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 June 30, 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)
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)
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 July 26, 1995, the number of shares of common stock
outstanding was 55,673,991.
Page 1 of 28
Part I. - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 617 $ 2,013
Accounts receivable 173,615 127,705
Inventories 63,057 69,758
Prepaid expenses 5,575 2,700
Deferred income taxes 5,861 9,332
Total current assets 248,725 211,508
Property, plant and equipment, net 288,951 291,126
Other assets 82,955 78,291
Total assets $620,631 $580,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 74,037 $ 76,857
Accrued liabilities 73,042 80,071
Current portion of long-term debt 13,393 33,771
Total current liabilities 160,472 190,699
Long-term debt 115,252 192,621
Deferred income taxes 40,661 38,837
Deferred credits and other liabilities 82,089 69,034
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 150,000
shares authorized, 60,327 shares
issued, 55,674 and 55,660 shares
outstanding, respectively 603 603
Additional paid-in capital 33,269 33,232
Retained earnings 260,004 125,003
Pension adjustment (950) (950)
Accumulated translation adjustment (19,996) (17,322)
Deferred compensation (159) (68)
272,771 140,498
Treasury stock at cost, 4,653
and 4,667 shares, respectively (50,614) (50,764)
Total stockholders' equity 222,157 89,734
Total liabilities and
stockholders' equity $620,631 $580,925
</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 Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $298,491 $204,668 $843,067 $489,981
Cost of goods sold 194,987 176,807 597,677 444,343
Gross profit 103,504 27,861 245,390 45,638
Selling, general
and administrative
expenses 9,606 13,579 26,086 25,777
Interest and debt
related expenses,
net of interest income 2,983 6,045 12,698 16,650
Other income - - - 2,606
Income before income
taxes and
extraordinary item 90,915 8,237 206,606 5,817
Provision for
income taxes 31,148 2,693 68,502 1,933
Income before
extraordinary item 59,767 5,544 138,104 3,884
Extraordinary item, loss
on early extinguishment
of debt, net of tax 3,104 - 3,104 -
Net income $56,663 $ 5,544 $135,000 $ 3,884
Per share data:
Income before
extraordinary item $ 1.08 $ 0.10 $ 2.48 $ 0.07
Extraordinary item (.06) - (.06) -
Net income $ 1.02 $ 0.10 $ 2.42 $ 0.07
Weighted average
shares outstanding 55,674 55,657 55,674 55,588
</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>
Nine Months Ended June 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $862,019 $471,367
Miscellaneous cash receipts 13,450 9,070
Cash paid to suppliers and
employees (675,326) (453,323)
Interest paid (12,316) (15,142)
Interest received 2,254 23
Income taxes paid (62,454) (1,108)
Net cash provided by
operating activities 127,627 10,888
Cash flows from investing activities:
Capital expenditures (26,770) (5,538)
Proceeds from sale of assets - 2,606
Net cash used in investing activities (26,770) (2,932)
Cash flows from financing activities:
Proceeds from long-term debt 217,535 -
Repayment of long-term debt (315,282) (9,184)
Other (4,491) (69)
Net cash used in
financing activities (102,238) (9,253)
Effect of exchange rate on cash (15) 17
Net decrease in cash
and cash equivalents (1,396) (1,280)
Cash and cash equivalents -
beginning of period 2,013 1,352
Cash and cash equivalents -
end of period $ 617 $ 72
</TABLE>
STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In Thousands)
(Unaudited)
RECONCILIATION OF NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1995 1994
<S> <C> <C>
Net income $135,000 $ 3,884
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 32,170 30,518
Loss (gain) on disposal of assets 259 (2,218)
Deferred tax expense 4,835 3,303
Accrued compensation 1,659 9,764
Treasury stock issued to ESOP - 954
Change in:
Accounts receivable (41,798) (63,426)
Inventories 6,581 4,149
Prepaid expenses (2,898) 3,841
Other assets (11,220) (2,420)
Accounts payable (1,706) 13,901
Accrued liabilities (5,796) 3,191
Interest payable (2,462) (1,508)
Taxes payable (1,659) 3,865
Other liabilities 14,662 3,090
Net cash provided by
operating activities $127,627 $ 10,888
</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 June 30, 1995 and the
consolidated results of their operations for the three and nine
month periods ended June 30, 1995 and 1994 and consolidated cash
flows for the nine months ended June 30, 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 or
stockholders' equity.
