FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-10059
STERLING CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0185186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number
1200 Smith Street, Suite 1900, Houston, Texas 77002-4312
(Address of Principal Executive Offices) (Zip Code)
(713) 650-3700
(Registrant's telephone number, 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 /x/ No / /
As of January 31, 1994, the number of shares of common stock
outstanding was 55,586,737.
<PAGE>
Part I. - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
---------------------
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
(Unaudited)
December 31, September 30,
1993 1993
------------ -------------
<C> <C>
<S>
ASSETS
------
Current assets:
Cash and cash equivalents $ 68 $ 1,352
Accounts receivable 92,132 74,553
Inventories 54,063 60,328
Prepaid expenses 6,924 4,632
Deferred income taxes 7,171 3,856
-------- --------
Total current assets 160,358 144,721
Property, plant and equipment, net 309,779 314,315
Other assets 77,859 80,669
-------- --------
Total assets $547,996 $539,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 46,644 $ 42,241
Accrued liabilities 41,768 43,513
Current portion of long-term debt 28,373 28,015
-------- --------
Total current liabilities 116,785 113,769
Long-term debt 255,834 256,845
Deferred income taxes 44,640 36,098
Deferred credits and other liabilities 62,162 62,657
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value
150,000 shares authorized,
60,325 shares issued and
55,549 and 55,435 shares
outstanding, respectively 603 603
Additional paid-in capital 33,891 34,708
Retained earnings 102,382 105,871
Pension adjustment (1,297) (1,297)
Accumulated translation adjustment (14,916) (16,184)
Deferred compensation (126) (164)
-------- --------
120,537 123,537
Treasury stock at cost, 4,777
and 4,891 shares, respectively (51,962) (53,201)
-------- --------
Total stockholders' equity 68,575 70,336
-------- --------
Total liabilities and
stockholders' equity $547,996 $539,705
======== ========
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended December 31,
-------------------------------
1993 1992
-------- --------
<C> <C>
<S>
Revenues $130,560 $137,789
Cost of goods sold 127,589 124,664
-------- --------
Gross profit 2,971 13,125
Selling, general and
administrative expenses 5,201 6,198
Interest and debt related
expenses, net of interest
income 5,212 5,636
Other income 2,606 -
-------- --------
Income (loss) before
income taxes (4,836) 1,291
Provision (benefit) for
income taxes (1,347) 1,212
-------- --------
Net income (loss) $ (3,489) $ 79
======== ========
Per share data:
Net income (loss) $ (.06) $ -
======== ========
Dividends declared per share $ - $ .02
======== ========
Weighted average shares
outstanding 55,501 55,094
======== ========
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended December 31,
-------------------------------
1993 1992
-------- --------
<C> <C>
<S>
Cash flows from operating
activities:
Cash received from customers $132,439 $134,384
Miscellaneous cash receipts 1,938 1,341
Cash paid to suppliers and
employees (131,634) (116,461)
Interest paid (4,503) (6,717)
Interest received 7 19
Income taxes paid (88) -
--------- --------
Net cash provided by (used in)
operating activities (1,841) 12,566
Cash flows from investing
activities:
Capital expenditures (2,845) (4,563)
Retirement of fixed assets (145) (718)
Proceeds from joint venture
distribution 700 -
Proceeds from sale of assets 2,606 -
-------- --------
Net cash provided by(used in)
investing activities 316 (5,281)
Cash flows from financing activities:
Net changes in revolving debt 7,119 1,690
Scheduled payments on long-term debt (6,802) (6,082)
Proceeds from sale of common stock - 203
Dividends paid - (1,102)
Other (86) (28)
-------- --------
Net cash provided by (used in)
financing activities 231 (5,319)
Effect of exchange rate on cash 10 (43)
-------- --------
Net increase (decrease) in cash
and cash equivalents (1,284) 1,923
Cash and cash equivalents - beginning
of period 1,352 2,625
-------- --------
Cash and cash equivalents - end of
period $ 68 $ 4,548
======== ========
(continued)
