UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

FORM 10-K
 
 (MARK ONE)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from ___________ to ________
 
Commission File Number 1-33926
 
 
TRECORA RESOURCES
 
 (Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
75-1256622
(I.R.S. Employer
Identification No.)
 
1650 Hwy 6 S, Suite 190
Sugar Land, TX
(Address of principal executive offices)
77478
(Zip code)

Registrant’s telephone number, including area code: (409) 385-8300
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of Class                                                      Name of exchange on which registered
Common stock, par value $0.10 per share                          New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨  Noý
 
 
 

 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨  No ý
 
_____________________

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer ¨                                                      Accelerated filer ý
 
Non-accelerated filer ¨                                                      Smaller reporting company¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes¨  No ý
 
The aggregate market value on June 30, 2014, of the registrant’s voting securities held by non-affiliates was approximately $199 million.
 
Number of shares of registrant’s Common Stock, par value $0.10 per share, outstanding as of March 5, 2015 (excluding 300,000 shares of treasury stock):  24,322,814.
 

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on or about May 20, 2015.

 
 

 

 
 
TABLE OF CONTENTS

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                PART IV
 
 
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PART I

Item 1.   Business.

General

Trecora Resources (the “Company”), formerly Arabian American Development Company, was incorporated in the State of Delaware in 1967. The Company’s principal business activities are the manufacturing of various specialty petrochemical products and synthetic waxes and the provision of custom processing services.  The Company also owns a 35% interest in Al Masane Al Kobra Mining Company, a Saudi Arabian closed joint stock mining company (“AMAK”) which is in commercial production of copper and zinc concentrate and a 55% interest in Pioche Ely Valley Mines, Inc. (“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 Trecora Resources and its subsidiaries.

On October 1, 2014,  Texas Oil & Chemical Co. II, Inc. (“Tocco”), a Texas corporation and a wholly owned subsidiary of the Company, completed the acquisition of 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 (the “Acquisition”).  The Acquisition was completed pursuant to a Stock Purchase Agreement dated as of September 19, 2014, by and among the Company, Tocco, Schumann/Steier Holdings, LLC (“SSH”), a Delaware limited liability company, and SSI.  On November 15, 2014, SSI’s name was changed to Trecora Chemical, Inc. (“TC”).

Business Segments

In October 2014 with the completion of the Acquisition, we began operating in two business segments; the manufacturing of various specialty petrochemical products and the manufacturing of specialty synthetic waxes.

Our specialty petrochemical products segment is conducted through South Hampton Resources, Inc. (“South Hampton”), a Texas corporation and wholly owned subsidiary of Tocco.  South Hampton owns and operates a specialty petrochemical facility near Silsbee, Texas which produces high purity hydrocarbons and other petroleum based products including isopentane, normal pentane, isohexane and hexane which may be used 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 industry.   Our petrochemical products are typically transported to customers by rail car, tank truck and iso-container.  South Hampton owns all of the capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”), a Texas corporation, which owns and operates pipelines that connect the South Hampton facility to a natural gas line, to South Hampton’s truck and rail loading terminal and to a major petroleum products pipeline owned by an unaffiliated third party.

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’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 capacity to process approximately 7,000 barrels per day of fresh feed with the Reforming 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

 
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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.
 
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 2014 and 2013 of approximately 84% and 70%, respectively, based upon 6,700 barrels per day. This compares to a rate of 72% for 2012 based upon 6,000 barrels per day.  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 two independent process units.  The two unit configuration also improves reliability by reducing the amount of total down time due to mechanical and other factors.  We are currently in the process of construction 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 full operation in 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. Together they realized a utilization rate of 36% for 2014, 42% for 2013 and 37% for 2012.  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 100 storage tanks with total capacity approaching 233,000 barrels, and 127 acres of land at the plant site, 92 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 55 acres of which 25 acres are developed.

We obtain our feedstock requirements from a sole supplier.  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 on a secured basis for the period from June 1, 2004 through May 31, 2006, subsequently extended to May 31, 2007, and annually thereafter with thirty days written notice of termination by either party.  In December 2006 the agreement was modified so that all purchases are on open account under normal credit terms and amounts owed are classified as current.    The current supply agreement expires at the end of July 2015, and we are in the process of negotiating a renewal.

As a result of various expansion programs and the toll processing contracts, essentially all of the standing equipment at South Hampton 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 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’s facility to: (1) a natural gas line, (2) South Hampton’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.  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.  We have adopted a strategy of moving our 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.  With this pricing mechanism, product prices move in conjunction with feedstock

 
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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 reduce 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 volatility and increase predictability of product margins.  However, we continue to investigate alternative product pricing methods.  During 2014 and 2013, sales to two customers exceeded 10% of our consolidated revenues.  Specifically, in 2014 sales to ExxonMobil and their affiliates represented 23.2% of revenues and sales to Tricon Energy represented 10.5%.  During 2013 sales to ExxonMobil and their affiliates represented 16.2% of revenues and sales to Flint Hills Resources represented 16.5%.  In both cases these sales represented multiple products at 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.

United States Specialty Synthetic Wax Operations

Trecora Chemical is a leading manufacturer of specialty synthetic waxes and also provides custom processing services from its 21 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 the on-site access to a 17” steam pipeline and dedicated hydrogen line create a platform for expansion of both wax production capacity and customer 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 and rubber; and dry stir-in additives for inks.  In oxidized forms, applications also include use in textile emulsions and lubricants in PVC extrusion.

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 the development of new wax products.

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.

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.

Environmental

General. Our operations are subject 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 relating 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.

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

 
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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. To 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

 
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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 Hampton 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 Hampton in 1981. Analysis of the material indicates it entered the ground prior to South Hampton’s acquisition of the property.  The other pool is under the original South Hampton 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.

 
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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 Hampton site is accumulated and sold as a by-product.  Approximately 75 barrels were recovered during 2014 and 71 barrels during 2013.  The recovered material had an economic value of approximately $6,700 during 2014 and $7,000 during 2013.  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 $0.9 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 hydrocarbons (hexanes) is phased out in parts of the industry, several manufacturers of such hydrocarbons 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 hydrocarbons in their business.

Personnel

The number of regular employees was approximately 271, 166 and 168 for the years ended December 31, 2014, 2013 and 2012, respectively.  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.  The significant increase during 2014 was primarily due to the Acquisition and D-train construction personnel needs.

Mr. Ghazi Sultan, a former director of the Company, is the Company’s representative in Saudi Arabia.

Competition

The petrochemical and specialty wax 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.

Investment in AMAK

As of December 31, 2014, we owned a 35% interest in AMAK.

AMAK commenced commercial operation in July 2012 and by the end of that year had shipped approximately 20,000 metric tons of copper and zinc concentrate to smelters in India, Korea and China.  During 2013 AMAK shipped approximately 72,000 tons of copper and zinc concentrate.    During 2014 AMAK shipped approximately 61,000 metric tons of copper and zinc concentrate.  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.  AMAK owns the Al Masane mine, processing plant and ancillary facilities located in Najran province, southwestern Saudi Arabia approximately 75 km northwest of the city of Najran.
 
