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TRECORA RESOURCES – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 March 10, 2016 - 11:36 PM EST

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TRECORA RESOURCES - 10-K - Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Forward Looking Statements


Statements in Items 7 and 7A, as well as elsewhere in or incorporated by
reference in, this Annual Report on Form 10-K regarding the Company's financial
position, business strategy and plans and objectives of the Company's management
for future operations and other statements that are not historical facts, are
"forward-looking statements" as that term is


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defined under applicable Federal securities laws. In some cases,
"forward-looking statements" can be identified by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "contemplates," "proposes,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology. Forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from those expressed or implied by such statements.
Such risks, uncertainties and factors include, but are not limited to, general
economic conditions domestically and internationally; insufficient cash flows
from operating activities; difficulties in obtaining financing; outstanding debt
and other financial and legal obligations; lawsuits; competition; industry
cycles; feedstock, product and mineral prices; feedstock availability;
technological developments; regulatory changes; environmental matters; foreign
government instability; foreign legal and political concepts; and foreign
currency fluctuations, as well as other risks detailed in the Company's filings
with the U.S. Securities and Exchange Commission, including this Annual Report
on Form 10-K, all of which are difficult to predict and many of which are beyond
the Company's control.

Overview

The following discussion and analysis of our financial results, as well as the
accompanying consolidated financial statements and related notes to consolidated
financial statements to which they refer, are the responsibility of the
management of the Company. Our accounting and financial reporting fairly reflect
our business model involving the manufacturing and marketing of petrochemical
products and specialty waxes. Our business model involves the manufacture and
sale of tangible products and providing custom processing services. Our
consistent approach to providing high purity products and quality services to
our customers has helped to sustain our current position as a preferred supplier
of various petrochemical products.

Business Environment and Risk Assessment


We believe we are well-positioned to participate in new investments to grow the
Company. While petrochemical prices are volatile on a short-term basis and
depend on the demand of our customers' products, our investment decisions are
based on our long-term business outlook using a disciplined approach in
selecting and pursuing the most attractive investment opportunities.

Petrochemical Operations

Worldwide petrochemical demand improved during 2015, and we benefitted from continued operational excellence and competitive advantages achieved through our business mix and focus on producing high quality products and outstanding customer service.


During 2015 feedstock prices continued the decline which began in the fourth
quarter of 2014. Average price fell $0.46 per gallon from end of year 2014 to
end of year 2015. Typically, during falling prices we experience better margins
since almost 60% of our selling prices are on formula pricing which follows
market prices calculated upon the prior month.

Specialty Wax Operations


Key applications for polyolefin waxes are in hot melt adhesives (HMA), plastic
processing, PVC lubricants, inks, paints and coatings, where they act as surface
or rheology modifiers. The HMA market is expected to grow at a higher rate than
GDP growth due to growth in the developing markets and increases in packaging
requirements due to changes in consumer purchasing (shift to home deliveries via
the internet) in developed economies. Road marking paints are also expected to
grow at rates exceeding GDP growth in developed economies due to new
infrastructure build-outs. New construction and upgrades to the existing water
network should encourage the PVC market to grow at GDP growth rates. Global
demand for polyethylene and polypropylene waxes, our target market, is expected
to grow to around 2 billion pounds globally by 2020. We expect to penetrate a
larger percentage of the market with our enhanced quality product by giving
customers an alternative to synthetic Fischer-Tropsch waxes.



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Liquidity and Capital Resources

Working Capital

Our approximate working capital days are summarized as follows:


                                                     December 31,     

December 31, December 31,

                                                             2015             2014             2013
Days sales outstanding in accounts receivable                29.4             35.6             34.1
Days sales outstanding in inventory                          23.8             16.1             18.6
Days sales outstanding in accounts payable                   12.2             12.0             11.4
Days of working capital                                      41.0             39.8             41.4



Our days sales outstanding in accounts receivable decreased from 2014 to 2015
due to decreases in deferred sales revenue and increased from 2013 to 2014 due
to increases in deferred sales revenue. Deferred sales revenue decreased by
approximately $1.4 million from 2014 to 2015 and increased by approximately $0.4
million from 2013 to 2014. Deferred sales are not recognized until the customer
accepts delivery of the product and title has transferred. The majority of these
sales are to foreign customers with longer payment terms due to increased
shipping times.

Our days sales outstanding in inventory increased from 2014 to 2015 due to
additional inventory on hand at TC. Due to TC's primary raw material supplier
being required to sell additional material, TC chose to purchase that material
rather than it being sold to a competitor. This significantly increased TC's
inventory because of the additional production from that raw material.

