UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q



      [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015
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
75-1256622
(State or other jurisdiction of
(I.R.S. employer incorporation or
organization)
identification no.)

1650 Hwy 6 South, Suite 190
77478
Sugar Land, Texas
(Zip code)
(Address of principal executive offices)
 

Registrant’s telephone number, including area code:  (409) 385-8300

Former name, former address and former fiscal year, if
changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes  X    No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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).
Yes  X    No                                

 
 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____                                                      Accelerated filer _ X__

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  X_

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at November 5, 2015: 24,458,740.

 
 

 

TABLE OF CONTENTS

Item Number and Description
 
 
 
 
 
1
 
2
 
3
 
4
 
5
 
6
     
17
     
24
     
24
 
 
                                                            PART II – OTHER INFORMATION
 
 
24
     
25
     
26

 
 


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
SEPTEMBER 30,
2015
(unaudited)
   
DECEMBER 31,
2014
 
ASSETS
 
(thousands of dollars)
 
 Current Assets
           
  Cash and cash equivalents
  $ 14,877     $ 8,506  
  Trade receivables, net
    22,830       28,271  
  Inventories
    12,513       12,815  
  Prepaid expenses and other assets
    3,824       3,257  
  Taxes receivable
    -       434  
  Deferred income taxes
    2,241       1,652  
          Total current assets
    56,285       54,935  
                 
  Plant, pipeline and equipment, net
    91,370       73,811  
                 
  Goodwill
    21,798       21,750  
  Other intangible assets, net
    25,019       26,235  
  Investment in AMAK
    50,658       53,023  
  Mineral properties in the United States
    588       588  
  Other assets
    1,053       1,732  
                 
     TOTAL ASSETS
  $ 246,771     $ 232,074  
 
LIABILITIES
               
  Current Liabilities
               
    Accounts payable
  $ 8,340     $ 9,535  
    Current portion of derivative instruments
    138       362  
    Accrued liabilities
    5,872       5,020  
    Accrued liabilities in Saudi Arabia
    495       495  
    Current portion of post-retirement benefit
    292       286  
    Current portion of long-term debt
    8,000       7,000  
    Current portion of other liabilities
    1,608       2,183  
          Total current liabilities
    24,745       24,881  
                 
  Long-term debt, net of current portion
    67,200       73,450  
  Post-retirement benefit, net of current portion
    649       649  
  Derivative instruments, net of current portion
    89       196  
  Other liabilities, net of current portion
    2,555       1,039  
  Deferred income taxes
    10,829       10,471  
     Total liabilities
    106,067       110,686  
                 
EQUITY
               
  Common stock-authorized 40 million shares of $.10 par value; issued and outstanding 24.1 million and 24.0 million shares in 2015 and 2014, respectively
    2,407       2,397  
  Additional paid-in capital
    50,112       48,282  
  Retained earnings
    87,896       70,420  
  Total Trecora Resources Stockholders’ Equity
    140,415       121,099  
  Noncontrolling Interest
    289       289  
   Total equity
    140,704       121,388  
 
               
     TOTAL LIABILITIES AND EQUITY
  $ 246,771     $ 232,074  


See notes to consolidated financial statements.

 
1



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
SEPTEMBER 30,
   
SEPTEMBER 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(thousands of dollars)
 
REVENUES
                       
  Petrochemical and Product Sales
  $ 63,190     $ 75,283     $ 170,396     $ 210,517  
  Processing Fees
    3,748       1,634       11,035       5,054  
      66,938       76,917       181,431       215,571  
                                 
OPERATING COSTS AND EXPENSES
                               
  Cost of  Sales and Processing
                               
    (including depreciation and amortization of  $2,118, $881, $6,083, and $2,614 respectively)
    50,313       63,873       133,909       182,112  
 
                               
   GROSS PROFIT
    16,625       13,044       47,522       33,459  
                                 
GENERAL AND ADMINISTRATIVE EXPENSES
                               
  General and Administrative
    5,368       4,086       16,656       12,430  
  Depreciation
    194       131       579       406  
      5,562       4,217       17,235       12,836  
                                 
OPERATING INCOME
    11,063       8,827       30,287       20,623  
                                 
OTHER INCOME (EXPENSE)
                               
  Interest Income
    5       8       18       26  
  Interest Expense
    (535 )     (70 )     (1,718 )     (169 )
  Losses on Cash Flow Hedge Reclassified from OCI
    -       (60 )     -       (190 )
  Equity in Losses of AMAK
    (2,054 )     (343 )     (2,364 )     (687 )
  Miscellaneous Expense
    2       2       (12 )     (47 )
      (2,582 )     (463 )     (4,076 )     (1,067 )
                                 
  INCOME BEFORE INCOME TAXES
    8,481       8,364       26,211       19,556  
                                 
  INCOME TAXES
    3,163       2,590       8,735       6,183  
 
                               
  NET INCOME
    5,318       5,774       17,476       13,373  
                                 
 NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    --       --       --       --  
                                 
 NET INCOME ATTRIBUTABLE TO TRECORA RESOURCES
  $ 5,318     $ 5,774     $ 17,476     $ 13,373  
                                 
Basic Earnings per Common Share
                               
  Net Income Attributable to Trecora Resources (dollars)
  $ 0.22     $ 0.24     $ 0.72     $ 0.55  
                                 
  Basic Weighted Average Number of Common Shares Outstanding
    24,369       24,175       24,344       24,163  
                                 
Diluted Earnings per Common Share
                               
  Net Income Attributable to Trecora Resources (dollars)
  $ 0.21     $ 0.23     $ 0.69     $ 0.54  
                                 
  Diluted Weighted Average Number of Common Shares Outstanding
    25,228       24,880       25,176       24,870  

See notes to consolidated financial statements.

 
2



TRECORA RESOURCES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


   
THREE MONTHS ENDED
   
NINE MONTHS
ENDED
 
   
SEPTEMBER 30,
   
SEPTEMBER 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(thousands of dollars)
 
                         
NET INCOME
  $ 5,318     $ 5,774     $ 17,476     $ 13,373  
                                 
OTHER COMPREHENSIVE INCOME, NET OF TAX
                               
      Unrealized holding gains arising during period
    -       115       -       308  
      Less: reclassification adjustment included in net income
    -       60       -       190  
                                 
OTHER COMPREHENSIVE INCOME, NET OF TAX
    -       55       -       118  
                                 
 COMPREHENSIVE INCOME
  $ 5,318     $ 5,829     $ 17,476     $ 13,491  

See notes to consolidated financial statements.