On October 24, 2010, we executed a limited guarantee in favor of the Saudi Industrial Development Fund ("SIDF") guarantying 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 loan 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.


 
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Accounting Treatment of Investment in AMAK.

We have significant influence over the operating and financial policies of AMAK 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.  Two of our directors are on the Audit Committee of the Board of Directors of AMAK with one serving as chairman of that committee.   We also have three directors on the Commercial Committee of AMAK.  We also spearheaded the process of locating, interviewing and hiring a new chief executive officer for AMAK.  The new chief executive officer began work in March 2014.  See Note 10 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, mineral prices, 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.

Available Information

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 Trecora Resources, P. O. Box 1636, Silsbee, TX  77656, (409) 385-8300.  These reports are also available free of charge on our website, www.trecora.com, as soon as reasonably practicable after they are filed electronically with the SEC.  South Hampton 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. These websites and the information contained on or connected to them are not incorporated by reference herein to the SEC filings.

Item 1A.   Risk Factors.

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 2014 sales to two customers each exceeded 10 percent of the South Hampton’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.

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

The demand for our 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 our 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

 
7


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

Our 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 our 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.

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 Al Masane mining lease is 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 our 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

 
8


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

 
9


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 potential for future terrorist acts and other recent events, including ISIL activities in the Middle East and the on-going Iranian nuclear confrontation 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.  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 the Kingdom of Saudi Arabia.  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

 
10


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 2014 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.  In March 2014 AMAK hired a very experienced Chief Executive Officer.  Notwithstanding the utilization of these consultants or hiring of experienced personnel, our risk will continue to and will ultimately depend upon 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 them 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 our 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.

Cancellation of the current mining lease held by AMAK

In the event that the Saudi Ministry of Petroleum and Minerals cancels the current lease, 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.

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.

Excess Products

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

 
11


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.

Item 1B.   Unresolved Staff Comments.

None

Item 2.  Properties.

United States Specialty Petrochemical Facility

South Hampton 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 State 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’s facility to: (1) a natural gas line, (2) South Hampton’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.

United States Specialty Polyethylene Wax Facility

TC owns and operates a specialty synthetic wax facility from its 21 acre plant site located in Pasadena, Texas.  The facility contains 6 stainless steel reactors ranging in size from 3,300 to 16,000 gallons with overhead condensing systems, two 4,000 gallon glass line reactors; 3 Sandvik forming belts with pastilling capabilities, two 12 square meter wipe file evaporators, steel batch column with 10,000 gallon still pot and 20 theoretical stages of structured packing.  There is also a fully equipped laboratory onsite.

Investment 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 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 became fully operational during the second half of 2012.

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 2012-2014
12/31/14
 
Increase (Decrease)
 
Gold
$1,448.33 per ounce
$1,206.00 per ounce
    (16.73 )%
Silver
$ 24.67 per ounce
$ 15.97  per ounce
    (35.27 )%
Copper
$  3.25 per pound
$  2.92  per pound
    (10.15 )%
Zinc
$  0.88 per pound
$  0.99  per pound
    12.50 %


 
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Of course, falling commodity prices negatively impact AMAK.  However, on the cost reduction side, in late 2014 AMAK renegotiated a more favorable plant operations and maintenance contract with China National Geological and Mining Corporation, and AMAK’s management is making efforts to eliminate processing inefficiencies to enhance productivity and consequently, profitability in future years.

Three mineralized zones, the Saadah, Al Houra and Moyeath, were outlined by 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 been adjusted to reflect production that began in July 2012:
 
Zone
Proven Reserves
(Tonnes)
(000’s)
Copper
(%)
Zinc
(%)
Gold
 (g/t)
Silver
(g/t)
Saadah
448
1.5
3.7
0.8
21.0
Al Houra
29
0.8
3.8
0.7
21.0
Moyeath
-
-
-
-
-
Total
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

Our rights to obtain additional mining licenses to other adjoining areas were also transferred to AMAK in December 2008 as part of our initial capital contribution.  AMAK is currently going through the process with the Saudi Arabian government to apply for licenses after reviewing feasibility.

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 Hampton 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.   On December 29, 2014, we received notice that the labor court had rejected all of his claims except for holidays and end of service benefits and awarded him a total of $495,000.  Due to the size of the award and associated litigation costs, we have decided not to appeal this decision and accepted the judgment.

In March 2011 Mr. El Khalidi filed suit against the Company in Texas alleging breach of contract and other claims.  On July 24, 2013, the 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution in this matter.  On May 22, 2014, the Ninth Court of Appeals affirmed the dismissal for want of prosecution.  On September 19, 2014, the Supreme Court of Texas denied Mr. El Khalidi’s petition for review.  On May 1, 2014, Mr. El Khalidi refiled 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

 
13


County, Texas where it is currently pending.  We believe that the above claim is unsubstantiated and plan to vigorously defend the case.

Liabilities of approximately $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 Hampton received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas which was subsequently transferred to the 11th Judicial District Court of Harris County, Texas.  The suit alleges that the plaintiff became ill from exposure to asbestos.  There are approximately 44 defendants named in the suit.  South Hampton has placed its insurers on notice of the claim and plans to vigorously defend the case. No accrual has been recorded for this claim.

Item 4. Mine Safety Disclosures.

Not applicable.

 
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PART II

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”) during the last two fiscal years under the symbols: TREC or ARSD. The following table sets forth the high and low bid prices for each quarter as reported by NYSE. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

   
NYSE
 
   
High
   
Low
 
Fiscal Year Ended December 31, 2014
           
Fourth Quarter ended December 31, 2014
  $ 15.61     $ 10.55  
Third Quarter ended September 30, 2014
  $ 13.48     $ 11.36  
Second Quarter ended June 30, 2014
  $ 12.83     $ 9.72  
First Quarter ended March 31, 2014
  $ 13.17     $ 10.50  
                 
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  

At March 6, 2015, there were approximately 445 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, 2014.  See Note 12 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, 2014.  The graph was constructed on the assumption that $100 was invested in our common stock and each comparative on December 31, 2009, and that any dividends were fully reinvested.
 

 
 
15

Item 6.  Selected Financial Data.

The following is a five-year summary of selected financial data (in thousands, except per share amounts):

   
2014
   
2013
   
2012
   
2011
   
2010
 
Revenues
  $ 289,643     $ 236,227     $ 222,858     $ 199,517       139,110  
Net Income
    15,571       19,498       10,321       13,884       2,075  
Net Income Per Share-Diluted
    0.63       0.79       0.42       0.57       0.09  
Total Assets (at December 31)
    232,074       143,667       120,376       117,833       91,916  
Current Portion of Long-Term Debt
 (at December 31)
    7,000       1,400       1,500       1,500       1,865  
Total Long-Term Debt Obligations
 (at December 31)
    73,450       11,839       14,239       22,739       20,836  

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, 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.
 
Overview

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 and specialty waxes.  Our business model involves the manufacture and sale of tangible 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.