Sources and Uses of Cash

Cash and cash equivalents increased by $10.1 million during the year ended December 31, 2015. The change in cash and cash equivalents is summarized as follows:


                                                   2015          2014       

2013

Net cash provided by (used in)                           (in thousands)
 Operating activities                         $  39,565     $  23,205     $  13,242
 Investing activities                           (31,294 )     (88,942 )     (12,702 )
 Financing activities                             1,846        66,635        (2,440 )
Increase (decrease) in cash and equivalents   $  10,117     $     898     $  (1,900 )
Cash and cash equivalents                     $  18,623     $   8,506     $   7,608



Operating Activities

Operating activities generated cash of $39.6 million during fiscal 2015 as compared with $23.2 million of cash provided during fiscal 2014. The Company's net income increased by $3.0 million from 2014 to 2015 and cash provided by operations increased by $16.4 million due primarily to the following factors:

· Net income for 2015 included a non-cash equity in loss from AMAK of $5.3

million as compared to equity in loss from AMAK $1.1 million in 2014;

· Net income for 2015 included a non-cash depreciation and amortization charge

of $9.1 million (due to the incorporation of TC's charges for a full year) as

compared to 2014 which included a charge of $5.7 million (included only one

   quarter of TC's charges);



· Net income for 2015 included a non-cash deferred income tax charge of $5.6

million as compared to 2014 which included a deferred income tax benefit of

   $1.9 million;



· Trade receivables decreased approximately $8.8 million in 2015 (due to a 27.1%

decrease in the average per gallon selling price) as compared to an increase

of approximately $3.4 million in 2014 (due to a 9.9% increase in volume sold

during the fourth quarter and receivables acquired from the Acquisition);

· Prepaid expenses and other assets decreased $1.2 million in 2015 (primarily

due to expensing of loan fees and disbursement of the prepayment of a lawsuit

settlement) as compared to an increase of $1.4 million in 2014 (primarily due

to prepaid loan fees associated with the debt from the Acquisition, prepayment

of a lawsuit settlement, and prepaids acquired from the Acquisition); and






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· Other liabilities increased $2.2 million in 2015 (due to customer funding of

capital projects for custom processing) as compared to an increase of $0.1

million in 2014 (due to deferred revenue acquired from the Acquisition offset

by recognition of deferred revenue during 2014).

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

· Income tax receivable increased $7.2 million in 2015 (primarily due to

estimated tax payments being made prior to the update of tax laws passed in

   December 2015) as compared to a decrease of $0.1 million in 2014;



· Inventory increased $3.0 million in 2015 (due to TC's increase in raw material

receipts from their primary supplier which translated into additional finished

goods production) as compared to a decrease of $2.6 million in 2014 (due to a

31.9% decrease in cost per gallon); and

· Accounts payable and accrued liabilities decreased $2.4 million in 2015

(primarily due to construction projects being completed during the year) as

compared to an increase of $1.8 million in 2014 (primarily due to the working

capital adjustment payable for the Acquisition).




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

· Net income for 2014 included a non-cash equity in loss from AMAK of $1.1

million as compared to equity in earnings from AMAK $4.7 million and gain on

equity issued in AMAK of $4.0 million in 2013;

· Net income for 2014 included a non-cash depreciation and amortization charge

of $5.7 million as compared to 2013 which included a non-cash depreciation

   charge of $4.0 million;



· Net income for 2014 included a non-cash share-based compensation charge of

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


· Trade receivables increased approximately $3.4 million in 2014 (due to a 9.9%

increase in volume sold during the fourth quarter and receivables acquired

from the Acquisition) as compared to an increase of approximately $6.3 million

(due to a 40.1% increase in volume sold during the fourth quarter) in 2013;

· Inventory decreased approximately $2.6 million in 2014 (due to a 31.9%

decrease in cost per gallon) as compared to an increase of approximately $2.2

million (due to a 58.8% increase in deferred sales) in 2013; and

· Accounts payable and accrued liabilities increased $1.8 million in 2014

(primarily due to the working capital adjustment payable for the Acquisition)

as compared to an increase of $1.4 million (primarily due to an increase in

the accrual for raw materials) in 2013.

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

· Net income for 2014 included non-cash deferred income tax benefits of $1.9

million as compared to charges of $1.5 million in 2013;

· Prepaid expenses and other assets increased $1.4 million in 2014 (primarily

due to prepaid loan fees associated with the debt from the Acquisition,

prepayment of a lawsuit settlement, and prepaids acquired from the

Acquisition) as compared to an increase of $1.0 million in 2013 (primarily due

   to an increase in prepaid insurance and notes receivable from processing
   customers); and


· Other liabilities increased $0.1 million in 2014 (due to deferred revenue

acquired from the Acquisition offset by recognition of deferred revenue during

2014) as compared to an increase of $3.0 million in 2013 (due to the receipt

of funds from toll processing customers for modifications of toll processing

   facilities within the plant).