 
3


TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)


   
TRECORA RESOURCES STOCKHOLDERS
             
   
COMMON STOCK
   
ADDITIONAL
PAID-IN
   
RETAINED
         
NON-
CONTROLLING
   
TOTAL
 
   
SHARES
   
AMOUNT
   
CAPITAL
   
EARNINGS
   
TOTAL
   
INTEREST
   
EQUITY
 
   
(thousands)
                                     
JANUARY 1, 2015
    23,975     $ 2,397     $ 48,282     $ 70,420     $ 121,099     $ 289     $ 121,388  
                                                         
Stock options
                                                       
  Issued to Directors
    -       -       174       -       174       -       174  
  Issued to Employees
    -       -       965       -       965       -       965  
  Issued to Former Director
    -       -       73       -       73       -       73  
Restricted Common Stock
                                                       
  Issued to Employees
    14       -       479       -       479       -       479  
  Issued to Directors
    -       -       25       -       25       -       25  
Common stock
                                                       
  Issued to Employees
    64       8       116       -       124       -       124  
  Issued to Directors
    16       2       (2 )     -       -       -       -  
Net Income
    -       -       -       17,476       17,476       -       17,476  
                                                         
SEPTEMBER 30, 2015
    24,069     $ 2,407     $ 50,112     $ 87,896     $ 140,415     $ 289     $ 140,704  

See notes to consolidated financial statements.


 
4


TRECORA RESOURCES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
NINE MONTHS ENDED
 
   
SEPTEMBER 30,
 
   
2015
   
2014
 
   
(thousands of dollars)
 
OPERATING ACTIVITIES
           
  Net Income Attributable to Trecora Resources
  $ 17,476     $ 13,373  
  Adjustments to Reconcile Net Income of Trecora Resources
               
    To Net Cash Provided by Operating Activities:
               
    Depreciation
    5,231       3,020  
    Amortization of Intangible Assets
    1,217       104  
    Unrealized Gain on Derivative Instruments
    (332 )     (48 )
    Share-based Compensation
    1,794       1,530  
    Deferred Income Taxes
    (231 )     (982 )
    Postretirement Obligation
    6       6  
    Equity in losses of AMAK
    2,364       687  
  Changes in Operating Assets and Liabilities:
               
    (Increase) Decrease in Trade Receivables
    5,441       (5,556 )
    Decrease in Taxes Receivable
    434       571  
    Decrease in Inventories
    302       107  
    Increase in Prepaid Expenses
    (103 )     (695 )
    Decrease in Other Assets
    215       164  
    Increase (Decrease) in Accounts Payable and Accrued Liabilities
    (342 )     6,064  
    Increase in Other Liabilities
    1,690       -  
                 
    Net Cash Provided by Operating Activities
    35,162       18,345  
                 
INVESTING ACTIVITIES
               
  Additions to Plant, Pipeline and Equipment
    (23,540 )     (8,582 )
  Acquisition Goodwill Adjustment
    (47 )     -  
  Advance to AMAK, net
    -       536  
    Net Cash Used in Investing Activities
    (23,587 )     (8,046 )
                 
FINANCING ACTIVITIES
               
  Issuance of Common Stock
    46       91  
  Additions to Long-Term Debt
    -       3,000  
  Repayment of Long-Term Debt
    (5,250 )     (7,050 )
                 
    Net Cash Used in Financing Activities
    (5,204 )     (3,959 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    6,371       6,340  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    8,506       7,608  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 14,877     $ 13,948  
                 
 
 
Supplemental disclosure of cash flow information:
     
  Cash payments for interest
  $ 1,653     $ 372  
  Cash payments for taxes, net of refunds
  $ 7,928     $ 5,859  
Supplemental disclosure of non-cash items:
               
  Capital expansion amortized to depreciation expense
  $ 749     $ 1,236  

See notes to consolidated financial statements.

 
5


TRECORA RESOURCES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. GENERAL

Organization

Trecora Resources (the “Company”), was incorporated in the State of Delaware in 1967. Our principal business activities are the manufacturing of various specialty hydrocarbons and synthetic waxes and the provision of custom processing services.   Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” are intended to mean Trecora Resources and its subsidiaries.

This document includes the following abbreviations:
(1) TREC – Trecora Resources
(2)  
TOCCO – Texas Oil & Chemical Co. II, Inc. – Wholly owned subsidiary of TREC and parent of SHR and TC
(3) SHR – South Hampton Resources, Inc. – Petrochemical segment
(4) GSPL – Gulf State Pipe Line Co, Inc. – Pipeline support for the petrochemical segment
(5) TC – Trecora Chemical, Inc. – Specialty wax segment
(6) AMAK – Al Masane Al Kobra Mining Company – Mining equity investment – 35% ownership
(7) PEVM – Pioche Ely Valley Mines, Inc. – Inactive mine - 55% ownership
(8) Acquisition – October 1, 2014, purchase of Trecora Chemical, Inc.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual financial statements and in management’s opinion reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented.  We have made estimates and judgments affecting the amounts reported in this document.  The actual results that we experience may differ materially from our estimates.  In the opinion of management, the disclosures included in these financial statements are adequate to make the information presented not misleading.

Operating results for the three and nine months ended September 30, 2015, are not necessarily indicative of results for the year ending December 31, 2015.

We currently operate in two segments, specialty petrochemical products and specialty synthetic waxes.  All revenue originates from United States’ sources, and all long-lived assets owned are located in the United States.

The Company owns a 35% interest in AMAK, a Saudi Arabian closed joint stock company which owns and is developing mining assets in Saudi Arabia.  We account for our investment under the equity method of accounting.   See Note 15.

2. RECENT ACCOUNTING PRONOUNCEMENTS

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, 2017. Early adoption
 
 
 
6

 
would be permitted but not before annual periods beginning after December 15, 2016.The Company is currently assessing the potential impact of adopting this ASU on its 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. The Company is currently assessing the potential impact of adopting this ASU on its consolidated financial statements and related disclosures.

