, and property taxes. Payroll costs increased approximately $0.1 million due to costs associated with our investment in AMAK, the retention of a cost of living adjustmentnew internal audit firm, and an increase in management compensation. Group health insurance premiums increased 21.6% due to the health insurance environment. General liability and property insurance premiums increased 37.9% due to the insurance market and an increase in the insured basis. Travel expenses increased due to an increase in the number of trips abroad for marketing purposes. Property taxes increased due to the increase in the taxable basis because of recent expansions. These increases were slightly offset by decreases in consulting fees, bad debt expense and legal fees.costs associated with B Plant valuation.
General Corporate Expenses
| (in thousands) | | | | | | | | | | | | |
| General corporate expenses | | $ | 3,701 | | | $ | 3,124 | | | $ | 577 | | | | 18.5 | % |
General corporate expenses increased from 20122014 to 20132015 primarily due to increases in officer compensation which were re-classed from the petrochemical company, directors’ fees post-retirement benefits,and accounting fees insurance expense, bad debt expense, investor relations expense, and administrative expenses in Saudi Arabia. Officer compensation increased $0.1 million due to the addition of an executive during the second half of 2012. Directors’ fees also increased $0.1 million due to the addition of a director in the fourth quarter of 2012. Post-retirement benefits increased due to the return to normal accrual for stock options, whereas for 2012 expired options were reversed. Accounting fees increased $0.2 million due to the PCAOB audits of AMAK for the years ended December 31, 2012, 2011, and 2010 as well as, our 2012 amended filings including AMAK. Insurance expense increased approximately $0.1 million due to changes in policy limits. Investor relations expense increased $0.2 million due to the granting of warrants to the new investor relations firm. Administrative expenses in Saudi increased $0.1 million due to additional staffing requirements. These increases were partially offset by decreases in travel, legal fees, and expenses associated with AMAK in Saudi Arabia.
| (in thousands) | | | | | | | | | | | | |
| General corporate expenses | | $ | 3,124 | | | $ | 3,185 | | | $ | (61 | ) | | | (2.0 | %) |
General corporate expenses decreased from 2011 to 2012 primarily due to decreases in post-retirement benefits, consulting fees and legalinvestor relations expenses. ConsultingDirectors’ fees decreasedincreased approximately $0.1$0.2 million post-retirement fees dropped $0.4 million due to the expirationbecause of stock options, and legal fees declined about $0.1 million due to decreased assistance provided by outside parties. These decreases were partially offset by increases in officer compensation, directors’ fees, travel expense, accounting fees, investor related expenses and expenses in Saudi Arabia. Officer compensation increased due to the award of bonus compensation upon meeting target performance as outlined in the executive compensation policy and the addition of a new executive position. Directors’ fees increased $0.1 million due to the additionone director and reassessment of a new director. Travel and investor relations’ expenses increased due to an increase in the number of trips to Saudi Arabia, the investor trip to the mine and investor conferences.directors’ compensation during 2015. Accounting fees increased due to costs associated with the addition of a formal internal audit program. Expenses in Saudi Arabia increasedAcquisition. Consulting fees decreased $0.5 million due to an increase in the Company’s presence in Saudi Arabiahiring of consultants for the Acquisition during 2014 and the investor trip to the mine.
Depreciation
2012-2013
Depreciation expense increased 13.0% from 2012 to 2013relations fees decreased $0.1 million due to an increasea change in the amount of depreciable assets year over year.
2011-2012
Depreciation expense increased 11.0% from 2011 to 2012 due to an increase in the amount of depreciable assets year over year.our investor relations firm.
Equity in Earnings (Losses) of AMAK/Gain on Equity Issuance of AMAK
2012-20132015-2016
Equity in earningsEarnings of AMAK increased $4.9 million from 20122015 to 20132016 primarily due to a settlement which was reached with the former operator of the AMAK beingmining facility. During 2016 AMAK reached the settlement which included a reduction in operationpreviously accrued operating expenses of approximately $17.4 million. We also recognized a gain on our investment in AMAK stemming from the July 2016 issuance of additional shares to Arab Mining Co. The settlement and the gain more than offset AMAK’s 2016 operating losses (please see Note 11 to the consolidated financial statements for the entire 2013 year versusimpact on our statements).
In November 2015 the decision was made to temporarily close the mine and to terminate the contract with the operator. This allowed AMAK to preserve asset value while the mill and underground assets were refurbished and equipment upgrades were installed. Additionally in November 2015, AMAK received formal approval for new licenses that included an additional 151 square kilometers (km2) of territory close to AMAK's prior 44 km2 mine. The additional territory comprised the Guyan and Qatan exploration licenses covering 151 km2, and within the Guyan exploration license, a 10 km2 mining lease which has potential for significant gold recovery.
Renovation and refurbishment work was completed and the mine began zinc and copper production in December 2016. In addition, processing of the gold-bearing waste dumps from historical mining at the Guyan mining license area has begun and the gold extraction is in process. An extensive exploration program for the rest of Guyan mining lease has been completed. Results are encouraging and are currently being evaluated. A systematic program of infill drilling exploration to extend the overall life of the copper and zinc mine has been initiated with detailed results expected in the second quarter of 2017.
Since the mine was not operating during 2016, there were only two shipments of zinc during the first quarter of 2016 from inventory that was on hand at the end of 2015. Approximately 16,000 dry metric tons were shipped.
AMAK is self-operating the mine and has signed a partial yearmanpower agreement with a third party that will provide greater technical know-how and required management skills in 2012. Gain on equity issuancecombination with expected cost savings.
Equity in Losses of AMAK increased $4.0 million396.7% from 20122014 to 20132015 due to the completiona number of an equity raise in May 2013reasons as discussed in Note 8.below.
2011-2012AMAK’s performance, like the rest of the mining sector, was severely impacted by the continued fall in metal demand and prices (average spot prices for zinc and copper in fourth quarter 2015 were down approximately 13% and 7%, respectively, compared to third quarter 2015). The mine also suffered significant raw material outages and operating inefficiencies.
Equity in losses of AMAKShipments decreased $0.8 million7.4% from 20112014 to 2012 due to AMAK becoming operation2015 as indicated in the second half of 2012. Gain on equity issuance oftable below. AMAK decreased $8.9 million from 2011 to 2012 due to the completion of an equity raisevolumes in July 2011dry metric tons (dmt) for 2015 and 2014 were as discussed in Note 8.follows:
2012-2013
Capital Expenditures decreased 16.1% from 2012 to 2013. See capital expenditures discussion below for more detail.
2011-2012
Capital Expenditures increased 24.9% from 2011 to 2012. See capital expenditures discussion below for more detail.
| | | 2015 | | | 2014 | | | Variance | |
Ore tons processed | | | 591,419 | | | | 670,812 | | | | (79,393 | ) |
Concentrate to the port | | | | | | | | | | | | |
| Copper | | | 24,218 | | | | 28,402 | | | | (4,184 | ) |
| Zinc | | | 35,447 | | | | 32,515 | | | | 2,932 | |
| | | | 59,665 | | | | 60,917 | | | | (1,252 | ) |
| | | | | | | | | | | | | |
| Shipments | | | | | | | | | | | | |
| Copper | | | 26,378 | | | | 25,691 | | | | 687 | |
| Zinc | | | 24,547 | | | | 29,326 | | | | (4,779 | ) |
| | | | 50,925 | | | | 55,017 | | | | (4,092 | ) |
Capital Resources and Requirements
2012-2013
Capital expenditures decreased 16.1% from 2012 to 2013. During 2013 we expended $0.3 million to debottleneck our Penhex Unit, $1.6 million for expansion of the sales loading rack facility, $0.9 million for construction of a new control room and lab, $0.4 million for transport trucks, $2.1 million for a new tolling unit, and $1.5 million for other equipment.
