SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1996,
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 No.)
1200 Smith Street, Suite 1900, Houston, Texas 77002-4312
(Address of Principal Executive Offices) (Zip Code)
713-650-3700
(Registrant's telephone number, including area code)
______________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes/x/ No/ /
As of May 6, 1996, the number of shares of common stock
outstanding was 55,689,991
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,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 1,261 $ 30,882
Accounts receivable................. 123,867 112,102
Inventories......................... 58,833 67,867
Prepaid expenses.................... 4,782 3,878
Deferred income taxes............... 6,751 5,622
--------- ---------
Total current assets.............. 195,494 220,351
Property, plant and equipment, net.. 336,371 309,084
Other assets........................ 82,594 80,504
--------- ---------
Total assets..................... $614,459 $609,939
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $62,267 $ 72,016
Accrued liabilities................. 50,842 55,858
Current portion of long-term debt... 13,393 17,857
--------- ---------
Total current liabilities......... 126,502 145,731
Long-term debt...................... 110,750 103,581
Deferred income taxes............... 43,577 40,297
Deferred credits and other liabilities 76,507 81,012
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 150,000
shares authorized, 60,327 shares issued,
55,690 and 55,674 shares outstanding,
respectively..................... 603 603
Additional paid-in capital.......... 33,225 33,269
Retained earnings................... 294,266 275,052
Pension adjustment.................. (1,556) (1,556)
Accumulated translation adjustment.. (18,881) (17,307)
Deferred compensation............... (94) (129)
--------- ---------
307,563 289,932
Treasury stock, at cost, 4,637 and
4,653 shares, respectively.......... (50,440) (50,614)
--------- ---------
Total stockholders' equity...... 257,123 239,318
--------- ---------
Total liabilities
and stockholders' equity..... $614,459 $609,939
========== =========
</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,
------------------ ----------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............ $190,879 $303,954 $382,421 $544,576
Cost of goods sold.. 161,481 210,424 323,628 402,690
-------- -------- -------- --------
Gross profit........ 29,398 93,530 58,793 141,886
Selling, general and
administrative
expenses........... 8,298 8,794 16,108 15,977
Stock appreciation
rights (SARs)
expense (benefit).. 6,447 (1,054) 6,658 503
Other expense (Note 8) 3,550 - 3,550 -
Interest and debt related
expenses, net of
interest income..... 1,601 4,183 3,210 9,715
-------- -------- -------- --------
Income before
income taxes........ 9,502 81,607 29,267 115,691
Provision for
income taxes........ 3,075 25,530 10,053 37,354
-------- -------- -------- --------
Net income........... $ 6,427 $56,077 $19,214 $78,337
======= ======= ======= =======
Net income per share $ 0.12 $ 1.01 $ 0.35 $ 1.41
======= ======= ======= =======
Weighted average
shares outstanding 55,690 55,674 55,682 55,674
======= ======= ======= =======
</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,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers..... $422,542 $533,496
Miscellaneous cash receipts...... 11,044 9,682
Cash paid to suppliers
and employees................... (404,391) (451,726)
Interest paid.................... (3,280) (9,649)
Interest received................ 538 2,188
Income taxes paid................ (10,303) (31,458)
-------- --------
Net cash provided by
operating activities............ 16,150 52,533
-------- --------
Cash flows from investing activities:
Capital expenditures............ (48,996) (15,774)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt.... 38,000 -
Repayment of long-term debt..... (34,392) (38,574)
Other........................... (289) (50)
-------- --------
Net cash provided by
(used in) financing activities. 3,319 (38,624)
-------- --------
Effect of exchange rate on cash. (94) (31)
-------- --------
Net decrease in cash
and cash equivalents........... (29,621) (1,896)
Cash and cash equivalents
- beginning of period.......... 30,882 2,013
-------- --------
Cash and cash equivalents
- end of period................ $ 1,261 $ 117
======== ========
</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>
Six Months Ended March 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Net income...................... $ 19,214 $ 78,337
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization... 21,188 20,769
Loss on disposal of assets...... 3,329 103
Deferred tax expense............ 1,600 3,374
Accrued compensation............ 6,850 571
Change in:
Accounts receivable............. (15,570) (47,095)
Inventories..................... 8,960 12,754
Prepaid expenses................ (912) (1,382)
Other assets.................... (5,589) (1,187)
Accounts payable................ (10,727) (7,301)
Accrued liabilities............. (18,829) (8,802)
Interest payable................ 705 (2,591)
Taxes payable................... (840) 3,098
Other liabilities............... 6,771 1,885
-------- --------
Net cash provided by
operating activities........... $ 16,150 $ 52,533
======== ========
</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)
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, 1996 and its
consolidated results of operations for the three and six-
month periods ended March 31, 1996 and 1995 and consolidated
cash flows for the six-month periods ended March 31, 1996
and 1995. 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, 1995
(the "Annual Report"). The condensed consolidated balance
sheet as of September 30, 1995 included herein has been
derived from the consolidated balance sheet as of September
30, 1995 included in the Annual Report. Such balance sheet
was audited by Coopers & Lybrand L.L.P. whose report dated
October 25, 1995 expressed an unqualified opinion.
