e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
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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 000-50132
Sterling Chemicals, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware
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76-0502785 |
| (State or other jurisdiction of
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(IRS Employer Identification No.) |
| Incorporation or organization) |
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| 333 Clay Street, Suite 3600
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(713) 650-3700 |
| Houston, Texas 77002-4109
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(Registrant’s telephone number, |
| (Address of principal executive offices)
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including area code) |
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 þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o.
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,” “non-accelerated filer,” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ.
As of April 30, 2010, Sterling Chemicals, Inc. had 2,828,460 shares of common stock
outstanding.
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to “we,” “us,” “our” and “ours” in this Form 10-Q refer
collectively to Sterling Chemicals, Inc. and its wholly-owned subsidiaries.
Readers should consider the following information as they review this Form 10-Q:
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States
Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements give
our current expectations or forecasts of future events. All statements other than statements of
historical fact are, or may be deemed to be, forward-looking statements. Forward-looking
statements include, without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain or be identified by the words
“expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,”
“may,” “might,” “will,” “will be,” “will continue,” “will likely result,” “project,” “forecast,”
“budget” and similar expressions. Statements in this report that contain forward-looking
statements include, but are not limited to, information concerning our possible or assumed future
results of operations. While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic, competitive, regulatory
and other risks, contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control.
Other sections of this Form 10-Q and our other filings with the Securities and Exchange
Commission, or the SEC, including, without limitation, our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, or our Annual Report, include additional factors that could
adversely affect our business, results of operations or financial performance. See “Risk Factors”
contained in Item 1A of Part I of our Annual Report. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. Forward-looking
statements included in this Form 10-Q are made only as of the date of this Form 10-Q and are not
guarantees of future performance. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, such expectations may prove to be incorrect. All
written or oral forward-looking statements attributable to us, or persons acting on our behalf, are
expressly qualified in their entirety by these cautionary statements.
Document Summaries
Descriptions of documents and agreements contained in this Form 10-Q are provided in summary
form only, and such summaries are qualified in their entirety by reference to the actual documents
and agreements filed as exhibits to our Annual Report, other periodic reports we file with the SEC
or this Form 10-Q.
Access to Filings
Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on
Form 8-K, and amendments to those reports, filed with or furnished to the SEC pursuant to Section
13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the
Exchange Act, may be obtained through our website (http://www.sterlingchemicals.com), at no
cost, as soon as reasonably practicable after we have electronically filed such material with the
SEC. The contents of our website (or the third-party websites accessible through the various
hyperlinks) are not, and shall not be deemed to be, incorporated into this Form 10-Q.
1
STERLING CHEMICALS, INC.
INDEX
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Sterling Chemicals, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Sterling Chemicals,
Inc. and its subsidiaries (the “Company”) as of March 31, 2010, and the related condensed
consolidated statements of operations and cash flows for the three-month periods ended March 31,
2010 and 2009. These interim financial statements are the responsibility of the Company’s
management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to
the accompanying condensed consolidated financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheet of the Company as of December 31, 2009, and the
related statements of income, stockholders’ equity and cash flows for the year then ended (not
presented herein); and in our report dated March 24, 2010, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 2009, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ GRANT THORNTON LLP
Houston, Texas
May 12, 2010
3
PART I.
FINANCIAL INFORMATION
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| Item 1. |
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Financial Statements |
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Share Data)
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Three months ended March 31, |
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2010 |
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2009 |
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Revenues |
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$ |
33,109 |
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$ |
31,377 |
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Cost of goods sold |
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27,910 |
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25,809 |
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Gross profit |
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5,199 |
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5,568 |
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Selling, general and administrative expenses |
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2,894 |
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|
3,883 |
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Impairment of long-lived assets |
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290 |
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— |
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Interest and debt related expenses |
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3,607 |
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|
4,003 |
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Interest income |
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(49 |
) |
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(384 |
) |
Other income |
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(76 |
) |
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(1,145 |
) |
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Loss from continuing operations before income tax |
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(1,467 |
) |
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(789 |
) |
Benefit for income taxes |
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— |
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(195 |
) |
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Loss from continuing operations |
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$ |
(1,467 |
) |
|
$ |
(594 |
) |
Income from discontinued operations, net of tax
expense of zero and $869, respectively |
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2,979 |
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1,622 |
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Net income |
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$ |
1,512 |
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$ |
1,028 |
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Preferred stock dividends |
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4,455 |
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4,147 |
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Net loss attributable to common stockholders |
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$ |
(2,943 |
) |
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$ |
(3,119 |
) |
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(Loss) income per share of common stock attributable to
common stockholders, basic and diluted: |
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Loss from continuing operations |
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$ |
(2.09 |
) |
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$ |
(1.67 |
) |
Income from discontinued operations,
net of tax |
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1.05 |
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0.57 |
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Basic and diluted loss per share |
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$ |
(1.04 |
) |
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$ |
(1.10 |
) |
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Weighted average shares outstanding: |
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Basic and diluted |
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2,828,460 |
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2,828,460 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
121,188 |
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$ |
123,778 |
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Accounts receivable, net of allowance of $58 and $58, respectively |
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13,779 |
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14,614 |
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Inventories, net |
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5,229 |
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5,268 |
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Prepaid expenses and other current assets |
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1,685 |
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2,539 |
