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 September 30, 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
Incorporation or organization)
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(IRS Employer Identification No.) |
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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 October 31, 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 September 30, 2010, and the related condensed
consolidated statements of operations for the three and nine-month periods ended September 30, 2010
and 2009, and cash flows for the nine months ended September 30, 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
November 9, 2010
3
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Share Data)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
30,899 |
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$ |
27,179 |
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$ |
93,018 |
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$ |
85,497 |
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Cost of goods sold |
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26,107 |
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24,932 |
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78,143 |
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76,514 |
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Gross profit |
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4,792 |
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2,247 |
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14,875 |
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8,983 |
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Selling, general and administrative expenses |
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2,247 |
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2,916 |
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7,364 |
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10,143 |
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Impairment of long-lived assets |
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— |
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— |
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290 |
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— |
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Interest and debt related expenses |
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3,349 |
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3,984 |
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10,294 |
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11,955 |
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Interest income |
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(101 |
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(94 |
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(226 |
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(690 |
) |
Other income |
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(102 |
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(234 |
) |
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(272 |
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(2,923 |
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Loss from continuing operations before income tax |
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(601 |
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(4,325 |
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(2,575 |
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(9,502 |
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Benefit for income taxes |
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— |
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(1,316 |
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— |
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(2,533 |
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Loss from continuing operations |
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$ |
(601 |
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$ |
(3,009 |
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$ |
(2,575 |
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$ |
(6,969 |
) |
Income from discontinued operations, net of tax
expense of zero, $972, zero and $2,884,
respectively |
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3,047 |
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1,805 |
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9,062 |
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5,355 |
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Net income (loss) |
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$ |
2,446 |
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$ |
(1,204 |
) |
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$ |
6,487 |
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$ |
(1,614 |
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Preferred stock dividends |
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4,683 |
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4,271 |
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13,643 |
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12,312 |
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Net loss attributable to common stockholders |
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$ |
(2,237 |
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$ |
(5,475 |
) |
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$ |
(7,156 |
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$ |
(13,926 |
) |
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Income (loss) per share of common stock
attributable
to common stockholders, basic and diluted: |
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Loss from continuing operations |
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$ |
(1.87 |
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$ |
(2.58 |
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$ |
(5.73 |
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$ |
(6.81 |
) |
Income from discontinued operations,
net of tax |
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1.08 |
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0.64 |
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3.20 |
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1.89 |
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Basic and diluted loss per share |
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$ |
(0.79 |
) |
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$ |
(1.94 |
) |
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$ |
(2.53 |
) |
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$ |
(4.92 |
) |
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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 |
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2,828,460 |
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2,828,460 |
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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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September 30, |
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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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$ |
124,377 |
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$ |
123,778 |
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Accounts receivable, net of allowance of $58 and $58, respectively |
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12,604 |
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14,614 |
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Inventories, net |
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4,615 |
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5,268 |
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Prepaid expenses and other current assets |
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2,634 |
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2,656 |
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Assets of discontinued operations |
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— |
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24 |
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Total current assets |
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144,230 |
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146,340 |
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Property, plant and equipment, net |
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58,924 |
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68,182 |
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Other assets, net |
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4,781 |
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5,643 |
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Total assets |
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$ |
207,935 |
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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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$ |
8,357 |
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$ |
11,703 |
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Accrued liabilities |
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22,506 |
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24,416 |
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Liabilities of discontinued operations |
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12,382 |
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12,384 |
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Total current liabilities |