In April 2015 the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU 2015-03. In August 2015 the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 was issued to address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements that were not found ASU 2015-03.   Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and should be applied retrospectively.  Early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2015-03 and ASU 2015-15 on its consolidated financial statements and related disclosures.

3. TRADE RECEIVABLES

Trade receivables, net, consisted of the following:

   
September 30, 2015
   
December 31, 2014
 
   
(thousands of dollars)
 
Trade receivables
  $ 23,040     $ 28,481  
Less allowance for doubtful accounts
    (210 )     (210 )
    Trade receivables, net
  $ 22,830     $ 28,271  

Trade receivables serve as collateral for our amended and restated loan agreement. See Note 8.

4. INVENTORIES

Inventories include the following:

   
September 30, 2015
   
December 31, 2014
 
   
(thousands of dollars)
 
Raw material
  $ 2,281     $ 2,826  
Work in process
    40       49  
Finished products
    10,192       9,940  
    Total inventory
  $ 12,513     $ 12,815  

The difference between the calculated value of inventory under the FIFO and LIFO bases generates either a recorded LIFO reserve (i.e., where FIFO value exceeds the LIFO value) or an unrecorded negative LIFO reserve (i.e., where LIFO value exceeds the FIFO value).  In the latter case, in order to ensure that inventory is reported at the lower of cost or market and in accordance with ASC 330-10, we do not increase the stated value of our inventory to the LIFO value.
 
 
 
7


At September 30, 2015, and December 31, 2014, LIFO value of petrochemical inventory exceeded FIFO; therefore, in accordance with the above policy, no LIFO reserve was recorded.

Inventory serves as collateral for our amended and restated loan agreement.  See Note 8.

Inventory included petrochemical products in transit valued at approximately $1.6 million and $3.5 million at September 30, 2015, and December 31, 2014, respectively.

5. PLANT, PIPELINE AND EQUIPMENT

 
Plant, pipeline and equipment consisted of the following:

   
September 30, 2015
   
December 31, 2014
 
   
(thousands of dollars)
 
Platinum catalyst
  $ 1,612     $ 1,612  
Land
    4,577       4,577  
Plant, pipeline and equipment
    103,297       95,351  
Construction in progress
    26,808       11,590  
Total plant, pipeline and equipment
    136,294       113,130  
  Less accumulated depreciation
    (44,924 )     (39,319 )
Net plant, pipeline and equipment
  $ 91,370     $ 73,811  

Plant, pipeline, and equipment serve as collateral for our amended and restated loan agreement. See Note 8.

Interest capitalized for construction was approximately $27,000 and $122,000 for the three and nine months ended September 30, 2015.  No amounts were capitalized during 2014.

Construction in progress during the first nine months of 2015 included petrochemical construction on the D-Train expansion, purchase of additional manufacturing equipment such as towers and tanks, additions to the tank farm, and upgrades to the electrical and flaring systems at SHR, as well as equipment for construction on the hydrogenation/distillation project at TC.

Amortization relating to the platinum catalyst which is included in cost of sales was $21,067 for the three months and $63,202 for the nine months ended September 30, 2015, and 2014.

6. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill and intangible assets were recorded in relation to the acquisition of TC on October 1, 2014.  We also recorded an intangible asset for the purchase of emissions allowances during the third quarter of 2015.

Goodwill

The balance of Goodwill was $21.8 million at September 30, 2015, and December 31, 2014.

 Intangible Assets

The following tables summarize the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):

   
September 30, 2015
 
Intangible assets subject to amortization
(Definite-lived)
 
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
  $ 16,852     $ (1,123 )   $ 15,729  
Non-compete agreements
    94       (19 )     75  
Licenses and permits
    1,471       (129 )     1,342  
Developed technology
    6,131       (613 )     5,518  
      24,548       (1,884 )     22,664  
Intangible assets not subject to amortization
(Indefinite-lived)
                       
Emissions Allowance
    197       -       197  
Trade name
    2,158       -       2,158  
Total
  $ 26,903     $ (1,884 )   $ 25,019  
 
 
 
8


 
   
December 31, 2014
 
Intangible assets subject to amortization
(Definite-lived)
 
Gross
   
Accumulated
Amortization
   
Net
 
Customer relationships
  $ 16,852     $ (281 )   $ 16,571  
Non-compete agreements
    94       (5 )     89  
Licenses and permits
    1,471       (32 )     1,439  
Developed technology
    6,131       (153 )     5,978  
      24,548       (471 )     24,077  
Intangible assets not subject to amortization
(Indefinite-lived)
                       
Trade name
    2,158       -       2,158  
Total
  $ 26,706     $ (471 )   $ 26,235  

Amortization expense for intangible assets included in cost of sales for the three months was approximately $471,000 and $1,413,000 for the nine months ended September 30, 2015.  There was no amortization expense in the first nine months of 2014 for these assets.

Based on identified intangible assets that are subject to amortization as of September 30, 2015, we expect future amortization expenses for each period to be as follows (in thousands):

   
Remainder of
2015
   
2016
   
2017
   
2018
   
2019
 
Customer relationships
  $ 281     $ 1,123     $ 1,123     $ 1,123     $ 1,123  
Non-compete agreements
    5       19       19       19       14  
Licenses and permits
    32       123       106       106       106  
Developed technology
    153       613       613       613       613  
Total future amortization expense
  $ 471     $ 1,878     $ 1,861       1,861     $ 1,856  

7. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO TRECORA RESOURCES

The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income per share attributable to Trecora Resources for the three and nine months ended September 30, 2015, and 2014, respectively.

   
Three Months Ended
September 30, 2015
   
Three Months Ended
September 30, 2014
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income Attributable to Trecora Resources
  $ 5,318       24,369     $ 0.22     $ 5,774       24,175     $ 0.24  
                                                 
Unvested restricted stock grant
            148                       -          
Dilutive stock options outstanding
            711                       705          
                                                 
Diluted Net Income per Share:
                                               
Net Income Attributable to Trecora Resources
  $ 5,318       25,228     $ 0.21     $ 5,774       24,880     $ 0.23  

   
Nine Months Ended
September 30, 2015
   
Nine Months Ended
September 30, 2014
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income Attributable to Trecora Resources
  $ 17,476       24,344     $ 0.72     $ 13,373       24,163     $ 0.55  
                                                 
Unvested restricted stock grant
            138                                  
Dilutive stock options outstanding
            694                       707          
                                                 
Diluted Net Income per Share:
                                               
Net Income Attributable to Trecora Resources
  $ 17,476       25,176     $ 0.69     $ 13,373       24,870     $ 0.54  

At September 30, 2015, and 2014, 1,497,771 and 1,560,540 potential common stock shares, respectively were issuable upon the exercise of options and warrants.
 