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Assets of discontinued operations |
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— |
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24 |
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Total current assets |
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141,881 |
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146,223 |
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Property, plant and equipment, net |
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65,585 |
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68,182 |
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Other assets, net |
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5,311 |
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5,760 |
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Total assets |
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$ |
212,777 |
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$ |
220,165 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIENCY IN ASSETS |
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Current liabilities: |
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Accounts payable |
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$ |
8,503 |
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$ |
11,703 |
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Accrued liabilities |
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23,479 |
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|
24,416 |
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Liabilities of discontinued operations |
|
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12,383 |
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|
12,384 |
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Total current liabilities |
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44,365 |
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48,503 |
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Long-term debt |
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|
123,000 |
|
|
|
125,000 |
|
Long-term liabilities |
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|
41,553 |
|
|
|
41,084 |
|
Long-term liabilities of discontinued operations |
|
|
19,915 |
|
|
|
23,010 |
|
Commitments and contingencies (Note 4) |
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
138,983 |
|
|
|
134,528 |
|
Stockholders’
deficiency in assets: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value (shares authorized 100,000,000;
shares issued
and outstanding 2,828,460) |
|
|
28 |
|
|
|
28 |
|
Additional paid-in capital |
|
|
102,517 |
|
|
|
106,948 |
|
Accumulated deficit |
|
|
(239,268 |
) |
|
|
(240,780 |
) |
Accumulated other comprehensive loss |
|
|
(18,316 |
) |
|
|
(18,156 |
) |
|
|
|
|
|
|
|
Total stockholders’ deficiency in assets |
|
|
(155,039 |
) |
|
|
(151,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficiency in assets |
|
$ |
212,777 |
|
|
$ |
220,165 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
| |
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|
|
|
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Three months ended March 31, |
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| |
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2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,512 |
|
|
$ |
1,028 |
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities: |
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
24 |
|
|
|
96 |
|
Bad debt expense |
|
|
21 |
|
|
|
— |
|
Benefit plan curtailment gain |
|
|
(115 |
) |
|
|
— |
|
Depreciation and amortization |
|
|
3,041 |
|
|
|
2,245 |
|
Interest amortization |
|
|
432 |
|
|
|
277 |
|
Unearned income amortization |
|
|
(4,280 |
) |
|
|
(3,637 |
) |
Impairment of long-lived assets |
|
|
290 |
|
|
|
— |
|
Gain on disposal of property, plant and equipment |
|
|
(15 |
) |
|
|
(83 |
) |
Gain on purchase of Senior Secured Notes |
|
|
(6 |
) |
|
|
— |
|
Other |
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|
13 |
|
|
|
— |
|
Change in assets/liabilities: |
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
838 |
|
|
|
5,406 |
|
Inventories |
|
|
(21 |
) |
|
|
(189 |
) |
Prepaid expenses and other current assets |
|
|
854 |
|
|
|
687 |
|
Other assets |
|
|
(52 |
) |
|
|
(119 |
) |
Accounts payable |
|
|
(3,310 |
) |
|
|
1,240 |
|
Accrued liabilities |
|
|
(938 |
) |
|
|
1,799 |
|
Long-term liabilities |
|
|
1,609 |
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(103 |
) |
|
$ |
9,298 |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment |
|
|
(577 |
) |
|
|
(2,442 |
) |
Net proceeds from the sale of property, plant and equipment |
|
|
15 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(562 |
) |
|
|
(2,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
Purchase of Senior Secured Notes |
|
|
(1,925 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,925 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash |
|
|
(2,590 |
) |
|
|
6,939 |
|
Cash and cash equivalents — beginning of year |
|
|
123,778 |
|
|
|
156,126 |
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of period |
|
$ |
121,188 |
|
|
$ |
163,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
129 |
|
|
$ |
70 |
|
Interest income received |
|
|
49 |
|
|
|
384 |
|
Cash paid for income taxes |
|
|
(598 |
) |
|
|
— |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Accounting Policies
The accompanying unaudited interim condensed consolidated financial statements were prepared
in accordance with accounting principles generally accepted in the United States of America, or
GAAP, and reflect all adjustments (including normal recurring accruals) which, in our opinion, are
considered necessary for the fair presentation of the results for the periods presented. The
results of operations and cash flows for the periods presented are not necessarily indicative of
the results to be expected for the full year. These statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in our Annual Report.
Property
Plant and Equipment Impairment
In
accordance with our policies, an impairment charge of
$0.3 million was recorded to reduce the carrying value of a turbo
generator unit classified as a spare, to its net realizable value of
$0.4 million.
2. Discontinued Operations
On September 17, 2007, we entered into a long-term exclusive styrene supply agreement and a
related railcar purchase and sale agreement with NOVA Chemicals Inc., or NOVA. Under this supply
agreement, NOVA had the exclusive right to purchase 100% of our styrene production (subject to
existing contractual commitments), the amount of styrene supplied in any particular period being at
NOVA’s option. In November 2007, this supply agreement, which was subsequently assigned by NOVA to
INEOS NOVA, LLC, or INEOS NOVA, received clearance under the Hart-Scott-Rodino Act. This clearance
caused the supply agreement and the railcar agreement to become effective and triggered a $60.0
million payment to us from INEOS NOVA. In accordance with the terms of the supply agreement, INEOS
NOVA assumed substantially all of our contractual obligations for future styrene deliveries. After
the supply agreement became effective, INEOS NOVA nominated zero pounds of styrene under the supply
agreement for the balance of 2007 and, in response, we exercised our right to terminate the supply
agreement and permanently shut down our styrene facility. Under the supply agreement, we were
responsible for the closure costs of our styrene facility and are also restricted from reentering
the styrene business for a period of time. The restricted period of time was initially through
2015, however, effective April 1, 2008, INEOS NOVA unilaterally reduced the restricted period to
five years ending November 2012.
As a result of our styrene facility being permanently shut down, we have no significant
continued involvement in the styrene business and have, therefore, reported the operating results
of this business as discontinued operations in our condensed consolidated financial statements.
The carrying amounts of assets and liabilities related to discontinued operations as of March 31,
2010 and December 31, 2009 were as follows:
| |
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|
|
|
|
|
|
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| |
|
March 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Assets of discontinued operations: |
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance of $44 and $23 respectively |
|
$ |
— |
|
|
$ |
24 |
|
| |
Liabilities of discontinued operations:(1) |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
12,383 |
|
|
$ |
12,384 |
|
Deferred credits and other liabilities |
|
|
19,915 |
|
|
|
23,010 |
|
|
|
|
|
|
|
|
Total |
|
$ |
32,298 |
|
|
$ |
35,394 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
As of March 31, 2010, represents deferred income from the NOVA supply agreement
that is being amortized over the contractual non-compete period of five years using the
straight-line method. Accrued liabilities represents the current portion of $12.4 million,
and deferred credits and other liabilities represents the long-term portion of the deferred
income of $19.9 million. |
Revenues and income before income taxes from discontinued operations for the three-month
periods ended March 31, 2010 and 2009 are presented below:
7
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
| |
|
2010 |
|
2009 |
| |
|
(Dollars in Thousands) |
Revenues |
|
$ |
3,096 |
|
|
$ |
3,096 |
|
Income before income taxes |
|
|
2,979 |
|
|
|
2,491 |
|
3. Long-Term Debt
On March 29, 2007, we completed a private offering of $150.0 million aggregate principal
amount of unregistered 101/4% Senior Secured Notes due 2015, or our Secured Notes pursuant to a
Purchase Agreement among us, Sterling Chemicals Energy, Inc., or Sterling Energy, one of our former
wholly-owned subsidiaries, and Jefferies & Company, Inc. and CIBC World Markets Corp., as initial
purchasers. In connection with that offering, we entered into an indenture dated March 29, 2007
among us, Sterling Energy, as guarantor, and U. S. Bank National Association, as trustee and
collateral agent. On May 6, 2008, Sterling Energy was merged with and into us. Upon consummation
of the merger, Sterling Energy no longer had independent existence and, consequently, our Secured
Notes are no longer guaranteed by Sterling Energy.