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43,245 |
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48,503 |
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Long-term debt |
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123,000 |
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125,000 |
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Long-term liabilities |
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38,998 |
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41,084 |
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Long-term liabilities of discontinued operations |
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13,724 |
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23,010 |
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Commitments and contingencies (Note 4) |
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Redeemable preferred stock |
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148,171 |
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134,528 |
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Stockholders’ deficiency in assets: |
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Common stock, $.01 par value (shares authorized 100,000,000;
shares issued
and outstanding 2,828,460) |
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28 |
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28 |
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Additional paid-in capital |
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93,378 |
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106,948 |
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Accumulated deficit |
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(234,293 |
) |
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(240,780 |
) |
Accumulated other comprehensive loss |
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(18,316 |
) |
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(18,156 |
) |
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Total stockholders’ deficiency in assets |
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(159,203 |
) |
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(151,960 |
) |
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Total liabilities and stockholders’ deficiency in assets |
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$ |
207,935 |
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$ |
220,165 |
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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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Nine months ended September 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income (loss) |
|
$ |
6,487 |
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$ |
(1,614 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |
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Stock compensation expense |
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73 |
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|
284 |
|
Bad debt expense |
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21 |
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— |
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Benefit plan curtailment gain |
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(115 |
) |
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— |
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Depreciation and amortization |
|
|
9,430 |
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|
7,289 |
|
Interest amortization |
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|
844 |
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|
830 |
|
Amortization of deferred revenue |
|
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(12,839 |
) |
|
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(10,911 |
) |
Impairment of long-lived assets |
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|
290 |
|
|
|
— |
|
Gain on disposal of property, plant and equipment |
|
|
(96 |
) |
|
|
(362 |
) |
Other |
|
|
468 |
|
|
|
(358 |
) |
Change in assets/liabilities: |
|
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Accounts receivable |
|
|
2,013 |
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|
12,994 |
|
Inventories |
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|
338 |
|
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|
(99 |
) |
Prepaid expenses and other current assets |
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|
22 |
|
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(678 |
) |
Other assets |
|
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(51 |
) |
|
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(10 |
) |
Accounts payable |
|
|
(3,116 |
) |
|
|
(1,003 |
) |
Accrued liabilities |
|
|
(1,912 |
) |
|
|
(1,880 |
) |
Long-term liabilities |
|
|
1,422 |
|
|
|
1,441 |
|
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|
|
|
|
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|
|
|
|
|
|
|
|
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Net cash provided by operating activities |
|
|
3,279 |
|
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|
5,923 |
|
|
|
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Cash flows used in investing activities: |
|
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|
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|
|
|
Capital expenditures for property, plant and equipment |
|
|
(857 |
) |
|
|
(8,972 |
) |
Net proceeds from the sale of property, plant and equipment |
|
|
102 |
|
|
|
362 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(755 |
) |
|
|
(8,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
Purchase of Senior Secured Notes |
|
|
(1,925 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,925 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
599 |
|
|
|
(2,687 |
) |
Cash and cash equivalents — beginning of year |
|
|
123,778 |
|
|
|
156,126 |
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of period |
|
$ |
124,377 |
|
|
$ |
153,439 |
|
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|
|
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|
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|
|
|
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Supplemental disclosures of cash flow information: |
|
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|
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|
|
|
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Interest paid |
|
$ |
6,514 |
|
|
$ |
8,449 |
|
Interest income received |
|
|
226 |
|
|
|
690 |
|
Cash received 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 (a) condensed consolidated
balance sheet as of December 31, 2009, which was derived from
audited financial statements, and (b) the 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.
Reclassifications and Revisions
We have reclassified certain amounts on the condensed consolidated balance sheet between other
assets and prepaid expenses and other current assets as of December 31, 2009. We have reclassified
amounts on the condensed consolidated statement of cash flows between other assets and prepaid
expenses and other current assets, between accounts receivable and accounts payable and between
depreciation and amortization, other, inventories and other assets to reconcile net income (loss)
to net cash provided by operating activities for the nine month
period ended September 30, 2009.
Property Plant and Equipment Impairment
In accordance with our policies, an impairment charge of $0.3 million was recorded in the
first quarter of 2010 to reduce the carrying value of one of our turbo generator units which was
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 Antitrust
Improvements 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 September
30, 2010 and December 31, 2009 were as follows (in thousands):
7
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
Assets of discontinued operations: |
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance of $44 and $23 respectively |
|
$ |
— |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations:(1) |
|
|
|
|
|
|
|
|
Current portion of deferred revenue |
|
$ |
12,382 |
|
|
$ |
12,384 |
|
Long-term portion of deferred revenue |
|
|
13,724 |
|
|
|
23,010 |
|
|
|
|
|
|
|
|
Total |
|
$ |
26,106 |
|
|
$ |
35,394 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
As of September 30, 2010, amounts represent 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. |
Revenues and income before income taxes from discontinued operations for the three and
nine-month periods ended September 30, 2010 and 2009 are presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Revenues |
|
$ |
3,096 |
|
|
$ |
3,096 |
|
|
$ |
9,287 |
|
|
$ |
9,502 |
|
Income before income taxes |
|
|
3,047 |
|
|
|
2,777 |
|
|
|
9,062 |
|
|
|
8,239 |
|
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
8
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. 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 initially had a one year term. 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. Since its inception, our LC
Facility has been and continues to be secured by $5.0 million in cash under an Assignment of
Deposit Account Agreement between us and Chase. On September 20, 2010, we amended our LC facility
to extend the initial term to April 30, 2011, and concurrently therewith entered into a Security
Agreement and a Pledge Agreement with Chase, pursuant to which we granted Chase first priority
liens on all of our accounts receivable, inventory and other specified assets to secure our
obligations under our LC Facility. As of September 30, 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 September 30, 2010, are due on April 1, 2015.