Additionally, the condensed consolidated financial
statements for the three and six-month periods ended March
31, 1995 were reviewed by Coopers & Lybrand L.L.P. The
condensed consolidated financial statements as of and for
the three and six-month periods ended March 31, 1996
included herein were reviewed by Arthur Andersen LLP, the
Company's independent public 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>
March 31, September 30,
1996 1995
--------- ------------
<S> <C> <C>
Finished products............... $ 36,317 $ 44,802
Raw materials................... 11,172 16,506
-------- --------
Inventories at FIFO cost...... 47,489 61,308
Inventories under
exchange agreements............. (528) (4,783)
Stores and supplies............. 11,872 11,342
-------- --------
$ 58,833 $ 67,867
======== ========
</TABLE>
4. Long-Term Debt:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
-------- -----------
<S> <C> <C>
Revolving credit facilities..... $ - $ 902
Term loan....................... 107,143 120,536
Loan under chlorate
plant credit agreement........ 17,000 -
-------- --------
Total debt outstanding.......... 124,143 121,438
Less:
Current maturities.............. (13,393) (17,857)
======== ========
Total long-term debt............ $110,750 $103,581
</TABLE>
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 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. These agreements generally provide for
cost recovery plus an agreed margin or element of profit
based upon market price.
ENVIRONMENTAL REGULATIONS
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 waste
water collection, pretreatment or disposal systems or for
other matters.
LEGAL PROCEEDINGS
Shareholder Lawsuits
In April and May, 1996, six class action lawsuits were filed
against the Company and the Company's directors alleging
conflict of interest and breach of fiduciary duties relating
to the sale of the Company (see Note 7). These lawsuits are styled:
1. Kurt Kopf et al. v. Sterling Chemicals, Inc., Gordon A.
Cain, et al; Civil Action No. 14960; In the Court of
Chancery of the State of Delaware, New Castle County,
Delaware.
2. Ernest Hack v. Sterling Chemicals, Inc., Gordon A. Cain,
et al; Civil Action No. 14962; In the Court of Chancery
of the State of Delaware, New Castle County, Delaware.
3. Salim Shiry, et al. v. Sterling Chemicals, Inc., Gordon
A. Cain, et al; Civil Action No. 14963; In the Court of
Chancery of the State of Delaware, New Castle County,
Delaware.
4. Olga Fried, et al. v. Sterling Chemicals, Inc., Gordon
A. Cain, et al; Civil Action No. 14969; In the Court of
Chancery of the State of Delaware, New Castle County,
Delaware.
5. Maria Lerman, et al. v. Sterling Chemicals, Inc., Gordon
A. Cain, et al; Civil Action No. 14972; In the Court of
Chancery of the State of Delaware, New Castle County,
Delaware.
6. Alan R. Kahn v. Sterling Chemicals, Inc., The Sterling
Group, Inc., Unicorn Group, STX Acquisition Corp.,
Gordon A. Cain, et al; Civil Action No. 14981; In the
Court of Chancery of the State of Delaware, New Castle
County, Delaware.
While these lawsuits are in their early stages, at this time
they are not anticipated to have a material adverse impact
on the financial position, results of operations or cash
flows of the Company.