3. Inventories:
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
<S> <C> <C>
Finished products $38,126 $49,189
Raw materials 13,595 21,761
Inventories at FIFO cost 51,721 70,950
Inventories under
exchange agreements (291) (12,350)
Stores and supplies 11,627 11,158
$63,057 $69,758
</TABLE>
4. Long-Term Debt:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
<S> <C> <C>
Revolving credit facilities $ 8,109 $ 32,940
Term loan 120,536 20,000
Project loan - 16,134
Subsidiary term loan (Sterling Pulp) - 113,050
Subordinated note (Sterling Pulp) - 44,268
Total debt outstanding $128,645 $226,392
Less:
Current maturities 13,393 33,771
Total long-term debt $115,252 $192,621
</TABLE>
On April 13, 1995, the Company, with a group of 14 commercial
banks including 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 Chemicals, Ltd. ("Sterling Pulp"). 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. The Canadian Revolver was utilized to refinance the
revolving debt associated with Sterling Pulp.
The new bank financing lowers the Company's overall borrowing
rate by approximately 200 basis points compared to the prior
financing. The Revolver and the Term Loan bear interest at the
Base Rate or, at the Company's option, the Eurodollar rate. The
Base Rate is equal to the greater of the Prime Rate as announced
from time to time by the agent bank, or the Federal Funds Rate
plus 1/2%. The Eurodollar Rate is equal to the Eurodollar
Interbank Rate plus the Margin Percentage, which 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 for the remaining term.
In connection with the refinancing, the Company incurred fees of
approximately $3,000 which will be amortized over the term of the
loans. Unamortized debt issue costs related to the retired loans
were expensed in April, 1995 and are recorded as an extraordinary
loss from early extinguishment of debt of approximately $3,104,
net of tax, or $.06 per share.
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 term. This payment schedule has resulted in a
significant decrease in current maturities of long-term debt from
$33,771 on September 30, 1994 to $13,393 on June 30, 1995. 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 to comply with future
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, previously suspended
by the Company, relating to possible 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 demanding a jury trial and 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". Subsequently, the
Company has filed a motion for summary judgment.
The Company believes that no enforceable agreement ever existed
between the Company and any of the defendants and the Company
intends to prosecute its declaratory judgment action and defend
the counterclaim vigorously. The Company believes a loss with
respect to this matter is not probable and is unable to quantify
a reasonably possible loss estimate(as defined in Statement of
Financial Accounting Standards No. 5, "Accounting for
Contingencies") at this time.
ALLEMAND LAWSUIT: On June 19, 1995, a lawsuit styled George
Allemand and Willa Allemand v. Sterling Chemicals, Inc., Olin
Corporation, Goodyear Tire & Rubber Co., Inc. and Marine Fueling
Service, Inc.; Cause No. A-152,286; In the 58th Judicial District
Court of Jefferson County, Texas, was filed against the Company.
The plaintiffs in the lawsuit assert personal injury and mental
anguish resulting from an incident occurring on June 16, 1995 in
which a hose being used to unload a barge of sulfuric acid at the
Company's Texas City, Texas facility ruptured, spraying sulfuric
acid on Mr. Allemand, an employee of Marine Fueling Service, Inc.
The plaintiffs seek an unspecified amount of damages. The
incident is under investigation and discovery is ongoing.
AMMONIA RELEASE: On May 8, 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 July 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.