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In Thousands)
(Unaudited)
RECONCILIATION OF NET INCOME (LOSS) TO CASH
- -------------------------------------------
PROVIDED BY (USED IN) OPERATING ACTIVITIES
- -------------------------------------------
Three Months Ended December 31,
1993 1992
-------- --------
<C> <C>
<S>
Net income (loss) $ (3,489) $ 79
Adjustments to reconcile net
income (loss) to cash
provided by (used in)
operating activities:
Depreciation and amortization 10,076 9,441
Loss on retirement of fixed
assets 149 2,026
Gain on sale of assets (2,606) -
Deferred tax expense 3,209 573
Deferred compensation 39 63
Treasury stock issued to ESOP 422 -
Change in:
Accounts receivable (16,865) (21,068)
Inventory 6,313 6,687
Prepaid expenses (2,737) (137)
Other assets (64) (1,198)
Accounts payable 2,808 14,127
Accrued liabilities (2,313) 6,579
Interest payable 180 (1,526)
Taxes payable 464 741
Other liabilities 2,573 (3,821)
-------- --------
Cash provided by (used in)
operating activities $ (1,841) $ 12,566
======== ========
<FN>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<PAGE>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands Except Per Share Data)
1. Basis of Presentation:
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all normal
and recurring adjustments necessary to present fairly the
consolidated financial position of Sterling Chemicals, Inc. and
its subsidiaries (the "Company") as of December 31, 1993 and the
consolidated results of their operations and their cash flows for
the three months ended December 31, 1993 and 1992. The results
of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The
accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes included in the Company's Annual
Report for the fiscal year ended September 30, 1993. The
condensed consolidated financial statements included herein have
been subjected to a review by Coopers & Lybrand, the Company's
independent accountants, whose report is included herein.
2. Details of Inventories:
----------------------
<TABLE>
<CAPTION>
December 31, September 30,
1993 1993
------------ -------------
<C> <C>
<S>
Inventories:
Finished products $20,150 $27,024
Work in process 2,614 2,794
Raw materials 13,489 16,598
------- -------
Inventories at
FIFO cost 36,253 46,416
Inventories under
exchange agreements 6,664 2,684
Stores and supplies 11,146 11,228
------- -------
$54,063 $60,328
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(In Thousands Except Per Share Data)
3. Long-Term Debt:
--------------
Long-term debt consisted of the following:
December 31, September 30,
1993 1993
------------ ------------
<C> <C>
<S>
Revolving credit facilities $ 59,500 $ 53,692
Term loan 39,000 39,563
Subsidiary term facility 126,438 130,900
Subordinated note 44,268 44,268
Project loan 21,711 23,486
-------- --------
Total debt outstanding 290,917 291,909
Less:
Current maturities (28,373) (28,015)
Unamortized debt issue
costs (6,710) (7,049)
-------- --------
Total long-term debt $255,834 $256,845
======== ========
</TABLE>
The Company has a credit agreement with a syndicate of banks
("Credit Agreement"). The Credit Agreement provides for a
revolving credit facility of up to $80,000 ($43,500 outstanding
at December 31, 1993), the availability of which is reduced by
outstanding letters of credit ($7,832 at December 31, 1993),
provides for the outstanding project loan of $21,711 at December
31, 1993 and provides for the outstanding term loan of $39,000 at
December 31, 1993. The Credit Agreement also allows for up to
$20,000 of additional borrowings from other lenders ($10,000
outstanding at December 31, 1993). The revolving credit facility
matures in August 1996, at which time any outstanding principal
and interest are due. The term loan matures in August 1999 and
provides for scheduled quarterly payments and for mandatory
prepayments of certain percentages of the Company's Excess Cash
Flow (as defined in the Credit Agreement). The project loan
provides for monthly principal payments and matures in July 1996.
The average interest rates on the term loan, the revolving credit
line and the $10,000 of additional borrowings at December 31,
1993 and September 30, 1993 were 5.4% and 5.1%, respectively.
