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 March 31, 1995
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 April 25, 1995, the number of shares of common stock
outstanding was 55,673,991.
Page 1 of 25
Part I. - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 117 $ 2,013
Accounts receivable 174,015 127,705
Inventories 56,789 69,758
Prepaid expenses 4,048 2,700
Deferred income taxes 6,437 9,332
-------- --------
Total current assets 241,406 211,508
Property, plant and equipment, net 285,574 291,126
Other assets 68,532 72,456
-------- --------
Total assets $595,512 $575,090
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,199 $ 76,857
Accrued liabilities 72,398 80,071
Current portion of long-term debt 31,606 33,771
------- -------
Total current liabilities 172,203 190,699
Long-term debt 151,447 186,786
Deferred income taxes 39,833 38,837
Deferred credits and other liabilities 68,763 69,034
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 150,000
shares authorized, 60,327 and 60,325
shares issued and 55,674 and 55,660
shares outstanding, respectively 603 603
Additional paid-in capital 33,269 33,232
Retained earnings 203,340 125,003
Pension adjustment (950) (950)
Accumulated translation adjustment (22,193) (17,322)
Deferred compensation (189) (68)
-------- --------
213,880 140,498
Treasury stock at cost, 4,653
and 4,667 shares, respectively (50,614) (50,764)
-------- --------
Total stockholders' equity 163,266 89,734
-------- --------
Total liabilities and
stockholders' equity $595,512 $575,090
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $303,954 $154,754 $544,576 $285,313
Cost of goods sold 210,424 139,948 402,690 267,537
-------- -------- -------- --------
Gross profit 93,530 14,806 141,886 17,776
Selling, general
and administrative
expenses 7,740 6,996 16,480 12,197
Interest and debt related
expenses, net of
interest income 4,183 5,394 9,715 10,605
Other income - - - 2,606
-------- -------- -------- --------
Income before
income taxes 81,607 2,416 115,691 (2,420)
Provision (benefit)
for income taxes 25,530 587 37,354 (760)
-------- -------- -------- --------
Net income (loss) $56,077 $ 1,829 $78,337 $(1,660)
======== ======== ======== ========
Per share data:
Net income (loss) $ 1.01 $ 0.03 $ 1.41 $ (0.03)
======== ======== ======== ========
Weighted average
shares outstanding 55,674 55,605 55,674 55,170
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $533,496 $281,936
Miscellaneous cash receipts 9,682 7,084
Cash paid to suppliers and
employees (451,726) (280,901)
Interest paid (9,649) (9,310)
Interest received 2,188 12
Income taxes paid (31,458) (815)
-------- --------
Net cash provided by (used in)
operating activities 52,533 (1,994)
Cash flows from investing activities:
Capital expenditures (15,774) (4,124)
Proceeds from sale of assets - 2,606
-------- --------
Net cash used in investing activities (15,774) (1,518)
Cash flows from financing activities:
Net change in revolving debt (18,678) 15,981
Payments on other long-term debt (19,896) (13,829)
Other (50) 106
-------- --------
Net cash provided by (used in)
financing activities (38,624) 2,258
Effect of exchange rate on cash (31) 10
-------- --------
Net decrease in cash
and cash equivalents (1,896) (1,244)
Cash and cash equivalents -
beginning of period 2,013 1,352
-------- --------
Cash and cash equivalents -
end of period $ 117 $ 108
======== ========
</TABLE>
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
<TABLE>
<CAPTION>
Six Months Ended March 31,
1995 1994
<S> <C> <C>
Net income (loss) $78,337 $(1,660)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in)operating activities:
Depreciation and amortization 20,769 20,161
Loss(gain) on disposal of assets 103 (2,398)
Deferred tax expense 3,374 5,373
Accrued compensation 571 2,620
Treasury stock issued to ESOP - 823
Change in:
Accounts receivable (47,095) (37,946)
Inventories 12,754 1,152
Prepaid expenses (1,382) 385
Other assets (1,187) (1,627)
Accounts payable (7,301) 11,055
Accrued liabilities (8,802) (4,917)
Interest payable (2,591) 209
Taxes payable 3,098 833
Other liabilities 1,885 3,943
-------- --------
Net cash provided by (used in)
operating activities $52,533 $(1,994)
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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 reflect all adjustments necessary
to present fairly the consolidated financial position of Sterling
Chemicals, Inc. and its subsidiaries (the "Company") as of March
31, 1995 and the consolidated results of their operations for the
three and six month periods ended March 31, 1995 and 1994 and
consolidated cash flows for the six months ended March 31, 1995 and
1994, and all such adjustments are of a normal and recurring
nature. 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, and are assumed to have been, read
in conjunction with the consolidated financial statements and notes
included in the Company's Annual Report for the fiscal year ended
September 30, 1994. The condensed consolidated financial
statements included herein have been subjected to a review by
Coopers & Lybrand L.L.P., the Company's independent accountants,
whose report is included herein.