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Investing Activities


Cash used by investing activities during fiscal 2015 was approximately $31.3
million, representing a decrease of approximately $57.6 million over the
corresponding period of 2014. The majority of the decrease was due to the 2014
Acquisition for $74.8 million, net of $0.1 million in cash acquired as discussed
in Note 3. During 2015 we expended $13.3 million on the D-train expansion, $1.8
million on tank farm improvements, $0.6 million on spare equipment, $2.8 on
pipeline upgrades, $1.5 million on transportation equipment, $2.2 million on the
Oligomerization project (costs fully paid by the customer), $2.1 million on the
hydrogenation project, $1.3 million on a wax stripping column, and $5.6 million
on various plant improvements and equipment.

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

Financing Activities


Cash provided by financing activities during fiscal 2015 was approximately $1.8
million versus cash provided of $66.6 million during the corresponding period of
2014. During 2015 we made principal payments of $7.0 million on our term debt
and $6.2 million on our line of credit. We drew $15.0 million on our term debt
at year end 2015 to pre-fund the new reformer project approved for 2016 since
borrowing availability for that particular financing was set to expire on
December 31, 2015.

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

Credit Agreement


On October 1, 2014, TOCCO, SHR, GSPL, and TC (SHR, GSPL and TC collectively the
"Guarantors") entered into an Amended and Restated Credit Agreement ("ARC
Agreement") with the lenders which from time to time are parties to the ARC
Agreement (collectively, the "Lenders") and Bank of America, N.A., a national
banking association, as Administrative Agent for the Lenders, and Merrill Lynch,
Pierce, Fenner & Smith Incorporated as Lead Arranger.

Subject to the terms and conditions of the ARC Agreement, TOCCO may (a) borrow,
repay and re-borrow revolving loans (collectively, the "Revolving Loans") from
time to time during the period ending September 30, 2019, up to but not
exceeding at any one time outstanding $40.0 million (the "Revolving Loan
Commitment") and (b) request up to $5.0 million of letters of credit and $5.0
million of swingline loans. Each of the issuance of letters of credit and the
advance of swingline loans shall be considered usage of the Revolving Loan
Commitment. All outstanding loans under the Revolving Loans must be repaid on
October 1, 2019. As of December 31, 2015, TOCCO had outstanding borrowings under
the Revolving Loans aggregating $1.0 million.

Under the ARC Agreement, TOCCO also borrowed $70.0 million in a single advance
term loan (the "Acquisition Term Loan") to partially finance the Acquisition. As
of December 31, 2015, TOCCO had outstanding borrowings under the Acquisition
Term Loan aggregating $61.3 million.

Under the ARC Agreement, TOCCO also has the right to borrow $25.0 million in a
multiple advance loan (the "Term Loans," together with the Revolving Loans and
Acquisition Term Loan, collectively the "Loans"). Borrowing availability under
the Term Loans ended on December 31, 2015. The Term Loans convert from a
multiple advance loan to a "mini-perm" loan once TOCCO has fulfilled certain
obligations such as certification that construction of D-Train was completed in
a good and workmanlike manner, receipt of applicable permits and releases from
governmental authorities, and receipt of releases of liens from the contractor
and each subcontractor and supplier. The Loans also include a $40,000,000
uncommitted increase option (the "Accordion Option"). As of December 31, 2015,
TOCCO had borrowed funds under this agreement aggregating $20.0 million.


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All of the Loans under the ARC Agreement will accrue interest at the lower of
(i) a 
London
 interbank offered rate ("Eurodollar Rate") plus a margin of between
2.00% and 2.50% based on the total leverage ratio of TOCCO and its subsidiaries
on a consolidated basis, or (ii) a base rate ("Base Rate") equal to the highest
of the federal funds rate plus 0.50%, the rate announced by Bank of America,
N.A. as its prime rate, and Eurodollar Rate plus 1.0%, plus a margin of between
1.00% to 1.50% based on the total leverage ratio of TOCCO and its subsidiaries
on a consolidated basis. The Revolving Loans will accrue a commitment fee on the
unused portion thereof at a rate between 0.25% and 0.375% based on the total
leverage ratio of TOCCO and its subsidiaries on a consolidated basis. Interest
on the Revolving Loans will be payable quarterly, with principal due and payable
at maturity. Interest on the Acquisition Term Loan became payable quarterly
using a ten year commercial style amortization, commencing on December 31,
2014. The Acquisition Term Loan was also payable as to principal beginning on
December 31, 2014, and continuing on the last business day of each March, June,
September and December thereafter, each payment in an amount equal to
$1,750,000, provided that the final installment on the September 30, 2019,
maturity date shall be in an amount equal to the then outstanding unpaid
principal balance of the Acquisition Term Loan. Interest on the Term Loans will
be payable quarterly using a fifteen year commercial style amortization, with
interest only through December 31, 2015, and principal payments to commence
March 31, 2016. Interest on the Loans will be computed (i) in the case of Base
Rate Loans, on the basis of a 365-day or 366-day year, as the case may be, and
(ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in
each case for the actual number of days elapsed in the period during which it
accrues.