4. Commitments and Contingencies
Product Contracts:
We have agreements, one with each of our two customers, which provide for the dedication of
100% of our production of acetic acid and plasticizers. 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. Oral arguments for this appeal were heard on September 14, 2010,
but to date the appellate court has not rendered a decision. 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 $1.0 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.
9
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On February 21, 2007, three retired employees of Sterling Fibers, Inc., one of our former
subsidiaries, sued us, several of our benefit plans and the plan administrators for those plans 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 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
that governed 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 claimed that we violated the terms of the benefit plans and breached
fiduciary duties governed by the Employee Retirement Income Security Act and failed to comply with
sections of the Bankruptcy Code dealing with retiree benefits, and sought damages, declaratory
relief, punitive damages and attorneys’ fees. A trial for this matter was held during the second
week of November 2009. On July 1, 2010, the judge ruled for us on the merits and dismissed all of
the plaintiffs’ claims. The plaintiffs filed an appeal on July 16, 2010. Oral arguments for this
appeal have not been scheduled to date. We are vigorously seeking affirmation of the trial judge’s
rulings. We 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.
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 was, therefore,
reimbursable through our insurance carriers. For the nine months ended September 30, 2010, we
incurred $0.2 million of legal costs that are reimbursable under our insurance policies and
received $0.2 million of payments from our insurance carriers, resulting in a receivable balance of
$0.1 million as of September 30, 2010.
5. Income Taxes
For each of the three and nine-month periods ended September 30, 2010, we recorded net tax
expense of zero for income taxes from continuing operations. During the three and nine-month
periods ended September 30, 2009, we recorded net tax benefit of $1.3 million and $2.5 million,
respectively, for income taxes from continuing operations. Based on our net operating loss position
and projections for the year, we expect any tax expense or benefit during 2010 to be fully offset
by a related change in the valuation allowance, resulting in an effective tax rate of zero. The net
tax benefit during the three and nine-month periods ended September 30, 2009 was generated as a
result of utilizing income in our discontinued operations to recognize a portion of the benefit
from losses generated in our continuing operations. Our continuing operations effective tax rate
was zero for the nine-month period ended September 30, 2010 compared to an effective tax rate of
26.9% for the nine-month period ended September 30, 2009.
6. Employee Benefits
Net periodic pension costs consisted of the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
Interest cost |
|
$ |
1,745 |
|
|
$ |
1,828 |
|
|
$ |
5,235 |
|
|
$ |
5,484 |
|
Expected return on plan assets |
|
|
(1,159 |
) |
|
|
(1,512 |
) |
|
|
(3,479 |
) |
|
|
(4,538 |
) |
Amortization |
|
|
191 |
|
|
|
863 |
|
|
|
574 |
|
|
|
2,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
777 |
|
|
$ |
1,179 |
|
|
$ |
2,330 |
|
|
$ |
3,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Other postretirement benefits consisted of the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Nine months ended |
|
| |
|
Three months ended September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
(Dollars in Thousands) |
|
|
|
|
|
Service cost |
|
$ |
10 |
|
|
$ |
12 |
|
|
$ |
30 |
|
|
$ |
34 |
|
Interest cost |
|
|
93 |
|
|
|
121 |
|
|
|
281 |
|
|
|
363 |
|
Amortization of unrecognized costs |
|
|
(540 |
) |
|
|
(542 |
) |
|
|
(1,624 |
) |
|
|
(1,624 |
) |
Curtailment gain |
|
|
— |
|
|
|
— |
|
|
|
(115 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net plan benefit |
|
$ |
(437 |
) |
|
$ |
(409 |
) |
|
$ |
(1,428 |
) |
|
$ |
(1,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Total contributions of $4.5 million expected to be paid in 2010 were paid during the
nine-month period ended September 30, 2010.