Our indenture contains affirmative and negative covenants and customary events of default,
including payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and
reorganization. If an event of default occurs and is continuing, other than an event of default
triggered upon certain bankruptcy events, the trustee under our indenture or the holders of at
least 25% in principal amount of our outstanding Secured Notes may declare our Secured Notes to be
due and payable immediately. Upon an event of default, the trustee may also take actions to
foreclose on the collateral securing our outstanding Secured Notes. Our indenture does not require
us to maintain any financial ratios or satisfy any financial maintenance tests. We are currently
in compliance with all of the covenants contained in our indenture.
Interest is due on our outstanding Secured Notes on April 1 and October 1 of each year. Our
outstanding Secured Notes, which mature on April 1, 2015, are senior secured obligations and rank
equally in right of payment with all of our existing and future senior indebtedness. Subject to
specified permitted liens, our outstanding Secured Notes are secured (i) on a first priority basis
by all of our fixed assets and certain related assets, including, without limitation, all of our
property, plant and equipment and (ii) on a second priority basis by our other assets, including,
without limitation, accounts receivable, inventory, capital stock of our domestic restricted
subsidiaries, intellectual property, deposit accounts and investment property.
In the fourth quarter of 2009, we purchased $25.0 million in aggregate principal amount of our
Secured Notes in the open market for $23.8 million in cash, resulting in a $1.2 million gain. This
gain was partially offset by the amortization of a pro rata portion of the related debt issue costs
of $0.9 million. In February 2010, we purchased an additional $2.0 million in aggregate principal
amount of our Secured Notes in the open market for $1.9 million in cash, resulting in a $0.1
million gain. This gain was partially offset by the amortization of a pro rata portion of the
related debt issue costs of less than $0.1 million.
On December 19, 2002, we entered into a Revolving Credit Agreement, or our revolving credit
facility, with The CIT Group/Business Credit, Inc, or CIT, as administrative agent and a lender,
and certain other lenders. Under our revolving credit facility, we and Sterling Energy were
co-borrowers and were jointly and severally liable for any indebtedness thereunder. After the
merger of Sterling Energy with and into us, Sterling Energy ceased to be a co-borrower under our
revolving credit facility. On December 10, 2009, we elected to terminate our revolving credit
facility effective January 24, 2010 due to our substantial cash reserves and low working capital
needs. There were no penalties or termination fees payable by us in connection with the early
termination of our revolving credit
facility. The remaining associated debt issue costs of $0.2 million were written off as of
the effective termination date.
8
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On January 31, 2010, we entered into a $5.0 million Revolving Line of Credit for letters of
credit, or our LC Facility, with JPMorgan Chase Bank, N.A., or Chase, for the issuance of
commercial and standby letters of credit. Our LC Facility has an initial term of one year. Under
our LC Facility, we pay Chase a fee of 1% per annum of the face amount of each outstanding letter
of credit and an issuance fee of $500 for each letter of credit. Our LC Facility is secured by
$5.0 million in cash under an Assignment of Deposit Account Agreement between us and Chase. As of
March 31, 2010, there were $3.3 million in standby letters of credit issued under our LC facility.
Debt Maturities
Our Secured Notes, which had an aggregate principal balance of $123.0 million outstanding as
of March 31, 2010, are due on April 1, 2015.
4. Commitments and Contingencies
Product Contracts:
We have long-term agreements which provide for the dedication of 100% of our production of
acetic acid and plasticizers, each to one customer. See Note 7 for more information regarding our
acetic acid and plasticizers segments.
Legal Proceedings:
On July 5, 2005, Patrick B. McCarthy, an employee of Kinder-Morgan, Inc., or Kinder-Morgan,
was seriously injured at Kinder-Morgan’s facilities near Cincinnati, Ohio, while attempting to
offload a railcar containing one of our plasticizers products. On October 28, 2005, Mr. McCarthy
and his family filed a suit in the Court of Common Pleas, Hamilton County, Ohio (Case No. A0509
144) against us and six other defendants. During the case, five of the other defendants were
dismissed. The plaintiffs sought in excess of $42 million in alleged compensatory and punitive
damages from the defendants in the aggregate. On May 7, 2009, the jury found that we had not been
negligent in connection with the incident and rendered a take nothing verdict in favor of the
defendants. On June 24, 2009, the plaintiffs filed a motion for judgment notwithstanding the
verdict or, in the alternative, a new trial. On September 4, 2009, the Court denied plaintiffs’
motion for judgment notwithstanding the verdict but granted plaintiffs’ motion for a new trial. We
and the other remaining defendant timely filed notices of appeal of that order, as well as other
orders issued during the trial. We believe that all, or substantially all, of any liability
imposed upon us as a result of this suit and our related out-of-pocket costs and expenses will be
covered by our insurance policies, subject to a one million deductible, which was met in January
2008. We do not believe that this incident will have a material adverse effect on our business,
financial condition, results of operations or cash flows, although we cannot guarantee that a
material adverse effect will not occur.