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

All amounts owing under the ARC Agreement and all obligations under the guarantees will be secured in favor of the Lenders by substantially all of the assets of TOCCO and its subsidiaries and guaranteed by its subsidiaries.


The ARC Agreement contains, among other things, customary covenants, including
restrictions on the incurrence of additional indebtedness, the granting of
additional liens, the making of investments, the disposition of assets and other
fundamental changes, the transactions with affiliates and the declaration of
dividends and other restricted payments. The ARC Agreement also includes the
following financial covenants, each tested on a quarterly basis for TOCCO and
its subsidiaries on a consolidated basis: a maximum total leverage ratio of 3.25
to 1, a minimum fixed charge coverage ratio of 1.25 to 1, and an asset coverage
test of greater than 1.1 to 1. The ARC Agreement further includes customary
representations and warranties and events of default, and upon occurrence of
such events of default the outstanding obligations under the ARC Agreement may
be accelerated and become immediately due and payable and the commitment of the
Lenders to make loans under the ARC Agreement may be terminated. TOCCO was in
compliance with all covenants at December 31, 2015.

Our average floating interest rate on debt outstanding under our credit facility at December 31, 2015, was 2.42%.

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 Years 2015, 2014, 2013


The tables containing financial and operating information set forth below are
presented to facilitate the discussion of the results of operations, and should
not be considered a substitute for, and should be read in conjunction with, the
audited consolidated financial statements.


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Specialty Petrochemical Segment

                                                2015          2014        Change        %Change
                                                      (in thousands)
Petrochemical Product Sales                $ 212,431     $ 277,623     $ (65,192 )        (23.5 %)
Processing                                     5,802         6,722          (920 )        (13.7 %)
Gross Revenue                              $ 218,233     $ 284,345     $ (66,112 )        (23.3 %)

Volume of petrochemical sales (thousand
gallons)                                      86,908        82,785         4,123            5.0 %

Cost of Sales                              $ 163,088     $ 238,455     $ (75,367 )        (31.6 %)
Total Operating Expense*                      54,299        52,275         2,024            3.9 %
Natural Gas Expense*                           4,190         6,362        (2,172 )        (34.1 %)
Operating Labor Costs*                        13,764        12,238         1,526           12.5 %
Transportation Costs*                         24,836        23,176         1,660            7.2 %
General & Administrative Expense              11,453        12,330          (877 )         (7.2 %)
Depreciation**                                 4,484         4,064           420           10.4 %

Capital Expenditures                       $  24,358     $  13,987        10,371           74.1 %

*Included in cost of sales **Includes $3,872 and $3,523 for 2015 and 2014 which is included in cost of sales and operating expenses


                                                2014          2013        

Change %Change

                                                      (in thousands)
Petrochemical Product Sales                $ 277,623     $ 230,643     $  46,980           20.4 %
Processing                                     6,722         5,584         1,138           20.4 %
Gross Revenue                              $ 284,345     $ 236,227     $  48,118           20.4 %

Volume of petrochemical sales (thousand
gallons)                                      82,785        67,066        15,719           23.4 %

Cost of Sales                              $ 238,455     $ 201,064     $  37,391           18.6 %
Total Operating Expense*                      52,275        44,158         8,117           18.4 %
Natural Gas Expense*                           6,362         5,204         1,158           22.3 %
Operating Labor Costs*                        12,238        10,624         1,614           15.2 %
Transportation Costs*                         23,176        18,398         4,778           26.0 %
General & Administrative Expense              12,330        10,971         1,359           12.4 %
Depreciation**                                 4,064         4,039            25            0.6 %

Capital Expenditures                       $  13,987     $   6,828     $   7,159          104.8 %

*Included in cost of sales **Includes $3,523 and $3,518 for 2014 and 2013 which is included in cost of sales and operating expenses


Gross Revenue

2014-2015

Revenues decreased from 2014 to 2015 by 23.3% primarily due to a decrease in the
average selling price per gallon of 27.1% and a decrease in processing fees of
13.7%.

2013-2014

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


Petrochemical Product Sales

2014-2015

Petrochemical product sales revenue decreased 23.5% from 2014 to 2015 due to a
decrease in the average selling price of 27.1%. We saw a significant decline in
raw material prices beginning in the fourth quarter of 2014 which continued


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throughout 2015. Since our selling prices are based on raw material prices, they
declined as well. Deferred sales volume remained steady from 2014 to 2015;
however, deferred sales revenue declined 19.8% due to the decrease in the
average selling price. Foreign sales volume accounted for approximately 25.2% of
volume and 27.9% of revenue for petrochemical product sales during 2015 as
compared to 27.7% of volume and 30.8% of revenue during 2014.