2. Reclassification
Certain amounts reported in the financial statements for the prior
periods have been reclassified to conform with the current
financial statement presentation with no effect on net income
(loss) or stockholders' equity.
3. Inventories:
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
<S> <C> <C>
Inventories:
Finished products $39,821 $49,189
Raw materials 16,248 21,761
------- -------
Inventories at FIFO cost 56,069 70,950
Inventories under
exchange agreements (10,467) (12,350)
Stores and supplies 11,187 11,158
------- -------
$56,789 $69,758
======= =======
</TABLE>
4. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
<S> <C> <C>
Revolving credit facilities $ 14,262 $ 32,940
Term loan 16,250 20,000
Project loan 11,522 16,134
Subsidiary term loan (pulp chemicals) 101,794 113,050
Subordinated note (pulp chemicals) 43,990 44,268
-------- --------
Total debt outstanding $187,818 $226,392
Less:
Current maturities 31,606 33,771
Unamortized debt issue costs 4,765 5,835
-------- --------
Total long-term debt $151,447 $186,786
======== ========
</TABLE>
On April 13, 1995, the Company, with a group of 14 commercial
banks, with Texas Commerce Bank N.A. as agent, closed a new
$275,000 bank financing that was used to refinance the Company's
existing debt except for the revolving debt associated with
Sterling Pulp (approximately $3,000). The seven-year credit
agreement ("Credit Agreement") provides for a revolving credit
facility of $150,000 ("Revolver") and a term loan of $125,000
("Term Loan"). The Credit Agreement will reduce the Company's
future interest costs and provide additional financial flexibility
and debt capacity. In a separate agreement, the Company has
arranged a Cdn. $20,000 revolving credit facility with the Bank of
Nova Scotia ("Canadian Revolver") for Sterling Pulp Chemicals, Ltd.
("Sterling Pulp"). The Canadian Revolver was utilized to refinance
the revolving debt associated with Sterling Pulp.
The new bank financing lowers the Company's overall interest cost.
The Revolver and the Term Loan bear interest at the Base Rate or,
at the Company's option, the Eurodollar rate, plus, in either case,
the applicable Margin Percentage. The Base Rate is equal to the
lesser of the prime rate as announced from time to time by the
agent bank, or the Federal Funds Rate plus 1/2%. The Margin
Percentage is adjustable quarterly and can range from 0.65% to
1.25%. Subsequent to the closing of the Credit Agreement, The
Company entered into an interest rate swap, equivalent in amount
and term to the Term Loan. The swap effectively replaces the
variable rate on the Term Loan with a fixed interest rate of
approximately 7% per annum.
In connection with the refinancing, the Company incurred fees of
approximately $3,000. The unamortized debt issue costs at March
31, 1995 will be expensed in the third quarter of fiscal 1995
resulting in an extraordinary loss from early extinguishment of
debt of approximately $3,100, net of tax.
All of the Company's existing debt was paid in full upon the
closing of the Credit Agreement, except for the revolving debt
associated with Sterling Pulp (approximately $3,000) which was
refinanced by the Canadian Revolver. The Term Loan was drawn in
full at closing and the Revolver was utilized for the remainder of
the funds needed to retire the prior debt. The Term Loan requires
equal quarterly installments of $4,464 over the seven year period
beginning July 1, 1995, resulting in a decrease in current
maturities of long-term debt to $13,392 as of the closing date of
the Credit Facility. The Revolver will mature at the end of the
seven year term, and no principal payments on it are required prior
to that time.
The Revolver and the Term Loan are collateralized by substantially
all of the inventory and accounts receivable of the Company and
certain of its subsidiaries, all of the Company's equity interests
in Sterling Canada, Inc. (a wholly-owned subsidiary of the
Company), 65% of the equity of Sterling Pulp and Sterling NRO,
Ltd., and certain contract rights of the Company. Additionally,
certain of the Company's subsidiaries have guaranteed the Revolver
and Term Loan.
