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RTK > SEC Filings for RTK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for RENTECH INC /CO/

Form 10-Q for RENTECH INC /CO/


8-Nov-2012

Quarterly Report


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

You should read the following discussion and analysis of our financial condition, results of operations and cash flows in conjunction with our consolidated financial statements and the related notes presented in this report and in our Transition Report.

FORWARD-LOOKING STATEMENTS

Certain information included in this report contains, and other reports or materials filed or to be filed by us with the SEC (as well as information included in oral statements or other written statements made or to be made by us or our management) contain or will contain, "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, Section 27A of the Securities Act of 1933, as amended, and pursuant to the Private Securities Litigation Reform Act of 1995. The forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. They can be identified by the use of terminology such as "may," "will," "expect," "believe," "intend," "plan," "estimate," "anticipate," "should" and other comparable terms or the negative of them. You are cautioned that, while forward-looking statements reflect management's good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Factors that could affect our results include the risk factors detailed in "Part I-Item 1A. Risk Factors" in the Transition Report and from time to time in our periodic reports and registration statements filed with the SEC. Such risks and uncertainties include, among other things:

our ability to implement the Rentech Process, the Rentech-SilvaGas biomass gasification technology, or the Rentech-SilvaGas Technology, or Rentech-ClearFuels biomass gasification technology, or the Rentech-ClearFuels Technology, at commercial-scale synthetic fuels or power plants; and the continuing costs of developing such technologies;

our ability to attract partners for the purpose of commercializing our technologies;

the economic feasibility of energy projects using our technologies;

our ability to successfully implement our revised project development strategy for the commercialization of our alternative energy technologies;

our pursuit of alternative energy projects that involve substantial expense and risk;

our ability to protect our intellectual property rights;

the ability of our technology to compete successfully against technologies developed by our competitors;

risks arising from changes in existing laws or regulations, or their interpretation, or the imposition of new restrictions relating to emissions of greenhouse gases or carbon dioxide;

our ability to identify and consummate acquisitions in related businesses, and the risk that any such acquisitions do not perform as anticipated;

the volatile nature of the nitrogen and ammonium sulfate fertilizer businesses and their ability to remain profitable;

a decline in demand for crops such as corn, soy beans, potatoes, cotton, canola, alfalfa and wheat or their prices or the use of nitrogen fertilizer for agricultural purposes;

adverse weather conditions, which can affect demand for, and delivery and production of, our nitrogen and ammonium sulfate fertilizer products;

any interruption in the supply, or rise in the price levels, of natural gas and other essential raw materials;

planned or unplanned shutdowns, or any operational difficulties, at the East Dubuque Facility or Pasadena Facility;

intense competition from other nitrogen fertilizer producers;

any loss of Agrium Inc., or Agrium, as a distributor or customer of our nitrogen fertilizer products, loss of storage rights at Agrium's terminal in Niota, Illinois or decline in sales of products through or to Agrium;

any loss of Interoceanic Corporation, or Interoceanic, as a distributor of our ammonium sulfate fertilizer products or decline in sales of products through Interoceanic;

potential operating hazards of the East Dubuque Facility or Pasadena Facility from accidents, fire, severe weather, floods or other natural disasters; and

risks associated with the expansion and other projects at our facilities, including any disruption to operations at our facilities during construction and our ability to sell the incremental products resulting from such projects.

You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.


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As used in this report, references to "Rentech" refer to Rentech, Inc., a Colorado corporation, and the terms "we," "our," "us" and "the Company" mean Rentech and its consolidated subsidiaries, unless the context indicates otherwise.

OVERVIEW OF OUR BUSINESSES

Our vision is to be a provider of clean energy solutions and quality nitrogen-based fertilizer products. We own and develop technologies that enable the production of certified synthetic fuels and renewable power when integrated with certain other third-party technologies. Our clean energy technology portfolio includes the Rentech-SilvaGas Technology and the Rentech-ClearFuels Technology, which can produce synthesis gas, or syngas, from biomass and waste materials for production of renewable power and fuels. Renewable hydrogen may also economically be separated out of the syngas produced using the Rentech-ClearFuels Technology. We also own the patented Rentech Process, which is based on Fischer-Tropsch chemistry. The Rentech Process can convert syngas from our or others' gasification technologies into complex hydrocarbons that then can be upgraded into fuels or chemicals using refining technology that we license.