7. Operating Segment and Sales Information
As of September 30, 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
these businesses. There are no sales between segments. The revenues and gross profit (losses) for
each of our reportable operating segments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
24,522 |
|
|
$ |
20,892 |
|
|
$ |
73,482 |
|
|
$ |
64,527 |
|
Plasticizers |
|
|
6,122 |
|
|
|
6,032 |
|
|
|
18,766 |
|
|
|
20,205 |
|
Other |
|
|
255 |
|
|
|
255 |
|
|
|
770 |
|
|
|
765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,899 |
|
|
$ |
27,179 |
|
|
$ |
93,018 |
|
|
$ |
85,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
3,925 |
|
|
$ |
43 |
|
|
$ |
11,216 |
|
|
$ |
4,484 |
|
Plasticizers |
|
|
1,748 |
|
|
|
1,511 |
|
|
|
5,129 |
|
|
|
4,235 |
|
Other |
|
|
(881 |
) |
|
|
693 |
|
|
|
(1,470 |
) |
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,792 |
|
|
|
2,247 |
|
|
|
14,875 |
|
|
|
8,983 |
|
Selling, general and administrative expenses |
|
|
2,247 |
|
|
|
2,916 |
|
|
|
7,364 |
|
|
|
10,143 |
|
Impairment of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
290 |
|
|
|
— |
|
Interest and debt related expenses |
|
|
3,349 |
|
|
|
3,984 |
|
|
|
10,294 |
|
|
|
11,955 |
|
Interest income |
|
|
(101 |
) |
|
|
(94 |
) |
|
|
(226 |
) |
|
|
(690 |
) |
Other income |
|
|
(102 |
) |
|
|
(234 |
) |
|
|
(272 |
) |
|
|
(2,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income
tax |
|
$ |
(601 |
) |
|
$ |
(4,325 |
) |
|
$ |
(2,575 |
) |
|
$ |
(9,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
2,029 |
|
|
$ |
2,114 |
|
|
$ |
5,951 |
|
|
$ |
5,473 |
|
Plasticizers |
|
|
874 |
|
|
|
342 |
|
|
|
2,466 |
|
|
|
979 |
|
Other(1) |
|
|
342 |
|
|
|
330 |
|
|
|
1,013 |
|
|
|
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,245 |
|
|
$ |
2,786 |
|
|
$ |
9,430 |
|
|
$ |
7,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
— |
|
|
$ |
1,472 |
|
|
$ |
144 |
|
|
$ |
5,179 |
|
Other — plant infrastructure |
|
|
82 |
|
|
|
1,120 |
|
|
|
713 |
|
|
|
3,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82 |
|
|
$ |
2,592 |
|
|
$ |
857 |
|
|
$ |
8,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Includes depreciation and amortization expenses for discontinued operations of
less than $0.1 million for each of the three and nine-month periods ended September 30, 2010
and 2009, respectively. |
11
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
| |
|
(Dollars in Thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Acetic acid |
|
$ |
32,956 |
|
|
$ |
35,362 |
|
Plasticizers |
|
|
2,349 |
|
|
|
5,412 |
|
Other(1) |
|
|
172,630 |
|
|
|
179,391 |
|
|
|
|
|
|
|
|
Total |
|
$ |
207,935 |
|
|
$ |
220,165 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Components of Other are presented in the table below: |
| |
|
|
|
|
|
|
|
|
| |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
| |
|
(Dollars in Thousands) |
|
Other: |
|
|
|
|
|
|
|
|
Corporate: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
124,377 |
|
|
$ |
123,778 |
|
Other |
|
|
13,422 |
|
|
|
17,677 |
|
Plant infrastructure: |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
34,831 |
|
|
|
37,912 |
|
Assets of discontinued operations |
|
|
— |
|
|
|
24 |
|
|
|
|
|
|
|
|
Total |
|
$ |
172,630 |
|
|
$ |
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 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
| |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
Secured Notes |
|
$ |
123,000 |
|
|
$ |
120,540 |
|
|
$ |
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.