The Credit Agreement contains a number of financial and other
covenants which management believes are customary in lending
transactions of this type. The Credit Agreement allows the Company
to redeem, retire or acquire shares of its capital stock and to
make dividend payments, within certain conditions and limitations,
as long as no Default or Event of Default (as defined in the Credit
Agreement) has occurred or is continuing.
5. Commitments and Contingencies
PRODUCT CONTRACTS
The Company has certain long-term agreements which provide for the
dedication of 100% of the Company's production of acetic acid,
plasticizers, tertiary butylamine (TBA) and sodium cyanide, each to
one customer. The Company also has various sales and conversion
agreements which dedicate significant portions of the Company's
production of styrene monomer and acrylonitrile, the Company's
major petrochemical products, to various customers.
ENVIRONMENTAL REGULATIONS
The Company's 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.
LEGAL PROCEEDINGS
Petrochemicals
HUNTSMAN LAWSUIT: On January 30, 1995, the Company filed a lawsuit
against Huntsman Chemical Corporation and certain affiliates
seeking a declaratory judgment in connection with an alleged
agreement arising from discussions, since suspended by the Company,
relating to future capacity rights for a significant portion of
the Company's styrene monomer facility at its Texas City, Texas
plant. Sterling Chemicals, Inc. v. Huntsman Chemical Corporation,
Huntsman Styrene Corporation and Huntsman Corporation; Cause No.
95-005256; In the 61st Judicial District Court of Harris County,
Texas. In the lawsuit, the Company is requesting a judicial
determination that, among other things, there is no enforceable
agreement between the Company and any of the defendants. In
response, the defendants have filed a counterclaim asserting that a
contractual agreement existed, that the Company breached the
alleged agreement, and that as a result the defendants incurred an
unspecified amount of "massive damages".
The Company believes that no enforceable agreement ever existed
between the Company and any of the defendants and that the
litigation will not have a material adverse impact on the financial
position, results of operations or liquidity of the Company. The
Company intends to prosecute its declaratory judgment action and
defend the counterclaim vigorously.
AMMONIA RELEASE: In May 1994, an ammonia release occurred at the
Company's Texas City facility while a reactor in the acrylonitrile
unit was being restarted after a shutdown for routine maintenance.
The Company estimated that approximately three thousand pounds of
ammonia were emitted into the atmosphere.
As of April 26, 1995, approximately nine thousand individuals have
filed claims directly with the Company alleging personal injury
and/or property damage as a result of exposure to the ammonia. The
Company and its insurance carrier are in the process of evaluating
these claims. Approximately two thousand of these claims have been
settled and three thousand have been denied. As of April 26, 1995,
six lawsuits involving approximately two thousand three hundred
plaintiffs have been filed against the Company seeking unspecified
damages for personal injuries and property damage as a result of
the release. Otis Pointer, et al. v. Sterling Chemicals, Inc., et
al.; Cause No. 94-CV-0514; In the 56th Judicial District Court of
Galveston County, Texas. Bobbie J. Adams, et al. v. Sterling
Chemicals, Inc.; Cause No. 94-CV-0764; In the 56th Judicial
District Court of Galveston County, Texas. Courtney Adomond, et
al. v. Sterling Chemicals, Inc.; Cause No. 94-CV-0947; In the
56th Judicial District Court of Galveston County, Texas. Caroll
Allen, et al. v. Sterling Chemicals, Inc.; Cause No. 94-CV-1147;
In the 212th Judicial District court of Galveston County, Texas.
Beverly O. Mitchell, et al. v. Sterling Chemicals, Inc., et al.;
Cause No. 94-CV-1312; In the 212th Judicial District Court of
Galveston County, Texas. Holly Benefiel, et al. v. Sterling
Chemicals, Inc.; Cause No. 95-CV-0246; In the 56th Judicial
District Court of Galveston County, Texas. The Company anticipates
that additional claims and litigation against the Company asserting
similar claims will ensue. The Company believes that its general
liability insurance coverage is sufficient to cover all costs and
expenses. The Company has accrued and reflected in expense in
fiscal 1994 its deductible under this coverage. Accordingly, the
Company believes that final resolution of this matter will not have
a material adverse impact on the financial position, results of
operations or liquidity of the Company.
SMITH LAWSUIT: On April 27, 1994, approximately one thousand two
hundred plaintiffs sued the Company and eighteen other corporate
defendants in the Texas City, Texas area in a lawsuit styled Angela
Smith, et al. v. Amoco Chemical Company, et al.; Cause no. B-0148-
927; In the 60th Judicial District Court of Jefferson County Texas.