RNHI, one of Rentech's indirect wholly owned subsidiaries, owns the general partner interest and 59.9% of the common units representing limited partner interests in RNP, a publicly traded limited partnership. Through its wholly owned subsidiary, RNLLC, RNP manufactures natural-gas based nitrogen fertilizer products at its East Dubuque Facility and sells such products to customers located in the Mid Corn Belt region of the United States. Through its wholly owned subsidiary, RNPLLC, RNP manufactures ammonium sulfate fertilizer, sulfuric acid and ammonium thiosulfate fertilizer at its Pasadena Facility. The Pasadena Facility purchases ammonia as a feedstock at contractual prices based on the monthly Tampa Index market, while the East Dubuque Facility sells ammonia at prevailing prices in the Mid Corn Belt which are typically significantly higher than Tampa ammonia prices.

Our ownership interest in RNP currently entitles us to 59.9% of all distributions made by RNP to its common unit holders, which distributions can be used for general corporate purposes. However, Rentech's ownership interest may be reduced over time if it elects to cause RNHI to sell any of its common units or if additional common units are issued by RNP in a manner that dilutes Rentech's ownership interest in RNP.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. The most significant estimates and judgments relate to: revenue recognition, inventories, and the valuation of long-lived assets and intangible assets. Actual amounts could differ significantly from these estimates. There has been no material change to our critical accounting policies and estimates from the information provided in the Transition Report.

FACTORS AFFECTING RESULTS OF OPERATIONS

More detailed information about our consolidated financial statements is provided in the following portions of this section. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto as presented in this report and in the Transition Report.

Acquisitions

One of our business strategies is to pursue acquisitions. In our alternative energy segment, we are actively seeking to acquire companies and assets, focusing on businesses with existing or near-term cash flow utilizing conventional energy technologies. In our nitrogen products manufacturing segment, RNP is actively pursuing acquisitions in related businesses that may benefit from RNP's partnership structure. On November 1, 2012, RNP completed the Agrifos Acquisition. The Agrifos Acquisition, including the debt RNP incurred to finance the transaction, will have a significant impact on the comparability of our financial condition and results of operations for periods before and after the transaction. If completed, other potential acquisitions could also be significant to our business, financial condition and results of operations. We have not entered into definitive agreements for any potential acquisitions, other than the completed Agrifos Acquisition, and we cannot assure you that we will enter into any definitive agreements on satisfactory terms, or at all. Costs associated with potential acquisitions are expensed as incurred, and could be significant.


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Seasonality

Results of operations for the interim periods are not necessarily indicative of results to be expected for the year primarily due to the impact of seasonality on the sales at RNLLC. Our nitrogen products manufacturing segment and our customers' businesses are seasonal, based on planting, growing and harvesting cycles. The following table shows product tonnage (in thousands) shipped by quarter for the nine months ended September 30, 2012 and the years ended December 31, 2011, 2010 and 2009.

                                            2012      2011      2010      2009
               Quarter ended March 31          92        89        86        65
               Quarter ended June 30          160       213       206       203
               Quarter ended September 30     180       125       181       150
               Quarter ended December 31      n/a       145       167       124

               Total Tons Shipped             432       572       640       542

RNLLC typically ships the highest volume of tons during the spring planting season, which occurs during the quarter ended June 30, and the next highest volume of tons after the fall harvest during the quarter ended December 31. However, as reflected in the table above, the seasonal patterns may change substantially from year-to-year due to various circumstances, including timing of or changes in the weather. These seasonal increases and decreases in demand also can cause fluctuations in sales prices. In more mild winter seasons with warmer weather, farmers prepare the soil with earlier application of ammonia fertilizer which may shift significant spring ammonia sales into the quarter ended March 31, as was the case during the three months ended March 31, 2012.

As a result of the seasonality of shipments and sales, we experience significant fluctuations in our revenues, income, net working capital levels and RNP's cash available for distribution from quarter to quarter. Weather conditions can significantly impact quarterly results by affecting the timing and amount of product deliveries. Our receivables and deferred revenues are seasonal and relatively unpredictable. Significant amounts of our products are typically sold for later shipment under product prepayment contracts, and the timing of these sales and the amount of down payment as a percentage of the total contract price may vary with market conditions. The variation in the timing of these sales and contract terms may add to the seasonality of our cash flows and working capital.

Our Pasadena Facility is not exposed to the effects of seasonality to the same extent as our East Dubuque Facility due to (i) the location of the facility and its customers in climate conditions that are different than those in our market near East Dubuque, (ii) the application of ammonium sulfate fertilizer to a broader range of crops in more locations, compared to the concentration on corn within 200 miles of East Dubuque, and (iii) sales to Brazil, which has different seasonal patterns than do our markets in North America.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011:

Since the Agrifos Acquisition was completed subsequent to September 30, 2012, all discussions and amounts related to the results of operations for the three and nine months ended September 30, 2012 and 2011 exclude the Pasadena Facility.