Business Environment and Risk Assessment

Petrochemical Operations

Worldwide petrochemical demand improved during 2014, 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 2014 feedstock prices fluctuated significantly with a substantial decrease beginning in the fourth quarter.  Prices fluctuated $0.75 per gallon from the high to the low per gallon price.  Typically, during falling prices we experience better margins since at least 50% of our selling prices are on formula pricing which follows market prices calculated upon the prior month.

 
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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.  We believe the wax market is in a long term growth trend as users strive to reduce volatile organic compound emissions and drive performance improvements.  Increased feedstock supply should also allow the Company to participate in a disciplined way in future growth.

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

   
December 31, 2014
   
December 31, 2013
   
December 31, 2012
 
Days sales outstanding in accounts receivable
    35.6       34.1       25.9  
Days sales outstanding in inventory
    16.1       18.6       16.1  
Days sales outstanding in accounts payable
    12.0       11.4       10.3  
Days of working capital
    39.8       41.4       31.7  

Our days sales outstanding in accounts receivable increased from 2013 to 2014 and from 2012 to 2013 due to increases in deferred sales.  Deferred sales increased by approximately $0.4 million from 2013 to 2014 and $1.8 million from 2012 to 2013.  Deferred sales are not recognized until the customer accepts delivery of the product and title has transferred.  The majority of these sales are to foreign customers with longer payment terms due to increased shipping times.

Sources and Uses of Cash

Cash and cash equivalents increased by $0.9 million during the year ended December 31, 2014.  The change in cash and cash equivalents is summarized as follows:

   
2014
   
2013
   
2012
 
Net cash provided by (used in)
 
(in thousands)
 
  Operating activities
  $ 23,205     $ 13,242     $ 21,373  
  Investing activities
    (88,942 )     (12,702 )     (10,185 )
  Financing activities
    66,635       (2,440 )     (8,354 )
Increase (decrease) in cash and equivalents
  $ 898     $ (1,900 )   $ 2,834  
Cash and cash equivalents
  $ 8,506     $ 7,608     $ 9,508  

Operating Activities

Operating activities generated cash of $23.2 million during fiscal 2014 as compared with $13.2 million of cash provided during fiscal 2013.  Although the Company’s net income decreased by $3.9 million from 2013 to 2014, the cash provided by operations increased by $10.0 million due primarily to the following factors:

·  
Net income for 2014 included a non-cash equity in loss from AMAK of $1.1 million as compared to equity in earnings from AMAK $4.7 million and gain on equity issued in AMAK of $4.0 million in 2013;

·  
Net income for 2014 included a non-cash depreciation and amortization charge of $5.7 million as compared to 2013 which included a non-cash depreciation charge of $4.0 million;

·  
Net income for 2014 included a non-cash share-based compensation charge of $2.1 million as compared to 2013 which included a non-cash share-based compensation charge of $1.2 million;

·  
Trade receivables increased approximately $3.4 million in 2014 (due to  a 9.9% increase in volume sold during the fourth quarter and receivables acquired from the Acquisition) as compared to an increase of approximately $6.3 million (due to a 40.1% increase in volume sold during the fourth quarter) in 2013;

·  
Inventory decreased approximately $2.6 million in 2014 (due to a 31.9% decrease in cost per gallon) as compared to an increase of approximately $2.2 million (due to a 58.8% increase in deferred sales) in 2013; and
 
 
17

·  
Accounts payable and accrued liabilities increased $1.8 million in 2014 (primarily due to the working capital adjustment payable for the Acquisition) as compared to an increase of $1.4 million (primarily due to an increase in the accrual for raw materials) in 2013.

These significant sources of cash were partially offset by the following decreases in cash provided by operations:

·  
Net income for 2014 included non-cash deferred income tax benefits of $1.9 million as compared to charges of $1.5 million in 2013;

·  
Prepaid expenses and other assets increased $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) as compared to an increase of $1.0 million in 2013 (primarily due to an increase in prepaid insurance and notes receivable from processing customers); and

·  
Other liabilities increased $0.1 million in 2014 (due to deferred revenue acquired from the Acquisition offset by recognition of deferred revenue during 2014) as compared to an increase of $3.0 million in 2013 (due to the receipt of funds from toll processing customers for modifications of toll processing facilities within the plant).

Operating activities generated cash of $13.2 million during fiscal 2013 as compared to $21.4 million during fiscal 2012.  Although our net income increased by $9.2 million from 2012 to 2013, cash provided by operations decreased by $8.1 million due primarily to the following factors:

·  
Net income for 2013 included non-cash equity in earnings from AMAK of $4.7 million and a gain on equity issued in AMAK of $4.0 million as compared to equity in loss from AMAK $0.9 million and gain on equity issued in AMAK of $0.7 million in 2012;

·  
Trade receivables increased approximately $6.3 million in 2013 (due to a 40.1% increase in volume sold during fourth quarter 2013) as compared to a decrease of approximately $7.4 million (due to a 2.4% decrease in price per gallon and a 16.8% decrease in volume sold during the fourth quarter) in 2012; and

·  
Inventory increased approximately $2.2 million in 2013 (due to a 58.8% increase in deferred sales at the end of 2013) as compared to an increase of approximately $0.4 million (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost per gallon) in 2012.

These significant sources of cash were partially offset by the following increases in cash provided by operations:

·  
Net income for 2013 included a non-cash depreciation charge of $4.0 million as compared to 2012 which included a non-cash depreciation charge of $3.6 million;

·  
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 income taxes of $1.5 million as compared to 2012 which included a non-cash charge for deferred income taxes of $0.5 million;

·  
Income tax receivable decreased approximately $0.6 million in 2013 (due to the overpayment of 2012 estimated taxes being applied to 2013) 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 compared to an increase of $0.4 million in 2012 (both years due to the receipt of funds from toll processing customers for modifications of toll processing facilities within the plant); and

·  
Accounts payable and accrued liabilities increased approximately $1.4 million in 2013 (primarily due to an increase in the accrual for raw materials) while in 2012 the same accounts increased by $0.2 million (primarily due to decreases in accruals for freight and utilities partially offset by an increase in the accrual for derivative settlements and raw material purchases).

 
18


Investing Activities

Cash used by investing activities during fiscal 2014 was approximately $88.9 million, representing an increase of approximately $76.2 million over the corresponding period of 2013.  The majority of the increase was due to the Acquisition for $74.8 million, net of $0.1 million in cash acquired as discussed in Note 3.  During 2014 we also expended $6.8 million on the D-train expansion, $0.9 million on tank farm improvements, $2.4 million on spare equipment, $0.3 on pipeline upgrades, and $4.4 million on various plant improvements and equipment.

Cash used by investing activities during fiscal 2013 was approximately $12.7 million, representing an increase of approximately $2.5 million over the corresponding period of 2012.  During 2013 we purchased an additional $7.5 million of stock in AMAK as discussed in Note 8, 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, and approximately $2.1 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 $2.0 million from AMAK which was previously advanced.