On February 21, 2007, we, several of our benefit plans and the plan administrators for those
plans were sued in a class action suit, Case No. H-07-0625 filed in the United States District
Court, Southern District of Texas, Houston Division. The plaintiffs represent a class of retired
employees of Sterling Fibers, Inc., one of our former subsidiaries that we sold in connection with
our emergence from bankruptcy in 2002. The plaintiffs allege that we were not permitted to
increase their premiums for retiree medical insurance based on a provision contained in an asset
purchase agreement between us, Sterling Fibers, Inc. and Cytec Industries Inc. and certain of its
affiliates governing our purchase of our former acrylic fibers business in 1997. During our
bankruptcy case, we specifically rejected this asset purchase agreement and the bankruptcy court
approved that rejection. The plaintiffs are claiming that we violated the terms of the benefit
plans and breached fiduciary duties governed by the Employee Retirement Income Security Act and are
seeking damages, declaratory relief, punitive damages and attorneys’ fees. A trial for this matter
was held during the second week of November 2009, but the court has not yet issued a ruling. We
are vigorously defending this action and are unable to state at this time if a loss is probable or
remote and are unable to determine the possible range of loss related to this matter, if any.
We are subject to various other claims and legal actions that arise in the ordinary course of
our business. We do not believe that any of these claims and actions, separately or in the
aggregate, will have a material adverse effect on our business, financial condition, results of
operations or cash flows, although we cannot guarantee that a material adverse effect will not
occur.
9
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2009, we had a receivable of $0.1 million due from our insurance carriers
for reimbursement of legal costs that exceeded our insurance deductibles and were, therefore,
reimbursable through our insurance carriers. For the three months ended March 31, 2010, we
incurred $0.1 million of legal costs that are reimbursable under our insurance policies and
received $0.1 million of payments from our insurance carriers, resulting in a receivable balance of
$0.1 million as of March 31, 2010.
5. Income Taxes
During the first quarters of 2010 and 2009, we recorded a net tax benefit of zero and $0.2
million, respectively, for income taxes from continuing operations. For the first quarter of 2009,
the tax benefit from continuing operations was generated by utilizing income in discontinued
operations to recognize a portion of the benefit from losses generated in continuing operations.
Our continuing operations effective tax rate for the three-month period ended March 31, 2010 was
zero. For the three-month period ended March 31, 2009 our effective tax rate was 24.8%.
6. Employee Benefits
Net periodic pension costs consisted of the following components:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Interest cost |
|
$ |
1,745 |
|
|
$ |
1,828 |
|
Expected return on plan assets |
|
|
(1,160 |
) |
|
|
(1,513 |
) |
Amortization |
|
|
191 |
|
|
|
864 |
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
776 |
|
|
$ |
1,179 |
|
|
|
|
|
|
|
|
Other postretirement benefits consisted of the following components:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Service cost |
|
$ |
10 |
|
|
$ |
11 |
|
Interest cost |
|
|
95 |
|
|
|
121 |
|
Amortization of unrecognized costs |
|
|
(544 |
) |
|
|
(541 |
) |
Curtailment gain |
|
|
(115 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net plan benefit |
|
$ |
(554 |
) |
|
$ |
(409 |
) |
|
|
|
|
|
|
|
During the first quarter of 2010, we announced and completed a reduction in our work force. In
accordance with Accounting Standards Codification, or ASC, Topic 715 “Compensation — Retirement
Benefits,” we recorded a curtailment gain of $0.1 million under our retiree medical plans.
7. Operating Segment and Sales Information
As of March 31, 2010, after considering the effects of discontinued operations, we have
reported our operations through two segments: acetic acid and plasticizers. The accounting
policies are the same as those disclosed in our Annual Report. We use gross profit for reporting
the results of our operating segments and this measure includes all operating items related to the
businesses. There are no sales between segments. The revenues and gross profit (losses) for each
of our reportable operating segments are as follows:
10
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
26,427 |
|
|
$ |
23,838 |
|
Plasticizers |
|
|
6,427 |
|
|
|
7,284 |
|
Other |
|
|
255 |
|
|
|
255 |
|
|
|
|
|
|
|
|
Total |
|
$ |
33,109 |
|
|
$ |
31,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit (loss): |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
3,683 |
|
|
$ |
4,574 |
|
Plasticizers |
|
|
1,545 |
|
|
|
1,323 |
|
Other |
|
|
(29 |
) |
|
|
(329 |
) |
|
|
|
|
|
|
|
Total |
|
|
5,199 |
|
|
|
5,568 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
2,894 |
|
|
|
3,883 |
|
Impairment of long-lived assets |
|
|
290 |
|
|
|
— |
|
Interest and debt related expenses |
|
|
3,607 |
|
|
|
4,003 |
|
Interest income |
|
|
(49 |
) |
|
|
(384 |
) |
Other income |
|
|
(76 |
) |
|
|
(1,145 |
) |
|
|
|
|
|
|
|
Loss from continuing operations before income tax |
|
$ |
(1,467 |
) |
|
$ |
(789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses: |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
1,962 |
|
|
$ |
1,643 |
|
Plasticizers |
|
|
795 |
|
|
|
312 |
|
Other(1) |
|
|
284 |
|
|
|
290 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,041 |
|
|
$ |
2,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
134 |
|
|
$ |
1,455 |
|
Other — plant infrastructure |
|
|
443 |
|
|
|
987 |
|
|
|
|
|
|
|
|
Total |
|
$ |
577 |
|
|
$ |
2,442 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Includes depreciation and amortization expenses for discontinued operations of
less than $0.1 million for each of the three-month periods ended March 31, 2010 and 2009,
respectively. |
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
|
As of |
|
| |
|
March 31, 2010 |
|
|
December 31, 2009 |
|
| |
|
(Dollars in Thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
36,500 |
|
|
$ |
35,362 |
|
Plasticizers |
|
|
4,741 |
|
|
|
5,412 |
|
Other(1) |
|
|
171,536 |
|
|
|
179,391 |
|
|
|
|
|
|
|
|
Total |
|
$ |
212,777 |
|
|
$ |
220,165 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Components of Other are presented in the table below: |
11
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
As of |
|
|
As of |
|
| |
|
March 31, 2010 |
|
|
December 31, 2009 |
|
| |
|
(Dollars in Thousands) |
|
Other: |
|
|
|
|
|
|
|
|
Corporate: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
121,188 |
|
|
$ |
123,778 |
|
Other |
|
|
13,078 |
|
|
|
17,677 |
|
Plant infrastructure: |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
37,270 |
|
|
|
37,912 |
|
Assets of discontinued operations |
|
|
— |
|
|
|
24 |
|
|
|
|
|
|
|
|
Total |
|
$ |
171,536 |
|
|
$ |
179,391 |
|
|
|
|
|
|
|
|
8. Fair Value Measurements
Fair Value of Financial Instruments
In accordance with the provisions of the Fair Value Measurements and Disclosures Topic of the ASC, the fair value of our financial instruments has been
estimated in accordance with Generally Accepted Accounting Principles, or GAAP. The fair value of
our fixed rate long-term debt is estimated based on quoted market prices or prices quoted from
third-party financial institutions. The carrying and fair values of our long-term debt are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of March 31, 2010 |
|
|
As of December 31, 2009 |
|
| |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
Secured Notes |
|
$ |
123,000 |
|
|
$ |
121,770 |
|
|
$ |
125,000 |
|
|
$ |
119,400 |
|
The fair values of our cash equivalents, trade receivables and trade payables approximate
their carrying values due to the short-term nature of these instruments.