The Credit Agreement contains a number of financial and other
covenants which were based upon estimates of the Company's future
financial performance provided by the Company at the time the
Credit Agreement was negotiated in August 1992. Starting in late
calendar year 1992, the styrene market became more depressed than
the Company had anticipated in August 1992, and that market has
not yet returned to the levels initially projected by the
Company. Further, the disruption in the acrylonitrile market
caused by the events in China described under "Results of
Operations - Acrylonitrile" was not foreseen by the Company in
1992. As a result primarily of these events, the Company's
results of operations are significantly lower than it anticipated
when the Credit Agreement was negotiated in 1992. Consequently,
the Company failed to meet several of the financial covenants in
the Credit Agreement at the end of the first quarter of fiscal
1994. Accordingly, the Company obtained a waiver of these
covenants through March 31, 1994. The Company has had
preliminary discussions with its banks regarding an amendment of
the Credit Agreement to modify the financial covenants in a
manner that will allow the Company to remain in compliance after
March 31, 1994. Based on those discussions, the Company believes
that the Credit Agreement will be amended before March 31, 1994.
The Company believes the amended Credit Agreement will allow
greater flexibility during this current cyclical commodity
chemical trough. Should the Company not be able to amend the
Credit Agreement prior to April 1, 1994, an event of default may
occur which would allow the lending banks to exercise their
remedies, including accelerating the maturity of the indebtedness
under the Credit Agreement.
The acquisition of the pulp chemicals business ("Sterling
Canada") during the fourth quarter of fiscal 1992 was financed
through additional debt, and in connection therewith, the Company
obtained a separate stand-alone credit facility for Sterling
Canada, which also issued an unsecured $44,268 subordinated note
to the seller. The Sterling Canada credit facility includes a
term loan to Sterling Canada ($126,438 outstanding at December
31, 1993), and an additional Cdn. $20,000 denominated revolving
credit line ($6,000 outstanding at December 31, 1993), the
availability of which is reduced by outstanding letters of credit
($1,430 at December 31, 1993). The Sterling Canada term loan,
which matures in August 1999, provides for scheduled quarterly
payments and additionally provides for mandatory prepayments of
certain percentages of the Excess Cash Flow (as defined in the
Sterling Canada Credit Facility) of Sterling Canada and its
subsidiaries.
<PAGE>
[CAPTION]
STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(In Thousands Except Per Share Data)
[TEXT]
The Sterling Canada revolving credit line expires in August 1997,
at which time any outstanding principal and interest are due.
The interest rates on the term loan and revolving credit line at
December 31, 1993 and September 30, 1993 were 5.8% and 5.7%,
respectively. The unsecured $44,268 subordinated note matures in
December 1999 and provides for mandatory prepayments of a certain
percentage of Sterling Canada's Excess Cash Flow (as defined in
the credit facility). The interest rates on the subordinated
note at December 31, 1993 and September 30, 1993 were 6.9% and
6.7%, respectively.
4. Income Taxes:
------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), effective October 1, 1993. Under SFAS 109,
deferred income taxes are provided for temporary differences in
recognition of income and expenses for tax and financial
reporting purposes. The temporary differences which give rise to
significant portions of the Company's deferred tax assets and
liabilities are the excess of tax depreciation, amortization and
pension expenses over such book expenses. The adoption of this
statement did not have an effect on the Company's results of
operations. Upon adoption of SFAS 109, the Company's current
deferred tax asset and deferred tax liability increased $1,609.
The provision for income taxes was computed using effective tax
rates of 27.9% and 15.2% for the three month periods ended
December 31, 1993 and 1992, respectively. The effective tax rate
during the first quarter of fiscal 1993 was affected by the
accrual of the earned surplus portion of the Texas Franchise Tax
in addition to an adjustment for certain foreign taxes payable.
5. Commitments and Contingencies:
-----------------------------
Federal Income Taxes
- --------------------
During 1991, the Internal Revenue Service ("IRS") completed its
examination of the Company's federal income tax returns for
fiscal years 1987, 1988, 1989 and 1990. The IRS issued a notice
of deficiency in June 1992 with respect to fiscal year 1987, in
which it proposed various adjustments, resulting in a tax
deficiency of $16,570, plus interest. The Company filed a
petition for redetermination of this deficiency with the United
States Tax Court. The IRS also has issued notices of proposed
deficiency with respect to fiscal years 1988, 1989 and 1990,
proposing primarily the same adjustments as for fiscal year 1987,
with a proposed tax deficiency for the three-year period of
$19,378, plus interest. The Company filed protests with the IRS
contesting these proposed adjustments.