Continuing Operations

Revenues



                                                 For the Three Months                 For the Nine Months
                                                 Ended September 30,                  Ended September 30,
                                               2012                 2011              2012              2011
                                                    (in thousands)                       (in thousands)
Revenues:
Nitrogen products manufacturing           $       60,112        $     38,567     $      169,228       $ 136,895
Alternative energy                                    58                  52                237             154

Total revenues                            $       60,170        $     38,619     $      169,465       $ 137,049


                                                 For the Three Months                 For the Three Months
                                               Ended September 30, 2012             Ended September 30, 2011
                                               Tons               Revenue             Tons             Revenue
                                                    (in thousands)                       (in thousands)
Nitrogen products manufacturing
revenues:
Ammonia                                               31        $     19,237                 18       $  11,582
Urea ammonium nitrate (UAN)                          110              32,609                 77          22,933
Urea (liquid and granular)                            10               5,864                  3           1,541
Carbon dioxide (CO2)                                  25                 854                 23             592
Nitric acid                                            4               1,506                  4           1,462
Sales of excess inventory of natural
gas                                                   -                   -                 N/A             457
Nitrous oxide (N2O) emission reduction
credits                                              N/A                  42                 -               -

Total                                                180        $     60,112                125       $  38,567


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                                                   For the Nine Months                  For the Nine Months
                                                Ended September 30, 2012             Ended September 30, 2011
                                               Tons              Revenue            Tons              Revenue
                                                     (in thousands)                       (in thousands)
Nitrogen products manufacturing revenues:
Ammonia                                            101       $        67,195             81       $        50,518
UAN                                                236                78,559            236                69,348
Urea (liquid and granular)                          29                17,622             23                10,715
CO2                                                 55                 1,817             76                 2,041
Nitric acid                                         11                 3,919             11                 3,816
Sales of excess inventory of natural gas            -                     -             N/A                   457
N2O emission reduction credits                     N/A                   116             -                     -

Total                                              432       $       169,228            427       $       136,895

Nitrogen products manufacturing. Our nitrogen products manufacturing segment provides revenue from sales of various nitrogen fertilizer products manufactured at the East Dubuque Facility and used primarily in corn production. The East Dubuque Facility is designed to produce ammonia, UAN, liquid and granular urea, nitric acid and CO2 using natural gas as a feedstock. Revenues are seasonal based on the planting, growing, and harvesting cycles of customers utilizing nitrogen fertilizer.

Revenues were approximately $60.1 million for the three months ended September 30, 2012 compared to approximately $38.6 million for the three months ended September 30, 2011. The increase in revenue for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily due to increased sales volume for all products, except for nitric acid which remained unchanged. We had a bi-annual turnaround during the three months ended September 30, 2011 during which time we did not operate the East Dubuque Facility and therefore did not produce products. With lower inventory available for sale, we sold product in the subsequent quarter at higher, in-season pricing. This resulted in lower ammonia sales volume in the three months ended September 30, 2011 compared to the three months ended September 30, 2012. The warm, dry weather during the second quarter of 2012 resulted in significantly lower UAN sales volume than is typical, providing a higher level of inventory available for sale entering the third quarter of 2012. This inventory was sold during the third quarter of 2012 in anticipation of the spring 2013 planting season, resulting in higher UAN sales volume during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

Revenues were approximately $169.2 million for the nine months ended September 30, 2012 compared to approximately $136.9 million for the nine months ended September 30, 2011. The increase in revenue for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was due to increased sales volume for ammonia, as described above, and higher sales prices for all products, due to market conditions.

The average sales price per ton for the three months ended September 30, 2012 decreased by approximately 2% for ammonia and by approximately 1% for UAN, compared with the three months ended September 30, 2011. These two products comprised approximately 86% and 89% of the revenues for the three months ended September 30, 2012 and 2011, respectively. The average sales price per ton for the nine months ended September 30, 2012 increased by approximately 6% for ammonia and by approximately 13% for UAN, compared with the nine months ended September 30, 2011. These two products comprised approximately 86% and 88% of the revenues for the nine months ended September 30, 2012 and 2011, respectively. Average sales prices per ton increased due to higher demand for the products caused by a combination of low levels of corn and fertilizer inventories and expectations of higher corn acreage in 2012.

For the three and nine months ended September 30, 2012, revenue from nitrogen products manufacturing includes approximately $42,000 and $116,000, respectively, from the sale of N2O emission reduction credits. In July 2011, RNLLC began operating a N2O catalytic converter on one of its nitric acid plants. The converter reduced N2O emissions at the East Dubuque Facility resulting in RNLLC being awarded corresponding emission reduction credits.