Nonrecurring Fair Value Measurements
Effective January 1, 2009, fair value measurements were applied with respect to our
non-financial assets and liabilities. We measure certain non-financial assets and liabilities,
including long-lived assets, at fair value on a non-recurring basis. The fair market value of
these assets is determined using Level 3 inputs, which requires management to make estimates about
future cash flows. Management estimates the amount and timing of future cash flows based on its
experience and knowledge of market factors.
9. New Accounting Standards
Adoption of Accounting Standards:
In January 2010, the FASB issued ASU No. 2010-06, an amendment to ASC Topic 820-10, “Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements,” or ASU No. 2010-06. ASU No. 2010-06 requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in Codification Subtopic
820-10. The objective of ASU No. 2010-06 is to improve these disclosures and, thus, increase the
transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10
to now require:
12
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
• |
|
a reporting entity to disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers; and |
| |
| |
• |
|
in the reconciliation for fair value measurements using significant unobservable
inputs, a reporting entity to present separately information about purchases, sales,
issuances and settlements. |
In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:
| |
• |
|
for purposes of reporting fair value measurement for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the appropriate
classes of assets and liabilities; and |
| |
| |
• |
|
a reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. |
ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal years. Early
application is permitted. We implemented ASU 2010-06 effective January 1, 2010, and have enhanced
our disclosures to comply with ASU 2010-06.
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated
financial statements (including the Notes thereto) included in Item 1, Part I of this report.
Business Overview
We were formed in 1986 to acquire a petrochemicals facility located in Texas City, Texas that
was previously owned by Monsanto Company. We are a producer of selected petrochemicals used to
manufacture a wide array of consumer goods and industrial products. Our primary products are
acetic acid and plasticizers.
Our site in Texas City, Texas, or our Texas City facility, is strategically located on
Galveston Bay and benefits from a deep-water dock capable of handling ships with up to a 40-foot
draft, as well as four barge docks and direct access to Union Pacific and Burlington Northern Santa
Fe railways. Our Texas City facility also has truck loading racks, weigh scales, stainless and
carbon steel storage tanks, three waste deepwells, 160 acres of available land zoned for heavy
industrial use, additional land zoned for light industrial use and a supportive political
environment for growth. In addition, we are in the heart of one of the largest petrochemical
complexes on the Gulf Coast and, as a result, have on-site access to a number of raw material
pipelines, as well as close proximity to a number of large refinery complexes. Given our
under-utilized infrastructure and our management, operational and engineering expertise, as well as
our ample unoccupied land, we believe that there are significant opportunities for further
development of our Texas City facility. Our feasibility study for the gasification project was
completed during the first quarter of 2010 and we have elected to defer any further work on this
project until the economics improve. We are currently pursuing numerous initiatives to attract new
manufacturing, distribution or storage related businesses to our Texas City facility.
Specifically, we are seeking long-term contractual business arrangements or partnerships that will
provide us with the ability to realize the value of our under-utilized assets through profit
sharing or other revenue generating arrangements. For development projects that may have
significant capital expenditure requirements, we are considering joint ventures or other
arrangements where we would contribute certain of our assets and our management and operational
expertise to minimize our share of the capital costs. In any case, we expect any new facility
constructed at our Texas City facility to lower the amount of overall fixed costs allocated to each
of our operating units and provide us with additional profit.
Our acetic acid is used primarily to manufacture vinyl acetate monomer and purified
terephthalic acid, which are used in a variety of products, including adhesives, surface coatings,
polyester fibers, films and plastic bottle resins. Pursuant to our 2008 Amended and Restated
Acetic Acid Production Agreement, or our Acetic Acid Production Agreement, that extends through
2031, all of our acetic acid production is sold by BP Amoco Chemical Company, or BP Chemicals. We
are BP Chemicals’ sole source of acetic acid production in the Americas. BP Chemicals markets all
of the acetic acid that we produce and pays us, among other amounts, a portion of the profits
derived from its sales of our acetic acid. In addition, BP Chemicals reimburses us for 100% of our
fixed and variable costs of production, other than specified indirect costs. We also jointly
invest with BP Chemicals in capital expenditures related to our acetic acid facility in the same
percentage as the profits from the business we receive from BP Chemicals.
Our rated annual production capacity is among the highest in North America for acetic acid.
In mid-2009, we and BP Chemicals implemented an incremental expansion of our acetic acid plant to
1.3 billion pounds of annual capacity, which represents 20% of total North American capacity,
making our acetic acid facility the second largest acetic acid production facility in North
America. Our acetic acid facility utilizes BP Chemicals’ proprietary “Cativa” methanol
carbonylation technology, which we believe offers several advantages over competing production
methods, including lower energy requirements and lower fixed and variable costs. Acetic acid
production has two major raw material requirements, methanol and carbon monoxide. BP Chemicals, a
producer of methanol, supplies 100% of our methanol requirements related to our production of
acetic acid. All of our requirements for carbon monoxide are supplied by Praxair Hydrogen Supply,
Inc., or Praxair, from a partial oxidation unit constructed by Praxair on land leased from us at
our Texas City facility.
All of our plasticizers, which are used to make flexible plastics, such as shower curtains,
floor coverings, automotive parts and construction materials, are produced exclusively for BASF
Corporation, or BASF. Under our Third Amended and Restated Plasticizers Production Agreement with
BASF, or our Plasticizers Production
14
Agreement, BASF provides us with most of the required raw materials, markets the plasticizers
that we produce and is obligated to make certain fixed quarterly payments to us and reimburse us
monthly for our actual production costs and capital expenditures relating to our plasticizers
facility.