Financing Activities

Cash provided by financing activities during fiscal 2014 was approximately $66.6 million versus cash used of $2.4 million during the corresponding period of 2013.  During 2014 we entered into an amended and restated loan agreement with the bank as discussed in Note 12 for the Acquisition, financing for the D-train expansion and a working capital line.  We also made principal payments of $9.2 million on our term debt and $11.5 million on our line of credit.

Cash used by financing activities during fiscal 2013 was approximately $2.4 million versus cash used of $8.4 million during the corresponding period of 2012.  During 2013 we drew $6.0 million on our line of credit for working capital purposes and to fund the capital contribution to AMAK.  We also made principal payments of $1.5 million on our term debt and $7.0 million on our line of credit.

Credit Agreement

On October 1, 2014, Tocco, South Hampton, Gulf State, and TC (South Hampton, Gulf State 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 America, N.A., a national banking association, as Administrative Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger.

Subject to the terms and conditions of the 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 (the “Revolving Loan Commitment”) and (b) request up to $5.0 million of letters of credit and $5.0 million of swingline loans.  Each of the issuance of letters of credit and the advance of swingline loans shall be considered usage of the Revolving Loan Commitment.  All outstanding loans under the Revolving Loans must be repaid on October 1, 2019.  As of December 31, 2014, Tocco had borrowed funds under the Revolving Loans aggregating $7.2 million.

Under the ARC Agreement, Tocco also borrowed $70.0 million in a single advance term loan (the “Acquisition Term Loan”) to partially finance the Acquisition.

Under the ARC Agreement, Tocco also has 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 ends on December 31, 2015.  The Term Loans convert from a multiple advance loan to a “mini-perm” loan once Tocco has 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.  The Loans also include a $40,000,000 uncommitted increase option (the “Accordion Option”).  As of December 31, 2014, Tocco had borrowed funds under this agreement aggregating $5.0 million.

All of the Loans under the ARC Agreement will accrue interest at the lower of (i) a London interbank offered rate (“Eurodollar Rate”) plus a margin of between 2.00% and 2.50% based on the total leverage ratio of Tocco and its

 
19


subsidiaries on a consolidated basis, or (ii) a base rate (“Base Rate”) equal to the highest of the federal funds rate plus 0.50%, the rate announced by Bank of America, N.A. as its prime rate, and Eurodollar Rate plus 1.0%, plus a margin 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 will be payable quarterly using a ten year commercial style amortization, commencing on December 31, 2014.  The Acquisition Term Loan is 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 then outstanding unpaid principal balance of the Acquisition Term Loan.  Interest on the Term Loans will be payable quarterly using a fifteen year commercial style amortization, with interest only through December 31, 2015, and principal payments to commence March 31, 2016.  Interest on the Loans will be 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.

The Loans may be prepaid in whole or in part without premium or penalty (Eurodollar Rate Loans are prepayable only on the last days of related interest periods or upon payment of any breakage costs) and the lenders’ commitments relative thereto reduced or terminated.  Subject to certain exceptions and thresholds, outstanding Loans shall be prepaid by an amount equal to 100% of the net cash proceeds from: (i) all sales, transfers, licenses, lease or other disposition of any property by Tocco and Guarantors (other than a permitted transfer); (ii) any equity issuance by Tocco or the Guarantors; (iii) any debt issuance by Tocco or the Guarantors; or (iv) the receipt of any cash received by Tocco or the Guarantors not in the ordinary course of business.  Amounts prepaid in connection with the mandatory repayments described above will be applied first, to the principal repayment installments of the Acquisition Term Loan in inverse order of maturity, second, to the principal repayment installments of the Term Loans in inverse order of maturity and, third, to the Revolving Loans in the manner set forth in the Amended and Restated Credit Agreement.

All amounts owing under the ARC Agreement and all obligations under the guarantees will be secured in favor of the Lenders 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 in compliance with all covenants at December 31, 2014.

Our average floating interest rate on debt outstanding under our credit facility at December 31, 2014, was 2.67%.

The ARC Agreement replaced the May 25, 2006, Credit Agreement with Bank of America.

We were in compliance with all covenants at December 31, 2014.

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.

 
20

Results of Operations

Comparison of Years 2014, 2013, 2012

Specialty Petrochemical Segment (including corporate overhead for comparative purposes)

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.  These statements do not include the fourth quarter results for TC due to their insignificance to our 2014 operations.  See Note 18 to the Notes to the Consolidated Financial Statements.

   
2014
   
2013
   
Change
   
%Change
 
   
(in thousands)
       
Petrochemical Product Sales
  $ 277,623     $ 230,643     $ 46,980       20.4 %
Processing
    6,722       5,584       1,138       20.4 %
Gross Revenue
  $ 284,345     $ 236,227     $ 48,118       20.4 %
                                 
Volume of petrochemical sales (thousand gallons)
    82,785       67,066       15,719       23.4 %
                                 
Cost of Sales
  $ 238,455     $ 201,064     $ 37,391       18.6 %
Total Operating Expense*
    52,275       44,158       8,117       18.4 %
Natural Gas Expense*
    6,362       5,204       1,158       22.3 %
Operating Labor Costs*
    12,238       10,624       1,614       15.2 %
Transportation Costs*
    23,176       18,398       4,778       26.0 %
General & Administrative Expense
    18,743       14,672       4,071       27.7 %
Depreciation**
    4,064       4,039       25       0.6 %
Equity in Earnings (Losses) of AMAK
    (1,072 )     4,703       (5,775 )     (122.8 %)
Gain on Equity Issuance AMAK
    -       3,997       (3,997 )     (100.0 %)
                                 
Capital Expenditures
  $ 13,987     $ 6,828     $ 7,159       104.8 %
*Included in cost of sales
**Includes $3,523 and $3,518 for 2014 and 2013 which is included in cost of sales and operating expenses

   
2013
   
2012
   
Change
   
%Change
 
   
(in thousands)
       
Petrochemical Product Sales
  $ 230,643     $ 218,512     $ 12,131       5.6 %
Processing
    5,584       4,346       1,238       28.5 %
Gross Revenue
  $ 236,227     $ 222,858     $ 13,369       6.0 %
                                 
Volume of petrochemical sales (thousand gallons)
    67,066       63,553       3,513       5.5 %
                                 
Cost of Sales
  $ 201,064     $ 192,100     $ 8,964       4.7 %
Total Operating Expense*
    44,158       39,532       4,626       11.7 %
Natural Gas Expense*
    5,204       3,914       1,290       33.0 %
Operating Labor Costs*
    10,624       10,437       187       1.8 %
Transportation Costs*
    18,398       15,881       2,517       15.8 %
General & Administrative Expense
    14,672       12,782       1,890       14.8 %
Depreciation**
    4,039       3,573       466       13.0 %
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 %)
*Included in cost of sales
**Includes $3,518 and $3,053 for 2013 and 2012 which is included in cost of sales and operating expenses
 
 
 
21

 
Gross Revenue

2013-2014

Revenues increased from 2013 to 2014 by approximately 20.4% primarily due to an increase in sales volume of 23.4% and an increase in processing fees of 20.4%.