Alternative Energy. This segment generates revenues for technical services and licensing activities related to our technologies. We enter into technical services contracts from time-to-time on a non-recurring basis which causes fluctuations in revenue from this segment. During the three and nine months ended September 30, 2012, we also generated revenue from the sale of fuel from our Product Demonstration Unit, or the PDU, in Commerce City, Colorado.


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Cost of Sales



                                      For the Three  Months          For the Nine Months
                                       Ended September 30,           Ended September 30,
                                       2012             2011          2012           2011
                                          (in thousands)                (in thousands)
  Cost of sales:
  Nitrogen products manufacturing   $    25,077       $ 25,751     $    65,975     $ 76,451
  Alternative energy                         53             49             159          149

  Total cost of sales               $    25,130       $ 25,800     $    66,134     $ 76,600

Nitrogen Products Manufacturing. Cost of sales was approximately $25.1 million for the three months ended September 30, 2012 compared to approximately $25.8 million for the three months ended September 30, 2011. The cost of sales for the three months ended September 30, 2012 decreased from the prior comparable period primarily due to turnaround expenses of approximately $4.5 million in the prior year and lower natural gas prices, partially offset by increased sales volume for all products, except for nitric acid which remained unchanged. Natural gas and labor costs comprised approximately 39% and 14%, respectively, of cost of sales for the three months ended September 30, 2012, and approximately 40% and 9%, respectively, of cost of sales for the three months ended September 30, 2011.

Cost of sales was approximately $66.0 million for the nine months ended September 30, 2012 compared to approximately $76.5 million for the nine months ended September 30, 2011. The cost of sales for the nine months ended September 30, 2012 decreased from the prior comparable period primarily due to turnaround expenses of approximately $4.5 million in the prior year, lower natural gas prices and lower sales commissions, partially offset by increased sales volume for ammonia. We did not pay commissions to Agrium from January 2012 through most of April 2012. Our agreement with Agrium includes a $5.0 million cap on commissions for each contract year, which, for the contract year ended April 2012, was met in late 2011. Natural gas and labor costs comprised approximately 44% and 14%, respectively, of cost of sales for the nine months ended September 30, 2012, and approximately 47% and 11%, respectively, of cost of sales for the nine months ended September 30, 2011.

Depreciation expense included in cost of sales from our nitrogen products manufacturing segment was approximately $3.6 million and $2.4 million for the three months ended September 30, 2012 and 2011, respectively. Depreciation expense included in cost of sales from our nitrogen products manufacturing segment was approximately $8.7 million and $7.1 million for the nine months ended September 30, 2012 and 2011, respectively.

Alternative Energy. The cost of sales in our alternative energy segment was for costs incurred for work performed under technical services contracts. The sale of fuel from the PDU had no material cost of sales since it is a by-product of our research and development efforts in developing and proving our technologies.

Gross Profit



                                      For the Three  Months          For the Nine Months
                                       Ended September 30,           Ended September 30,
                                       2012             2011          2012           2011
                                          (in thousands)                (in thousands)
  Gross profit:
  Nitrogen products manufacturing   $    35,035       $ 12,816     $   103,253     $ 60,444
  Alternative energy                          5              3              78            5

  Total gross profit                $    35,040       $ 12,819     $   103,331     $ 60,449

Nitrogen Products Manufacturing. Gross profit was approximately $35.0 million for the three months ended September 30, 2012 compared to approximately $12.8 million for the three months ended September 30, 2011. Gross profit margin was 58% for the three months ended September 30, 2012 as compared to 33% for the three months ended September 30, 2011. The gross profit for the three months ended September 30, 2012 increased compared to the prior comparable period primarily due to increased sales volume for all products, except for nitric acid which remained unchanged, turnaround expenses of approximately $4.5 million in the prior year and lower natural gas prices.

Gross profit was approximately $103.3 million for the nine months ended September 30, 2012 compared to approximately $60.4 million for the nine months ended September 30, 2011. Gross profit margin was 61% for the nine months ended September 30, 2012 as compared to 44% for the nine months ended September 30, 2011. The gross profit for the nine months ended September 30, 2012 increased compared to the prior comparable period primarily due to increased sales prices for all products, increased sales volume for ammonia, turnaround expenses of approximately $4.5 million in the prior year, lower natural gas prices, and lower sales commissions. We did not pay commissions to Agrium from January 2012 through most of April 2012 as described above.


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Operating Expenses



                                                    For the Three Months             For the Nine Months
                                                    Ended September 30,              Ended September 30,
                                                    2012             2011            2012            2011
                                                       (in thousands)                  (in thousands)
Operating expenses:
Selling, general and administrative              $    12,058       $  4,409       $   33,832       $ 20,318
Research and development                               5,563         10,223           14,675         24,582
. . .
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