12
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 Financial Accounting Standards Board issued Accounting Standards Update
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 new disclosures and clarifies some existing disclosure requirements with respect to fair
value measurement as set forth in Codification Subtopic 820-10. The objective of ASU No. 2010-06 is
to improve these disclosures and increase the transparency in financial reporting. Specifically,
ASU No. 2010-06 amends ASC Topic 820-10 to require that:
| |
• |
|
a reporting entity disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers; and |
| |
• |
|
a reporting entity present separately information about purchases, sales,
issuances and settlements in the reconciliation for fair value measurements using
significant unobservable inputs. |
In addition, ASU No. 2010-06 provides that:
| |
• |
|
for purposes of reporting fair value measurements 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 No. 2010-06 is effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures with respect to 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 No. 2010-06 effective January 1, 2010, and have
enhanced our disclosures to comply with ASU No. 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 select 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. 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. We recently entered into a contract
involving the terminaling of methanol as a part of our strategy, although we do not expect this
transaction to have a material affect on our business, financial results or cash flows.
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 to 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 portion of the profits we receive from BP Chemicals.
Our rated annual production capacity for acetic acid is among the highest in North America.
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 Agreement, BASF provides us with most of the required raw
materials, markets the plasticizers that we produce and
14
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 a $1.0 million 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 or before 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. However, 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 our plasticizers operations, we expect to incur
approximately $1.0 million in shutdown
and decontamination costs. The costs and timing for dismantling of our plasticizers facility are
unknown at this time but 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. As we are still in the process 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. We have, however, developed plans for restructuring
our operating costs during the first quarter of 2011, the extent of which will be dependent upon
whether we elect to permanently close our plasticizers facility. 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.
On May 7, 2010, our Board of Directors authorized us to pursue the acquisition of companies or
assets with the goals of materially diversifying 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 been focusing 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 facility.
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.
15
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Revenues and loss from continuing operations
Our revenues were $30.9 million for the third quarter of 2010, a 14% increase from the $27.2
million in revenues we recorded for the third quarter of 2009. We had a loss from continuing
operations of $0.6 million for the third quarter of 2010, compared to a loss from continuing
operations of $3.0 million for the third quarter of 2009.
Revenues from our acetic acid operations were $24.5 million in the third quarter of 2010, a
17% increase from the $20.9 million in revenues we received from these operations in the third
quarter of 2009. This increase in acetic acid revenues was primarily due to increased contribution
margin and sales volume
in the third quarter of 2010 compared to the third quarter of 2009, and the 42 day shutdown
of our acetic acid unit beginning in June 2009 for scheduled maintenance work and the lower
production volumes and associated variable cost reimbursements resulting from that shutdown,
partially offset by increased fixed cost reimbursements for shutdown costs in 2009. Gross profit
for our acetic acid operations was $3.9 million for the third quarter of 2010 compared to less than
$0.1 million for the third quarter of 2009. This increase in gross profit was primarily due to the
same factors that caused our increase in acetic acid revenues.
Revenues from our plasticizers operations were $6.1 million in the third quarter of 2010, a 2%
increase from the $6.0 million in revenues we received from these operations in the third quarter
of 2009. This increase in revenues was primarily due to a $0.6 million increase in the
amortization of the payment we received in connection with the previous termination by BASF of its
obligations related to our oxo alcohols facilities under our Plasticizers Production Agreement.
Due to the termination of our Plasticizers Production Agreement by BASF effective December 31,
2010, the original 8-year life used to amortize this payment was accelerated to coincide with the
termination of our Plasticizers Production Agreement. This increase was offset by lower cost
reimbursements of $0.5 million in the third quarter of 2010 primarily due to reimbursement of costs
in 2009 for the project to redesign our process wastewater treatment system. Gross profit from our
plasticizers operations was $1.7 million for the third quarter of 2010, compared to $1.5 million
for the third quarter of 2009. This increase was primarily due to the $0.6 million in increased
amortization of the BASF payment discussed above and the impact of $0.1 million of increased
reimbursements for various components of reimbursable costs under our Plasticizers Production
Agreement, offset by a $0.6 million increase in depreciation expense that resulted from the
acceleration of depreciation on our plasticizers facility as a result of BASF terminating our
Plasticizers Production Agreement effective December 31, 2010.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $2.2 million during the third quarter of
2010, a 24% decrease from the $2.9 million in selling, general and administrative expenses we
incurred during the third quarter of 2009. This decrease was primarily due to a $0.4 million
decrease in engineering costs for strategic initiatives and a $0.1 million decrease in legal fees.