Settlements, costs and expenses to date have totaled less than
$2,000. All amounts above the Company's $1,000 deductible (which
has been charged against earnings) have been paid by its
insurance carriers.
As of July 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.
1. 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.
2. Bobbie J. Adams, et al. v. Sterling Chemicals, Inc.;
Cause No. 94-CV-0764; In the 56th Judicial District Court of
Galveston County, Texas.
3. Courtney Adomond, et al. v. Sterling Chemicals, Inc.;
Cause No. 94-CV-0947; In the 56th Judicial District Court of
Galveston County, Texas.
4. Caroll Allen, et al. v. Sterling Chemicals, Inc.; Cause
No. 94-CV-1147; In the 212th Judicial District court of Galveston
County, Texas.
5. 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.
6. Holly Benefiel, et al. v. Sterling Chemicals, Inc.;
Cause No. 95-CV-0246; In the 56th Judicial District Court of
Galveston County, Texas.
Additional claims and litigation against the Company asserting
similar claims may ensue.
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.
95CV0509; In the 212th Judicial District Court of Galveston
County, Texas. The plaintiffs seek an unspecified amount of
damages for personal injury and property damages arising from
alleged chemical releases. 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 be
required to make adjustments and modifications to its commercial
operations or obtain a license from the prevailing party. The
Company believes that it is entitled to certain indemnities from
Tenneco Canada with respect to the acquired technology.
LITIGATION CONTINGENCY:
In accordance with Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies" and Financial Accounting
Standards Board Interpretation No. 39 "Offsetting of Amounts
Related to Certain Contracts", the Company has made estimates of
the reasonably possible range of liability with regard to its
outstanding litigation for which it may incur liability. These
estimates are based on currently available information and
consultation with the Company's insurance carriers and outside
legal counsel, in addition to management's judgments. A number
of the claims in these litigation matters are covered by the
Company's insurance policies or by third party indemnification of
the Company. The Company therefore has also made estimates of its
anticipated recoveries under insurance policies or from third
party indemnitors based on its understanding of its insurance
policies and indemnifications, discussions with its insurers and
indemnitors and consultation with outside legal counsel, in
addition to management's judgments. Based on the foregoing, the
Company has accrued approximately $12,000 as its estimate of
aggregate contingent liability for these matters, and has also
recorded aggregate receivables from its insurers and third party
indemnitors of $12,000. In addition, management estimates that at
present, the reasonably possible range of loss, in addition to
the amount accrued, is from $0 to $36,000. The Company believes
that it is insured or indemnified for all but an immaterial
portion of the additional possible loss.
While the Company has based its estimates on its evaluation of
available information to date and the other matters described
above, much of the litigation is in its early stages and it is
impossible to predict with certainty the ultimate outcome. The
Company will adjust its estimates as necessary as additional
information is developed and evaluated.
The timing of probable insurance and indemnity recoveries, and
payment of liabilities, if any, is not expected to have a
material effect on the financial position, results of operations
or cash flows of the Company.
While most of the Company's litigation is in the early stages,
the Company believes that the final resolution of this litigation
will not have a material adverse impact on the financial
position, results of operations, or cash flows of the Company.
6. New Accounting Standards:
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 cash flows.
Beginning in fiscal 1995, the Company adopted the Financial
Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" ("FIN 39"). That standard
requires, among other things, that insured liabilities of the
Company be recorded separately as a liability and a claim
receivable. The Company previously recorded these items on a net
basis. The adoption of FIN 39 did not have a material effect on
the Company's results of operations or cash flows.
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 June 30, 1995, and the
condensed consolidated statement of operations for the three and
nine month periods ended June 30, 1995 and 1994 and the condensed
consolidated statement of cash flows for the nine months ended
June 30, 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
July 26, 1995
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the first nine months of fiscal 1995 were $843
million compared to revenues of $490 million for the first nine
months of fiscal 1994, an increase of 72%. Net income for the
first nine months of fiscal 1995 was $135 million ($2.42 per
share) compared to $3.9 million ($0.07 per share) for the first
nine months of fiscal 1994.