2011-20122015-2016
Capital expenditures increased 24.9%29.6% from 20112015 to 2012.2016. During fiscal 20122016 we purchasedexpended $15.5 million on the hydrogenation/distillation project, $3.9 million to purchase and upgrade the BASF facility, $11.6 million to begin construction on our advanced reformer unit, $1.9 million for tank farm improvements, $1.2 million for high purity hexane production, $0.8 million for cooling tower construction, $0.6 million for transport trucks, $0.5 million for loading rack expansion capabilities, and trailers for $1.0$4.5 million land surrounding the facility for $0.2 million, increased/improved tankage for $0.4 million, madeon various facility improvements for $0.8 million, converted a processing tower for $0.5 million, made purchases for expansionand equipment.
2014-2015
Capital expenditures typically average $4.0increased 74.1% from 2014 to 2015. During 2015 we expended $13.3 million per year for facility improvements. on the D Train expansion, $1.8 million on tank farm improvements, $0.6 million on spare equipment, $2.8 on pipeline upgrades, $1.5 million on transportation equipment, $2.2 million on the Oligomerization project (costs fully paid by the customer), $2.1 million on the hydrogenation project, $1.3 million on a wax stripping column, and $5.6 million on various plant improvements and equipment.
At December 31, 2013,2016, there was $11.5approximately $29.5 million available on the Company’s line of credit. We believe that operating cash flows along with credit availability will be sufficient to finance our 20142017 operations and capital expenditures.
The table below summarizes the following contractual obligations of the Company:
| | | Payments due by period | | | Payments due by period | |
| Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than
1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| | | (thousands of dollars) | | | (thousands of dollars) | |
| Operating Lease Obligations | | $ | 5,690 | | | $ | 1,742 | | | $ | 3,008 | | | $ | 809 | | | $ | 131 | | | $ | 21,374 | | | $ | 3,595 | | | $ | 6,734 | | | $ | 6,370 | | | $ | 4,675 | |
| Purchase Obligations | | | | 5,328 | | | | 5,328 | | | | - | | | | - | | | | - | |
| Long-Term Debt Obligations | | | 13,239 | | | | 1,400 | | | | 9,289 | | | | 2,550 | | | | - | | | | 84,000 | | | | 10,417 | | | | 73,583 | | | | - | | | | - | |
| Total | | $ | 18,929 | | | $ | 3,142 | | | $ | 12,297 | | | $ | 3,359 | | | $ | 131 | | | $ | 110,702 | | | $ | 19,340 | | | $ | 80,317 | | | $ | 6,370 | | | $ | 4,675 | |
The majority of our operating lease obligations are for railcars as discussed in Note 15 of the Notes to Consolidated Financial Statements. Purchase obligations are primarily related to commitments for our capital construction projects. The anticipated source of funds for payments due within three years that relate to contractual obligations is from a combination of continuing operations and long-term debt refinancing.supplemented with borrowings under our credit facility.
Investment in AMAK
Information concerning our investment in AMAK is set forth in Note 811 of the Notes to Consolidated Financial Statements.
In July 2012May 2014 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements of FASB Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and most industry-specific guidance throughout the Accounting Standards Codification, resulting in the creation of FASB ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of retrospective adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption would be permitted but not before annual periods beginning after December 15, 2016. The Company is in its preliminary stages of evaluating the impact of these amendments, although it does not expect the amendments to have a significant impact to the Company’s financial position or results of operation. The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption.
In April 2015 the FASB issued ASU No. 2012-02, Intangibles2015-03, Interest - GoodwillImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and Other (Topic 350)measurement guidance for debt issuance costs are not affected by the amendments in this ASU 2015-03. In August 2015 the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Testing Indefinite-Lived Intangible AssetsPresentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 was issued to address presentation or subsequent measurement of debt issuance costs
related to line-of-credit arrangements that were not found ASU 2015-03. Given the absence of authoritative guidance within ASU 2015-03 for Impairment. This is amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment. Afterdebt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an assessmententity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired; entities must perform the quantitative impairment test. Otherwise,line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the quantitative test is optional. The amended guidance isline-of-credit arrangement. These standards are effective for annualfiscal years, and interim impairment tests performedperiods within those fiscal years, beginning after December 15, 2015, and should be applied retrospectively. The Company adopted ASU 2015-03 and ASU 2015-15 during 2016. At December 31, 2016, and 2015, related net loan fees of approximately $0.7 million and $1.0 million, respectively, have been netted against long term debt.
In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The new standard eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company will implement ASU 2015-17 by classifying all of it deferred tax assets (liabilities) as noncurrent on its March 31, 2017, Balance Sheet, see Note 17.
In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after SeptemberDecember 15, 2012,2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability to make lease payments and a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and does not expect to early adoption permitted.adopt. As permitted by the amendments, the Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The update had no impactCompany is currently in the process of fully evaluating the amendments and will subsequently implement new processes. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above. For additional information on the Company’s consolidated financial statements.leases, see Note 15.
In February 2013March 2016 the FASB issued ASU No. 2013-02, Reporting2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will reduce complexity in accounting standards related to share-based payment transactions, including, among others, (1) accounting for income taxes, (2) classification of Amounts Reclassified Outexcess tax benefits on the statement of Accumulated Other Comprehensive Income. Undercash flow, (3) forfeitures, and (4) statutory tax withholding requirements. The ASU 2013-02, an entity is requiredeffective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company will adopt the amendments as of January 1, 2017, and the Company is currently evaluating the full impact of these amendments. The stock based compensation plan has not historically generated material amounts of excess tax benefits or deficiencies; therefore, the Company does not anticipate a material change in its financial position or results of operation as a result of adopting this Update. The Company is currently implementing the new processes and does not anticipate significant changes. For additional information on the stock-based compensation plan, see Note 16.
In January 2017 the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections Topic 250) and Investments —Equity Method and Joint Ventures (Topic 323). The amendments in the Update relate to provide informationSEC paragraphs pursuant to Staff Announcements at the September 22, 2016, and November 17, 2016, EITF meetings related to disclosure of the impact of recently issued accounting standards. The SEC staff view that a registrant should evaluate ASC updates that have not yet been adopted to determine the appropriate financial disclosures about the amounts reclassified outpotential material effects of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, eitherthe updates on the face of the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASC amendments to Topic 326, Financial Instruments - Credit Losses, Topic 842, Leases, and Topic 606, Revenue from Contracts with Customers, although, the amendments apply to any subsequent amendments to guidance in the notes, significant amounts reclassified outASC. The Company adopted the amendments in this Update during the
fourth quarter of 2016 and appropriate disclosures have been included in this Note for each recently issued accounting standard.
In January 2017 the FASB issued ASU No. 2017-04, Intangibles –Goodwill and Other (Topic 350). The amendments in ASU 2017-04 simplify the measurement of goodwill by eliminating Step 2 from the respective line itemsgoodwill impairment test. Instead, under these amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of net income, but only ifa reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount reclassified is requiredby which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to be reclassified in its entirety inthat reporting unit. The amendments are effective for public business entities for the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective forfirst interim and annual reporting periods beginning after December 15, 2012. 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.The update had no impactamendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company has goodwill from prior business combination and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During the current year, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated; therefore, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change except for the elimination of the Step 2 analysis.
Critical Accounting Policies
Our consolidated financial statements.statements are based on the selection and application of significant accounting policies. The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of net sales, expenses and allocated charges during the reported period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.