 
 
9


The earnings per share calculations for the periods ended September 30, 2015, and 2014, include 300,000 shares of the Company that are held in the treasury of TOCCO.

8. LIABILITIES AND LONG-TERM DEBT

On October 1, 2014, we entered into an Amended and Restated Credit Agreement (“ARC”) with the lenders which from time to time are parties to the ARC and Bank of America, N.A., as Administrative Agent for the Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger.

Under the ARC, we may borrow, repay and re-borrow revolving loans from time to time during the period ending September 30, 2019, up to but not exceeding $40.0 million.  All outstanding loans under the revolving loans must be repaid on October 1, 2019.  As of September 30, 2015, and December 31, 2014, there was a long-term amount of $7.2 million outstanding.  The interest rate on the loan varies according to several options.  Interest on the loan is paid monthly and a commitment fee of 0.37% is due quarterly on the unused portion of the loan.  At September 30, 2015, approximately $32.8 million was available to be drawn.

Under the ARC, we also borrowed $70.0 million in a single advance term loan (the “Acquisition Loan”) to partially finance the acquisition of TC.  Interest on the Acquisition Loan is payable quarterly using a ten year commercial style amortization.  Principal is also payable on the last business day of each March, June, September and December 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 Loan.  At September 30, 2015, there was a short-term amount of $7.0 million and a long-term amount of $56.0 million outstanding.  At December 31, 2014, there was a short-term amount of $7.0 million and a long-term amount of $61.3 million outstanding.

Under the ARC, we also have the right to borrow $25.0 million in a multiple advance loan (“Term 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 certain obligations have been fulfilled such as certification that construction of D-Train has been 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.  Interest on the Term Loans is paid monthly.  At September 30, 2015, and December 31, 2014, there was a short-term amount of $1.0 million and $0, respectively, and a long-term amount due of $4.0 million and $5.0 million, respectively with $20.0 million available to be drawn.

The interest rate on all of the above loans varies according to several options.  At September 30, 2015, and December 31, 2014, the rate was 2.44 % and 2.67%.  We were in compliance with all covenants at September 30, 2015.

9. FAIR VALUE MEASUREMENTS

The following items are measured at fair value on a recurring basis subject to disclosure requirements of ASC Topic 820 at September 30, 2015, and December 31, 2014:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

         
Fair Value Measurements Using
 
   
September 30, 2015
   
Level 1
   
Level 2
   
Level 3
 
   
(thousands of dollars)
 
Liabilities:
                       
Interest rate swap
  $ 227       -     $ 227       -  

         
Fair Value Measurements Using
 
   
December 31, 2014
   
Level 1
   
Level 2
   
Level 3
 
   
(thousands of dollars)
 
Liabilities:
                       
Interest rate swap
  $ 378       -     $ 378       -  
Commodity financial instruments
    180       180       -       -  

The carrying value of cash and cash equivalents, trade receivables, accounts payable, accrued liabilities, accrued liabilities in Saudi Arabia and other liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of variable rate long term debt and notes payable reflect recent market transactions and approximate carrying value.  We used other observable inputs that would qualify as Level 2 inputs to make our assessment of
 
 
 
10

the approximate fair value of our cash and cash equivalents, trade receivables,  accounts payable, accrued liabilities, accrued liabilities in Saudi Arabia, other liabilities and variable rate long term debt.  The fair value of the derivative instruments are described below.

Commodity Financial Instruments

We periodically enter into financial instruments to hedge the cost of natural gasoline (the primary feedstock) and natural gas (used as fuel to operate the plant).  

We assess the fair value of the financial swaps on feedstock using quoted prices in active markets for identical assets or liabilities (Level 1 of fair value hierarchy).  At September 30, 2015, no commodity financial instruments were outstanding.  At December 31, 2014, we had derivative contracts with settlement dates through January 2015.  For additional information see Note 10.

Interest Rate Swap

In March 2008 we entered into an interest rate swap agreement with Bank of America related to a $10.0 million term loan secured by plant, pipeline and equipment.  The interest rate swap was designed to minimize the effect of changes in the London InterBank Offered Rate (“LIBOR”) rate.  We had designated the interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and Hedging; however, due to the ARC, we felt 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 it as ineffective as of October 1, 2014.

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).

We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. See discussion of our derivative instruments in Note 10.

10. DERIVATIVE INSTRUMENTS

Commodity Financial Contracts

Hydrocarbon based manufacturers, such as SHR, are significantly impacted by changes in feedstock and natural gas prices. Not considering derivative transactions, feedstock and natural gas used for the nine months ended September 30, 2015, and 2014, represented approximately 70.0% and 81.6% of our petrochemical operating expenses, respectively. The significant percentage decrease of petrochemical operating expenses illustrates the impact that feedstock price changes have on our operations.  During the first nine months of 2015, feedstock prices declined industry-wide.

We endeavor to acquire feedstock and natural gas at the lowest possible cost.  Our primary feedstock (natural gasoline) is traded over the counter and not on organized futures exchanges.  Financially settled instruments (fixed price swaps) are the principal vehicle used to give some predictability to feed prices. We do not purchase or hold any derivative financial instruments for trading or speculative purposes and hedging is limited by our risk management policy to a maximum of 40% of monthly feedstock requirements.

Typically, financial contracts are not designated as hedges.  As of September 30, 2015, we had no outstanding committed financial contracts.

The following tables detail (in thousands) the impact the agreements had on the financial statements:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Unrealized gain (loss)
  $ -     $ -     $ 180     $ (48 )
Realized gain (loss)
    -       -       (180 )     87  
Net gain
  $ -     $ -     $ -     $ 39  

 
 
11


 

Table of Contents
   
September 30, 2015
   
December 31, 2014
 
             
Fair value of financial contracts – liability
  $ -     $ 180  

The realized and unrealized gains/(losses) are recorded in Cost of Sales and Processing for the periods ended September 30, 2015, and 2014.  As a percentage of Cost of Sales and Processing, realized and unrealized gains/(losses) accounted for 0% for the three and nine months ended September 30, 2015, and 2014.