In October 1993, the Company and the IRS agreed upon a basis for
settlement of the adjustments proposed for fiscal years 1987
through 1990. This settlement will result in a tax refund of
$3,407 plus interest. Resulting adjustments to its fiscal year
1991 and 1992 federal income returns will result in additional
taxes owed of approximately $1,525 plus interest. In addition,
the Company's deferred tax liability for future years will
increase by approximately $3,965. During fiscal year 1992, the
Company accrued $2,000 in anticipation of this settlement;
therefore, the net effect of these adjustments resulted in an
additional $83 in tax expense during the first quarter of fiscal
1994.
Legal Proceedings
- -----------------
In January 1993, Hoeschst Celanese Corporation ("HCC") filed suit
against BP Chemicals Limited ("BP") and the Company alleging
patent infringement in connection with the use of an ion exchange
resin in a guard bed installed in the Company's acetic acid
production facility in Texas City. The suit sought unspecified
damages and issuance of an injunction against BP and the Company
to enjoin further infringement. The trial commenced on January
10, 1994 and on January 19, 1994, the jury rendered its verdict
that BP and the Company had willfully infringed HCC's patent and
were liable to HCC for a reasonable royalty of .6 cents per pound
($.006/lb) for the acetic acid produced by the Company during the
infringing period (approximately $5,600). On January 21, 1994,
an interim judgement was entered on the jury verdict. Post-trial
motions are pending and it is anticipated that a final judgement
will be entered in March 1994 in which the court could also
assess additional damages and attorney's fees. Under the terms
of the Lease and Production Agreement between the Company and BP
Chemicals, Inc. ("BPC"), a U.S. subsidiary of British Petroleum
Company plc, BPC has undertaken the defense of the Company and
will indemnify the Company against all damages incurred as a
result of the suit. In the event the final judgement is adverse,
BPC and the Company intend to pursue all available appeal
possibilities. Regardless of the final outcome, the Company does
not anticipate final resolution of this matter to have a material
impact on the Company's financial position or results of
operations. In addition, future operations of the acetic acid
production facility are not expected to be materially impacted by
the final resolution of this matter.
Environmental Regulations
- -------------------------
The Company's Texas City plant and Canadian operations are
subject to extensive federal, state, provincial and local
environmental regulations. The Company may incur significant
expenditures in order to comply with environmental regulations.
<PAGE>
Report of Independent Accountants'
Review of Interim Financial Information
To the Board of Directors and Stockholders
Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated balance
sheet of Sterling Chemicals, Inc. as of December 31, 1993 and the
condensed consolidated statement of operations and the condensed
consolidated statement of cash flows for the three month periods
ended December 31, 1993 and 1992. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. 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 generally accepted auditing
standards, 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 review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of
September 30, 1993, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report
dated November 19, 1993, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of September 30, 1993 is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
As more fully discussed in Note 4 to the condensed consolidated
financial statements, effective October 1, 1993 the Company
changed its method of accounting for income taxes.
COOPERS & LYBRAND
Houston, Texas
January 21, 1994
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the first quarter of fiscal 1994 were $130.6 million
compared to revenues of $137.8 million for the first quarter of
fiscal 1993, a decrease of 5%. The Company incurred a net loss
of $3.5 million ($.06 per share) for the first quarter of fiscal
1994 compared to net income of $.1 million for the same period a
year ago. For the first quarter of fiscal 1994, the Company's
revenues from its petrochemical operations decreased from $107.2
million to $104.7 million when compared to the first quarter of
fiscal 1993. Improved revenues from increased styrene sales
quantities were more than offset by a reduction in export
acrylonitrile sales margins and volumes.
Pulp chemicals revenues for the first quarter of fiscal 1994
decreased from $30.6 million to $25.8 million compared to the
first quarter of fiscal 1993. This decrease was a result of
somewhat lower sodium chlorate sales volumes and margins due to
the continuing sodium chlorate oversupply situation and flat
demand due to the sluggish pulp and paper market. Pulp
chemicals' income for the first quarter of fiscal 1994 was
enhanced by a one-time gain from the termination of a power
supply contract related to the sale of a hydroelectric plant
owned by a third-party, which provided a portion of the power
requirements to the Buckingham, Quebec plant. This one-time gain
improved pre-tax income by $2.6 million during the first quarter
of fiscal 1994. Although the rates paid by the Company under
this contract were generally favorable, the Company does not
anticipate the termination of this contract will materially
increase its electricity costs in the future.