2013-2014


Petrochemical product sales increased 20.4% from 2013 to 2014 due to an increase
in total sales volume of 23.4% while average selling price declined slightly by
2.5%. We saw a significant decline in raw material prices during the fourth
quarter of 2014 which caused our average selling price for the year to
decline. Deferred sales volume increased 12.6% from the end of 2013 to 2014
which delayed recognition until 2015.

Processing

2014-2015

Processing revenues decreased 13.7% from 2014 to 2015 due to lower run rates being required by our customers.

2013-2014


Processing revenues increased 20.4% from 2013 to 2014 due to the continued
benefit from renegotiated contacts.
We remain dedicated to maintaining a certain level of toll processing business
in the facility and continue to pursue opportunities.

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

2014-2015


Cost of Sales decreased 31.6% from 2014 to 2015 due primarily to a 46.9%
decrease in the average cost per gallon of raw material. This was offset
slightly by higher raw material volumes being processed in order to support the
5.0% increase in sales volume. Our raw material composition fluctuated during
the year. We use natural gasoline as feedstock which is the heavier liquid
remaining after butane and propane are removed from liquids produced by natural
gas wells. The material is a commodity product in the oil/petrochemical markets
and generally is readily available. We continue to investigate alternative
feedstock sources which contain lower percentages of less desirable components
in an effort to reduce the amount of byproduct sold into secondary markets at
lower margins, thereby increasing overall profitability.

2013-2014


Cost of Sales increased 18.6% from 2013 to 2014 due in part to a 19.4% increase
in volumes processed to support the increase in sales volume slightly offset by
a 4.4% decrease in the average cost per gallon of raw material.

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


2014-2015

Total Operating Expense increased 3.9% from 2014 to 2015. Natural gas, labor and
transportation are the largest individual expenses in this category; however,
not all of these increased.

The cost of natural gas purchased decreased 34.1% from 2014 to 2015 due to a
decrease in the average per unit cost and lower volume used. The average price
per MMBTU for 2015 was $2.94 whereas, for 2014 the average per unit cost was
$4.49. Volume consumed decreased to approximately 1,402,000 MMBTU from about
1,417,000 MMBTU.

Operating labor costs were higher by 12.5% mainly due to a cost of living
adjustment that was given mid-year 2015, additional profit sharing distributions
based upon profitability, and an increase in our employee count for the
petrochemical segment. Employee count increased approximately 9.5% from year end
2014 to year end 2015 as support for the D-train expansion and in preparation
for construction of the new reformer unit.


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Transportation costs were higher by 7.2% primarily due to an increase in rail
freight which includes car rental. The number of cars in our rail fleet remained
significant during 2015 in support of our oil sands customer. As we approached
year end, we began trading some of the smaller railcars which were on lease for
larger railcars which are more acceptable to our customers. These costs are
typically recovered through our selling price. Higher transportation costs
accounted for 82.0% of the increase in operating expense.

2013-2014

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


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

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

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

General and Administrative Expense

2014-2015


General and Administrative costs decreased from 2014 to 2015 due primarily to
management expenses being recorded at the corporate level instead of at the
petrochemical level and a decrease in consulting fees. During 2014 consulting
fees were higher than normal due to costs associated with the Acquisition.

2013-2014


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


Depreciation

2014-2015

Depreciation expense increased 11.0% from 2014 to 2015 primarily due to D-train coming online during the fourth quarter of 2015.

2013-2014


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



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Capital Expenditures

2014-2015

Capital expenditures increased 74.1% from 2014 to 2015. See discussion under "Capital Resources and Requirements" below for more detail.

2013-2014

Capital expenditures increased 104.8% from 2013 to 2014. See discussion under "Capital Resources and Requirements" below for more detail.

Specialty Wax Segment

Due to the Acquisition on October 1, 2014, the following table only includes fourth quarter 2014 results as compared to full year 2015; therefore, no variances are displayed or explained.

                                       2015        2014
Product Sales                      $ 15,506     $ 3,242
Processing                            8,237       2,056
Gross Revenue                        23,743       5,298

Cost of Sales*                       19,519       5,444
General & Administrative Expense      4,138         958
Depreciation                          4,550       1,612

Capital Expenditures               $  6,889     $   780


           *includes depreciation and amortization of $4,464 and $1,122,

respectively

Capital expenditures for 2015 include $2.2 million on the Oligomerization project (cost fully paid for by the customer), $2.1 million on the hydrogenation project, and $1.3 million on a wax stripping column.