Interest Rate Swap

In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to a $10.0 million (later increased to $14 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 $3.00 million and $3.75 million at September 30, 2015, and December 31, 2014, respectively.  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 originally designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company’s Statement of Stockholders’ Equity.  We originally entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.

The following tables detail (in thousands) the impact the agreement had on the financial statements:

   
September 30,
 
   
2015
   
2014
 
Other Comprehensive Loss
           
  Cumulative loss
  $ -     $ (382 )
  Deferred tax benefit
    -       134  
  Net cumulative loss
  $ -     $ (248 )
                 
Interest expense reclassified from other comprehensive loss
  $ -     $ 190  

   
September 30, 2015
   
December 31, 2014
 
             
Fair value of interest rate swap  - liability
  $ 227     $ 378  

Due to the ARC, we believe that the hedge is no longer entirely effective; therefore, we began treating the interest rate swap as ineffective at that point.  The changes in fair value are now recorded in the Statement of Income.  For the three months ended September 30, 2015, an unrealized loss of approximately $3,000 and a realized loss of approximately $46,000 were recorded.  For the nine months ended September 30, 2015, an unrealized gain of approximately $6,000 and a realized loss of approximately $147,000 were recorded.

11. STOCK-BASED COMPENSATION

Stock-based compensation of approximately $506,000 and $556,000 during the three months and $1,794,000 and $1,530,000 during the nine months ended September 30, 2015, and 2014, respectively, was recognized.

Restricted Stock Awards

On May 20, 2015, we awarded 30,000 shares of restricted stock to a director at a grant date price of $12.39.  The restricted stock award vests over 5 years in 20% increments with the first tranche to be issued on May 19, 2016.  Compensation expense recognized during the three and nine months ended September 30, 2015, was approximately $19,000 and $25,000, respectively.

On April 14, 2015, we awarded 1,000 shares of restricted stock to two of our 30 year employees at a grant date price of $12.03.  The restricted stock award was fully vested.  Compensation expense recognized during the three and nine months ended September 30, 2015, was approximately $0 and $12,000, respectively.


 
12


On February 12, 2015, we awarded 18,000 shares of fully vested restricted stock to various employees at a grant date price of $14.34.  Compensation expense recognized during the three and nine months ended September 30, 2015, was approximately $0 and $258,000, respectively.

On February 10, 2015, we awarded 118,040 shares of restricted stock to our officers at a grant date price of $14.59.  The restricted stock award vests over 4 years in 25% increments with the first tranche to be issued on February 9, 2016.  Compensation expense recognized during the three and nine months ended September 30, 2015, was approximately $108,000 and $287,000.

Restricted stock activity in the first nine months of 2015 was as follows:

   
Shares of Restricted
Stock
   
Weighted Average Grant Date Price per Share
 
             
Outstanding at January 1, 2015
    -     $ -  
   Granted
    167,040       14.15  
   Vested
    (19,000 )     14.22  
Outstanding at September 30, 2015
    148,040     $ 14.14  

Stock Option and Warrant Awards

A summary of the status of our stock option awards and warrants is presented below:

   
Number of Stock Options & Warrants
   
Weighted Average Exercise Price per Share
   
Weighted
Average
Remaining
Contractual
Life
 
                   
Outstanding at January 1, 2015
    1,598,191     $ 7.16        
   Granted
    --       --        
   Exercised
    (100,420 )     4.13        
   Expired
    --       --        
   Cancelled
    --       --        
   Forfeited
    --       --        
Outstanding at September 30, 2015
    1,497,771     $ 7.36       6.2  
Exercisable at September 30, 2015
    755,271     $ 6.16       5.5  

The fair value of the options granted below was calculated using the Black Scholes option valuation model with the assumptions as disclosed in prior quarterly and annual filings.

Directors’ compensation of approximately $46,000 and $80,000 during the three months and $174,000 and $250,000          during the nine months ended September 30, 2015, and 2014,  respectively, was recognized related to options to purchase shares vesting through 2017.

Employee compensation of approximately $309,000 and $427,000 during the three months and $965,000 and $1,128,000 during the nine months ended September 30, 2015, and 2014, respectively, was recognized related to options with a 4 year vesting period which were awarded to officers and key employees.  These options vest through 2018.

Post-retirement compensation of approximately $24,000 was recognized during the three months and $73,000 during the nine months ended September 30, 2015, and 2014, related to options awarded to Mr. Hatem El Khalidi in July 2009.  On May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited these options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders.  The Company is litigating its right to withdraw the options and benefits and as such, these options and benefits continue to be shown as outstanding.  See further discussion in Note 17.
 
 
 
13

Investor relations expense of approximately $0 and $25,000 during the three months and $0 and $79,000 during the nine months ended September 30, 2015, and 2014, respectively, was recognized related to warrants issued for the purchase of 100,000 shares of common stock to Genesis Select Corporation (“Genesis”).  Our agreement with Genesis was terminated effective September 30, 2014; therefore, no additional amounts will vest going forward.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional information.

12. SEGMENT INFORMATION

We operate through business segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by our key decision maker, who is our Chief Executive Officer.

Our petrochemical segment includes SHR and GSPL.  Our specialty wax segment includes TC.  We also separately identify our corporate overhead and investing which includes financing and administrative activities such as legal, accounting, consulting, investor relations, officer and director compensation, corporate insurance, and other administrative costs.

The tables below reflect only 2015 transactions for TC since that is the time period affected by segment reporting due to the acquisition closing in the fourth quarter of 2014.