2012-2013

Revenues increased from 2012 to 2013 by approximately 6.0% primarily due to an increase in sales volume of 5.5% and an increase in processing fees of 28.5%.

Petrochemical Product Sales

2013-2014

Petrochemical product sales increased 20.4% from 2013 to 2014 due to an increase in total sales volume of 23.4% as noted above while average selling price declined slightly by 2.5%.  We say a significant decline in raw material prices during the fourth quarter of 2014 which caused our average selling price for the year to decline.  We shipped a record number of railcars during 2014; however, our iso-container shipments decreased slightly from 2013.  Deferred sales volume increased 12.6% from the end of 2013 to 2014 which delayed recognition until 2015.

2012-2013

Petrochemical product sales increased 5.6% from 2012 to 2013 due to an increase in total sales volume of 5.5% as noted above while average selling price remained stable.  Even though approximately 50% of our sales are based upon formulas derived from market prices of raw materials and those prices declined in 2013, we were able to maintain our average selling price.  We shipped a record number of iso-containers during 2013 which is the method most frequently used to ship product overseas.  Deferred sales volume increased 58.8% from the end of 2012 to 2013 which delayed recognition until 2014.

Processing

2013-2014

Processing revenues increased 20.4% from 2013 to 2014 due to the continued benefit from renegotiated contacts.

2012-2013

Processing revenues increased 28.5% from 2012 to 2013 due to renegotiation of our tolling contracts.  We remain dedicated to maintaining a certain level of toll processing business in the facility and continue to pursue opportunities.

Cost of Sales (includes but is not limited to raw materials, total operating expense, natural gas, operating labor and transportation)

2013-2014

Cost of Sales increased 18.6% from 2013 to 2014 due in part to a 19.4% increase in volumes processed to support the increase in sales volume slightly offset by a 4.4% decrease in the average cost per gallon of raw material.  We use natural gasoline as feedstock which is the heavier liquid remaining after butane and propane 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.  We continue to investigate alternative feedstock sources which contain lower percentages of less desirable components in an effort to reduce the amount of byproduct sold into secondary markets at lower margins, thereby increasing overall profitability.

 
22

 
2012-2013

Cost of Sales increased 4.7% from 2012 to 2013 due in part to a 38.6% increase in volumes processed partially offset by a 2.3% decrease in the average cost per gallon of feedstock.

Total Operating Expense (includes but is not limited to natural gas, operating labor and transportation)

2013-2014

Total Operating Expense increased 18.4% from 2013 to 2014.  Natural gas, labor and transportation are the largest individual expenses in this category.

The cost of natural gas purchased increased 22.3% from 2013 to 2014 due to an increase in the average per unit cost and additional volume used.  The average price per MMBTU for 2014 was $4.49 whereas, for 2013 the average per unit cost was $3.89.  Volume consumed increased to approximately 1,417,000 MMBTU from about 1,342,000 MMBTU.

Operating labor costs were higher by 15.2% mainly due to a cost of living adjustment that was given mid-year 2014, additional profit sharing distributions based upon profitability, and an increase in our employee count for the petrochemical segment.  Employee count increased approximately 33% from year end 2013 to year end 2014 as construction for the D-train expansion was underway.

Transportation costs were higher by 26.0% primarily due to an increase in rail freight.  We increased our rail fleet by 25.5%, and shipments increased by 32.5%. These costs are typically recovered through our selling price.  Higher transportation costs accounted for 58.9% of the increase in operating expense.

2012-2013

Total Operating Expense increased 11.7% from 2012 to 2013.  Natural gas, labor and transportation are the largest individual expenses in this category.

The cost of natural gas purchased increased 33.0% from 2012 to 2013 due to an increase in the average per unit cost and additional volume used.  The average price per MMBTU for 2013 was $3.89 whereas, for 2012 the average per unit cost was $3.03.  Volume consumed increased to approximately 1,342,000 MMBTU from about 1,285,000 MMBTU.

Operating labor costs were slightly higher by 1.8% mainly due to a cost of living adjustment that was given mid-year 2013.  Our employee count remained relatively stable year-over-year.

Transportation costs were higher by 15.8% primarily due to an increase in rail freight and isocontainer shipments.  These costs are typically recovered through our selling price.  Higher transportation costs accounted for 54.4% of the increase in operating expense.

General and Administrative Expense

2013-2014

General and Administrative costs increased 27.7% from 2013 to 2014 due primarily to expenses recorded for management payroll costs, officers’ compensation, insurance premiums, property taxes, and consulting fees.  Payroll costs increased approximately $0.4 million primarily due to a cost of living adjustment.  Officer compensation increased approximately $1.0 million due to option grants and approximately $1.0 million for executive bonuses based upon 2014 performance.  Group health insurance premiums increased 8.2% due to the health insurance environment.   Property insurance premiums increased 4.7% due to an increase in the insured basis.  Property taxes increased 11.8% due to the increase in the taxable basis because of recent expansions and additions.  Consulting fees increased $1.0 million due to the hiring of consultants to assist with the Acquisition.

2012-2013

General and Administrative costs increased 14.8% from 2012 to 2013 due primarily to expenses recorded for administrative payroll costs, officers’ compensation, directors’ fees, insurance premiums, property taxes, accounting
 
 
 
23

 
fees, consulting fees, bad debt expense, investor relations’ expenses, post-retirement benefits, 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 addition of a new executive position which occurred at the end of the third quarter 2012.  Directors’ 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.

Our general and administrative expenses have two principle components; general and administrative expenses for our specialty petrochemical segment and general corporate expenses.  TC’s general and administrative expenses are not being shown because there is no basis for comparison.

General & Administrative Expenses for our Specialty Petrochemicals Operations

   
2014
   
2013
   
Change
   
%Change
 
Petrochemical Company
 
(in thousands)
       
General & Administrative Expense
  $ 12,330     $ 10,971     $ 1,359       12.4 %

General and Administrative costs increased from 2013 to 2014 due primarily to expenses recorded for administrative payroll costs, 401(k) contributions, insurance premiums, consulting fees, legal fees and property taxes. Payroll costs increased approximately $0.4 million due to a cost of living adjustment, increased profit sharing distributions, and an increase in personnel.  Group health insurance premiums increased 8.2% due to the health insurance environment and an increase in personnel.   Property insurance premiums increased 4.7% due to an increase in the insured basis.  Consulting fees increased $0.5 million due to the hiring of consultants to assist with the Acquisition.  Property taxes increased 11.8% due to the increase in the taxable basis because of recent expansions and additions.

   
2013
   
2012
   
Change
   
%Change
 
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.

General Corporate Expenses

(in thousands)
 
2014
   
2013
   
Change
   
% Change
 
General corporate expenses
  $ 6,413     $ 3,701     $ 2,712       73.3 %

General corporate expenses increased from 2013 to 2014 primarily due to increases in officer compensation, consulting fees, insurance expense, and administrative expenses in Saudi Arabia.  Officer compensation increased $2.0 million due to the award of options and an increase in the executive bonus based upon 2014 performance.  Consulting fees increased $0.6 million due to the hiring of consultants for the Acquisition.  Administrative expenses in Saudi Arabia increased $0.1 million due to additional staffing requirements.
 