On November 11, 2009, BASF elected to terminate our Plasticizers Production Agreement,
effective December 31, 2010, at which time we will no longer produce plasticizers for BASF. We
will not be subject to any early termination penalties in connection with BASF’s termination of our
Plasticizers Production Agreement, although we will be required to refund BASF’s $1.0 million
pre-payment deposit previously paid by BASF. BASF, on the other hand, will be required to pay us
an early termination fee of $9.8 million on December 31, 2010. In addition, if we continue to
operate our plasticizers business after the termination of our Plasticizers Production Agreement,
we will be required to make payments to BASF for the undepreciated portion of past capital
expenditures paid by BASF, determined as of the end of the original term of our Plasticizers
Production Agreement, based on a straight line, 8-year life. As of December 31, 2013, we expect
the total amount of these undepreciated capital expenditures to be approximately $2.6 million, with
approximately $1.0 million, $0.7 million, $0.6 million and $0.3 million potentially to be paid in
2011, 2012, 2013 and 2014, respectively. If within 90 days after the termination of our
Plasticizers Production Agreement, we provide written notice to BASF of our election to permanently
close our plasticizers facility, the undepreciated capital expenditures paid by BASF for all
capital projects is deemed to be zero, and we will not be required to make any payments to BASF.
In the event we discontinue the plasticizers operations in 2011, we expect to incur approximately
$3.0 million in shutdown and decontamination costs. The costs and timing for dismantling of our
plasticizers facility are unknown at this time. However, we do not expect these costs to be
significant.
We are in the process of exploring and evaluating our commercial options with respect to
continuing our plasticizers business after the termination of our Plasticizers Production Agreement
with BASF. Since we are in the early stages of evaluating our commercial options regarding our
plasticizers business, we cannot predict the ultimate outcome or the success of continuing our
plasticizers business after December 31, 2010. In the event we conclude to permanently close our
plasticizers facility, we have also developed plans for restructuring our operating costs following
the termination of our Plasticizers Production Agreement. If we are unable to continue our
plasticizers operations through other viable commercial options for our plasticizers business or
facility or restructure our operating costs, or are unable to do so at or shortly after December
31, 2010, the termination of our Plasticizers Production Agreement will likely have a material
adverse effect on our financial condition, results of operations and cash flows. However, we do
not believe that these effects will impact our ability to continue as a going concern. Other than
our Plasticizers Production Agreement, we do not have any material relationships with BASF.
In
January 2010, we announced and completed a reduction in our work force in order to reduce
our staffing to a level appropriate for our existing operations. As a
result, we reduced our salaried work force by ten people and our hourly work force by 7 people and
we recognized and paid $0.9 million of severance costs.
Additionally, as a result of our work force
reduction, we recorded a curtailment gain of $0.1 million under
our retiree medical plans in the first
quarter of 2010.
Recent
Developments
On May 7, 2010,
our Board of Directors authorized us to pursue the acquisition of companies or assets with the goals of
materially diversifing our cash flow streams, creating strong long-term growth opportunities and providing
a platform for listing our shares of common stock on The NASDAQ Stock Market or the New York Stock Exchange.
After an extensive review with our Board of Directors of a wide range of acquisition targets and financing
alternatives, we have decided to focus our search for acquisition candidates on companies or assets involved in chemical distribution, specialty chemical manufacture or bulk,
petroleum or chemical storage or logistics and whose existing business would benefit from our available acreage
and infrastructure at our Texas City, Texas site. We anticipate that the structure of the financing for any such
acquisition will be determined by, among other things, the characteristics of the acquisition target, and may
involve a cash purchase, a merger, an exchange of stock or another financing mechanism, or may involve the formation
of a joint venture or other business partnership.
Results of Operations
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenues and loss from continuing operations
Our revenues were $33.1 million for the first quarter of 2010, a 5% increase from the $31.4
million in revenues we recorded for the first quarter of 2009. We had a loss from continuing
operations of $1.5 million for the first quarter of 2010, compared to a loss from continuing
operations of $0.6 million in the first quarter of 2009.
Revenues from our acetic acid operations were $26.4 million in the first
quarter of 2010, an 11% increase from the $23.8 million in revenues we received from these operations in the first
quarter of 2009. This increase in acetic acid revenues in the first quarter of 2010 was due to a
$3.3 million increase in cost reimbursements from BP Chemicals primarily due to increased energy
costs, partially offset by a $0.8 million decrease in contribution margin. Gross profit for our
acetic acid operations was $3.7 million for the first quarter of 2010 compared to a gross profit of
15
$4.6 million for the first quarter of 2009. This decrease in gross profit was primarily due
to a decrease in contribution margins for the first quarter of 2010 compared to the first quarter
of 2009.
Revenues from our plasticizers operations were $6.4 million in the first quarter of 2010, a
12% decrease from the $7.3 million in revenues we received from these operations in the first
quarter of 2009. Revenues for the first quarter of 2010 were lower primarily due to decreased cost
reimbursements of $1.5 million, partially offset by a $0.6 million increase in the amortization of
the payment we received in connection with BASF’s termination of their obligations related to our
oxo alcohols facilities. Due to the termination of our Plasticizers Production Agreement by BASF
effective December 31, 2010, the original eight year life used to amortize this payment was
accelerated to coincide with the termination of the agreement. Gross profit from our plasticizers
operations was $1.5 million for the first quarter of 2010 compared to $1.3 million for the first
quarter of 2009.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $2.9 million for the first quarter of
2010 compared to $3.9 million for the first quarter of 2009. This decrease was primarily due to a
$1.2 million decrease in legal fees for the first quarter 2010 resulting from the resolution of
various lawsuits during 2009.
Impairment of long-lived assets
In
accordance with our policies, an impairment charge of $0.3 million was recorded to reduce the carrying value of
a turbo generator unit classified as a spare, to its net realizable value of $0.4 million.
Interest and debt related expenses
We recorded $3.6 million of interest and debt related expenses in the first quarter of 2010
compared to $4.0 million in the first quarter of 2009. This decrease was due to our purchase of
$27.0 million in aggregate principal amount of our 101/4% Senior Secured Notes due 2015, or our
Secured Notes, over the period November 2009 through February 2010.
Interest income
We recorded less than $0.1 million of interest income in the first quarter of 2010 compared to
$0.4 million in the first quarter of 2009. This decrease was due to lower interest earned on our
cash investments and a lower cash balance in the first quarter of 2010 compared to 2009.