STYRENE: Styrene revenues in the first quarter of fiscal 1994
increased over 80% to $46 million from $25 million during the
first quarter of fiscal 1993. This increase was primarily due to
a 33% increase in sales volume in addition to a dramatic increase
in direct sales versus conversion sales during the period. The
change in styrene's sales pattern was caused by the expiration of
the Company's conversion agreement with Novacor Chemicals Inc.
("Novacor") near the end of fiscal 1993. The increase in
aggregate sales volumes was also due to the Company not
experiencing the significant production loss it incurred during
the first quarter of fiscal 1993 as a result of an extensive
scheduled maintenance shutdown. The Company's styrene unit
operated at almost 85% of its rated capacity for the first three
months of fiscal 1994 compared to approximately 50% during the
first three months of fiscal 1993.
Styrene's performance improved during the first quarter of fiscal
1994 compared to the same period a year ago due to the higher
production rates. However, this improved operating performance
was partially offset by lower margins due to the change in sales
pattern mentioned above. The expired conversion contract with
Novacor, which called for the delivery of approximately one-third
of the Company's annual styrene capacity, provided for full cost
recovery and a small margin. The Company has been successful in
replacing substantially all of the lost volumes under the expired
conversion contract through a number of various domestic and
export contract arrangements, in addition to spot sales. But, as
sales margins continue to be under pressure due to worldwide
overcapacity, some of these sales did not provide full cost
recovery resulting in overall lower margins than when the Novacor
conversion contract was in effect. Styrene's performance during
the first quarter of fiscal 1994 also benefited somewhat by an 8%
decrease in each of its two major raw materials, benzene and
ethylene, from the corresponding quarter of fiscal 1993.
While no immediate sustainable significant improvement is
expected in styrene's global supply/demand balance in the next
few years, the Company believes that the continuing growth in
styrene demand can ultimately absorb the current overcapacity of
the styrene industry.
ACRYLONITRILE: Acrylonitrile revenues in the first quarter of
fiscal 1994 decreased approximately 45% compared to the first
quarter of fiscal 1993. Sales volumes decreased 37% while export
sales prices decreased 25% during this period. Acrylonitrile's
performance was also negatively affected by a scheduled four week
maintenance shutdown, along with a reduction in acrylonitrile
demand, in October 1993 which resulted in lower operating margins
due to lower production rates. This scheduled shutdown, along
with a reduction in acrylonitrile demand, reduced acrylonitrile
production to approximately 60% of its rated capacity during the
first quarter of fiscal 1994 compared to almost 95% of its rated
capacity during the same period a year ago.
Acrylonitrile's performance continued to be negatively affected
by weakness in the demand from export customers, particularly
those supplying acrylic fiber to the People's Republic of China.
In recent years the acrylic fiber market, the largest market for
acrylonitrile, has been subject to volatility due to the
relatively unstable nature of the Chinese market. The Company
began to see some improvement in acrylonitrile demand toward the
end of the first quarter of fiscal 1994, and anticipates this
improvement will continue through the second quarter of fiscal
1994. The price of propylene, a major raw material, decreased
13% in the first quarter of fiscal 1994 compared to the same
period of fiscal 1993.
ACETIC ACID: Acetic acid revenues for the first quarter of
fiscal 1994 decreased 5% when compared to the corresponding
period in fiscal 1993. The acetic acid unit operated at
approximately 75% of its rated capacity during the first three
months of fiscal 1994 compared to 100% during the first quarter
of fiscal 1993. The decrease in revenues and production volumes
was due to lower demand from the Company's sole acetic acid
customer, BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of
British Petroleum Company plc. BPC requested that the Company
produce less acetic acid during the first quarter of fiscal 1994
for inventory control purposes. The Company anticipates improved
operating rates during the second quarter of fiscal 1994.