The plaintiffs seek an unspecified amount of damages for claimed
personal injury and property damages arising from alleged chemical
releases. Venue has subsequently been transferred to Galveston
County, Texas. Discovery is proceeding and the Company is
vigorously defending this lawsuit.
ALLEN LAWSUIT: On May 9, 1991, a lawsuit styled Moranda Allen, et
al. v. Sterling Chemicals, Inc., et al.; Cause No. 91-019786; In
the 127th Judicial District Court of Harris County, Texas, was
filed against the Company and several other petrochemical companies
operating in the Texas City, Texas area. The plaintiffs in the
lawsuit assert personal injury and property damage claims arising
from alleged chemical releases. The plaintiffs seek an unspecified
amount of damages. Although the court dismissed a number of the
plaintiffs for failure to comply with discovery, over three hundred
plaintiffs remain. The Company is vigorously defending this
lawsuit.
Pulp Chemicals
The Company's primary competitor in the supply of patented
technology for generators which convert sodium chlorate into
chlorine dioxide is Akzo Nobel (formerly Eka Nobel) and its
affiliates. The Company is engaged with Akzo Nobel in numerous
patent disputes throughout the world in which the Company and Akzo
Nobel are challenging certain patents of the other and attempting
to restrict the other's operating range. If either party is
successful in these disputes, the other party may have to make
adjustments and modifications in its commercial operations or
obtain a license from the prevailing party. The Company believes
that any potential costs for such adjustments or modifications
would be immaterial and that the Company is entitled to certain
indemnities from Tenneco Canada with respect to the acquired
technology.
6. Financial Accounting Statement No. 121.
The Financial Accounting Standards Board has issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". The Company is required to
adopt this Statement by fiscal 1997. The Company does not
anticipate the adoption of this Statement to have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
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 March 31, 1995, and the
condensed consolidated statement of operations for the three and
six month periods ended March 31, 1995 and 1994 and the condensed
consolidated statement of cash flows for the six months ended March
31, 1995 and 1994. 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, 1994, 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 11,
1994, 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, 1994 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
Coopers & Lybrand L.L.P.
Houston, Texas
April 26, 1995
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the first six months of fiscal 1995 were $545 million
compared to revenues of $285 million for the first six months of
fiscal 1994, an increase of 91%. Net income for the first six
months of fiscal 1995 was $78.3 million ($1.41 per share) compared
to a net loss of $1.7 million ($0.03 per share) for the first six
months of fiscal 1994.
For the second quarter of fiscal 1995, revenues were $304 million
compared to revenues of $155 million for the second quarter of
fiscal 1994, an increase of 96%. Net income for the second quarter
of fiscal 1995 was $56.1 million or $1.01 per share compared to net
income of $1.8 million or $.03 per share for the second quarter of
fiscal 1994. Strong market conditions for the Company's two major
petrochemical products -- styrene and acrylonitrile -- as well as
sodium chlorate resulted in the second best quarterly results in
the Company's history.
PETROCHEMICALS:
The financial performance of the Company's petrochemical business
improved significantly during the first six months of fiscal 1995
compared to the same period a year ago.
For the first six months of fiscal 1995, the Company's revenues
from its petrochemical business increased 109% to $476 million when
compared to the first six months of fiscal 1994. This increase in
revenues resulted primarily from increased sales prices for styrene
and acrylonitrile as well as higher sales volumes for both
products. Net income from the Company's petrochemical business
increased to $75.1 million for the first six months of fiscal 1995
from a loss of $5.1 million during the same period in fiscal 1994.
The improved earnings resulted primarily from the substantially
higher margins and increased sales volumes for styrene and
acrylonitrile.
STYRENE: Styrene revenues in the first six months of fiscal 1995
increased 150% to $256 million when compared to the same period of
fiscal 1994. Styrene sales prices and margins increased
substantially as a result of improved worldwide demand. Demand for
styrene has improved due to continuing market growth for styrene
and its derivatives based on global economic expansion. Sales
volume increased by more than 20% in the first half of this year
over the same period last year, despite a shutdown for scheduled
maintenance and catalyst replacement in the first quarter of this
year. In the first quarter of fiscal 1994, styrene sales volume was
depressed as the Company was in the process of replacing volumes
previously sold to its largest styrene customer whose contract
expired in August, 1993. In the second quarter of fiscal 1994, the
Company's sales volumes improved substantially over the first
quarter. Margins began increasing in the second quarter of fiscal
1994 and have continued to increase each quarter to their current
level.