Corporate Segment

                                          2015         2014       Change      %Change
                                                (in thousands)

General & Administrative Expense $ 7,011 $ 6,413 $ 598

       9.3 %
Depreciation                                26            -           26        100.0 %
Equity in earnings (losses) of AMAK     (5,325 )     (1,072 )     (4,253 )      396.7 %



                                                    2014          2013        Change       %Change
                                                          (in thousands)
General & Administrative Expense               $   6,413     $   3,701     $   2,712          42.3 %
Equity in earnings(losses) of AMAK                (1.072 )       4,703        (5.775 )      (122.8 %)
Gain from additional equity issuance by AMAK   $       -     $  13,987      

(3,997 ) (100.0 %)

General and Administrative Expenses

2014-2015


General corporate expenses increased from 2014 to 2015 primarily due to
increases in officer compensation which were re-classed from the petrochemical
company, directors' fees and accounting fees offset by decreases in consulting
fees and investor relations expenses. Directors' fees increased approximately
$208,000 because of the addition of one director and reassessment of directors'
compensation during 2015. Accounting fees increased due to costs associated with
the Acquisition. Consulting fees decreased $0.5 million due to the hiring of
consultants for the Acquisition during 2014 and investor relations fees
decreased $0.1 million due to a change in our investor relations firm.



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2013-2014


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

increased $0.1 million due to additional staffing requirements.

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

2014-2015

Equity in Losses of AMAK increased 396.7% from 2014 to 2015 due to a number of reasons as discussed below.


AMAK's performance, like the rest of the mining sector, was severely impacted by
the continued fall in metal demand and prices (average spot prices for zinc and
copper in fourth quarter 2015 were down approximately 13% and 7%, respectively,
compared to third quarter 2015). The mine also suffered from significant raw
material outages and operating inefficiencies.

Shipments decreased 7.4% from 2014 to 2015 as indicated in the table
below. There was one shipment of zinc in the first quarter, one shipment of
copper in the second quarter, one shipment of copper and two shipments of zinc
in the third quarter and one shipment of copper (to two customers) in the fourth
quarter. AMAK volumes in dry metric tons (dmt) for 2015 and 2014 were as
follows:

                               2015          2014      Variance

Ore tons processed          591,419       670,812       (79,393 )

Concentrate to the port
 Copper                      24,218        28,402        (4,184 )
 Zinc                        35,447        32,515         2,932
                             59,665        60,917        (1,252 )

Shipments
  Copper                     26,378        25,691           687
  Zinc                       24,547        29,326        (4,779 )
                             50,925        55,017        (4,092 )


In November 2015 the decision was made to temporarily close the mine and to terminate the contract with the operator. This allows AMAK to preserve asset value while the mill and underground assets are returned to their original condition and equipment upgrades are installed.


Renovation work began at the AMAK facility in December 2015 with zinc and copper
production expected to resume in the fourth quarter of 2016. During the
renovation, AMAK's focus remains on improving recoveries overall and upgrading
the precious metals circuit through the installation of SART modifications which
should lower chemical use; thereby, reducing operating costs once processing
resumes. In addition, processing of the gold-bearing waste dumps from historical
mining at the newly acquired Guyan mining license area are also scheduled to
begin in the fourth quarter of 2016. An exploration program for the rest of
Guyan mining lease will commence shortly, along with a systematic program of
infill drilling to extend the overall life of the copper and zinc mine.

The renovation work at AMAK is proceeding on schedule and installation of new
equipment is expected to finish early in the fourth quarter of 2016. We believe
that AMAK has sufficient capital to complete the planned improvements. AMAK will
self-operate the mine after start-up and has signed a manpower agreement with a
Turkish company that will provide greater technical know-how and required
management skills in combination with significant cost savings.




                                       29
--------------------------------------------------------------------------------

2013-2014


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

Shipments decreased by 26.0% from 2013 to 2014 as indicated in the table
below. There were no shipments in the first quarter of 2014 due to logistics
delays and the rebuilding of warehouse stocks. Shipments in the second quarter
of 2014, while up in number (4), were limited by volume shipped. Shipments in
the third and fourth quarters were also limited by volume shipped. AMAK volumes
in dry metric tons (dmt) for 2014 and 2013 were as follows:

                               2014          2013      Variance

Ore tons processed          670,812       699,316       (28,504 )

Concentrate to the port
 Copper                      28,402        36,722        (8,320 )
 Zinc                        32,515        35,685        (3,170 )
                             60,917        72,407       (11,490 )

Shipments
  Copper                     25,691        35,908       (10,217 )
  Zinc                       29,326        38,430        (9,104 )
                             55,017        74,338       (19,321 )


Capital Resources and Requirements

2014-2015


Capital expenditures increased 74.1% from 2014 to 2015. During 2015 we expended
$13.3 million on the D-train expansion, $1.8 million on tank farm improvements,
$0.6 million on spare equipment, $2.8 on pipeline upgrades, $1.5 million on
transportation equipment, $2.2 million on the Oligomerization project (costs
fully paid by the customer), $2.1 million on the hydrogenation project, $1.3
million on a wax stripping column, and $5.6 million on various plant
improvements and equipment.