Interest and debt related expenses
We recorded $3.3 million of interest and debt related expenses during the third quarter of
2010, an 18% decrease from the $4.0 million of interest and debt related expenses we incurred
during the third quarter of 2009. This decrease was primarily 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.
Other income
Our other income was $0.1 million during the third quarter of 2010 and $0.2 million during the
third quarter of 2009. This decrease in other income was primarily due to a $0.1 million decrease
in reimbursement of legal fees.
Benefit for income taxes
During the third quarters of 2010 and 2009, we recorded net tax expense of zero and net tax
benefit of $1.3 million, respectively, for income taxes from continuing operations. Based on our
net operating loss position and projections for the year, we expect any tax expense or benefit
during 2010 to be fully offset by a related change in our valuation allowance, resulting in an
effective tax rate of zero. The tax benefit in the third quarter of 2009 was generated as a result
of utilizing income in our discontinued operations to recognize a portion of the benefit from
16
losses generated in our continuing operations. For the three-month periods ended September 30,
2010, and September 30, 2009, our continuing operations effective tax rate was zero and 31.1%,
respectively.
Income from discontinued operations, net of tax
Our income from discontinued operations, net of tax, was $3.0 million during the third quarter
of 2010, a 67%
increase compared to the $1.8 million in income from discontinued operations net of
tax, we recorded during the third quarter of 2009. This increase was primarily due to our
recording $1.0 million of income tax expense during the third quarter of 2009, whereas we had no
income tax expense during the third quarter of 2010.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Revenues and loss from continuing operations
Our revenues were $93.0 million for the first nine months of 2010, a 9% increase from the
$85.5 million in revenues we recorded for the first nine months of 2009. We had a loss from
continuing operations of $2.6 million for the first nine months of 2010, compared to a loss from
continuing operations of $7.0 million for the first nine months of 2009.
Revenues from our acetic acid operations were $73.5 million for the first nine months of 2010,
a 14% increase from the $64.5 million in revenues we received from these operations for the first
nine months of 2009. This increase in acetic acid revenues was primarily due to increased
contribution margin and sales volume
in the first nine months of 2010 compared to the first nine months of 2009, and
the 42 day shutdown of our acetic acid unit beginning in June 2009 for scheduled maintenance work
and the lower production volumes, associated variable cost reimbursements resulting from that
shutdown, partially offset by increased fixed cost reimbursements for shutdown costs in 2009.
Gross profit from our acetic acid operations was $11.2 million for the first nine months of 2010
compared to $4.5 million for the first nine months of 2009. The $6.7 million increase in gross
profit was primarily due to the same factors that caused our increase in acetic acid revenues.
Revenues from our plasticizers operations were $18.8 million for the first nine months of
2010, a 7% decrease from the $20.2 million in revenues we received from these operations for the
first nine months of 2009. This decrease in revenues was primarily due to lower cost
reimbursements of $3.4 million in the first nine months of 2010, compared to the first nine months
of 2009, as the 2009 period included reimbursement of costs to redesign our process wastewater
treatment system. Partially offsetting this decrease in revenues was a $1.9 million increase in
the amortization of the payment we received in connection with the previous termination by BASF of
its obligations related to our oxo alcohols facilities under our Plasticizers Production Agreement.
Due to the termination of our Plasticizers Production Agreement by BASF effective December 31,
2010, the original 8-year life used to amortize this payment was accelerated to coincide with the
termination of our Plasticizers Production Agreement. Gross profit from our plasticizers
operations was $5.1 million for the first nine months of 2010, compared to $4.2 million for the
first nine months of 2009. This increase was primarily due to the $1.9 million in increased
amortization of the BASF payment discussed above and the impact of $0.7 million of increased
reimbursements for various components of reimbursable costs under our Plasticizers Production
Agreement. These favorable variances were offset by a $1.5 million increase in depreciation that
resulted from acceleration of depreciation on our plasticizers facility as a result of BASF
terminating our Plasticizers Production Agreement effective December 31, 2010.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $7.4 million during the first nine
months of 2010, a 27% decrease from the $10.1 million of selling, general and administrative
expenses we incurred during the first nine months of 2009. This decrease was primarily due to a
$1.9 million decrease in legal fees and a $0.8 million decrease in engineering costs for strategic
initiatives in the first nine months of 2010 compared to the same period in 2009.