The Company's styrene unit operated at approximately 101% of
capacity for the first six months of fiscal 1995 and 111% for the
second fiscal quarter, compared to 90% and 95%, respectively, for
the corresponding periods of fiscal 1994. As noted above, the
styrene unit was shut down during the first quarter of fiscal 1995
for scheduled maintenance and catalyst replacement. If the unit
had not been shut down the operating rate for the first six months
of fiscal 1995 would have been significantly higher. The Company
anticipates that high operating rates will continue in the third
quarter of fiscal 1995 but a scheduled maintenance shutdown of the
unit in the fourth fiscal quarter will limit production in that
period.
The price of styrene's two major raw materials, benzene and
ethylene, were substantially higher in the first six months of
fiscal 1995 compared to the same period in fiscal 1994. Benzene
prices were approximately 30% higher while ethylene prices were
more than 50% higher. Not withstanding these increases, the
Company was able to substantially improve margins due to increases
in its selling price. The Company anticipates that prices for
these raw materials will remain at these increased levels or
increase slightly in the third quarter of fiscal 1995.
The Company anticipates continued strong demand for styrene. Even
though some incremental capacity additions are anticipated over the
next few years, demand growth is expected to absorb the capacity
additions during that period. While it is difficult to predict the
duration of the improved market conditions for styrene, the Company
expects its present earnings level from styrene to continue in the
third quarter of fiscal 1995.
ACRYLONITRILE: Acrylonitrile revenues in the first six months of
fiscal 1995 were $129 million and were approximately 120% higher
than in the corresponding period in fiscal 1994. Revenues in the
second quarter of fiscal 1995 were $76 million, approximately 40%
higher than in the first quarter of fiscal 1995. The increase in
revenues was primarily a result of the rapid increase in export
sales prices to their current unprecedented levels. Total sales
volume in the first six months of fiscal 1995 increased by nearly
40% over the same period in fiscal 1994 due to the improved demand
for acrylic fibers, the largest derivatives of acrylonitrile.
Demand for acrylic fibers has improved in the last year because of
favorable economic conditions worldwide and poor cotton crops in
parts of the world. This has led to increased demand for all
synthetic fibers, including acrylic fibers. Export sales margins
improved throughout the first six months of fiscal 1995, and have
reached historic high levels, as sales prices increased more
rapidly than rising raw material costs. The Company expects
acrylonitrile margins to remain at their improved levels in the
third quarter of fiscal 1995.
The Company's acrylonitrile unit operated at approximately 98% of
capacity during the first six months of fiscal 1995 and 112% during
the second quarter, compared to approximately 75% and 90%,
respectively, for the corresponding periods of fiscal 1994. The
improved operating rate was achieved even though the unit was
shutdown for scheduled maintenance during the first quarter of
fiscal 1995. If the scheduled shutdown had not occurred, the
operating rate for the first six months of fiscal 1995 would have
been significantly higher.
The prices of the major raw materials used to make acrylonitrile,
propylene and ammonia, were significantly higher in the first six
months of fiscal 1995 than in the first six months of fiscal 1994.
Propylene prices were over 80% higher and ammonia prices were up by
approximately 75%. However, the Company was able to substantially
improve margins for acrylonitrile due to vigorous price increases.
Although the demand for these raw materials is expected to remain
strong, applying upward pressure on prices, the Company anticipates
that it will be able to secure sufficient supplies to meet its
needs.
OTHER PRODUCTS: The performance of the Company's other products in
the first half of fiscal 1995 remained approximately the same as in
the first half of fiscal 1994. Revenues during the first six months
of fiscal 1995 from acetic acid, plasticizers, lactic acid,
tertiary butylamine and sodium cyanide increased approximately 35%
compared to the same period in fiscal 1994. This increase was
mainly the result of higher prices for the acetic acid raw material
methanol, which the Company's passes on to its contract partner.
The Company recently announced plans to construct a world-scale,
150 million gallons per year, methanol plant at its Texas City,
Texas facility. The project is expected to be completed by June,
1996. Capital investment and production capacity will be shared by
the Company and BP Chemicals, Inc. ("BP"), the Company's contract
partner in acetic acid. A major portion of the methanol production
will be used as a raw material in the Company's acetic acid plant,
while the remainder will be available for BP's worldwide acetic
acid business and for the merchant market. The Company will have
the rights to a larger share of the output than the ratio of
capital contributed.
The plant will be constructed at significantly less than normal
replacement cost because available and underutilized equipment
already at the Company's Texas City facility will be reactivated.