   
Three Months Ended September 30, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 59,122     $ 4,068     $ -     $ 63,190  
Processing fees
    1,364       2,384       -       3,748  
Net revenues
    60,486       6,452       -       66,938  
Operating profit before depreciation and amortization
    13,636       1,393       (1,654 )     13,375  
Operating profit (loss)
    12,557       178       (1,672 )     11,063  
Depreciation and amortization
    1,079       1,215       18       2,312  
Capital expenditures
    4,857       1,766               6,623  

   
Nine Months Ended September 30, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Consolidated
 
   
(in thousands)
 
Product sales
  $ 158,647     $ 11,749     $ -     $ 170,396  
Processing fees
    4,409       6,626       -       11,035  
Net revenues
    163,056       18,375       -       181,431  
Operating profit before depreciation and amortization
    38,197       3,897       (5,145 )     36,949  
Operating profit (loss)
    35,075       375       (5,163 )     30,287  
Depreciation and amortization
    3,122       3,522       18       6,662  
Capital expenditures
    17,876       5,597       -       23,473  

   
September 30, 2015
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Goodwill and intangible assets, net
  $ -     $ 46,817     $ -     $ -     $ 46,817  
Total assets
    189,537       84,794       101,581       (129,141 )     246,771  

   
Year Ended December 31, 2014
 
   
Petrochemical
   
Specialty Wax
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Goodwill and intangible assets, net
  $ -     $ 47,985     $ -     $ -     $ 47,985  
Total assets
    172,945       79,135       99,360       (119,366 )     232,074  

13. INCOME TAXES

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. Tax returns for the years 2012 through 2014 remain open for examination.  As of September 30, 2015, and December 31, 2014, we recognized no material
 
 
 
14

 
adjustments in connection with uncertain tax positions.  The effective tax rate varies from the federal statutory rate of 35% primarily as a result of state tax expense, stock option based compensation and the manufacturing deduction.

Our state income tax rate was affected by Texas House Bill 32 which was signed in June 2015.  The Texas margin tax rate was reduced for tax reports due on or after January 1, 2016.  We have adopted the U.S. Treasury Department and IRS final regulations that address costs incurred in acquiring, producing, or improving tangible property.  Based on the  final regulations a tax accounting method change was filed with the IRS. We do not anticipate the impact of these changes to be material to our consolidated financial statements.

14. POST-RETIREMENT OBLIGATIONS

In January 2008 an amended retirement agreement was entered into with Mr. Hatem El Khalidi; however, on May 9, 2010, the Board of Directors terminated the agreement due to actions of Mr. El Khalidi.  See Note 17.  All amounts which have not met termination dates remain recorded until a resolution is achieved. As of September 30, 2015, and 2014, approximately $1.0 million and $0.9 million, respectively, remained outstanding and was included in post-retirement benefits.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional information.

15. INVESTMENT IN AMAK

As of September 30, 2015, and December 31, 2014, the Company had a non-controlling equity interest (35%) of approximately $50.7 million and $53.0 million, respectively. Our investment is accounted for under the equity method.

AMAK’s financial statements were prepared in the functional currency of AMAK which is the Saudi Riyal (SR).  In June 1986 the SR was officially pegged to the U. S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR.

The summarized results of operation and financial position for AMAK are as follows:

 
Results of Operations

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Thousands of Dollars)
 
Sales
  $ 19,874     $ 16,957     $ 38,458     $ 47,655  
Gross Profit (Loss)
    (2,711 )     1,785       35       6,469  
General, administrative and other expenses
    4,067       3,714       9,605       11,285  
Net Loss
  $ (6,778 )   $ (1,929 )   $ (9,570 )   $ (4,816 )
Depreciation, depletion and amortization
    4,235       5,930       15,250       16,744  
Net Income (Loss) before depreciation, depletion and amortization
  $ (2,543 )   $ 4,001     $ 5,680     $ 11,928  

 
Financial Position

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(Thousands of Dollars)
 
Current assets
  $ 31,904     $ 17,782  
Noncurrent assets
    261,623       265,584  
Total assets
  $ 293,527     $ 283,366  
                 
Current liabilities
  $ 21,216     $ 23,034  
Long term liabilities
    89,156       67,598  
Shareholders' equity
    183,155       192,734  
    $ 293,527     $ 283,366  

 

 
 
15

The equity in the income or loss of AMAK reflected on the consolidated statement of income for the three and nine months ended September 30, 2015, and 2014, is comprised of the following:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Thousands of Dollars)
 
Company’s share of loss reported by AMAK
  $ (2,391 )   $ (680 )   $ (3,375 )   $ (1,698 )
Amortization of difference between Company’s investment in AMAK and Company’s share of net assets of AMAK
    337       337       1,011       1,011  
Equity in loss of AMAK
  $ ( 2,054 )   $ (343 )   $ (2,364 )   $ (687 )

See our Annual Report on Form 10-K for the year ended December 31, 2014, for additional information.

16. RELATED PARTY TRANSACTIONS

Consulting fees of approximately $0 and $0 were incurred during the three months and $25,000 and $22,000 during the nine months ended September 30, 2015, and 2014, respectively from IHS Global FZ LLC of which Company Director Gary K. Adams holds the position of Chief Advisor – Chemicals.

17. COMMITMENTS AND CONTINGENCIES

Guarantees

On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund (“SIDF”) whereby we agreed to guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330.0 million Saudi Riyals (US$88.0 million) (the “Loan”). The term of the loan is through June 2019.  As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate Guarantees; as a result, our guarantee is for approximately 135.33 million Saudi Riyals (US$36.1 million). The loan was necessary to continue construction of the AMAK facilities and provide working capital needs.  We received no consideration in connection with extending the guarantee and did so to maintain and enhance the value of its investment.  The total amount outstanding to the SIDF at September 30, 2015, was 310.0 million Saudi Riyals (US$82.7 million).

Litigation -

On March 21, 2011, Mr. El Khalidi filed suit against the Company in Texas alleging breach of contract and other claims.  The 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for want of prosecution in this matter on July 24, 2013.  The Ninth Court of Appeals subsequently affirmed the dismissal for want of prosecution and the Supreme Court of Texas denied Mr. El Khalidi’s petition for review.  On May 1, 2014, Mr. El Khalidi 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 County, Texas where it is currently pending.  On April 6, 2015, Mr. El-Khalidi nonsuited his defamation claim.  We believe that the remaining claims are 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, SHR 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.  SHR has placed its insurers on notice of the claim and plans to vigorously defend the case. No accrual has been recorded for this claim.

On April 30, 2015, TC and TREC received notice of a lawsuit filed in the 152nd Judicial District Court of Harris County, Texas.  The suit alleges that the plaintiff, an independent contractor employee, was injured while working on a product line at TC.  We have placed our insurers on notice and plan to vigorously defend the case. 