PULP CHEMICALS OPERATIONS: The pulp chemicals operations made a
positive contribution during the first quarter of fiscal 1994
despite lower sales volumes and margins due to sodium chlorate's
continuing oversupply situation and flat demand due to the
sluggish pulp and paper market. The lower sales volumes and
margins were offset by a one-time gain on the termination of the
power supply contract (mentioned above) which improved pulp
chemicals' performance by $2.6 million (before tax). The sodium
chlorate plants operated at approximately 70% of their rated
capacity during the first quarter of fiscal 1994 compared to 80%
for the same period a year ago. While the operating performance
of the pulp chemicals business during the first quarter of fiscal
1994 was down somewhat from a year ago, the Company anticipates
its performance to improve in subsequent quarters as a result of
recent sodium chlorate contracts for additional volumes that were
negotiated and entered into with new and existing customers
during the first quarter of fiscal 1994.
OTHER PRODUCTS: Performance of the Company's other products
remained consistent during the first quarter of fiscal 1994
compared to the first quarter of fiscal 1993. Revenues during
the first quarter of fiscal 1994 from plasticizers, lactic acid,
tertiary butylamine and sodium cyanide increased approximately 5%
compared to the corresponding period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $43.6 million at December 31, 1994
from $31.0 million at September 30, 1993. Net cash used in
operations was $ 1.8 million during the first quarter of fiscal
1994 compared to $12.6 million net cash provided by operations for the
corresponding period in fiscal 1993. The increase in working
capital was primarily attributable to a $17.8 million increase in
accounts receivable which also negatively affected cash provided
by operations. This increase in accounts receivable was due to
greater acrylonitrile sales toward the end of the first quarter
of fiscal 1994 compared to the fourth quarter of fiscal 1993
along with the recognition of the agreed to income tax settlement
(as discussed in Note 5 of "Notes to Condensed Consolidated
Financial Statements"). The recognition of the agreed to income
tax settlement also had the effect of increasing deferred income
taxes. Current deferred income taxes were also increased, with a
corresponding increase in deferred income taxes, due to the
Company's adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective
October 1, 1993. The adoption of SFAS 109 had no impact on the
results of operations.
The Company has a credit agreement with a syndicate of banks
("Credit Agreement"). The Credit Agreement provides for a
revolving credit facility of up to $80 million ($43.5 million
outstanding at December 31, 1993), the availability of which is
reduced by outstanding letters of credit ($7.8 million at
December 31, 1993), provides for the outstanding project loan of
$21.7 million at December 31, 1993 and provides for the
outstanding term loan of $39 million at December 31, 1993. The
Credit Agreement also allows for up to $20 million of additional
borrowings from other lenders ($10 million outstanding at
December 31, 1993). The revolving credit facility matures in
August 1996, at which time any outstanding principal and interest
are due. The term loan matures in August 1999 and provides for
scheduled quarterly payments and for mandatory prepayments of
certain percentages of the Company's Excess Cash Flow (as defined
in the Credit Agreement). The project loan provides for monthly
principal payments and matures in July 1996. The average
interest rates on the term loan, the revolving credit line and
the $10 million of additional borrowings at December 31, 1993 and
September 30, 1993 were 5.4% and 5.1%, respectively.
The Credit Agreement contains a number of financial and other
covenants which were based upon estimates of the Company's future
financial performance provided by the Company at the time the
Credit Agreement was negotiated in August 1992. Starting in late
calendar year 1992, the styrene market became more depressed than
the Company had anticipated in August 1992, and that market has
not yet returned to the levels initially projected by the
Company. Further, the disruption in the acrylonitrile market
caused by the events in China described under "Results of
Operations - Acrylonitrile" was not foreseen by the Company in
1992. As a result primarily of these events, the Company's
results of operations are significantly lower than it anticipated
when the Credit Agreement was negotiated in 1992. Consequently,
the Company failed to meet several of the financial covenants in
the Credit Agreement at the end of the first quarter of fiscal
1994. Accordingly, the Company obtained a waiver of these
covenants through March 31, 1994. The Company has had
preliminary discussions with its banks regarding an amendment of
the Credit Agreement to modify the financial covenants in a
manner that will allow the Company to remain in compliance after
March 31, 1994. Based on those discussions, the Company believes
that the Credit Agreement will be amended before March 31, 1994.