Petrochemicals
HUNTSMAN LAWSUIT: On November 30, 1995, the court granted
the motion for summary judgment filed by the Company in
Sterling Chemicals, Inc. v. Huntsman Chemical Corporation,
Huntsman Styrene Corporation and Huntsman Corporation. As
discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995, the summary
judgment confirms that, as a matter of law, no enforceable
contract or agreement ever existed between the Company and
the defendants. The court's order, which includes recovery
of legal fees, also moots the defendants' counterclaim
against the Company for damages resulting from breach of the
alleged contract. The defendants have appealed this decision.
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.
Pulp Chemicals
PATENT LITIGATION: 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
previously disclosed that it was engaged with Akzo Nobel in
numerous patent disputes throughout the world in which the
Company and Akzo Nobel were challenging certain patents of
the other and attempting to restrict the other's operating
range. The Company and Akzo Nobel have reached an out-of-
court settlement resolving all such disputes. The
settlement allows licensees of both the Company and Akzo
Nobel to operate their chlorine dioxide generators within
the broadest range of operating conditions. The settlement
did not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
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. In addition, liabilities have
been accrued based on the estimated probable loss from such
litigation. These estimates are based on management's
judgments using currently available information as well as
consultation with the Company's insurance carriers and
outside legal counsel. 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
probable 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 as of March 31, 1996, the Company has
accrued approximately $12 million as its estimate of
aggregate contingent liability for these matters, and has
also recorded aggregate receivables from its insurers and
third-party indemnitors of $11 million. In addition, at
March 31, 1996, management estimates that the aggregate
reasonably possible range of loss for all litigation
combined, in addition to the amount accrued, is from $0 to
$41 million. The Company believes that it is insured or
indemnified for this additional reasonably possible
loss, except for a portion which is not material.
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. However, the Company believes that the final
resolution of these contingencies will not have a material
adverse impact on the financial position, results of
operations or cash flows of the Company.
The timing of probable insurance and indemnity recoveries,
and additional accruals or payment of liabilities, if any,
are not expected to have a material adverse effect 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 of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". This statement
establishes new accounting standards for measuring the
impairment of long-lived assets. The Company is required to
adopt this Statement by fiscal 1997. The Company
anticipates that the adoption of this Statement will not
have a material adverse effect on the Company's financial position,
results of operations or cash flows.
7. Recent Developments:
On January 29, 1996, the Company announced that it was
exploring all strategic alternatives to enhance stockholder
value. In this connection, the Board of Directors
established a Special Committee which retained Lazard Freres
& Co. LLC as its financial advisor and Piper & Marbury
L.L.P. as legal advisors.
On April 25, 1996, the Company announced that it had entered
into a definitive agreement for the sale of the Company to
an investment group formed by The Sterling Group, Inc. and
The Unicorn Group, Inc. Under the terms of the agreement,
shareholders may elect to receive $12.00 per share in cash,
or retain part or all of their shares in the Company,
subject to a 5,000,000 share maximum, and proration to the
extent aggregate elections exceed 5,000,000 shares.
The transaction is expected to be concluded by late August
of this year and is subject to customary closing conditions,
including shareholder approval.
8. Write-off of Lactic Acid Plant
The Company has decided to stop producing lactic acid at its
Texas City, Texas facility by the end of the third quarter
of fiscal 1996. In the second quarter of fiscal 1996, the
Company charged to expense the remaining net book value and
other related costs resulting in a $3.6 million pretax
charge against earnings ($0.04 per share, after taxes).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Sterling Chemicals, Inc.
We have reviewed the accompanying condensed consolidated
balance sheet of Sterling Chemicals, Inc. as of March 31,
1996, and the related condensed consolidated statement of
operations for the three and six-month periods then ended
and the condensed consolidated statement of cash flows for
the six-month period then ended. 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.
ARTHUR ANDERSEN LLP
Houston, Texas
April 24, 1996
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On January 29, 1996, the Company announced that it was
exploring all strategic alternatives to enhance stockholder
value. In this connection, the Board of Directors
established a Special Committee which retained Lazard Freres
& Co. LLC as its financial advisor and Piper & Marbury
L.L.P. as legal advisors.
On April 25, 1996, the Company announced that it had entered
into a definitive agreement for the sale of the Company to
an investment group formed by The Sterling Group, Inc. and
The Unicorn Group, Inc. Under the terms of the agreement,
shareholders may elect to receive $12.00 per share in cash,
or retain part or all of their shares in the Company,
subject to a 5,000,000 share maximum, and proration to the
extent aggregate elections exceed 5,000,000 shares.