For the third quarter of fiscal 1995, revenues were $299 million
compared to revenues of $205 million for the third quarter of
fiscal 1994, an increase of 46%. Net Income for the third quarter
of fiscal 1995 was $56.7 million or $1.02 per share compared to
$5.5 million or $.10 per share for the third quarter of fiscal
1994.
Net income for the three and nine month periods ended June 30,
1995 included an extraordinary charge of $3.1 million or $.06 per
share related to early extinguishment of debt. Net income for the
same periods in fiscal 1994 did not include any extraordinary
items.
The increase in revenues and earnings for the three and nine
month periods ended June 30, 1995 over the prior year periods was
primarily from the Company's petrochemical business. Styrene and
acrylonitrile, the Company's two major petrochemical products,
experienced significantly higher margins during the quarter and
year to date period compared to the same periods a year ago as a
result of stronger demand worldwide. Earnings from the Company's
pulp chemical business were slightly better in the third quarter
of fiscal 1995 than in the prior year and its earnings for the
first nine months of fiscal 1995 were approximately the same as
in the first nine months of fiscal 1994.
PETROCHEMICALS:
The financial performance of the Company's petrochemical business
was significantly better during the first nine months of fiscal
1995 compared to the same period a year ago.
For the first nine months of fiscal 1995, the Company's revenues
from its petrochemical business increased 85% to $737 million
when compared to the first nine months of fiscal 1994. This
increase in revenues resulted primarily from substantial
increases in styrene and acrylonitrile sales prices and higher
sales volumes for both products in the current year period. Net
income from the Company's petrochemical business increased to
$132 million ($2.36 per share) for the first nine months of
fiscal 1995 from $.7 million ($.01 per share) during the same
period in fiscal 1994. The improved earnings resulted primarily
from substantially higher margins and increased sales volumes for
styrene and acrylonitrile in fiscal 1995.
Results for the third quarter of fiscal 1995 improved over the
prior year's quarter for the same reasons as the year to date
period. For the third quarter of fiscal 1995, petrochemical
revenues increased 53% to $261 million compared to $171 million
for the third quarter of fiscal 1994. Net income for the third
quarter of fiscal 1995 was $56.5 million or $1.02 per share
compared to net income of $5.8 million or $.11 per share for the
third quarter of fiscal 1994.
STYRENE: Styrene revenues in the first nine months of fiscal
1995 increased 109% to $398 million as compared to the same
period of fiscal 1994. Styrene sales prices and margins
increased substantially over the same fiscal 1994 period because
of improved worldwide demand and continued market growth for
styrene and its derivatives generated by global economic
expansion. Sales volume increased by approximately 7% in the
first nine months 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. Quarterly
average margins began increasing in the second quarter of fiscal
1994 and have increased each quarter through the third quarter of
fiscal 1995.
Styrene revenues in the third quarter of fiscal 1995 increased
62% to $142 million as compared to the same period of fiscal
1994. The substantial increase in revenues resulted from higher
sales prices and was partially offset by a 14% decrease in sales
volume from the same period in fiscal 1994. Sales volume in the
third quarter of fiscal 1994 was unusually high due to large
export shipments in that period.
The Company anticipates that earnings for styrene in the fourth
quarter of fiscal 1995 will be down substantially from the third
quarter. The scheduled shutdown discussed above will result in
lower sales volume during the fourth quarter. Also, spot prices
for styrene have significantly weakened recently, which the
Company believes to be due to a decrease in demand for styrene in
the Far East resulting from changes in China's economic and tax
policies that affect its polymer imports. The Company believes
that the fundamental demand for styrenic polymers in China
remains strong and that Chinese economic growth will continue.
However, the Company is presently unable to predict whether the
effect of the changes in China's economic and tax policies will
be temporary or longer term.