Other income
Our other income was $0.1 million for the first quarter of 2010 compared to $1.1 million for
the first quarter of 2009. This decrease in other income was primarily due to a decrease in legal
fee reimbursements under our insurance policies as a result of the resolution of various lawsuits
during 2009.
Benefit for income taxes
During the first quarters of 2010 and 2009, we recorded a net tax benefit of zero and $0.2
million, respectively, for income taxes from continuing operations. The tax benefit in the first
quarter of 2009 was generated by utilizing income in discontinued operations to recognize a portion
of the benefit from losses generated in continuing operations. For the three-month periods ended
March 31, 2010, and March 31, 2009, our continuing operations effective tax rate was zero and
24.8%, respectively.
16
Income from discontinued operations, net of tax
During the first quarter of 2010, income from discontinued operations, net of tax, was
$3.0 million compared to income from discontinued operations, net of tax, of $1.6 million for the
first quarter of 2009. This increase was primarily due to
$0.9 million of income tax expense incurred during the first
quarter of 2009 and decreased operating costs of $0.5 million in
the first quarter of 2010 compared to the first quarter of 2009.
Liquidity and Capital Resources
General
Our working capital was $97.5 million as of March 31, 2010, a decrease of $0.2 million from
our working capital of $97.7 million as of December 31, 2009. This decrease was primarily due to a
$6.2 million profit sharing accrual, partially offset by increased accrued interest of $3.8
million, the purchase of $2.0 million in aggregate principal amount of our Secured Notes for $1.9
million and $1.2 million for the amortization of the oxo alcohols and phthalic anhydride, or PA,
payments we received in connection with BASF’s termination of their obligations related to our oxo
alcohols and PA facilities.
Our liquidity was $121.2 million at March 31, 2010, a decrease of $6.6 million compared to our
liquidity of $127.8 million at December 31, 2009. This decrease was primarily due to a $4.0
million reduction caused by the termination of our revolving credit facility and our purchase of
$2.0 million in aggregate principal amount of our Secured Notes in 2010 for $1.9 million. We
periodically review the balance of our cash on hand in light of our strategic objectives and the
restrictions on the use of cash contained in the indenture for our Secured Notes. As opportunities
arise, we intend to utilize our cash as circumstances warrant, possibly in material amounts, to
fund all or a portion of the purchase price of mergers or acquisitions, engage in project
development work, make contributions to our defined benefit plans or purchase our outstanding
Secured Notes on the open market, in privately negotiated transactions, or otherwise.
We invest our excess cash in various investments. Our cash is invested in money market funds
and certificates of deposit. However, we may invest cash in other high quality, highly liquid cash
equivalents from time to time.
Debt
On March 29, 2007, we completed a private offering of $150.0 million aggregate principal
amount of unregistered Secured Notes pursuant to a Purchase Agreement among us, Sterling Chemicals
Energy, Inc., or Sterling Energy, one of our former wholly-owned subsidiaries, and Jefferies &
Company, Inc. and CIBC World Markets Corp., as initial purchasers. In connection with that
offering, we entered into an indenture dated March 29, 2007 among us, Sterling Energy, as
guarantor, and U. S. Bank National Association, as trustee and collateral agent. On May 6, 2008,
Sterling Energy was merged with and into us. Upon consummation of the merger, Sterling Energy no
longer had independent existence and, consequently, our Secured Notes are no longer guaranteed by
Sterling Energy.
Our indenture contains affirmative and negative covenants and customary events of default,
including payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and
reorganization. If an event of default occurs and is continuing, other than an event of default
triggered upon certain bankruptcy events, the trustee under our indenture or the holders of at
least 25% in principal amount of our outstanding Secured Notes may declare our Secured Notes to be
due and payable immediately. Upon an event of default, the trustee may also take actions to
foreclose on the collateral securing our outstanding Secured Notes. Our indenture does not require
us to maintain any financial ratios or satisfy any financial maintenance tests. We are currently
in compliance with all of the covenants contained in our indenture.
Interest is due on our outstanding Secured Notes on April 1 and October 1 of each year. Our
outstanding Secured Notes, which mature on April 1, 2015, are senior secured obligations and rank
equally in right of payment with all of our existing and future senior indebtedness. Subject to
specified permitted liens, our outstanding Secured Notes are secured (i) on a first priority basis
by all of our fixed assets and certain related assets, including, without
17
limitation, all of our property, plant and equipment and (ii) on a second priority basis by
our other assets, including, without limitation, accounts receivable, inventory, capital stock of
our domestic restricted subsidiaries, intellectual property, deposit accounts and investment
property.
In the fourth quarter of 2009, we purchased $25.0 million in aggregate principal amount of our
Secured Notes in the open market for $23.8 million in cash, resulting in a $1.2 million gain. This
gain was partially offset by the amortization of a pro rata portion of the related debt issue costs
of $0.9 million. In February 2010, we purchased an additional $2.0 million in aggregate principal
amount of our Secured Notes in the open market for $1.9 million in cash, resulting in a $0.1
million gain. This gain was partially offset by the amortization of a pro rata portion of the
related debt issue costs of less than $0.1 million.
On December 19, 2002, we entered into a Revolving Credit Agreement, or our revolving credit
facility, with The CIT Group/Business Credit, Inc, or CIT, as administrative agent and a lender,
and certain other lenders. Under our revolving credit facility, we and Sterling Energy were
co-borrowers and were jointly and severally liable for any indebtedness thereunder. After the
merger of Sterling Energy with and into us, Sterling Energy ceased to be a co-borrower under our
revolving credit facility. On December 10, 2009, we elected to terminate our revolving credit
facility effective January 24, 2010 due to our substantial cash reserves and low working capital
needs. There were no penalties or termination fees payable by us in connection with the early
termination of our revolving credit facility. The remaining associated debt issue costs of $0.2
million were written off as of the effective termination date.
On January 31, 2010, we entered into a $5.0 million Revolving Line of Credit for letters of
credit, or our LC Facility, with JPMorgan Chase Bank, N.A., or Chase, for the issuance of
commercial and standby letters of credit. Our LC Facility has an initial term of one year. Under
our LC Facility, we pay Chase a fee of 1% per annum of the face amount of each outstanding letter
of credit and an issuance fee of $500 for each letter of credit. Our LC Facility is secured by
$5.0 million in cash under an Assignment of Deposit Account Agreement between us and Chase. As of
March 31, 2010, there were $3.3 million in standby letters of credit issued under our LC facility.