The Company believes the amended Credit Agreement will allow
greater financial flexibility during the current cyclical
commodity chemical trough. Should the Company not be able to
amend the Credit Agreement prior to April 1, 1994, an event of
default may occur which would allow the lending banks to exercise
their remedies, including accelerating the maturity of the
indebtedness under the Credit Agreement.
The Company's acquisition of the pulp chemicals business
("Sterling Canada") during the fourth quarter of fiscal 1992 was
financed through additional debt, and in connection therewith,
the Company obtained a separate stand-alone credit facility for
Sterling Canada, which also issued an unsecured $44.3 million
subordinated note to the seller. The Sterling Canada credit
facility includes a term loan to Sterling Canada ($126.4 million
outstanding at December 31, 1993), and an additional Cdn. $20
million revolving credit line ($6 million outstanding at December
31, 1993), the availability of which is reduced by outstanding
letters of credit ($1.4 million at December 31, 1993). The
Sterling Canada term loan, which matures in August 1999, provides
for scheduled quarterly payments and additionally provides for
mandatory prepayments of certain percentages of the Excess Cash
Flow (as defined in the Sterling Canada Credit Facility) of
Sterling Canada and its subsidiaries.
The Sterling Canada revolving credit line expires in August 1997,
at which time any outstanding principal and interest are due.
The interest rates on the term loan and revolving credit line at
December 31, 1993 and September 30, 1993 were 5.8% and 5.7%,
respectively. The unsecured $44.3 million subordinated note
matures in December 1999 and provides for mandatory prepayments
of a certain percentage of Sterling Canada's Excess Cash Flow (as
defined in the credit facility). The interest rates on the
subordinated note at December 31, 1993 and September 30, 1993
were 6.9% and 6.7%, respectively.
Capital expenditures for the first quarter of fiscal 1994 were
$2.8 million and are expected to approach $17 million for fiscal
1994, approximately $5 million of which will be used for pulp
chemicals operations. The Company anticipates $8 million of
these expenditures will be for environmental and safety matters,
while the majority of the remainder will be for a part of the
Company's contribution to a planned acetic acid expansion. In
the future, the Company may incur additional significant
expenditures in order to comply with environmental regulations.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
In January 1993, Hoeschst Celanese Corporation ("HCC") filed suit
against BP Chemicals Limited ("BP") and the Company alleging
patent infringement in connection with the use of an ion exchange
resin in a guard bed installed in the Company's acetic acid
production facility in Texas City. The suit sought unspecified
damages and issuance of an injunction against BP and the Company
to enjoin further infringement. The trial commenced on January
10, 1994 and on January 19, 1994, the jury rendered its verdict
that BP and the Company had willfully infringed HCC's patent and
were liable to HCC for a reasonable royalty of .6 cents per pound
($.006/lb) for the acetic acid produced by the Company during the
infringing period (approximately $5.6 million). On January 21,
1994, an interim judgement was entered on the jury verdict.
Post-trial motions are pending and it is anticipated that a final
judgement will be entered in March 1994 in which the court could
also assess additional damages and attorney's fees. Under the
terms of the Lease and Production Agreement between the Company
and BP Chemicals, Inc. ("BPC"), a U.S. subsidiary of British
Petroleum Company plc, BPC has undertaken the defense of the
Company and will indemnify the Company against all damages
incurred as a result of the suit. In the event the final
judgement is adverse, BPC and the Company intend to pursue all
available appeal possibilities. Regardless of the final outcome,
the Company does not anticipate final resolution of this matter
to have a material impact on the Company's financial position or
results of operations. In addition, future operations of the
acetic acid production facility are not expected to be materially
impacted by the final resolution of this matter.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of security holders
during the three months ended December 31, 1993, however, the
Annual Meeting of Stockholders was held January 26, 1994, at
which time the Company's nominees for directors were elected.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: No reports on Form 8-K were
filed during the three months ended December 31,
1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STERLING CHEMICALS, INC.
(Registrant)
Date: February 11, 1994 __________________________________
J. Virgil Waggoner
President and Chief Executive
Officer (Principal Executive
Officer)
Date: February 11, 1994 __________________________________
J. David Heaney
Vice President-Finance and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