 
 
24


(in thousands)
 
2013
   
2012
   
Change
   
% Change
 
General corporate expenses
  $ 3,701     $ 3,124     $ 577       18.5 %

General corporate expenses increased from 2012 to 2013 primarily due to increases in officer compensation, directors’ fees, post-retirement benefits, 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.

Depreciation

2013-2014

Depreciation expense increased only slightly by 0.6% from 2013 to 2014.  Many of the capital expenditures for 2014 remained in construction in progress accounts at year end.

2012-2013

Depreciation expense increased 13.0% from 2012 to 2013 due to an increase in the amount of depreciable assets year over year.

Equity in Earnings (Losses) of AMAK/Gain on Equity Issuance of AMAK

2013-2014

Equity in Earnings (Losses) of AMAK decreased 122.8% from 2013 to 2014 due to a number of reasons as discussed below.  Our equity in AMAK’s results of operations for 2013 also included a gain from the additional equity issuance by AMAK of $4.0 million.  There was no such gain in 2014.

The mining sector as a whole has been depressed due to low metal prices and demand.  However, the performance of AMAK to date has been below our expectation, and steps are being taken to improve performance and solidify its position over the long term.  The project is self-supporting and cash flow is adequate to meet current needs.

For 2014 shipments were 14.0% short of budgeted volumes as indicated in the table below.  There were no shipments in the first quarter of 2014 due to logistics delays and the rebuilding of warehouse stocks.  Shipments in the second quarter of 2014, while up in number (4), were limited by volume shipped.  Shipments in the third and fourth quarters were also limited by volume shipped.  AMAK volumes in dry metric tons (dmt) for 2014 were as follows:

   
Actual
   
Budgeted
   
Variance
 
 
Ore tons processed
    670,813       700,740       (29,927 )
 
Concentrate to the port
                       
  Copper
    28,402       28,945       (543 )
  Zinc
    32,515       35,009       (2,494 )
      60,917       63,954       (3,037 )
                         
Shipments
                       
   Copper
    25,691       28,945       (3,254 )
   Zinc
    29,326       35,009       (5,683 )
      55,017       63,954       (8,937 )

 
 
25

 
In addition, AMAK faced operational issues including mechanical issues and water shortages which caused the plant run time to decrease to 60% versus the 80+% which has been the norm over the first 18 months of operation.  The water issues have been largely resolved with the addition of more wells, purchases of supplemental water via truck from nearby sources, and the addition of a dam and holding area in a nearby drainage area.  The mechanical problems, while a continued concern due to the remote location and lack of vendor expertise within the country, are being addressed with the identification and stocking of critical spares and a change of management staff.

During 2014 AMAK hired a new CEO (a US citizen), a new mining engineer (a Canadian citizen), and a new mill manager (an Australian citizen).  Individuals previously in those positions did a creditable job in starting up the facility and getting it to the point of production.  However, the AMAK Board felt that for AMAK to advance to a consistent and profitable operation, a different set of skills was needed.  AMAK incurred expenses to transition the new and old personnel.  The new management team presented an action plan to the Board of Directors at the September meeting which outlined the steps to be taken for improvement and the timeline for implementation.  Implementation will take a good portion of 2015 to produce results.  There was agreement among the group that the plan would position AMAK for a successful IPO on the Saudi Arabian Stock Exchange which is currently targeted for late 2016.

Finally, in an area over which AMAK has little to no control, average metal prices were softer for the period and negatively affected AMAK’s financial results.  Copper prices may continue to be volatile and are largely affected by economic data announcements from China.  Zinc prices are predicted to be stronger as time passes due to the run down and closure of several large mines this year and next.

We continue to expect better performance based upon the activation of the precious metal circuit; the activation of an improved and larger volume talc circuit prior; improved recoveries and product quality based upon better process control and improvements made to mill equipment; institution of better controls on the ore dilution; and an ore blending program which should improve product quality and production levels.  Also in November 2014, a favorably revised and amended contract with the Chinese company supplying the labor for the mill operation was signed.

2012-2013

Equity in earnings of AMAK increased $4.9 million from 2012 to 2013 due to AMAK being in operation for the entire 2013 year versus only a partial year in 2012.  Gain on equity issuance of AMAK increased $4.0 million from 2012 to 2013 due to the completion of an equity raise in May 2013 as discussed in Note 8.

Capital Expenditures

2013-2014

Capital Expenditures increased 104.8% from 2013 to 2014. See capital expenditures discussion below for more detail.

2012-2013

Capital Expenditures decreased 16.1% from 2012 to 2013.  See capital expenditures discussion below for more detail.

Capital Resources and Requirements

2013-2014

Capital expenditures increased 104.8% from 2013 to 2014.  During 2014 we expended $6.8 million to begin construction on our D-train expansion, $2.4 million to purchase spare equipment for future use, $0.9 million for tank farm improvements, $1.9 million for various plant upgrades, $0.6 million for a new warehouse and building improvements, $0.5 million for loading rack expansion capabilities, and $.3 million for pipeline upgrades.

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.
 
 
 
26


 
Capital expenditures typically average $6.0 million per year for facility improvements.  At December 31, 2014, there was $32.8 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 2015 operations and capital expenditures.

The table below summarizes the following contractual obligations of the Company:

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
   
(thousands of dollars)
 
Operating Lease Obligations
  $ 6,882     $ 2,005     $ 3,003     $ 896     $ 978  
Long-Term Debt Obligations
    80,450       7,000       16,608       56,842       -  
Total
  $ 87,332     $ 9,005     $ 19,611     $ 57,738     $ 978  

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.

Investment in AMAK

Information concerning our investment in AMAK is set forth in Note 10 of the Notes to Consolidated Financial Statements.

New Accounting Standards

In May 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, 2016. Early adoption is not permitted. We are currently assessing the potential impact of adopting this ASU on our consolidated financial statements and related disclosures.

In June 2014 the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. We are currently assessing the potential impact of adopting this ASU on our consolidated financial statements and related disclosures.

Critical Accounting Policies

Our consolidated financial 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.
 
 
27


 
We 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 South Hampton.  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 7 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 when the carrying amount of the asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition.  Our long-lived assets include our petrochemical facility, specialty synthetic wax facility, and our investments in AMAK and PEVM.

Our petrochemical facility and specialty synthetic wax facility are currently our revenue generating assets.  The facilities were in full operation at December 31, 2014.  Plant, pipeline and equipment costs are reviewed annually to determine if adjustments should be made.

We assess the carrying values of our assets on an ongoing basis. Factors which may affect carrying values 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, 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 our mineral properties.

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 continually evaluate the reasonableness of the useful lives of these assets.  Once these assets are fully amortized, they will be removed from the consolidated balance sheets.