The unit will use highly efficient state-of-the-art ICI catalyst
technology. The lower capital investment coupled with the modern
operating technology should result in a very cost competitive
methanol plant.
PULP CHEMICALS:
Pulp chemicals revenues for the first six months of fiscal 1995
increased by nearly 20% to $68 million compared to the first six
months of fiscal 1994. The increase in revenues resulted primarily
from higher sodium chlorate sales volume. Sodium chlorate
experienced higher sales volumes and increased margins in the first
six months of fiscal 1995 compared to the same period in fiscal
1994 as a result of increased chlorine dioxide utilization in pulp
bleaching. Royalty revenues from installed generator technology
also increased in the period as a result of higher customer
operating rates and increased capacity. However, net earnings for
the business were slightly lower in the first six months of fiscal
1995 because last year's results included a one-time gain from the
sale of the Company's rights to a portion of the power from a
hydroelectric plant owned by a third-party, which provided a
portion of the power requirements to the Buckingham, Quebec plant.
The Company's sodium chlorate plants operated near capacity during
the first six months of fiscal 1995 compared to approximately 80%
of capacity for the same period in fiscal 1994.
The Company anticipates that sodium chlorate margins will continue
to improve during the third quarter of fiscal 1995 as strong demand
continues and operating rates remain high.
The Company is planning its first production facility for sodium
chlorate in the United States to meet growing market demand by the
pulp and paper industry. While the majority of the sodium chlorate
consumption in North America is in the southeastern U.S., two-
thirds of North America's sodium chlorate production is in Canada
Therefore the Company has begun the process of selecting a site in
the southeastern U.S. for construction of the new facility. The
availability of low cost electricity and proximity to customers are
the critical factors in the selection of a site. In addition to
building the new facility to meet growing demand, the Company is
actively debottlenecking its existing facilities to gain additional
production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses for the first six months of fiscal
1995 were $16.5 million compared to $12.2 million in the first six
months of fiscal 1994, a 35% increase. The increase in SG&A
resulted from increased employee profit sharing expense resulting
from the Company's improved earnings and from increased legal
expenses due to the Company's various lawsuits and business and
financing transactions. These increases were partially offset by a
reduction in the expense related to the stock appreciation rights
program ("SARs") to $.5 million for the first six months of fiscal
1995, from $2.6 million for the corresponding period last year.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital increased to $69 million at March 31, 1995 from $21
million at September 30, 1994. The increase in working capital was
primarily attributable to a $46 million increase in accounts
receivable resulting from the increased sales prices in styrene and
acrylonitrile as well as from the high sales volumes for these
products. The increase in working capital was also attributable to
decreases in accounts payable ($8.7 million) and accrued
liabilities ($7.7 million) resulting from significant expenditures
for the scheduled maintenance shutdowns of the styrene and
acrylonitrile units in the first quarter, as well as from an $8.3
million payment in October 1994 under the Company's Omnibus Stock
and Incentive Plan for SARs. These increases were partially offset
by a $13 million decrease in inventories resulting primarily from
the increased sales volume of styrene and acrylonitrile.
CASH FLOW
Net cash provided by operations was $52.5 million during the first
six months of fiscal 1995 compared to $2.0 million used by
operations for the corresponding period in fiscal 1994. The
increase is primarily attributable to the increased profitability
of styrene and acrylonitrile partially offset by the increase in
working capital. The Company utilized the improved cash from
operations to repay approximately $38 million of debt and to begin
its increased capital spending program.
FINANCING
On April 13, 1995, the Company, with a group of 14 commercial
banks, with Texas Commerce Bank N.A. as agent, closed a new $275
million bank financing that was used to refinance the Company's
existing debt except for the revolving debt associated with
Sterling Pulp (approximately $3,000). The seven-year credit
agreement ("Credit Agreement") provides for a revolving credit
facility of $150 million ("Revolver") and a term loan of $125
million ("Term Loan"). The Credit Agreement will reduce the
Company's future interest costs and provide additional financial
flexibility. In a separate agreement, the Company has arranged a
Cdn. $20 million revolving credit facility with the Bank of Nova
Scotia ("Canadian Revolver")for Sterling Pulp Chemicals, Ltd.
("Sterling Pulp"). The Canadian Revolver was utilized to refinance
the revolving debt associated with Sterling Pulp.
The new bank financing lowers the Company's overall interest cost.