17
Impairment of long-lived assets
We recorded $0.3 million for the impairment of long-lived assets during the first nine months
of 2010 and had no impairments during the first nine months of 2009. In accordance with our
policies, the impairment charge of $0.3 million was recorded to reduce the carrying value of one of
our turbo generator units, which we have classified as a spare, to its net realizable value of $0.4
million in the first quarter of 2010.
Interest and debt related expenses
We recorded $10.3 million of interest and debt related expenses during the first nine months
of 2010, a 14% decrease from the $12.0 million of interest and debt related expenses we incurred
during the first nine months of 2009. This decrease was primarily due to our purchase of $27.0
million in aggregate principal amount of our Secured Notes over the period from November 2009
through February 2010.
Interest income
We recorded $0.2 million of interest income during the first nine months of 2010 and $0.7
million in the first nine months of 2009. This decrease in interest income was primarily due to
lower interest rates for our cash investments and a lower cash balance in the first nine months of
2010 compared to the same period in 2009.
Other income
Our other income was $0.3 million during the first nine months of 2010 and $2.9 million during
the first nine months of 2009. This decrease in other income was primarily due to the receipt of a
previously disputed $1.1 million contractual payment during the second quarter of 2009 and the
reimbursement of $1.5 million of legal fees during the first nine months of 2009.
Benefit for income taxes
For the nine-month period ended September 30, 2010, we recorded net tax expense of zero for
income taxes from continuing operations compared to a net tax benefit of $2.5 million for income
taxes from continuing operations for the nine-month period ended September 30, 2009. Based on our
net operating loss position and projections for the year, we expect any tax expense or benefit
during 2010 to be fully offset by a related change in our valuation allowance, resulting in an
effective tax rate of zero. The net tax benefit during the nine-month period ended September 30,
2009 was generated as a result of utilizing income in our discontinued operations to recognize a
portion of the benefit from losses generated in our continuing operations. Our continuing
operations effective tax rate was zero for the nine-month period ended September 30, 2010 compared
to an effective tax rate of 26.9% for the nine-month period ended September 30, 2009.
Income from discontinued operations, net of tax
Our
income from discontinued operations, net of tax, was $9.1 million during the first
nine months of 2010, a 69% increase compared to the $5.4 million
in income from discontinued operations, net of tax, we recorded
during the first nine months of 2009. This increase was primarily
due to our recording $2.9 million of
income tax expense during the first nine months of 2009, whereas we had no income tax expense in
the first nine months of 2010.
Liquidity and Capital Resources
General
Our working capital was $101.0 million as of September 30, 2010, an increase of $3.2 million
from our working capital of $97.8 million as of December 31, 2009. This increase was primarily due
to an $18.6 million increase in our accrual for profit sharing, a $3.6 million decrease in our
accrual for deferred revenue, the receipt of three fixed quarterly payments from BASF and
reclassification of $1.5 million from short-term pension liability to long-term pension liability.
Partially offsetting this increase was $9.5 million in accrued interest, the purchase of $2.0
million in aggregate principal amount of our Secured Notes for $1.9 million, a $2.7 million
decrease in prepaid insurance, a $2.4 million accrual for variable compensation, $5.4 million in
net benefit payments, capital expenditures of $0.9 million and a property tax accrual of $0.9
million.
18
Our liquidity was $124.4 million as of September 30, 2010, a decrease of $3.4 million from our
liquidity of $127.8 million as of December 31, 2009. This decrease was primarily due to 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 currently invest our cash in money market funds and certificates of deposit. However, we
may invest our 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 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. 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.