2013-2014


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

Capital expenditures typically average $7.0 million per year for facility
improvements. At December 31, 2015, there was $39.0 million available on the
Company's line of credit. We believe that operating cash flows along with credit
availability will be sufficient to finance our 2016 operations and capital
expenditures.

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

                                                           Payments due by period
                                                Less than 1                                     More than 5
Contractual Obligations             Total          year          1-3 years  

3-5 years years

                                                           (thousands of 

dollars)

Operating Lease Obligations $ 13,846 $ 3,309 $ 4,667

     $     3,805     $     2,065
Long-Term Debt Obligations           82,250           8,333          16,667          57,250               -
Total                             $  96,096     $    11,642     $    21,334     $    61,055     $     2,065



The anticipated source of funds for payments due within three years that relate
to contractual obligations is from a combination of continuing operations and
long-term debt refinancing.




                                       30
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Investment in AMAK

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

New Accounting Standards


In May 2014 the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU
2014-09"). ASU 2014-09 supersedes the revenue recognition requirements of FASB
Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and
most industry-specific guidance throughout the Accounting Standards
Codification, resulting in the creation of FASB ASC Topic 606, Revenue from
Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in
a way that depicts the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. This ASU provides
alternative methods of retrospective adoption and is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2017. Early
adoption 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.

In November 2015 the FASB issued ASU No. 2015-17, Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes. The new standard eliminates the
current requirement for organizations to present deferred tax liabilities and
assets as current and noncurrent in a classified balance sheet. Instead,
organizations will be required to classify all deferred tax assets and
liabilities as noncurrent. The amendments are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The Company is currently assessing the potential
impact of adopting this ASU on its consolidated financial statements and related
disclosures.



                                       31
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In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU
was issued to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. This ASU affects any
entity that enters into a lease, with some specified scope exemptions. The
guidance in this Update supersedes FASB ASC 840, Leases. The amendments in this
ASU are effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company is currently assessing
the impact of adopting this ASU on its consolidated financial statements and
related disclosures.

Critical Accounting Policies

Our consolidated financial statements are based on the selection and application
of significant accounting policies. The preparation of consolidated financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of net sales, expenses and allocated charges during the
reported period. Actual results could differ from those estimates. However, we
are not currently aware of any reasonably likely events or circumstances that
would result in materially different results.

We believe the following accounting policies and estimates are critical to
understanding the financial reporting risks present currently. These matters,
and the judgments and uncertainties affecting them, are essential to
understanding our reported results. See Note 2 to the Notes to the Consolidated
Financial Statements for further information.

Inventories


Finished products and feedstock are recorded at the lower of cost, determined on
the last-in, first-out method (LIFO); or market for SHR. For TC, inventory is
recorded at the lower of cost or market as follows: (1) raw material cost is
calculated using the weighted-average cost method and (2) product inventory cost
is calculated using the specific cost method. See Note 7 to the Notes to the
Consolidated Financial Statements for more information.

Revenue recognition


Revenue is recorded when (1) the customer accepts delivery of the product and
title has been transferred or when the service is performed and we have no
significant obligations remaining to be performed; (2) a final understanding as
to specific nature and terms of the agreed upon transaction has occurred; (3)
price is fixed and determinable; and (4) collection is assured. For our product
sales these criteria are generally met, and revenue is recognized, when the
product is delivered or title is transferred to the customer. Sales are
presented net of discounts, allowances, and sales taxes. Freight costs billed to
customers are recorded as a component of revenue. For our custom processing we
recognize revenue when the service has been provided to the customer. Revenues
received in advance of future sales of products or prior to the performance of
services are presented as deferred revenues.

Long-lived Assets


Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable from
estimated future undiscounted cash flows. If the estimated future undiscounted
cash flows are less than the carrying value of the assets, we calculate the
amount of impairment if the carrying value of the long-lived assets exceeds the
fair value of the assets.  Our long-lived assets include our petrochemical
facility and our specialty synthetic wax facility.

Our petrochemical facility and specialty synthetic wax facility are currently
our revenue generating assets. The facilities were in full operation at December
31, 2015.

Goodwill and other intangible assets


Goodwill and indefinite-lived intangible assets are tested for impairment at
least annually; however, these tests are performed more frequently when events
or changes in circumstances indicate that the asset may be impaired. Impairment
exists when carrying value exceeds fair value.



                                       32
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Definite-lived intangible assets are being amortized using discounted estimated
future cash flows over the term of the related agreements. We continually
evaluate the reasonableness of the useful lives of these assets. Once these
assets are fully amortized, they will be removed from the consolidated balance
sheets.

See Note 9 to the Notes to the Consolidated Financial Statements for additional information.