The Revolver and the Term Loan bear interest at the Base Rate or,
at the Company's option, the Eurodollar rate, plus in either case
the applicable Margin Percentage. The Base Rate is equal to the
lesser of the prime rate as announced from time to time by the
agent bank, or the Federal Funds Rate plus 1/2%. The Margin
Percentage is adjustable quarterly and can range from 0.65% to
1.25%. Subsequent to the closing of the Credit Agreement, The
Company entered into an interest rate swap, equivalent in amount
and term to the Term Loan. The swap effectively replaces the
variable rate on the Term Loan with a fixed interest rate of
approximately 7% per annum.
In connection with the refinancing, the Company incurred fees of
approximately $3 million. The unamortized debt issue costs at
March 31, 1995 will be expensed in the third quarter of fiscal 1995
resulting in an extraordinary loss from early extinguishment of
debt of approximately $3.1 million, net of tax.
All of the Company's existing debt was paid in full upon the
closing of the Credit Agreement, except for the revolving debt
associated with Sterling Pulp (approximately $3 million) which was
refinanced by the Canadian Revolver. The Term Loan was drawn in
full at closing and the Revolver was utilized for the remainder of
the funds needed to retire the prior debt. The Term Loan requires
equal quarterly installments of approximately $4.5 million over the
seven year period beginning July 1, 1995, resulting in a decrease
in current maturities of long-term debt to approximately $13.4
million as of the closing date of the Credit Facility. The
Revolver will mature at the end of the seven year term, and no
principal payments on it are required prior to that time.
The Revolver and the Term Loan are collateralized by substantially
all of the inventory and accounts receivable of the Company and
certain of its subsidiaries, all of the Company's equity interests
in Sterling Canada, Inc. (a wholly-owned subsidiary of the
Company), 65% of the equity of Sterling Pulp and Sterling NRO,
Ltd., and certain contract rights of the Company. Additionally,
certain of the Company's subsidiaries have guaranteed the Revolver
and Term Loan.
The Credit Agreement contains a number of financial and other
covenants which management believes are customary in lending
transactions of this type. The Credit Agreement allows the Company
to redeem, retire or acquire shares of its capital stock and to
make dividend payments, as long as no Default or Event of Default
(as defined in the Credit Agreement) has occurred or is continuing.
CAPITAL EXPENDITURES
Capital expenditures for the first six months of fiscal 1995 were
$15.8 million compared to $4.1 million in the same period last
year. The fiscal 1995 capital expenditures were primarily for
plant instrumentation modernization and process improvement
projects. During fiscal 1995, the Company expects to spend a total
of $60-70 million on capital expenditures. These expenditures will
be focused on further plant instrumentation modernization and
process improvements, the acetic acid expansion, the new sodium
chlorate plant in the southeastern U.S. and the new methanol plant
at Texas City. The Company expects to fund its fiscal 1995 capital
expenditures from operating cash flow and its Revolver, as needed.
The Company is planning a capital spending program of approximately
$200 million over the next three years. The program includes
modernization of the Company's Texas City petrochemical plant, the
new methanol plant at Texas City, the acetic acid expansion, the
new sodium chlorate plant, capacity increasing process improvements
at its existing sodium chlorate facilities and various
environmental and safety projects. The plant modernization effort
includes a significant capital commitment for replacing the older
control technology in the styrene and acrylonitrile units with
state-of-the-art distributive control systems, which should result
in increased efficiencies and stronger operating fundamentals.
CERTAIN KNOWN EVENTS, TRENDS AND UNCERTAINTIES
PETROCHEMICAL RAW MATERIAL PRICES AND AVAILABILITY
For each of the Company's petrochemical products, the cost of raw
materials and utilities is far greater than all other costs of
production combined. Therefore, an adequate supply of raw
materials at reasonable prices is critical to the success of the
Company's business. The Company does not produce any of its major
raw materials, benzene, ethylene, propylene and ammonia. There is
currently a high demand for ethylene and propylene and the prices
of each have recently risen significantly. The Company has several
long-term arrangements with ethylene suppliers that provide for the
majority of its estimated requirements for purchased ethylene.
Although no assurances can be given, management believes that the
Company will continue to be able to secure adequate supplies of all
its raw materials at acceptable prices.
ENVIRONMENTAL AND SAFETY MATTERS
The Company's operations involve the handling, production,
transportation and disposal of materials classified as hazardous or
toxic and are extensively regulated under environmental and health
and safety laws. Operating permits are required for the Company's
operations. They are subject to periodic renewal and may be
revoked or modified for cause.