The Company's styrene unit operated at approximately 104% of
rated capacity for the first nine months of fiscal 1995 and 109%
for the third fiscal quarter, compared to approximately 95% and
110%, 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. The Company anticipates that the operating rate in
the fourth quarter of fiscal 1995 will be substantially lower
than in the third quarter due to a scheduled shutdown for
maintenance and catalyst replacement that will limit production
in that period. During the shutdown, major progress will be made
on the instrumentation modernization project which involves
replacing older control technology with state-of-the-art
distributive control systems. This new instrumentation should
produce additional operating efficiencies after start-up.
The price of styrene's two major raw materials, benzene and
ethylene, was substantially higher during the first nine months
of fiscal 1995 compared to the same period in fiscal 1994.
Benzene prices were approximately 20% higher while ethylene
prices were more than 60% higher. Not withstanding these
increases, the Company was able to substantially improve styrene
margins due to higher selling prices in fiscal 1995. The Company
anticipates that benzene prices will remain relatively stable and
that ethylene prices will decline somewhat in the fourth quarter
of fiscal 1995.
ACRYLONITRILE: Acrylonitrile revenues in the first nine months
of fiscal 1995 were $210 million, approximately 110% higher than
in the corresponding period in fiscal 1994. Revenues in the
third quarter of fiscal 1995 were $81 million, approximately 90%
higher than in the third quarter of fiscal 1994. The increase in
revenues was primarily a result of the rapid increase in export
sales prices to unprecedented levels in the third quarter of
fiscal 1995. Total sales volume in the first nine months of
fiscal 1995 increased by nearly 20% over the same period in
fiscal 1994 primarily due to the improved demand for acrylic
fibers and ABS, the largest derivatives of acrylonitrile. Demand
for acrylic fibers has increased in the last year because of
favorable economic conditions worldwide and poor cotton crops in
various parts of the world. This has led to increased demand for
all synthetic fibers, including acrylic fibers.
Export sales margins rose to historically high levels during the
first nine months of fiscal 1995 as sales prices increased more
rapidly than rising raw material costs. The Company expects
acrylonitrile margins to remain near third quarter levels in the
fourth quarter of fiscal 1995.
The Company's acrylonitrile unit operated at approximately 100%
of rated capacity during the first nine months of fiscal 1995 and
106% during the third quarter, compared to approximately 85% and
103%, respectively, for the corresponding periods of fiscal 1994.
The improved operating rate for the first nine months of fiscal
1995 was achieved even though the unit was shut down for
scheduled maintenance during the first quarter of fiscal 1995.
The prices of propylene and ammonia, which are the major raw
materials used to make acrylonitrile, , were significantly higher
in the first nine months of fiscal 1995 than in the corresponding
period in fiscal 1994. Propylene prices were over 80% higher and
ammonia prices were up by approximately 50%. However, the
Company was able to substantially improve margins for
acrylonitrile due to vigorous price increases. The Company
believes that its purchase price for propylene will not change
significantly in the fourth quarter of fiscal 1995 but the
Company does believe that the price for ammonia should weaken.
OTHER PETROCHEMICAL PRODUCTS: The profitability of the Company's
other petrochemical products in the first nine months of fiscal
1995 remained approximately the same as in the first nine months
of fiscal 1994. While revenues during the first nine months of
fiscal 1995 from acetic acid, plasticizers, lactic acid, tertiary
butylamine and sodium cyanide increased approximately 18% to $129
million, compared to the same period in fiscal 1994, earnings did
not increase because of increases in raw material costs.
METHANOL PLANT: The Company recently announced plans to
construct a world-scale, 150 million gallon 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"). A major portion of the methanol production will be used
as a raw material in the Company's existing acetic acid plant,
replacing methanol currently being purchased, while the remainder
will be available for the merchant market and for BP's worldwide
acetic acid business. The Company will have the rights to a
larger share of the output than its percentage 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 catalyst
technology. The lower capital investment coupled with the modern
operating technology should result in a cost competitive methanol
plant.