On or about August 3, 2015, SHR received notice of a lawsuit filed in the 14th Judicial District Court of Calcasieu Parish, Louisiana.  The suit alleges that the plaintiff became ill from exposure to benzene.  SHR placed its insurers on notice.  Its insurers retained a law firm based in Louisiana to defend SHR.




 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussion contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment; the Company’s failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the Company’s pension plans; ineffective internal controls; the Company’s use of accounting estimates; competitive conditions; the Company’s ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations; impact of changes in market liquidity conditions and customer credit risk on receivables; the Company’s ability to successfully manage acquisitions and alliances; general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; industry cycles; specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; 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 release, 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 unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of our management.  Our accounting and financial reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products and synthetic waxes.  Our business model involves the manufacture and sale of tangible products and the provision of 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.

The discussion and analysis of financial condition and the results of operations which appears below should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 our volume expectations 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.  The drop in petroleum prices, which began in mid-September of last year and continued throughout 2015, reduced our average feedstock price per gallon approximately 46% over the first nine months of 2014.  The price reduction had a positive effect on our business.  Typically as prices drop, we see increased cash flow as the cash required for replacement feedstock is less at lower prices.  Also, the formulas we use to sell our products typically have a 30 day trailing feed cost basis; and therefore, are slightly favorable to us during falling prices but are unfavorable when prices rise.  In addition, we have not seen that reduced petroleum prices would be unfavorable to our customers or would require them to curtail operations in any manner.  The chemical industry in general remains robust and is experiencing unprecedented capital investment.

We continue to make progress at our specialty wax segment by improving wax quality and consistency and expanding our custom processing capability.

Review of Third Quarter and Year-to-Date 2015 Results

We reported third quarter 2015 earnings of $5.3 million down from $5.8 million from the third quarter of 2014. Diluted earnings per share of $0.21 were reported for 2015, down from $0.23 from 2014.  Equity in losses from AMAK was $2.1 million for the third quarter of 2015 compared to $0.3 million for the same period in 2014.  Sales volume of our petrochemical products increased 14.0%, but sales revenue from those products decreased 21.5% as compared to the third quarter of 2014 due to lower average selling prices.  Our gross profit increased $3.6 million, and our operating income increased $2.2 million from the third quarter of 2014.
 
 

 
 
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We reported year-to-date 2015 earnings of $17.5 million up from $13.4 million from the first nine months of 2014. Diluted earnings per share of $0.69 were reported for 2015, up from $0.54 from 2014. Equity in losses of AMAK was $2.4 million through September 30, 2015, compared to $0.7 million for the same period of 2014. Sales volume of our petrochemical products increased 1.9%, and sales revenue from those products decreased 24.6% as compared to the first nine months of 2014.  However, our gross profit increased $14.1 million, and our operating income increased $9.7 million from 2014.

We do not include comparisons of our specialty wax segment since it was acquired in the fourth quarter of 2014; therefore, we have no basis for comparison.

Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:

   
September 30, 2015
   
December 31, 2014
   
September 30, 2014
 
Days sales outstanding in accounts receivable
    34.4       35.6       35.0  
Days sales outstanding in inventory
    18.8       16.1       15.1  
Days sales outstanding in accounts payable
    12.5       12.0       16.0  
Days of working capital
    40.6       39.8       34.2  

Our days sales outstanding in accounts receivable remained fairly consistent.  Our days sales outstanding in inventory increased as of the end of the third quarter of 2015 due to decreases in volume sold for both segments, additional raw material purchases by TC, and inventory for hurricane backup purposes at SHR.  Our days sales outstanding in accounts payable also remained fairly consistent from year-end 2014.  Since days of working capital is calculated using the above three metrics, it increased for the reasons discussed.

Cash and cash equivalents increased $6.4 million during the nine months ended September 30, 2015, as compared to an increase of $6.3 million for the nine months ended September 30, 2014.

The change in cash and cash equivalents is summarized as follows:

   
2015
   
2014
 
Net cash provided by (used in)
 
(thousands of dollars)
 
Operating activities
  $ 35,162     $ 18,345  
Investing activities
    (23,587 )     (8,046 )
Financing activities
    (5,204 )     (3,959 )
Increase in cash and equivalents
  $ 6,371     $ 6,340  
Cash and cash equivalents
  $ 14,877     $ 13,948  

Operating Activities
 
Cash provided by operating activities totaled $35.2 million for the first nine months of 2015, $16.8 million higher than 2014.  For the first nine months of 2015 net income increased by approximately $4.1 million as compared to the corresponding period of 2014. Major non-cash items affecting net income included increases in depreciation and amortization of $3.3 million, unrealized gain of $0.3 million, equity in losses from AMAK of $1.7 million and deferred taxes of $0.8 million.

Significant factors leading to an increase in cash provided by operating activities included:

·  
Trade receivables decreased approximately $5.4 million (due to a decrease in average selling price from fourth quarter 2014) as compared to an increase of approximately $5.6 million in 2014 (due to the sales volume increase of 9.5% and average sales price increase of 5.9% over year end 2013),

·  
Prepaid assets increased approximately $0.1 million as compared to an increase of approximately $0.7 million in 2014, and

·  
Other liabilities increased approximately $1.7 million (due to payments received from custom processing customers to fund projects) compared to 2014 which remained steady.


 
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These provisions of cash were partially offset by the following decrease in cash used by operations:

·  
Accounts payable and accrued liabilities decreased approximately $0.3 million (due to the variability in payment dates) as compared to an increase of approximately $6.0 million in 2014 (due to an increase in the accrual for raw material and additional purchases relating to the D-Train expansion).

Investing Activities

Cash used by investing activities during the first nine months of 2015 was approximately $23.6 million, representing an increase of approximately $15.5 million over the corresponding period of 2014. During the first nine months of 2015 we purchased equipment for the D-Train expansion, tank farm improvements, spare equipment, various facility upgrades, hydrogenation/distillation expansion and improvements at our specialty wax facility.  During the first nine months of 2014 we began preparing for the expansion of our penhex unit (D-Train) and made various other facility improvements.