19
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 initially had a one year term. 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. Since its inception, our LC
Facility has been and continues to be secured by $5.0 million in cash under an Assignment of
Deposit Account Agreement between us and Chase. On September 20, 2010, we amended our LC facility
to extend the initial term to April 30, 2011, and concurrently therewith entered into a Security
Agreement and a Pledge Agreement with Chase, pursuant to which we granted Chase first priority
liens on all of our accounts receivable, inventory and other specified assets to secure our
obligations under our LC Facility. As of September 30, 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 provided by operations was $3.3 million during the first
nine months of 2010, a 44%
decrease from the $5.9 million in net cash provided by operations we recorded during the first nine
months of 2009. This decrease in net cash provided by operations was primarily due to higher
acetic acid profit sharing payments in 2009 compared to 2010, due to a higher percentage true-up
payment in 2009 under the previous version of our Acetic Acid Production Agreement, offset by
higher net income in 2010 compared to 2009. Net cash used in
investing activities was $0.8 million
during the first nine months of 2010, a 92% decrease from the $8.6 million net cash used in
investing activities we recorded during the first nine months of 2009. This decrease in net cash
used in investing activities was primarily due to higher capital expenditures in 2009 of $4.4
million for acetic acid related projects and $1.8 million for a process wastewater treatment
system. Net cash used in financing activities was $1.9 million during the first nine months of
2010 and zero during the first nine months of 2009. This increase in net cash flow used in
financing activities was primarily due to our purchase of $2.0 million in aggregate principal
amount of our 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
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
20
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 September 30,
2010. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of September 30, 2010.
Although we identified a control deficiency in the fourth quarter of 2009 that represented a
material weakness in our internal controls over financial reporting, we believe this control
deficiency was remediated as of June 30, 2010.
The material weakness 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. We implemented new controls and
strengthened our control documentation regarding non-routine transactions during the first quarter
of 2010, and we now require all 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, the effectiveness of
these controls could not be tested until the second quarter of 2010, when a non-routine transaction
occurred. The tests of our controls over non-routine transactions indicated that those controls
are operating effectively.
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 Controls over Financial Reporting. There have been no changes in our
internal controls over financial reporting for the quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.
21
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.
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description of Exhibit |
*3.1
|
|
—
|
|
Amendment to Line Letter dated as of September 10, 2010 between Sterling
Chemicals, Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
*3.2
|
|
—
|
|
Security Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
*3.3
|
|
—
|
|
Pledge Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
+*10.1
|
|
—
|
|
Fifth Amended and Restated Severance Pay Plan. |
|
|
|
|
|
+*10.2
|
|
—
|
|
Sterling Chemicals, Inc. Savings and Investment Plan. |
| |
*15.1
|
|
—
|
|
Letter of Grant Thornton LLP regarding unaudited interim financial information. |
|
|
|
|
|
*31.1
|
|
—
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
|
|
*31.2
|
|
—
|
|
Rule 13a-14(a) Certification of the Principal Financial Officer. |
|
|
|
|
|
*32.1
|
|
—
|
|
Section 1350 Certification of the Chief Executive Officer. |
|
|
|
|
|
*32.2
|
|
—
|
|
Section 1350 Certification of the Principal Financial Officer. |
|
|
|
| + |
|
Management contracts or compensatory plans or arrangements |
| |
| * |
|
Filed or furnished herewith |
22
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.
| |
|
|
|
|
| |
STERLING CHEMICALS, INC.
(Registrant)
|
|
| Date: November 9, 2010 |
By /s/ JOHN V. GENOVA
|
|
| |
John V. Genova |
|
| |
President and Chief Executive Officer |
|
| |
| |
|
|
|
|
| |
|
|
| Date: November 9, 2010 |
By /s/ DAVID J. COLLINS
|
|
| |
David J. Collins |
|
| |
Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
| |
23
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description of Exhibit |
*3.1
|
|
—
|
|
Amendment to Line Letter dated as of September 10, 2010 between Sterling
Chemicals, Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
*3.2
|
|
—
|
|
Security Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
*3.3
|
|
—
|
|
Pledge Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A. |
|
|
|
|
|
+*10.1
|
|
—
|
|
Fifth Amended and Restated Severance Pay Plan. |
|
|
|
|
|
+*10.2
|
|
—
|
|
Sterling Chemicals, Inc. Savings and Investment Plan. |
|
|
|
|
|
*15.1
|
|
—
|
|
Letter of Grant Thornton LLP regarding unaudited interim financial information. |
|
|
|
|
|
*31.1
|
|
—
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
|
|
*31.2
|
|
—
|
|
Rule 13a-14(a) Certification of the Principal Financial Officer. |
|
|
|
|
|
*32.1
|
|
—
|
|
Section 1350 Certification of the Chief Executive Officer. |
|
|
|
|
|
*32.2
|
|
—
|
|
Section 1350 Certification of the Principal Financial Officer. |
|
|
|
| + |
|
Management contracts or compensatory plans or arrangements |
| |
| * |
|
Filed or furnished herewith |
24