See Note 9 to the Notes to the 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. See Note 10 to the Notes to the Consolidated Financial Statements.
 
 
 
28

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.

Environmental Liabilities

The Petrochemical Company is subject to the rules and regulations of the TCEQ, which inspects the operations 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 in 1993. The recovery process, initiated in 1998, is proceeding as planned and is expected to continue for many years. See Note 15 to the Notes to the Consolidated Financial Statements.

 Share-Based Compensation

We expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. 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, 2014. See Note 17 to the Notes to the Consolidated Financial Statements.

Derivative Instruments

We 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.

On March 21, 2008, South Hampton 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 $3.75 million at December 31, 2014.  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 designated the interest rate swap as a cash flow hedge under ASC Topic 815 (see Note 22); however, due to the new debt agreements associated with the Acquisition, we believe that the hedge was no longer entirely effective.  Due to the time required to make the determination and the immateriality of the hedge, we began treating the interest rate swap as ineffective as of October 1, 2014, and the unrealized loss associated with the swap of approximately $378,000 was recognized in the Statement of Income.  The fair value of the derivative liability associated with the interest rate swap at December 31, 2014, and 2013 totaled $0.4 million and $0.6 million, respectively.
 

 
 
29

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, 2014, 2013 and 2012, we had approximately $80.5 million, $13.2 million and $15.7 million, respectively, in variable rate debt outstanding. A hypothetical 10% change in interest rates underlying these borrowings would result in annual changes in our earnings and cash flows of approximately $215,000, $30,000 and $35,000 at December 31, 2014, 2013 and 2012, respectively.

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 2014, market risk for 2015 was estimated as a hypothetical 10% increase in the cost of natural gas and feedstock over the market price prevailing on December 31, 2014.   Assuming that 2015 total petrochemical product sales volumes stay at the same rate as 2014, the 10% market risk increase will result in an increase in the cost of natural gas and feedstock of approximately $14.3 million in fiscal 2015.

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)  
Disclosure Controls and Procedures.

We maintain disclosure controls and 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, Executive Vice President 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, Executive Vice President 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.  Based on such evaluation, our Chief Executive Officer, Executive Vice President and
 
 
30

 
Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective at a reasonable assurance level to ensure 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 SEC rules and forms and 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.

(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 is a process that is designed under the supervision of our Chief Executive Officer, Executive Vice President, and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide assurance regarding the 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.

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 he degree of compliance with the policies and procedures may deteriorate.

The scope of management’s assessment of the effectiveness of internal control over fianacial reporting as of December 31, 2014, excludes the business acquired by the Company in 2014 (Trecora Chemical, Inc.).  This scope exception is permissible under applicable SEC guidelines.  The business acquired represents approximately 34.1% and 5.5% of consolidated total assets and net assets, respectively, and 1.8% and (6.4%) of consolidated revenues and net income for the year ended December 31, 2014.

Management has conducted its evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based upon the framework in Internal Control – Integrated Framework (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 its assessment and review with the Audit Committee, management concluded that our internal control over financial reporting was effective as of December 31, 2014.

(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.

(d) Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during the fourth quarter of 2014 that have materially affected, or are reasonable 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.


 
31



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Trecora Resources

We have audited Trecora Resources’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Trecora 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 Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’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 including 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 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 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 and procedures may deteriorate.

As indicated in Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Trecora Chemical which is included in the  December 31, 2014, consolidated financial statements of Trecora Resources and constituted 34.1% and 5.5% of total and net assets, respectively, as of December 31, 2014, and 1.8% and (6.4%) of revenues and net income, respectively, for the year then ended.  Our audit of internal control over financial reporting of Trecora Resources also did not include an evaluation of the internal controls over financial reporting of Trecora Chemical.

In our opinion, Trecora Resources maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway 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 Trecora Resources as of December 31, 2014 and 2013 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, 2014, and our report dated March 13, 2015 expressed an unqualified opinion.


 
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 13, 2015
 

 
32



 
Item 9B.  Other Information.

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Incorporated by reference from our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2014.

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 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2014.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference from our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2014.

Item 13. Certain Relationships, Related Transactions, and Director Independence.

Incorporated by reference from our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2014.

Item 14.  Principal Accounting Fees and Services.

Incorporated by reference from our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2014.

PART IV

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, 2014 and 2013
 
Consolidated Statements of Income for the three years ended December 31, 2014
 
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2014
 
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2014
 
Consolidated Statements of Cash Flows for the three years ended December 31, 2014
 
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, 2014.
 
 
33

   3.  The financial statements of Al Masane Al Kobra Mining Company (AMAK) for the years ended December 31, 2014, 2013, and 2012, 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 May 22, 2014 (incorporated by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-33926))
 
3(b)
- Restated Bylaws of the Company dated August 1, 2014 (incorporated by reference to Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-33926))
 
10(a)*
- Retirement Awards Program dated January 15, 2008 between Trecora 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 Trecora 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 Trecora 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))
 
 
 
 
34

 
 
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
 
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
 
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

 
35


POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of Trecora Resources, a Delaware corporation, and the undersigned directors and officers of Trecora Resources, hereby constitutes and appoints Nicholas Carter 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.

                TRECORA RESOURCES


Dated: March 13, 2015                                           By: /s/ Nicholas Carter
                                                                                        Nicholas Carter
                                                                              President and Chief Executive Officer


 
36


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 13, 2015.

Signature
Title
/s/ Nicholas Carter
Nicholas Carter
 
 
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Simon Upfill-Brown
Simon Upfill-Brown
 
 
 
Executive Vice President and Director
 
/s/ Connie Cook
Connie Cook
 
Chief Financial Officer
(principal financial and accounting officer)
/s/ John R. Townsend
John R. Townsend
 
Director
/s/ Allen P. McKee
Allen P. McKee
 
Director
/s/ Joseph P. Palm
Joseph P. Palm
 
Director
/s/ Gary K. Adams
Gary K. Adams
 
Director



 
37


 
Page
 
F-2
   
F-3
   
F-5
   
F-6
   
F-7
   
F-8
   
F-10
   
INDEX TO FINANCIAL STATEMENT SCHEDULES
 
   
F-37
   
F-38


 
F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Trecora Resources

We have audited the accompanying consolidated balance sheets of Trecora Resources and Subsidiaries (the Company) as of December 31, 2014 and 2013, 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, 2014. Our audit also includes the financial statement schedule listed in the index at Item 15(a). Trecora Resources’s 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 Trecora Resources and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014 in conformity with 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), Trecora Resources’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 

 

 
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 13, 2015
 



 

 
F-2



TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 

   
December 31,
 
   
2014
   
2013
 
   
(thousands of dollars)
 
ASSETS
           
CURRENT ASSETS
           
  Cash and cash equivalents
  $ 8,506     $ 7,608  
  Trade receivables, net (Note 6)
    28,271       22,069  
  Advance to AMAK (Note 10)
    -       536  
  Prepaid expenses and other assets
    3,257       2,179  
  Inventories (Note 7)
    12,815       12,063  
  Deferred income taxes (Note 17)
    1,652       1,324  
  Taxes receivable
    434       571  
                 
          Total current assets
    54,935       46,350  
                 
  PLANT, PIPELINE, AND EQUIPMENT – AT COST
    113,130       75,128  
    LESS ACCUMULATED DEPRECIATION
    (39,319 )     (33,203 )
                 
  PLANT, PIPELINE, AND EQUIPMENT, NET (Note 8)
    73,811       41,925  
                 
  GOODWILL (Notes 3 and 9)
    21,750       -  
  OTHER INTANGIBLE ASSETS, net (Notes 3 and 9)
    26,235       -  
  INVESTMENT IN AMAK (Note 10)
    53,023       54,095  
  MINERAL PROPERTIES IN THE UNITED STATES (Note 11)
    588       588  
  OTHER ASSETS
    1,732       709  
                 
TOTAL ASSETS
  $ 232,074     $ 143,667  










See notes to the consolidated financial statements.
 