Critical Accounting PoliciesWe believe the following accounting policies and estimates are critical to understanding the financial reporting risks present currently. These matters, and the judgments and uncertainties affecting them, are essential to understanding our reported results. See Note 2 to the Notes to the Consolidated Financial Statements for further information.
Inventories
Finished products and feedstock are recorded at the lower of cost, determined on the last-in, first-out method (LIFO); or market for SHR. For TC, inventory is recorded at the lower of cost or market as follows: (1) raw material cost is calculated using the weighted-average cost method and (2) product inventory cost is calculated using the specific cost method. See Note 8 to the Notes to the Consolidated Financial Statements for more information.
Revenue recognition
Revenue is recorded when (1) the customer accepts delivery of the product and title has been transferred or when the service is performed and we have no significant obligations remaining to be performed; (2) a final understanding as to specific nature and terms of the agreed upon transaction has occurred; (3) price is fixed and determinable; and (4) collection is assured. For our product sales these criteria are generally met, and revenue is recognized, when the product is delivered or title is transferred to the customer. Sales are presented net of discounts, allowances, and sales taxes. Freight costs billed to customers are recorded as a component of revenue. For our custom processing we recognize revenue when the service has been provided to the customer. Revenues received in advance of future sales of products or prior to the performance of services are presented as deferred revenues.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized whenrecoverable from estimated future undiscounted
cash flows. If the estimated future undiscounted cash flows are less than the carrying value of the assets, we calculate the amount of impairment if the assetcarrying value of the long-lived assets exceeds the estimated undiscounted future cash flows expected to result from the usefair value of the asset and its eventual disposition.assets. Our long-lived assets include our petrochemical facility and our investments in AMAK and PEVM.specialty synthetic wax facility.
Our petrochemical facility isand specialty synthetic wax facility are currently our only revenue generating asset.assets. The facility wasfacilities were in full operation at December 31, 2013. Plant, pipeline and equipment costs are reviewed annually to determine if adjustments should be made.2016.
Goodwill and other intangible assets
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually; however, these tests are performed more frequently when events or changes in circumstances indicate that the asset may be impaired. Impairment exists when carrying value exceeds fair value.
Definite-lived intangible assets are being amortized using discounted estimated future cash flows over the term of the related agreements. We assesscontinually evaluate the carrying valuesreasonableness of ourthe useful lives of these assets. Once these assets on an ongoing basis. Factors which may affect carrying values include, but are not limitedfully amortized, they will be removed from the consolidated balance sheets.
See Note 10 to mineral prices, capital cost estimates, equity transactions, the estimated operating costs of any mines and related processing, ore grade and related metallurgical characteristics,Notes to the design of any mines and the timing of any mineral production. There are no assurances that, particularly in the event of a prolonged period of depressed mineral prices, we will not be required to take a material write-down of any of its mineral properties.
Consolidated Financial Statements for additional information. Investment in AMAK
We account for our investment in AMAK using the equity method of accounting under which we record in income our share of AMAK’s income or loss for each period. The amount recorded is also adjusted to reflect the amortization of certain differences between the basis in our investment in AMAK and our share of the net assets of AMAK as reflected in AMAK’s financial statements (seestatements. See Note 8).11 to the Notes to the Consolidated Financial Statements.
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by the production of those reserves, as well as, recent equity transactions within AMAK. Factors which may affect carrying value include, but are not limited to, mineral prices, capital cost estimates, equity transactions, the estimated operating costs of any mines and related processing, ore grade and related metallurgical characteristics, the design of any mines and the timing of any mineral production. There are no assurances that we will not be required to take a material write-down of any of our mineral properties.
Environmental Liabilities
The Petrochemical Company isOur operations are subject to the rules and regulations of the TCEQ which inspects the operationsfacilities at various times for possible violations relating to air, water and industrial solid waste requirements. As noted in Item 1. Business, evidence of groundwater contamination was discovered at SHR in 1993. The recovery process, initiated in 1998, is proceeding as planned and is expected to continue for many years.
In 2008 we learned of a claim by the U.S. Bureau of Land Management (“BLM”) against World Hydrocarbons, Inc. for contamination of real property owned by the BLM north of and immediately adjacent See Note 15 to the processing mill situated on property owned by PEVM. The BLM’s claim alleged that mine tailings from the processing mill containing lead and arsenic migrated onto BLM property during the first half of the twentieth century. World Hydrocarbons, Inc. respondedNotes to the BLM by stating that it does not own the mill and that PEVM is the owner and responsible party. PEVM subsequently retained an environmental consultant and a local contractor to assist with the cleanup. In June and July 2013, the contractor excavated and transported tailings from BLM property and other surrounding properties to an impoundment area located on PEVM property. The cleanup is complete except for some minor work involving haul ramps and brush piles on BLM property. Once this is complete PEVM expects to receive a no-further-action letter (NFA), or equivalent, from BLM. The environmental consultant submitted a report to the Nevada Division of Environmental Protection on the entire removal project including a neighbor’s adjoining property, and PEVM received an NFA on October 30, 2013. Finally, PEVM will need to cover the tailings impoundment where all of the tailings were placed and improve the impoundment walls. Once that work is complete and fencing is repaired, all of the remaining work will be complete. The contractor is expected to start on the finish work in 2014 as soon as the ground thaws enough to excavate clean cover soil. The Company agreed to advance approximately $250,000 to PEVM for payment of the contractor and in return, PEVM will transfer interest in selected patented mining claims of equivalent value to the Company. An accrual for $350,000 was recorded by PEVM in 2010 and $203,000 remained outstanding at December 31, 2013.Consolidated Financial Statements.
Share-Based Compensation
We expense the cost of director and employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. WeFor options we use the Black-Sholes model to calculate the fair value of the equity instrument on the grant date. See Note 16 to the Notes to the Consolidated Financial Statements.
Off Balance Sheet Arrangements
Off balance sheet arrangements as defined by the SEC means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (i) obligations under certain guarantees or contracts, (ii) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangements, (iii) obligations under certain derivative arrangements, and (iv) obligations arising out of a material variable interest in an unconsolidated entity. Our guarantee for AMAK’s debt is considered an off balance sheet arrangement. Please see further discussion under “Investment in AMAK” in Item 1. Business.
Income Taxes
In determining our income tax provision, we assess the likelihood our deferred tax assets will be recovered through future taxable income. Based on this assessment, a valuation allowance against all or a portion of our deferred tax asset that will, more likely than not, be realized. If these estimates, assumptions, or actual results of operations change in the
future, we may reverse the valuation allowance against deferred tax assets. Income tax liabilities are determined based on judgment and estimates assuming it is more likely than not that the position will be sustained upon examination by a taxing authority. There are no uncertain income tax positions taken or expected to be taken at January 1, 2007 (adoption date), and at December 31, 2013.2016. See Note 17 to the Notes to the Consolidated Financial Statements.
New tax laws and regulations as well as new interpretations of existing tax laws and regulation, are being proposed or promulgated. The impact which may increase or decrease tax liabilities cannot be estimated at this time.
Derivative Instruments
We periodically use financial commodity agreements to hedge the cost of natural gasoline, the primary source of feedstock, and natural gas used as fuel to operate our plant to manage risks generally associated with price volatility. The commodity agreements are recorded in our consolidated balance sheets as either an asset or liability measured at fair value. Our commodity agreements are not designated as hedges; therefore, all changes in estimated fair value are recognized in cost of petrochemical product sales and processing in the consolidated statements of operations.income. At December 31, 2016, we had no financial commodity agreements in place.