Increasingly strict new laws or permits might affect the Company's
operations, products or waste disposal. Past or future operations
may result in claims or liabilities. Also, expenditures could be
required to upgrade wastewater collection, pretreatment or disposal
systems or other matters. Although no assurances can be given, the
Company does not anticipate any material environmental costs or
liabilities associated with its operations or products.
The Company, after almost nine years of continuous operations, has
reduced 17 targeted pollutants 83% under the EPA's 33/50 program,
lowered hydrocarbon emissions 71% with a major waste water
treatment facility and decreased hydrogen cyanide emissions 97% by
converting the by-product into sodium cyanide. In addition to
these improvements, the Company has voluntary initiated a complete
review of the overall environmental condition at its Texas City,
Texas petrochemical plant. If warranted by the review, the Company
may address overall site conditions.
[The Company has initiated a voluntary, comprehensive review of the
overall environmental condition of its Texas City, Texas
petrochemical plant site and, if warranted, may address site
conditions and begin process improvements.]
The Company's sodium chlorate market (pulp chemicals) is sensitive
to potential environmental regulation. Certain environmental groups
are encouraging passage of regulations which restrict the amount of
Absorbable Organic Halides (AOX) in pulp mill effluent. In
general, environmental regulations support substitution of chlorine
dioxide, which is produced from sodium chlorate, for elemental
chlorine in the pulp bleaching process. As long as there is not an
outright ban on these compounds, such regulation favors the use of
chlorine dioxide, thus sodium chlorate.
British Columbia has a regulation in place that would effectively
eliminate the use of chlorine dioxide in the bleaching process by
the year 2002. The industry is actively working to change this
regulation on the basis that it is not supported by sound science.
The industry is becoming increasingly optimistic of success. There
are no other laws or regulations currently in place which would
restrict the use of the product. The Company believes that
bleaching methods that substitute chlorine dioxide for elemental
chlorine achieve all reasonable pollution reduction targets for air
and water emissions, and it believes that a conversion to totally
chlorine-free bleaching would yield no measurable environmental or
public health benefits. The Company believes its position is
supported by the EPA's selection of chlorine dioxide as the best
available technology for pulp bleaching.
LEGAL PROCEEDINGS
The information under "Legal Proceedings" in note 5 of the notes to
condensed consolidated financial statements herein is hereby
incorporated by reference.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information under "Legal Proceedings" in note 5 of the notes to
condensed consolidated financial statements herein is incorporated
by reference in response to this item.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on January 25, 1995,
the Company's nominees for directors were elected and Coopers &
Lybrand L.L.P. was appointed as independent accountants for the
Company for the fiscal year ended September 30, 1995. The results
of the voting were as follows:
(a) Board of Directors:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
<C> <C> <C>
Gordon A. Cain 43,814,209 461,238
J. Virgil Waggoner 43,821,619 453,828
William A. McMinn 43,950,384 325,063
James J. Kerley 43,098,388 1,177,059
Gilbert M. A. Portal 43,612,248 663,199
Frank J. Pizzitola 43,423,988 851,459
Ray R. Knowland 43,954,484 320,963
</TABLE>
(b) Ratification of Independent Accountants:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
<C> <C> <C> <C>
Coopers &
Lybrand L.L.P. 43,985,271 27,677 262,499
</TABLE>
There were no broker nonvotes with respect to either of these
items.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were
filed during the three months ended March 31, 1995
SIGNATURES
Pursuant to the requirements of the Securities and 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: May 15, 1995 _________________________________
J. Virgil Waggoner
President and Chief Executive
Officer (Principal Executive
Officer)
Date: May 15, 1995 _________________________________
Jim P. Wise
Vice President and Chief
Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 174,015
<ALLOWANCES> 0
<INVENTORY> 56,789
<CURRENT-ASSETS> 241,406
<PP&E> 465,469
<DEPRECIATION> 179,895
<TOTAL-ASSETS> 595,512
<CURRENT-LIABILITIES> 172,203
<BONDS> 0
<COMMON> 603
0
0
<OTHER-SE> 162,663
<TOTAL-LIABILITY-AND-EQUITY> 595,512
<SALES> 544,576
<TOTAL-REVENUES> 544,576
<CGS> 402,690
<TOTAL-COSTS> 402,690
<OTHER-EXPENSES> 16,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,715
<INCOME-PRETAX> 115,691
<INCOME-TAX> 37,354
<INCOME-CONTINUING> 78,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,337
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
</TABLE>