 
F-3





TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - Continued
 

   
December 31,
 
   
2014
   
2013
 
   
(thousands of dollars)
 
LIABILITIES
           
  CURRENT LIABILITIES
           
    Accounts payable
  $ 9,535     $ 7,362  
    Current portion of derivative instruments (Notes 5 and 22)
    362       292  
    Accrued liabilities (Note 13)
    5,020       3,162  
    Accrued liabilities in Saudi Arabia (Note 14)
    495       140  
    Current portion of post-retirement benefit (Note 23)
    286       278  
    Current portion of long-term debt (Note 12)
    7,000       1,400  
    Current portion of other liabilities
    2,183       1,654  
                 
          Total current liabilities
    24,881       14,288  
                 
  LONG-TERM DEBT, net of current portion (Note 12)
    73,450       11,839  
  POST- RETIREMENT BENEFIT, net of current portion (Note 23)
    649       649  
                 
  DERIVATIVE INSTRUMENTS, net of current portion (Notes 5 and 22)
    196       319  
  OTHER LIABILITIES, net of current portion
    1,039       1,369  
  DEFERRED INCOME TAXES (Note 17)
    10,471       11,984  
                 
          Total liabilities
    110,686       40,448  
                 
COMMITMENTS AND CONTINGENCIES (Note 15)
               
                 
EQUITY
               
  Common Stock - authorized 40 million shares of $.10 par value; issued and outstanding, 24.0 million and 23.8 million shares in 2014 and 2013, respectively
    2,397       2,383  
  Additional Paid-in Capital
    48,282       46,064  
  Accumulated Other Comprehensive Loss
    -       (366 )
  Retained Earnings
    70,420       54,849  
 Total Trecora Resources Stockholders’ Equity
    121,099       102,930  
 Noncontrolling interest
    289       289  
       Total equity
    121,388       103,219  
 
               
     TOTAL LIABILITIES AND EQUITY
  $ 232,074     $ 143,667  

See notes to the consolidated financial statements.
 

 
F-4


TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
 
For the years ended December 31,

   
2014
   
2013
   
2012
 
   
(thousands of dollars)
 
Revenues
                 
  Petrochemical and product sales
  $ 280,866     $ 230,643     $ 218,512  
  Processing
    8,777       5,584       4,346  
      289,643       236,227       222,858  
Operating costs and expenses
                       
  Cost of petrochemical, product sales, and Processing (including depreciation of $4,645, $3,518, and $3,053, respectively)
    243,900       201,064       192,100  
   Gross Profit
    45,743       35,163       30,758  
                         
General and Administrative Expenses
                       
  General and administrative
    19,701       14,672       12,782  
  Depreciation
    560       521       520  
      20,261       15,193       13,302  
                         
Operating income
    25,482       19,970       17,456  
                         
Other income (expense)
                       
  Interest expense
    (1,042 )     (520 )     (547 )
  Losses on cash flow hedge reclassified from OCI
    (378 )     (301 )     (359 )
  Equity in earnings (loss) of AMAK (Note 10)
    (1,072 )     4,703       (211 )
  Gain from additional equity issuance by AMAK (Note 10)
    --       3,997       --  
  Miscellaneous expense
    (272 )     (204 )     (114 )
      (2,764 )     7,675       (1,231 )
 Income before income tax expense
    22,718       27,645       16,225  
                         
Income tax expense
    7,147       8,147       5,904  
 
                       
   Net income
    15,571       19,498       10,321  
                         
Net loss attributable to Noncontrolling Interest
    --       --       --  
                         
Net income attributable to Trecora Resources
  $ 15,571     $ 19,498     $ 10,321  
                         
Net income per common share
                       
    Basic earnings per share (dollars)
  $ 0.64     $ 0.81     $ 0.43  
    Diluted earnings per share (dollars)
  $ 0.63     $ 0.79     $ 0.42  
                         
Weighted average number of common
                       
  shares outstanding
                       
     Basic
    24,188       24,115       24,081  
     Diluted
    24,896       24,745       24,745  

See notes to the consolidated financial statements.
 


 
F-5


TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the years ended December 31,

   
2014
   
2013
   
2012
 
   
(thousands of dollars)
 
                   
NET INCOME
  $ 15,571     $ 19,498     $ 10,321  
                         
OTHER COMPREHENSIVE INCOME, NET OF TAX
                       
      Unrealized holding gains  arising during period
    744       515       527  
      Less: reclassification adjustment included in net income
    378       301       359  
                         
OTHER COMPREHENSIVE INCOME , NET OF TAX (Note 22)
    366       214       168  
                         
 COMPREHENSIVE INCOME
  $ 15,937     $ 19,712     $ 10,489  
                         



See notes to the consolidated financial statements.
 


 
F-6



TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the years ended December 31, 2014, 2013, and 2012

   
TRECORA RESOURCES STOCKHOLDERS
                   
                     
Accumulated
                         
               
Additional
   
Other
               
Non-
       
   
Common Stock
   
Paid-In
   
Comprehensive
   
Retained
         
Controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Earnings
   
Total
   
Interest
   
Equity
 
   
(thousands)
   
(thousands of dollars)
 
JANUARY 1, 2012
    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  
Other Comprehensive Income (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  
                                                                 
Stock options
                                                               
  Issued to Directors
    -       -       377       -       -       377       -       377  
  Issued to Employees
    -       -       559       -       -       559       -       559  
  Issued to Former Director
    -       -       97       -       -       97       -       97  
Warrants
    -       -       181       -       -       181       -       181  
Common Stock
                                                               
  Issued to Directors
    12       1       6       -       -       7       -       7  
  Issued to Employees
    15       1       53       -       -       54       -       54  
Other Comprehensive Income (net of income tax expense of $115)
    -       -       -       214       -       214       -       214  
Net Income
    -       -       -       -       19,498       19,498       -       19,498  
                                                                 
DECEMBER 31, 2013
    23,832     $ 2,383     $ 46,064     $ (366 )   $ 54,849     $ 102,930     $ 289     $ 103,219  
                                                                 
Stock options