On March 21, 2008, South HamptonSHR entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to the $10.0 million term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017. The notional amount of the interest rate swap was $4.25$1.75 million at December 31, 2013.2016. We receive credit for payments of variable rate interest made on the term loan at the loan’s variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest rate swap. We had originally designated the transactioninterest rate swap as a cash flow hedge according tounder ASC Topic 815 Derivatives(see Note 22); however, due to the new debt agreements associated with the Acquisition in 2014, we believed that the hedge was no longer entirely effective. Due to the time required to make the determination and Hedging. Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in our Consolidated Statementimmateriality of Stockholders’ Equity. We entered intothe hedge, we began treating the interest rate swap to minimizeas ineffective as of October 1, 2014, and the effectunrealized loss associated with the swap of changesapproximately $378,000 was recognized in the LIBOR rate.
consolidated statement of income. The fair value of the derivative liability associated with the interest rate swap at December 31, 2013,2016, and 20122015 totaled $0.6$0.1 million and $0.9$0.2 million, respectively. The cumulative loss from the changes in the swap contract’s fair value that is included in other comprehensive loss is reclassified into income when interest is paid.
We assess the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy). See Notes 5 and 22 to the Notes to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The market risk inherent in our financial instruments represents the potential loss resulting from adverse changes in interest rates, foreign currency rates and commodity prices. Our exposure to interest rate changes results from our variable rate debt instruments which are vulnerable to changes in short term United States prime interest rates. At December 31, 2013, 20122016, 2015 and 2011,2014, we had approximately $13.2$84.0 million, $15.7$82.3 million and $24.0$80.5 million, respectively, in variable rate debt outstanding.outstanding excluding deferred financing costs. A hypothetical 10% change in interest rates underlying these borrowings would result in annual changes in our earnings and cash flows of approximately $1.3 million, $1.6 million$275,000, $199,000 and $2.4 million$215,000 at December 31, 2013, 20122016, 2015 and 2011,2014, respectively. However, the interest rate swap will limit this exposure in future periods on $4.25 million of the outstanding term debt.
We do not view exchange rates exposure as significant and have not acquired or issued any foreign currency derivative financial instruments.
We purchase all of our raw materials, consisting of feedstock and natural gas, on the open market. The cost of these materials is a function of spot market oil and gas prices. As a result, our revenues and gross margins could be affected by changes in the price and availability of feedstock and natural gas. As market conditions dictate, from time to time we engage in various hedging techniques including financial swap and option agreements. We do not use such financial instruments for trading purposes and are not a party to any leveraged derivatives. Our policy on such hedges is to buy
positions as opportunities present themselves in the market and to hold such positions until maturity, thereby offsetting the physical purchase and price of the materials.
At the end of 2013,2016, market risk for 20142017 was estimated as a hypothetical 10% increase in the cost of natural gas and feedstock over the market price prevailing on December 31, 2013.2016. Assuming that 20142017 total petrochemical product sales volumes stay at the same rate as 2013 and that feed prices stay in2016, the range that they were at the end of the year, the
10% market risk increase will result in an increase in the cost of natural gas and feedstock of approximately $16.2$9.8 million in fiscal 2014.2017.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and the consolidated financial statement schedules, including the report of our independent registered public accounting firm thereon, are set forth beginning on Page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
(a) | (a) | Disclosure Controls and Procedures. |
We maintain disclosure controls and Procedures.procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) that are designed to provide reasonable assurance that the information that we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Office and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objective of the disclosure controls and procedures are met.
As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer, and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures asreport. Based on such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer Executive Vice President and Chief Financial Officer have concluded, that as of the end of the period covered by this report, that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that the information that we are required to be disclosed by usdisclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (2)such information is accumulated and communicated to our management, including our Chief Executive Officer Executive Vice President and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.disclosure because of the material weakness in our internal control over financial reporting described below.
(b) Management’s Annual Report on Internal Control over Financial Reporting. | (b) | Management’s Annual Report on Internal Control over Financial Reporting. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting as such term in defined in Rule 13a-15(f) of the Exchange Act. Underis a process that is designed under the supervision and with the participation of our management, including our Chief Executive Officer Executive Vice President, and Chief Financial Officer, weand effected by our Board of Directors, management and other personnel, to provide assurance regarding financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control of financial reporting includes those policies and procedures that:
| · | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures recorded by us are being made only in accordance with authorizations of our management and Board of Directors; and |
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management has conducted anits evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016, based upon the framework in Internal Control – Integrated Framework (1992)(2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing the operating effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of the Board of Directors. Based on that evaluation, ourits assessment and review with the Audit Committee, management concludedhas determined that our internal control over financial reporting was not effective as of December 31, 2013.2016, because of the material weakness described below.
We determined that we did not maintain effective internal control over the accounting for our investment in AMAK. Specifically, controls were not appropriately designed, adequately documented and operating effectively related to the accounting by us for: (1) our equity in earnings of AMAK; and (2) changes in our ownership percentage in AMAK as the result of the sale and issuance of shares of AMAK to other investors. As a result of this material weakness, we restated our financial statements for the three months ended June 30, 2016 and September 30, 2016, respectively. This control deficiency did not result in any material adjustments to our consolidated financial statements for the year ended December 31, 2016.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement our annual or interim financial statements will not be prevented or detected on a timely basis. We have taken steps and plan to take additional measures to remediate the above identified material weakness. Specifically, we are strengthening our controls and procedures regarding our accounting for our investment in AMAK to ensure a complete review of AMAK’s activities are reviewed and considered in the accounting for our investment in AMAK, including all necessary adjustments, related to our investment in AMAK, including, but no limited to, the recognition of its share of AMAK’s earnings and the recognition of changes in our ownership percentage. Additional controls are being implemented to mitigate the associated risks and to support the completeness and accuracy of our financial reporting.
Despite this material weakness, we have concluded that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Attestation Report of the Registered Public Accounting Firm. | (c) | Attestation Report of the Registered Public Accounting Firm. |
BKM Sowan Horan, LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
(c)(d) Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) underduring the Exchange Act) that occurred during our last fiscalfourth quarter of 2016 that have materially affected, or are reasonablyreasonable likely to materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Arabian American Development Company
Trecora Resources
We have audited Arabian American Development Company’sTrecora Resources’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established in Internal Control – Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Arabian American Development Company’sTrecora Resources’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’scompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting includingincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies andor procedures may deteriorate.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management’s failure to apply the appropriate level of review and oversight to the accounting for significant, infrequently occurring transactions such as unusual gains and the additional equity issuance by AMAK, resulted in undetected material adjustments to the Company’s equity investment in the second and third quarter of 2016. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report does not affect our report dated March 16, 2017, on those financial statements.
In our opinion, Arabian American Development Companybecause of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Trecora Resources has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2013,2016, based on the criteria established in Internal Control – Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arabian American Development Company as of December 31, 2013 and 2012 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013,Trecora Resources, and our report dated March 14, 201416, 2017, expressed an unqualified opinion.
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 14, 2014
Item 9B. Other Information.
None
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated by reference from our Proxy Statement for our 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2013.2016.
We have adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer and controller, and to persons performing similar functions. A copy of the Code of Ethics has been filed as an exhibit to this Annual Report on Form 10-K and is available on our website.
Item 11. Executive Compensation.
Incorporated by reference from our Proxy Statement for our 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2013.2016.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference from our Proxy Statement for our 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2013.2016.
Item 13. Certain Relationships, Related Transactions, and Director Independence.
Incorporated by reference from our Proxy Statement for our 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2013.2016.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference from our Proxy Statement for our 20142017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2013.2016.