PULP CHEMICALS:
Revenues from the Company's pulp chemicals business for the first
nine months of fiscal 1995 increased by approximately 15% to $106
million compared to the first nine months of fiscal 1994. The
increase in revenues resulted primarily from a 17% increase in
sodium chlorate sales volume as well as a slight increase in
average sales prices. For the third quarter of fiscal 1995,
revenues increased by approximately 10% compared to the third
quarter of fiscal 1994. This increase resulted primarily from a
8% increase in sales prices as well as from a 5% increase in
sales volume. Sodium chlorate has experienced higher sales volume
and higher sales prices as well as increased margins in the third
quarter and first nine months of fiscal 1995 compared to the same
periods 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. The
higher chlorate sales volume and higher royalty revenues resulted
in substantially higher gross profit for the business. However,
net income for the business for the three and nine month periods
ending June 30, 1995 were approximately the same as in the
corresponding periods of fiscal 1994 due to an extraordinary item
for early extinguishment of debt. Last year's results for the
first nine months 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 100% of rated
capacity during the first nine months of fiscal 1995 compared to
slightly over 80% for the same period in fiscal 1994. The Company
anticipates that the high operating rates will continue and the
improved margins for sodium chlorate will continue to increase
during the fourth quarter of fiscal 1995 as strong demand
continues.
On June 5, 1995, the Company announced that it will construct a
110,000 ton per year sodium chlorate plant in Valdosta, Georgia.
The new facility, expected to cost approximately $55 million,
will increase Sterling Pulp Chemicals' total annual capacity by
more than 30% to nearly 460,000 tons. Valdosta, Georgia was
selected because of its proximity to Sterling's customers and to
reliable, competitively priced electricity, one of the most
important variables in sodium chlorate production costs. The
facility is expected to require a work force of up to 125 people
during construction, and about 30 permanent employees will be
located at the plant. Construction will begin as soon as
possible this summer and is expected to be completed and
operational before the end of 1996.
The new facility was planned to meet the growing market demand
from the pulp and paper industry. The majority of the sodium
chlorate consumption in North America is in the United States,
and the Company anticipates that demand growth will be especially
strong in the southeastern U.S. However, two-thirds of North
America's sodium chlorate capacity is in Canada.
In addition to building the new facility to meet growing demand,
the Company is debottlenecking its existing facilities to gain
additional production capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general
and administrative ("SG&A") expenses for the first nine months of
fiscal 1995 were $26.1 million compared to $25.8 million in the
first nine months of fiscal 1994. A substantial decrease in the
expense related to the stock appreciation rights program ("SARs")
to $1.6 million for the first nine months of fiscal 1995, from
$9.7 million for the corresponding period last year was offset by
an increase in employee profit sharing resulting from the
Company's improved earnings in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital increased to $89 million at June 30, 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 was also attributable to a $20
million reduction in the current portion of long-term debt as
part of the April 1995 refinancing of the Company's outstanding
debt. Accrued liabilities decreased by $7 million primarily
resulting from an $8.3 million payment in October 1994 under the
Company's Omnibus Stock and Incentive Plan for SARs.
CASH FLOW
Net cash provided by operations was $127.6 million during the
first nine months of fiscal 1995 compared to $10.9 million for
the corresponding period in fiscal 1994. The increase was
primarily attributable to the increased earnings partially offset
by the increase in working capital. The Company utilized cash
from operations to repay approximately $98 million of debt during
the first nine months of fiscal 1995 (see note 4. "Long-Term
Debt" of the notes to condensed consolidated financial statements
herein for more information), including approximately $59 million
in the third quarter, and for capital expenditures of
approximately $27 million as a result of the capital spending
program discussed below.
FINANCING
Reference is made to the information in note 4. "Long-Term Debt"
of the notes to condensed consolidated financial statements
herein for a discussion of the April 1995 refinancing of the
Company's debt.