Financing Activities

Cash used by financing activities during the first nine months of 2015 was approximately $5.2 million versus cash used of $4.0 million during the corresponding period of 2014.  During 2015 we made principal payments on our acquisition loan of $5.3 million.  During 2014 we drew $3.0 million on our line of credit and made principal payments on our line of credit of $6.0 million and $1.1 million on our term debt.

Anticipated Cash Needs

We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds supplemented with borrowings under our credit facility.

Results of Operations

 
Comparison of Three Months Ended September 30, 2015 and 2014

 
Specialty Petrochemical Segment (including corporate transactions for comparative purposes)

These tables do not include the results for our specialty wax segment since it was acquired in the fourth quarter of 2014; therefore, we have no basis for comparison.

   
2015
   
2014
   
Change
   
%Change
 
   
(thousands of dollars)
 
Petrochemical Product Sales
  $ 59,121     $ 75,283     $ (16,162 )     (21.5 %)
Processing
    1,364       1,634       (270 )     (16.5 %)
Gross Revenue
  $ 60,485     $ 76,917     $ (16,432 )     (21.4 %)
                                 
Volume of Sales (gallons)
                               
  Petrochemical Products
    24,603       21,574       3,029       14.0 %
                                 
  Cost of Sales
  $ 45,005     $ 63,873     $ (18,868 )     (29.5 %)
  Total Operating Expense**
    13,870       13,320       550       4.1 %
  Natural Gas Expense**
    955       1,429       (474 )     (33.2 %)
  Operating Labor Costs**
    3,308       3,060       248       8.1 %
  Transportation Costs**
    6,925       6,206       719       11.6 %
  General & Administrative Expense
    4,424       4,086       338       8.3 %
  Depreciation and Amortization*
    1,096       1,012       84       8.3 %
  Equity in Losses of AMAK
    (2,054 )     (343 )     (1,711 )     498.8 %
  Capital Expenditures
  $ 4,857     $ 4,455     $ 402       9.0 %
 
*Includes $2,118 and $881 for 2015 and 2014, respectively, which is included in operating expense
 
** Included in cost of sales

Gross Revenue

Gross Revenue decreased during the third quarter of 2015 from 2014 by 21.4% primarily due to a decrease in the average selling price of 31.1%.
 
 
 
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Petrochemical Product Sales

Petrochemical product sales decreased by 21.5% during the third quarter of 2015 from 2014 due to a decrease in the average selling price of 31.1%.  Our average selling price decreased because a large portion of our sales are contracted with formulas which are tied to Natural Gas Liquid (NGL) prices which is our primary feedstock.  Natural gasoline prices fell significantly during the first nine months of 2015 reflecting the drop in petroleum prices.  Sales volume increased by 14.0% from the third quarter of 2014.

Processing

Processing revenues decreased 16.5% during the third quarter of 2015 from 2014 due to a decrease in production required by our customers.

Cost of Sales

Cost of Sales decreased 29.5% during the third quarter of 2015 from 2014 due to the substantial decrease in natural gasoline prices as mentioned above.  Our average feedstock cost per gallon decreased 48.5% while volume processed increased 9.7% to support the additional sales volume.  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.  The price of natural gasoline normally correlates with the price of crude oil.  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 fuel markets at lower prices, thereby increasing overall profitability.
 
 
Total Operating Expense

Total Operating Expense increased 4.1% during the third quarter of 2015 from 2014.  Natural gas, labor and transportation are the largest individual expenses in this category, although not all of these increased.

The cost of natural gas purchased decreased 33.2% during 2015 from 2014 due to a decrease in the average per unit cost and in the quantity purchased.  The average price per MMBTU for the third quarter of 2015 was $3.02 whereas, for 2014 the per-unit cost was $4.34.  Volume decreased to approximately 324,000 MMBTU from about 330,000 MMBTU.

Labor costs were higher by approximately 8.1% due to cost of living and competitive wage adjustments averaging 3% to 4%, operational overtime because of loading demands and training, maintenance overtime because of turnarounds, and additional profit sharing due to the increase in operating income and personnel. We are studying ways to reduce overtime caused by the short term surge of loading iso-containers which occurs periodically.  The overtime created by the training for the new equipment and processes of D-Train will continue until the project is complete and operating routinely.  The maintenance overtime was higher than traditionally seen during turnarounds due to the extended nature of the work including the arrangements for testing capacities for higher volumes of production.

Transportation costs increased 11.6% due to the increased sales volume and additional railcars on lease.  These costs are included in our selling prices.

General and Administrative Expense

General and Administrative costs for the third quarter of 2015 from 2014 increased by 8.3% due primarily to increases in officer compensation (due to a restricted stock grant and the accrual for end of year bonuses) and contributions to the 401(k) plan (due to contributions being generated from profit sharing distributions).

Depreciation and Amortization

Depreciation and amortization increased 8.3% during the third quarter of 2015 from 2014 due to a larger asset base.

Equity in Losses of AMAK

Equity in Losses of AMAK increased $1.7 million during the third quarter of 2015 from 2014.  See discussion in nine months section below.

 
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Capital Expenditures

Capital Expenditures increased 9.0% during the third quarter of 2015 from 2014 primarily due to improvements in the petrochemical facility as detailed above under “Investing Activities”.

 
Comparison of Nine Months Ended September 30, 2015 and 2014

 
Specialty Petrochemical Segment (including corporate transactions for comparative purposes)

These tables do not include the results for our specialty wax segment since it was acquired in the fourth quarter of 2014; therefore, we have no basis for comparison.

   
2015
   
2014
   
Change
   
%Change
 
   
(thousands of dollars)
 
Petrochemical Product Sales
  $ 158,647     $ 210,517     $ (51,870 )     (24.6 %)
Processing
    4,409       5,054       (645 )     (12.8 %)
Gross Revenue
  $ 163,056     $ 215,571     $ (52,515 )     (24.4 %)
                                 
Volume of Sales (gallons)
                               
  Petrochemical Products
    62,311       61,144       1,167       1.9 %
                                 
  Cost of Sales
  $ 119,001     $ 182,112     $ (63,111 )     (34.7 %)
  Total Operating Expense**
    38,890       38,271       619       1.6 %
  Natural Gas Expense**
    3,226       4,829       (1,603 )     (33.2 %)
  Operating Labor Costs**
    10,218       8,782       1,436       16.4 %
  Transportation Costs**
    17,348       16,852