ITEM 15. Exhibits, Financial Statement Schedules. (a)1. The following financial statements are filed with this Report:
| Reports of Independent Registered Public Accounting Firm |
| Consolidated Balance Sheets dated December 31, 2013 and 2012 |
Consolidated Balance Sheets dated December 31, 2016 and 2015 | Consolidated Statements of Income for the three years ended December 31, 2013 |
Consolidated Statements of Income for the three years ended December 31, 2016 | Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013 |
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2016 | Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2013 |
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2016 | Consolidated Statements of Cash Flows for the three years ended December 31, 2013 |
Consolidated Statements of Cash Flows for the three years ended December 31, 2016 | Notes to Consolidated Financial Statements |
2. The following financial statement schedules are filed with this Report:
| Schedule II -- Valuation and Qualifying Accounts for the three years ended December 31, 2013. |
Schedule II -- Valuation and Qualifying Accounts for the three years ended December 31, 2016. 3. The following financial statements are filed with this Report:
The financial statements of Al Masane Al Kobra Mining Company (AMAK) for the years ended December 31, 2013, 2012,2016, 2015, and 2011,2014, required by Rule 3-09 of Regulation S-X.
4. The following documents are filed or incorporated by reference as exhibits to this Report. Exhibits marked with an asterisk (*) are management contracts or a compensatory plan, contract or arrangement.
Exhibit Number | Description |
| 3(a) | - Certificate of Incorporation of the Company as amended through the Certificate of Amendment filed with the Delaware Secretary of State on July 19, 2000May 22, 2014 (incorporated by reference to Exhibit 3(a) to the Company’s AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 2000June 30, 2014 (File No. 0-6247)001-33926)) |
| 3(b) | - Restated Bylaws of the Company dated April 26, 2007August 1, 2014 (incorporated by reference to Item 5.03Exhibit 3(b) to the Company’s Quarterly Report on Form 8-K dated April 26, 200710-Q for the quarter ended June 30, 2014 (File No. 0-6247)001-33926)) |
| 10(a)* | - Retirement Awards Program dated January 15, 2008 between Arabian American Development CompanyTrecora Resources and Hatem El Khalidi (incorporated by reference to Exhibit 10(h) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (file No. 001-33926)) |
| 10(b)* | - Arabian American Development Company Stock and Incentive Plan adopted April 3, 2012 (incorporated by reference to Exhibit A to the Company’s Form DEF 14A filed April 25, 2012 (file No. 001-33926)) |
| 10(c) | - Articles of Association of Al Masane Al Kobra Mining Company, dated July 10, 2006 (incorporated by reference to Exhibit 10(m) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926)) |
| 10(d) | - Bylaws of Al Masane Al Kobra Mining Company (incorporated by reference to Exhibit 10(n) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926)) |
| 10(e) | - Letter Agreement dated August 5, 2009, between Arabian American Development CompanyTrecora Resources and the other Al Masane Al Kobra Company shareholders named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 27, 2009 (file No. 001-33926)) |
| 10(f) | - Limited Guarantee dated October 24, 2010, between Arabian American Development CompanyTrecora Resources and the Saudi Industrial Development Fund (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 27, 2010 (file No. 001-33926)) |
| 10(g) | -Amended and Restated Credit Agreement dated October 1, 2014, between Texas Oil & Chemical Co. II, Inc. and certain subsidiaries and Bank of America, N.A. as administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on October 3, 2014 (file No. 001-33926)) |
| 10(h) | -Stock Purchase Agreement dated September 19, 2014, between Trecora Resources, Texas Oil & Chemical Co. II, Inc. SSI Chusei, Inc. and Schumann/Steier Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on September 25, 2014 (file No. 001-33926)) |
| 14 | - Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-6247)) |
Exhibit Number | Description |
| 16 | - Letter re change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K dated June 21, 2010 (File No. 001-33926)) |
| 21 | - Subsidiaries (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 20122014 (File No. 001-33926)) |
| 23.1 | - Consents of Independent Registered Public Accounting Firms |
| 24 | - Power of Attorney (set forth on the signature page hereto). |
| 31.1 | - Certification of Chief Executive Officer pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934 |
Exhibit
Number
| Description
|
| 31.2 | -Certification of Executive Vice President pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934
|
31.3
| - Certification of Chief Financial Officer pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934 |
32.1 | - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | - Certification of Executive Vice President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.3
| -Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | - XBRL Instance Document |
| 101.SCH | - XBRL Taxonomy Schema Document |
| 101.CAL | - XBRL Taxonomy Calculation Linkbase Document |
| 101.LAB | - XBRL Taxonomy Label Linkbase Document |
| 101.PRE | - XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF | - XBRL Taxonomy Extension Definition Linkbase Document |
| (b) | Exhibits required by Regulation 601 S-K |
See (a) 3 of this Item 15
| (c) | Financial Statement Schedules |
See (a) 2 of this Item 15
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Arabian American Development Company,Trecora Resources, a Delaware corporation, and the undersigned directors and officers of Arabian American Development Company,Trecora Resources, hereby constitutes and appoints Nicholas CarterSimon Upfill-Brown its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES
Dated: March 14, 2014 16, 2017 By: /s/ Nicholas CarterSimon Upfill-Brown
Nicholas CarterSimon Upfill-Brown
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 14, 2014.16, 2017.
| Signature | Title |
/s/ Nicholas CarterSimon Upfill-Brown Nicholas CarterSimon Upfill-Brown
| President, Chief Executive Officer and Director (principal executive officer) |
/s/ Simon Upfill-BrownSami Ahmad Simon Upfill-BrownSami Ahmad
| Executive Vice President
Chief Financial Officer
(principal financial officer) |
/s/ Connie Cook Connie Cook | Chief Financial Officer
Vice President of Accounting and Compliance
(principal financial and accounting officer) |
/s/ Nicholas Carter Nicholas Carter | Chairman of the Board and Director |
/s/ John R. Townsend John R. Townsend | Director |
/s/ Allen P. McKeePamela R. Butcher Allen P. McKeePamela R. Butcher
| Director |
/s/ Joseph P. Palm Joseph P. Palm | Director |
/s/ Ghazi Sultan
Ghazi Sultan
| Director |
/s/ Gary K. Adams Gary K. Adams | Director |
/s/ Karen A. Twitchell Karen A. Twitchell | Director |
INDEX TO FINANCIAL STATEMENTS | Page |
| F-2 |
| | |
| F-3 |
| | |
| F-5 |
| | |
| F-6 |
| | |
| F-7 |
| | |
| F-8 |
| | |
| F-10 |
| | |
| INDEX TO FINANCIAL STATEMENT SCHEDULES | |
| | |
| F-32F-38 |
| | |
| F-33F-39 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Arabian American Development Company
Trecora Resources
We have audited the accompanying consolidated balance sheets of Arabian American Development CompanyTrecora Resources and Subsidiaries (the Company) as of December 31, 20132016 and 2012,2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013.2016. Our auditaudits also includesinclude the financial statement schedule listed in the index at Item 15(a). Arabian American Development Company’sTrecora Resources’ management is responsible for these financial statements and schedule. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arabian American Development CompanyTrecora Resources and subsidiaries as of December 31, 20132016 and 2012,2015, and the results of theirits operations and theirits cash flows for each of the three years in the three-year period ended December 31, 20132016, in conformity with U. S.U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arabian American Development Company’sTrecora Resources’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 201416, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
adverse opinion.