CAPITAL EXPENDITURES
Capital expenditures for the first nine months of fiscal 1995
were $26.8 million compared to $5.5 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 $50-70 million on capital expenditures. These
expenditures will be focused primarily on further plant
instrumentation modernization and process improvements, the
acetic acid expansion at Texas City, the new sodium chlorate
plant in Valdosta, Georgia 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 investigating various options with regard
to its planned Valdosta, Georgia sodium chlorate plant and may
finance this plant with additional debt.
The Company has initiated a capital spending program of
approximately $200 million over the three years beginning with
fiscal 1995. 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 at
Valdosta, Georgia, capacity increasing process improvements at
its existing sodium chlorate facilities and various other
projects. The plant modernization effort at Texas City 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. (See
discussions under results of operations section for further
information on major capital projects.) In addition to the
capital spending program described above, the Company anticipates
capital expenditures of approximately $25 million over the next
five years relating to environmentally related prevention,
containment, process improvements and remediation at its Texas
City petrochemical plant. Specific classifications of these
expenditures are difficult to project, since an expenditure may
be made for more than one purpose.
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).
The Company has several long-term arrangements with ethylene
suppliers that provide for the majority of its anticipated
requirements for purchased ethylene.
The prices of ethylene and propylene each have risen
significantly during fiscal 1995 but the Company has been able to
obtain adequate supplies of each during that time. The Company
believes that these price increases have ended and expects that
the prices for its major raw materials will remain stable or
decline in the fourth quarter of fiscal 1995. Although no
assurances can be given, management believes that the Company
will continue 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 which are required for
the Company's operations are subject to periodic renewal and may
be revoked or modified for cause.
New laws or permit requirements and conditions, may affect the
Company's operations, products or waste disposal. Past or future
operations may result in claims or liabilities. Expenditures
could be required to upgrade wastewater collection, pretreatment,
disposal systems or other matters.
The Company, after nine years of 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 this by-product into sodium cyanide. In addition to
these improvements, the Company has voluntarily initiated a
complete review of the overall environmental condition at its
Texas City, Texas petrochemical plant and will initiate
additional actions or preventative projects designed to insure
that the facility continues to operate in a safe and
environmentally responsible manner. No assurances can be given
that the Company will not incur material environmental
expenditures associated with its operations or products.
The Company has entered into negotiations with Monsanto with
respect to the scope of Monsanto's obligations to the Company for
pre-closing environmental conditions at the Company's Texas City
Plant under the indemnification provisions of the Assets Purchase
Agreement and applicable state and federal law.
The Company's sodium chlorate market (pulp chemicals) is
sensitive to potential environmental regulation. In general,
environmental regulations support substitution of chlorine
dioxide, which is produced from sodium chlorate, for elemental
chlorine in the pulp bleaching process. Certain environmental
groups are encouraging passage of regulations which restrict the
amount of Absorbable Organic Halides (AOX) or chlorine
derivatives in pulp mill effluent. Increased substitution of
chlorine dioxide for elemental chlorine in the pulp bleaching
process significantly reduces the amount of AOX and chlorine
derivatives in pulp mill effluent. As long as there is not an
outright ban on chlorine containing compounds, regulation
restricting AOX or chlorine derivatives in pulp mill effluent
should favor the use of chlorine dioxide, thus sodium chlorate.
Any significant ban on all chlorine containing compounds could
have a material adverse effect on the Company's financial
condition and results of operations.
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 pulp and paper industry is working to change
this regulation and believes that a ban of chlorine dioxide in
the bleaching process will yield no measurable environmental or
public health benefit. There are no other laws or regulations
currently in place which would restrict the use of the product.
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 hereby
incorporated by reference in response to this item.
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 June 30, 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: August 14, 1995 _________________________________
J. Virgil Waggoner
President and Chief Executive
Officer (Principal Executive
Officer)
Date: August 14, 1995 _________________________________
Jim P. Wise
Vice President and Chief
Financial Officer
(Principal Financial Officer)
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