As part of our strategic
goals, we are seeking to consummate strategic transactions, including, but not limited to, acquisitions of assets
or businesses and the formation of joint ventures or other business combinations. Although we do not currently have
any commitments with respect to any strategic transactions, we may enter into such commitments in the future, which
could result in a material expansion of our existing operations or result in our entering into new lines of business.
In addition, a strategic transaction could result in the expenditure of a material amount of our funds or the issuance by us of a material amount of debt or equity securities.
Cash Flow
Net cash used in operations was $0.1 million for the first three months of 2010, compared to
net cash provided by operations of $9.3 million during the first three months of 2009. This
decrease in net cash flow provided by operations during the first three months of 2010 was
primarily due to an $11.4 million reduction in the profit sharing payment in the first quarter of
2010 compared to the first quarter of 2009 due to a change in contract payment terms. Net cash
used in investing activities was $0.6 million during the first three months of 2010, compared to
$2.4 million for the first three months of 2009. This decrease in net cash flow used in investing
activities was primarily due to higher capital expenditures in 2009 for acetic acid related
projects and a process wastewater treatment system. Net cash used in financing activities was $1.9
million in the first three months of 2010, compared to zero during the first three months of 2009.
This increase in net cash flow used in financing activities was primarily due to the purchase of
$2.0 million in aggregate principal amount of our Senior Secured Notes for $1.9 million in the
first quarter of 2010.
Critical Accounting Policies, Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and related notes. Actual results could differ
from those estimates. On an ongoing basis, we review our estimates, including those related to the
allowance for doubtful accounts, recoverability of long-lived assets, deferred tax asset valuation
allowance, litigation, environmental liabilities, pension and post-retirement benefits, preferred
stock dividends and various other operating allowances and accruals, based on currently available
information. Changes in facts and circumstances may alter such estimates and affect our results of
operations and financial position in future periods. There have been no material changes or
developments in our evaluation of the accounting estimates or the underlying assumptions or
methodologies that we believe to be critical accounting policies disclosed in our Annual Report.
Item 4T. Controls and Procedures
18
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable
assurance that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. These include controls and procedures designed to ensure
that this information is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Because of its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving their control
objectives. Our management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of
March 31, 2010. Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that, due to the material weakness described below, our disclosure controls
and procedures were not effective as of March 31, 2010 at the reasonable assurance level.
In the fourth quarter of 2009, our management identified a control deficiency that represents
a material weakness in our internal control over financial reporting as disclosed in our Annual
Report. The material weaknesses identified by management resulted from a lack of effective
controls over the review and approval of non-routine transactions. In particular, the material
weakness related to the review and approval of cost allocation billing corrections.
Management has implemented new controls and strengthened the control documentation regarding non-routine transactions and
now requires applicable departments to formally review and approve non-routine transactions prior
to their finalization.
Although these controls were implemented in the first quarter of 2010, they were not in effect
for a sufficient period of time and therefore have not been tested. As a result, our principal
executive officer and principal financial officer concluded that, as of March 31, 2010, our
disclosure controls and procedures were not effective pursuant to Exchange Act Rules 13a-15(f) and
15d-15(f).
Management is in the process of completing the remediation and testing of the new controls.
We anticipate that the newly implemented controls will be tested by the end of the second quarter of
2010.
Notwithstanding our assessment that our internal controls over financial reporting were not
effective and that there was a material weakness as identified in our Annual Report, we believe
that our financial statements contained in this Form 10-Q accurately present our financial
condition, results of operations and cash flows in all material respects.
Changes in Internal Control over Financial Reporting. Other than as described above there have been no changes in our
internal control over financial reporting for the quarter ended March 31, 2010, that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
The information under “Legal Proceedings” in Note 4 to the condensed consolidated financial
statements included in Item 1 of Part I of this report is hereby incorporated by reference.
Item 6. Exhibits
Exhibits not incorporated by reference to a prior filing and filed or furnished herewith are
designated by an “*”. All exhibits not so designated are incorporated herein by reference to a
prior filing as indicated.
19
| |
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| Exhibit |
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| Number |
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Description of Exhibit |
| |
10.1
|
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—
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|
$5,000,000 Revolving Line of Credit for letters of credit from JPMorgan Chase
Bank, N.A. dated January 31, 2010 (incorporated herein by reference from
Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009). |
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*15.1
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—
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Letter of Grant Thornton LLP regarding unaudited interim financial information. |
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*31.1
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—
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Rule 13a-14(a) Certification of the Chief Executive Officer. |
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*31.2
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—
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Rule 13a-14(a) Certification of the Principal Financial Officer. |
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*32.1
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—
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Section 1350 Certification of the Chief Executive Officer. |
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*32.2
|
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—
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Section 1350 Certification of the Principal Financial Officer. |
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| * |
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Filed or furnished herewith |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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STERLING CHEMICALS, INC.
(Registrant)
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| Date: May 12, 2010 |
By |
/s/ JOHN V. GENOVA
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John V. Genova |
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President and Chief Executive Officer |
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| Date: May 12, 2010 |
By |
/s/ DAVID J. COLLINS
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David J. Collins |
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Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
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21
EXHIBIT INDEX
| |
|
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|
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| Exhibit |
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| Number |
|
|
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Description of Exhibit |
|
|
|
|
|
10.1
|
|
—
|
|
$5,000,000 Revolving Line of Credit for letters of credit from JPMorgan Chase
Bank, N.A. dated January 31, 2010 (incorporated herein by reference from
Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009). |
|
|
|
|
|
*15.1
|
|
—
|
|
Letter of Grant Thornton LLP regarding unaudited interim financial information. |
|
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|
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*31.1
|
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—
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Rule 13a-14(a) Certification of the Chief Executive Officer. |
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*31.2
|
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—
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Rule 13a-14(a) Certification of the Principal Financial Officer. |
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*32.1
|
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—
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Section 1350 Certification of the Chief Executive Officer. |
|
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*32.2
|
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—
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Section 1350 Certification of the Principal Financial Officer. |
|
|
|
| * |
|
Filed or furnished herewith |
22