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 14, 2014
16, 2017
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | December 31, | |
| | | 2013 | | | 2012 | |
| | | (thousands of dollars) | |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 7,608 | | | $ | 9,508 | |
| Trade receivables, net (Note 5) | | | 22,069 | | | | 15,802 | |
| Advance to AMAK (Note 8) | | | 536 | | | | 2,162 | |
| Prepaid expenses and other assets | | | 2,075 | | | | 1,561 | |
| Contractual based intangible assets (Note 2) | | | 104 | | | | 250 | |
| Inventories (Note 6) | | | 12,063 | | | | 9,840 | |
| Deferred income taxes (Note 15) | | | 1,324 | | | | 1,054 | |
| Taxes receivable | | | 571 | | | | 1,182 | |
| | | | | | | | | |
| Total current assets | | | 46,350 | | | | 41,359 | |
| | | | | | | | | |
PLANT, PIPELINE, AND EQUIPMENT – AT COST | | | 75,128 | | | | 68,482 | |
| LESS ACCUMULATED DEPRECIATION | | | (33,203 | ) | | | (28,062 | ) |
| | | | | | | | | |
| PLANT, PIPELINE, AND EQUIPMENT, NET (Note 7) | | | 41,925 | | | | 40,420 | |
| | | | | | | | | |
| INVESTMENT IN AMAK (Note 8) | | | 54,095 | | | | 37,894 | |
| MINERAL PROPERTIES IN THE UNITED STATES (Note 9) | | | 588 | | | | 588 | |
CONTRACTUAL BASED INTANGIBLE ASSETS, net of current portion (Note 2) | | | - | | | | 104 | |
| OTHER ASSETS | | | 709 | | | | 11 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 143,667 | | | $ | 120,376 | |
| | | December 31, | |
| | | 2016 | | | 2015 | |
| | | (thousands of dollars) | |
ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 8,389 | | | $ | 18,623 | |
| Trade receivables, net (Note 6) | | | 22,193 | | | | 19,474 | |
| Prepaid expenses and other assets (Note 7) | | | 3,511 | | | | 2,392 | |
| Inventories (Note 8) | | | 17,871 | | | | 15,804 | |
| Deferred income taxes (Note 17) | | | 1,615 | | | | 2,116 | |
| Taxes receivable | | | 3,983 | | | | 7,672 | |
| | | | | | | | | |
| Total current assets | | | 57,562 | | | | 66,081 | |
| | | | | | | | | |
PLANT, PIPELINE, AND EQUIPMENT – AT COST | | | 194,486 | | | | 143,471 | |
| LESS ACCUMULATED DEPRECIATION | | | (54,477 | ) | | | (46,564 | ) |
| | | | | | | | | |
| PLANT, PIPELINE, AND EQUIPMENT, NET (Note 9) | | | 140,009 | | | | 96,907 | |
| | | | | | | | | |
| GOODWILL (Note 10) | | | 21,798 | | | | 21,798 | |
| OTHER INTANGIBLE ASSETS, net (Note 10) | | | 22,669 | | | | 24,549 | |
| INVESTMENT IN AMAK (Note 11) | | | 49,386 | | | | 47,697 | |
| MINERAL PROPERTIES IN THE UNITED STATES (Note 12) | | | 588 | | | | 588 | |
| OTHER ASSETS | | | 87 | | | | 171 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 292,099 | | | $ | 257,791 | |
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
| | | December 31, | |
| | | 2013 | | | 2012 | |
| | | (thousands of dollars) | |
| LIABILITIES | | | | | | |
CURRENT LIABILITIES | | | | | | |
| Accounts payable | | $ | 7,362 | | | $ | 6,306 | |
| Accrued interest | | | 102 | | | | 96 | |
| Current portion of derivative instruments (Notes 4 and 19) | | | 292 | | | | 301 | |
| Accrued liabilities (Note 11) | | | 3,048 | | | | 2,687 | |
| Accrued liabilities in Saudi Arabia (Note 12) | | | 140 | | | | 140 | |
| Notes payable (Note 10) | | | 12 | | | | 12 | |
| Current portion of post-retirement benefit (Note 20) | | | 278 | | | | 269 | |
| Current portion of long-term debt (Note 10) | | | 1,400 | | | | 1,500 | |
| Current portion of other liabilities | | | 1,654 | | | | 880 | |
| | | | | | | | | |
| Total current liabilities | | | 14,288 | | | | 12,191 | |
| | | | | | | | | |
LONG-TERM DEBT, net of current portion (Note 10) | | | 11,839 | | | | 14,239 | |
POST- RETIREMENT BENEFIT, net of current portion (Note 20) | | | 649 | | | | 649 | |
| | | | | | | | | |
DERIVATIVE INSTRUMENTS, net of current portion (Notes 4 and 19) | | | 319 | | | | 592 | |
OTHER LIABILITIES, net of current portion | | | 1,369 | | | | 379 | |
DEFERRED INCOME TAXES (Note 15) | | | 11,984 | | | | 10,094 | |
| | | | | | | | | |
| Total liabilities | | | 40,448 | | | | 38,144 | |
| | | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| | | | | | | | | |
| EQUITY | | | | | | | | |
Common Stock - authorized 40 million shares of $.10 par value; issued and outstanding, 23.8 million and 23.8 million shares in 2013 and 2012, respectively | | | 2,383 | | | | 2,381 | |
| Additional Paid-in Capital | | | 46,064 | | | | 44,791 | |
| Accumulated Other Comprehensive Loss | | | (366 | ) | | | (580 | ) |
| Retained Earnings | | | 54,849 | | | | 35,351 | |
| Total Arabian American Development Company Stockholders’ Equity | | | 102,930 | | | | 81,943 | |
| Noncontrolling interest | | | 289 | | | | 289 | |
| Total equity | | | 103,219 | | | | 82,232 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND EQUITY | | $ | 143,667 | | | $ | 120,376 | |
| | | December 31, | |
| | | 2016 | | | 2015 | |
| | | (thousands of dollars) | |
LIABILITIES | | | | | | |
CURRENT LIABILITIES | | | | | | |
| Accounts payable | | $ | 13,306 | | | $ | 8,090 | |
| Current portion of derivative instruments (Notes 5 and 22) | | | 58 | | | | 118 | |
| Accrued liabilities (Note 14) | | | 2,017 | | | | 4,062 | |
| Current portion of post-retirement benefit (Note 23) | | | 316 | | | | 294 | |
| Current portion of long-term debt (Note 13) | | | 10,145 | | | | 8,061 | |
| Current portion of other liabilities | | | 870 | | | | 2,050 | |
| | | | | | | | | |
| Total current liabilities | | | 26,712 | | | | 22,675 | |
| | | | | | | | | |
LONG-TERM DEBT, net of current portion (Note 13) | | | 73,107 | | | | 73,169 | |
POST- RETIREMENT BENEFIT, net of current portion (Note 23) | | | 897 | | | | 649 | |
| | | | | | | | | |
DERIVATIVE INSTRUMENTS, net of current portion (Notes 5 and 22) | | | - | | | | 59 | |
OTHER LIABILITIES, net of current portion | | | 2,309 | | | | 2,351 | |
DEFERRED INCOME TAXES (Note 17) | | | 24,698 | | | | 16,503 | |
| | | | | | | | | |
| Total liabilities | | | 127,723 | | | | 115,406 | |
| | | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 15) | | | | | | | | |
| | | | | | | | | |
EQUITY | | | | | | | | |
Common Stock ‑ authorized 40 million shares of $.10 par value; issued 24.5 million in 2016 and 2015 and outstanding 24.2 million in 2016 and 2015 | | | 2,451 | | | | 2,416 | |
| Additional Paid-in Capital | | | 53,474 | | | | 50,662 | |
| Common Stock in Treasury, at cost 0.3 million shares | | | (284 | ) | | | - | |
| Retained Earnings | | | 108,446 | | | | 89,018 | |
| Total Trecora Resources Stockholders’ Equity | | | 164,087 | | | | 142,096 | |
| Noncontrolling interest | | | 289 | | | | 289 | |
| Total equity | | | 164,376 | | | | 142,385 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND EQUITY | | $ | 292,099 | | | $ | 257,791 | |
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31,
| | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | |
| | | (thousands of dollars) | | | (thousands of dollars) | |
| Revenues | | | | | | | | | | | | | | | | | | |
| Petrochemical product sales | | $ | 230,643 | | | $ | 218,512 | | | $ | 194,620 | | |
| Processing | | | 5,584 | | | | 4,346 | | | | 4,897 | | |
| Petrochemical and product sales | | | $ | 193,581 | | | $ | 227,937 | | | $ | 280,866 | |
| Processing fees | | | | 18,818 | | | | 14,039 | | | | 8,777 | |
| | | | 236,227 | | | | 222,858 | | | | 199,517 | | | | 212,399 | | | | 241,976 | | | | 289,643 | |
| Operating costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of petrochemical product sales and Processing (including depreciation of $3,518, $3,053, and $2,744, respectively) | | | 201,064 | | | | 192,100 | | | | 173,600 | | |
| Cost of petrochemical, product sales, and processing (including depreciation and amortization of $9,016, $8,335, and $5,116, respectively) | | | | 172,497 | | | | 184,967 | | | | 246,140 | |
| Gross Profit | | | 35,163 | | | | 30,758 | | | | 25,917 | | | | 39,902 | | | | 57,009 | | | | 43,503 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| General and Administrative Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| General and administrative | | | 14,672 | | | | 12,782 | | | | 11,778 | | | | 20,434 | | | | 20,243 | | | | 17,461 | |
| Depreciation | | | 521 | | | | 520 | | | | 476 | | | | 761 | | | | 725 | | | | 560 | |
| | | | 15,193 | | | | 13,302 | | | | 12,254 | | | | 21,195 | | | | 20,968 | | | | 18,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 19,970 | | | | 17,456 | | | | 13,663 | | | | 18,707 | | | | 36,041 | | | | 25,482 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 15 | | | | 3 | | | | 4 | | |
| Interest expense | | | (520 | ) | | | (547 | ) | | | (699 | ) | | | (1,985 | ) | | | (2,217 | ) | | | (1,042 | ) |
| Losses on cash flow hedge reclassified from OCI | | | (301 | ) | | | (359 | ) | | | (414 | ) | | | - | | | | - | | | | (378 | ) |
| Equity in earnings (loss) of AMAK (Note 8) | | | 4,703 | | | | (211 | ) | | | (1,018 | ) | |
| Gain from additional equity issuance by AMAK (Note 8) | | | 3,997 | | | | -- | | | | 8,850 | | |
| Miscellaneous income (expense) | | | (219 | ) | | | (117 | ) | | | 3 | | |
| Bargain purchase gain from acquisition | | | | 11,549 | | | | - | | | | - | |
| Equity in earnings (loss) of AMAK (Note 11) | | | | (1,479 | ) | | | (5,325 | ) | | | (1,072 | ) |
| Gain from additional equity issuance by AMAK (Note 11) | | | | 3,168 | | | | - | | | | - | |
| Miscellaneous expense | | | | (28 | ) | | | (137 | ) | | | (272 | ) |
| | | | 7,675 | | | | (1,231 | ) | | | 6,726 | | | | 11,225 | | | | (7,679 | ) | | | (2,764 | ) |
| Income before income tax expense | | | 27,645 | | | | 16,225 | | | | 20,389 | | | | 29,932 | | | | 28,362 | | | | 22,718 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax expense | | | 8,147 | | | | 5,904 | | | | 6,505 | | | | 10,504 | | | | 9,764 | | | | 7,147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 19,498 | | | | 10,321 | | | | 13,884 | | | | 19,428 | | | | 18,598 | | | | 15,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss attributable to Noncontrolling Interest | | | -- | | | | -- | | | | -- | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to Arabian American Development Company | | $ | 19,498 | | | $ | 10,321 | | | $ | 13,884 | | |
| Net income attributable to Trecora Resources | | | $ | 19,428 | | | $ | 18,598 | | | $ | 15,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per common share | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share (dollars) | | $ | 0.81 | | | $ | 0.43 | | | $ | 0.58 | | | $ | 0.80 | | | $ | 0.76 | | | $ | 0.64 | |
| Diluted earnings per share (dollars) | | $ | 0.79 | | | $ | 0.42 | | | $ | 0.57 | | | $ | 0.78 | | | $ | 0.74 | | | $ | 0.63 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of common | | | | | | | | | | | | | | | | | | | | | | | | |
| shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 24,115 | | | | 24,081 | | | | 23,993 | | | | 24,284 | | | | 24,370 | | | | 24,188 | |
| Diluted | | | 24,745 | | | | 24,745 | | | | 24,267 | | | | 24,982 | | | | 25,181 | | | | 24,896 | |
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31,
| | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | |
| | | (thousands of dollars) | | | (thousands of dollars) | |
| | | | | | | | | | | | | | | | | | | |
| NET INCOME | | $ | 19,498 | | | $ | 10,321 | | | $ | 13,884 | | | $ | 19,428 | | | $ | 18,598 | | | $ | 15,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER COMPREHENSIVE GAIN (LOSS), NET OF TAX | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during period | | | 515 | | | | 527 | | | | (426 | ) | |
| OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | | | | | | | | | | |
| Unrealized holding gains arising during period | | | | - | | | | - | | | | 744 | |
| Less: reclassification adjustment included in net income | | | 301 | | | | 359 | | | | (414 | ) | | | - | | | | - | | | | 378 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER COMPREHENSIVE GAIN (LOSS), NET OF TAX (Note 19) | | | 214 | | | | 168 | | | | (12 | ) | |
| OTHER COMPREHENSIVE INCOME , NET OF TAX (Note 22) | | | | - | | | | - | | | | 366 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| COMPREHENSIVE INCOME | | $ | 19,712 | | | $ | 10,489 | | | $ | 13,872 | | | $ | 19,428 | | | $ | 18,598 | | | $ | 15,937 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
ARABIAN AMERICAN DEVELOPMENT COMPANYTRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2013, 2012,2016, 2015, and 20112014
| | | ARABIAN AMERICAN DEVELOPMENT STOCKHOLDERS | | | | | | | | | | | | | | | TRECORA RESOURCES STOCKHOLDERS | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | Additional | | | Other | | | | | | | | | Non- | | | | | | | | | | | | Additional | | | | | | Other | | | | | | | | | Non- | | | | |
| | | Common Stock | | | Paid-In | | | Comprehensive | | | Retained | | | | | | Controlling | | | Total | | | Common Stock | | | Paid-In | | | Treasury | | | Comprehensive | | | Retained | | | | | | Controlling | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Total | | | Interest | | | Equity | | | Shares | | | Amount | | | Capital | | | Stock | | | Loss | | | Earnings | | | Total | | | Interest | | | Equity | |
| | | (thousands) | | | (thousands of dollars) | | | (thousands) | | | | | | (thousands of dollars) | |
| JANUARY 1, 2011 | | | 23,682 | | | $ | 2,368 | | | $ | 43,163 | | | $ | (736 | ) | | $ | 11,146 | | | $ | 55,941 | | | $ | 289 | | | $ | 56,230 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | - | | | | - | | | | 190 | | | | - | | | | - | | | | 190 | | | | - | | | | 190 | | |
| Issued to Employees | | | - | | | | - | | | | 585 | | | | - | | | | - | | | | 585 | | | | - | | | | 585 | | |
| Issued to Former Director | | | - | | | | - | | | | 97 | | | | - | | | | - | | | | 97 | | | | - | | | | 97 | | |
| Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | 41 | | | | 4 | | | | 87 | | | | - | | | | - | | | | 91 | | | | - | | | | 91 | | |
| Issued to Employees | | | 8 | | | | 1 | | | | 16 | | | | - | | | | - | | | | 17 | | | | - | | | | 17 | | |
Unrealized Loss on Interest Rate Swap (net of income tax benefit of $6) | | | - | | | | - | | | | - | | | | (12 | ) | | | - | | | | (12 | ) | | | - | | | | (12 | ) | |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | 13,884 | | | | 13,884 | | | | - | | | | 13,884 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2011 | | | 23,731 | | | $ | 2,373 | | | $ | 44,138 | | | $ | (748 | ) | | $ | 25,030 | | | $ | 70,793 | | | $ | 289 | | | $ | 71,082 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | - | | | | - | | | | 270 | | | | - | | | | - | | | | 270 | | | | - | | | | 270 | | |
| Issued to Employees | | | - | | | | - | | | | 489 | | | | - | | | | - | | | | 489 | | | | - | | | | 489 | | |
| Issued to Former Director | | | - | | | | - | | | | (317 | ) | | | - | | | | - | | | | (317 | ) | | | - | | | | (317 | ) | |
| Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | 53 | | | | 5 | | | | 92 | | | | - | | | | - | | | | 97 | | | | - | | | | 97 | | |
| Issued to Employees | | | 21 | | | | 3 | | | | 119 | | | | - | | | | - | | | | 122 | | | | - | | | | 122 | | |
Unrealized Gain on Interest Rate Swap (net of income tax expense of $73) | | | - | | | | - | | | | - | | | | 168 | | | | - | | | | 168 | | | | - | | | | 168 | | |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | 10,321 | | | | 10,321 | | | | - | | | | 10,321 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2012 | | | 23,805 | | | $ | 2,381 | | | $ | 44,791 | | | $ | (580 | ) | | $ | 35,351 | | | $ | 81,943 | | | $ | 289 | | | $ | 82,232 | | |
| JANUARY 1, 2014 | | | | 23,832 | | | $ | 2,383 | | | $ | 46,064 | | | | - | | | $ | (366 | ) | | $ | 54,849 | | | $ | 102,930 | | | $ | 289 | | | $ | 103,219 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | - | | | | - | | | | 377 | | | | - | | | | - | | | | 377 | | | | - | | | | 377 | | | | - | | | | - | | | | 330 | | | | - | | | | - | | | | - | | | | 330 | | | | - | | | | 330 | |
| Issued to Employees | | | - | | | | - | | | | 559 | | | | - | | | | - | | | | 559 | | | | - | | | | 559 | | | | - | | | | - | | | | 1,555 | | | | - | | | | - | | | | - | | | | 1,555 | | | | - | | | | 1,555 | |
| Issued to Former Director | | | - | | | | - | | | | 97 | | | | - | | | | - | | | | 97 | | | | - | | | | 97 | | | | - | | | | - | | | | 97 | | | | - | | | | - | | | | - | | | | 97 | | | | - | | | | 97 | |
| Warrants | | | - | | | | - | | | | 181 | | | | - | | | | - | | | | 181 | | | | - | | | | 181 | | | | - | | | | - | | | | 79 | | | | - | | | | - | | | | - | | | | 79 | | | | - | | | | 79 | |
| Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | 12 | | | | 1 | | | | 6 | | | | - | | | | - | | | | 7 | | | | - | | | | 7 | | | | 88 | | | | 9 | | | | (8 | ) | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | 1 | |
| Issued to Employees | | | 15 | | | | 1 | | | | 53 | | | | - | | | | - | | | | 54 | | | | - | | | | 54 | | | | 55 | | | | 5 | | | | 165 | | | | - | | | | - | | | | - | | | | 170 | | | | - | | | | 170 | |
Unrealized Gain on Interest Rate Swap (net of income tax expense of $115) | | | - | | | | - | | | | - | | | | 214 | | | | - | | | | 214 | | | | - | | | | 214 | | |
| Other Comprehensive Income | | | | - | | | | - | | | | - | | | | - | | | | 366 | | | | - | | | | 366 | | | | - | | | | 366 | |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | 19,498 | | | | 19,498 | | | | - | | | | 19,498 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,571 | | | | 15,571 | | | | - | | | | 15,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2013 | | | 23,832 | | | $ | 2,383 | | | $ | 46,064 | | | $ | (366 | ) | | $ | 54,849 | | | $ | 102,930 | | | $ | 289 | | | $ | 103,219 | | |
| DECEMBER 31, 2014 | | | | 23,975 | | | $ | 2,397 | | | $ | 48,282 | | | $ | - | | | $ | - | | | $ | 70,420 | | | $ | 121,099 | | | $ | 289 | | | $ | 121,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | | - | | | | - | | | | 274 | | | | - | | | | - | | | | - | | | | 274 | | | | - | | | | 274 | |
| Issued to Employees | | | | - | | | | - | | | | 1,274 | | | | - | | | | - | | | | - | | | | 1,274 | | | | - | | | | 1,274 | |
| Issued to Former Director | | | | - | | | | - | | | | 97 | | | | - | | | | - | | | | - | | | | 97 | | | | - | | | | 97 | |
| Restricted common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Employees | | | | 14 | | | | - | | | | 587 | | | | - | | | | - | | | | - | | | | 587 | | | | - | | | | 587 | |
| Issued to Directors | | | | - | | | | - | | | | 43 | | | | - | | | | - | | | | - | | | | 43 | | | | - | | | | 43 | |
| Warrants | | | | 5 | | | | 1 | | | | (1 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | | 100 | | | | 10 | | | | (10 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Issued to Employees | | | | 64 | | | | 8 | | | | 116 | | | | - | | | | - | | | | - | | | | 124 | | | | - | | | | 124 | |
| Net Income | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 18,598 | | | | 18,598 | | | | - | | | | 18,598 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2015 | | | | 24,158 | | | $ | 2,416 | | | $ | 50,662 | | | $ | - | | | $ | - | | | $ | 89,018 | | | $ | 142,096 | | | $ | 289 | | | $ | 142,385 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | | - | | | | - | | | | 173 | | | | - | | | | - | | | | - | | | | 173 | | | | - | | | | 173 | |
| Issued to Employees | | | | - | | | | - | | | | 1,234 | | | | - | | | | - | | | | - | | | | 1,234 | | | | - | | | | 1,234 | |
| Issued to Former Director | | | | - | | | | - | | | | 48 | | | | - | | | | - | | | | - | | | | 48 | | | | - | | | | 48 | |
| Restricted common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | | - | | | | - | | | | 254 | | | | - | | | | - | | | | - | | | | 254 | | | | - | | | | 254 | |
| Issued to Employees | | | | - | | | | - | | | | 783 | | | | - | | | | - | | | | - | | | | 783 | | | | - | | | | 783 | |
| Common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issued to Directors | | | | 13 | | | | 2 | | | | 58 | | | | - | | | | - | | | | - | | | | 60 | | | | - | | | | 60 | |
| Issued to Employees | | | | 51 | | | | 3 | | | | (8 | ) | | | 16 | | | | - | | | | - | | | | 11 | | | | - | | | | 11 | |
| Treasury stock transferred from TOCCO to TREC | | | | - | | | | 30 | | | | 270 | | | | (300 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
| Net Income | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 19,428 | | | | 19,428 | | | | | | | | 19,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2016 | | | | 24,222 | | | $ | 2,451 | | | $ | 53,474 | | | $ | (284 | ) | | $ | - | | | $ | 108,446 | | | $ | 164,087 | | | $ | 289 | | | $ | 164,376 | |