Investment in AMAK

We account for our investment in AMAK using the equity method of accounting
under which we record in income our share of AMAK's income or loss for each
period. The amount recorded is also adjusted to reflect the amortization of
certain differences between the basis in our investment in AMAK and our share of
the net assets of AMAK as reflected in AMAK's financial statements. See Note 10
to the Notes to the Consolidated Financial Statements.

We assess our investment in AMAK for impairment when events are identified, or
there are changes in circumstances that may have an adverse effect on the fair
value of the investment. We consider recoverable ore reserves and the amount and
timing of the cash flows to be generated by the production of those reserves, as
well as, recent equity transactions within AMAK. Factors which may affect
carrying value include, but are not limited to, mineral prices, capital cost
estimates, equity transactions, the estimated operating costs of any mines and
related processing, ore grade and related metallurgical characteristics, the
design of any mines and the timing of any mineral production. There are no
assurances that we will not be required to take a material write-down of any of
our mineral properties.

Environmental Liabilities


Our operations are subject to the rules and regulations of the TCEQ which
inspects the facilities at various times for possible violations relating to
air, water and industrial solid waste requirements. As noted in Item 1.
Business, evidence of groundwater contamination was discovered at SHR in 1993.
The recovery process, initiated in 1998, is proceeding as planned and is
expected to continue for many years. See Note 15 to the Notes to the
Consolidated Financial Statements.

Share-Based Compensation


We expense the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of such instruments. For
options we use the Black-Sholes model to calculate the fair value of the equity
instrument on the grant date. See Note 16 to the Notes to the Consolidated
Financial Statements.

Off Balance Sheet Arrangements


Off balance sheet arrangements as defined by the SEC means any transaction,
agreement or other contractual arrangement to which an entity unconsolidated
with the registrant is a party, under which the registrant has (i) obligations
under certain guarantees or contracts, (ii) retained or contingent interest in
assets transferred to an unconsolidated entity or similar arrangements, (iii)
obligations under certain derivative arrangements, and (iv) obligations arising
out of a material variable interest in an unconsolidated entity. Our guarantee
for AMAK's debt is considered an off balance sheet arrangement. Please see
further discussion under "Investment in AMAK" in Item 1. Business.

Income Taxes


In determining our income tax provision, we assess the likelihood our deferred
tax assets will be recovered through future taxable income. Based on this
assessment, a valuation allowance against all or a portion of our deferred tax
asset that will, more likely than not, be realized. If these estimates,
assumptions, or actual results of operations change in the future, we may
reverse the valuation allowance against deferred tax assets. Income tax
liabilities are determined based on judgment and estimates assuming it is more
likely than not that the position will be sustained upon examination by a taxing
authority. There are no uncertain income tax positions taken or expected to be
taken at January 1, 2007 (adoption date), and at December 31, 2015. See Note 17
to the Notes to the Consolidated Financial Statements.

Derivative Instruments


We use financial commodity agreements to hedge the cost of natural gasoline, the
primary source of feedstock, and natural gas used as fuel to operate our plant
to manage risks generally associated with price volatility. The commodity
agreements are recorded in our consolidated balance sheets as either an asset or
liability measured at fair value. Our


                                       33

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commodity agreements are not designated as hedges; therefore, all changes in
estimated fair value are recognized in cost of petrochemical product sales and
processing in the consolidated statements of income.

On March 21, 2008, SHR entered into a pay-fixed, receive-variable interest rate
swap agreement with Bank of America related to the $10.0 million term loan
secured by plant, pipeline and equipment. The effective date of the interest
rate swap agreement was August 15, 2008, and terminates on December 15,
2017. The notional amount of the interest rate swap was $2.75 million at
December 31, 2015. We receive credit for payments of variable rate interest made
on the term loan at the loan's variable rates, which are based upon the 
London

InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of
5.83% less the credit on the interest rate swap. We had originally designated
the interest rate swap as a cash flow hedge under ASC Topic 815 (see Note 22);
however, due to the new debt agreements associated with the Acquisition in 2014,
we believed that the hedge was no longer entirely effective. Due to the time
required to make the determination and the immateriality of the hedge, we began
treating the interest rate swap as ineffective as of October 1, 2014, and the
unrealized loss associated with the swap of approximately $378,000 was
recognized in the consolidated statement of income. The fair value of the
derivative liability associated with the interest rate swap at December 31,
2015, and 2014 totaled $0.2 million and $0.4 million, respectively.

We assess the fair value of the interest rate swap using a present value model
that includes quoted LIBOR rates and the nonperformance risk of the Company and
Bank of America based on the Credit Default Swap Market (Level 2 of fair value
hierarchy). See Notes 5 and 22 to the Notes to the Consolidated Financial
Statements.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Source: Equities.com News
(March 10, 2016 - 11:36 PM EST)

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