The transaction is expected to be concluded by late August
of this year and is subject to customary closing conditions,
including shareholder approval.
RESULTS OF OPERATIONS
Revenues for the first six months of fiscal 1996 were $382
million compared to revenues of $545 million for the first
six months of fiscal 1995, a decrease of 30%. Net income for
the first six months of fiscal 1996 was $19.2 million ($0.35
per share) compared to $78.3 million ($1.41 per share) for
the first six months of fiscal 1995.
Revenues for the second quarter of fiscal 1996 were $191
million compared to revenues of $304 million for the second
quarter of fiscal 1995, a decrease of 37%. Net income for
the second quarter of fiscal 1996 was $6.4 million ($.12 per
share) compared to $56.1 million ($1.01 per share) for the
second quarter of fiscal 1995.
The decrease in revenues and earnings for the three and six-
month periods ending March 31, 1996 compared to the same
periods in fiscal 1995 was primarily in the Company's
petrochemical business, while the pulp chemical business
recorded increased revenues and earnings. Styrene and
acrylonitrile, the Company's two major petrochemical
products, experienced significantly lower sales prices and
margins during the quarter compared to the same period a
year ago. Earnings from the Company's pulp chemical
business improved primarily as a result of higher sodium
chlorate sales prices and margins.
Earnings for the second quarter of fiscal 1996 were reduced
$0.12 per share by two non-cash charges. The Company
recorded $6.4 million in pretax expense ($0.08 per share,
after taxes) related to stock appreciation rights resulting
from an increase in the Company's stock price during the
second quarter. The Company also recorded $3.6 million in
pretax expense ($0.04 per share, after taxes) to write-off
the remaining net book value of its lactic acid plant and
other costs associated with the Company's decision to stop
producing lactic acid by the end of the third fiscal quarter
of 1996.
PETROCHEMICALS:
For the first six months of fiscal 1996, the Company's
revenues from its petrochemical business decreased 36% to
$307 million when compared to the first six months of fiscal
1995. This decrease in revenues resulted primarily from
decreases in styrene and acrylonitrile average sales prices
compared to the year ago period as well as from lower
acrylonitrile and acetic acid sales volumes. Net income
from the Company's petrochemical business decreased to $10.9
million ($0.20 per share) for the first six months of fiscal
1996 from $75.0 million ($1.35 per share) during the same
period in fiscal 1995. The decrease in earnings resulted
primarily from substantially lower margins for styrene and
acrylonitrile in the fiscal 1996 period.
STYRENE: Styrene revenues in the first six months of fiscal
1996 decreased approximately 37% to $162 million compared to
the same period of fiscal 1995. Styrene sales prices and
margins decreased substantially from the same fiscal 1995
period because of weak market conditions. Average sales
prices for the first half of fiscal 1996 decreased by
approximately 42% from the year ago period. Although sales
prices and margins were substantially lower than a year ago,
both began to increase in March. Sales volumes in the first
half of fiscal 1996 increased by approximately 8% over the
same period last year when a shutdown for scheduled
maintenance and catalyst replacement restricted first-half
production.
The Company's styrene unit operated at approximately 112% of
its rated capacity of 1.5 billion pounds per year for the
first six months of fiscal 1996 and 116% for the second
quarter, compared to approximately 100% and 111% for the
corresponding periods in fiscal 1995. As noted above, the
styrene unit was shut down for a portion of the first
quarter of fiscal 1995 for scheduled maintenance and
catalyst replacement.
The prices of styrene's major raw materials, benzene and
ethylene, were substantially lower during the first half of
fiscal 1996 compared to the same period in fiscal 1995.
Benzene prices were approximately 26% lower while ethylene
prices were approximately 32% lower. These decreases helped
to offset some of the decrease in selling prices discussed
above, but margins still declined substantially.
ACRYLONITRILE: Acrylonitrile revenues in the first six
months of fiscal 1996 decreased approximately 42% to $75
million compared to the corresponding period in fiscal 1995.
The decrease in revenues resulted from a decrease of
approximately 30% in average sales prices and a decrease in
sales volumes of approximately 32%. Reduced imports of
acrylonitrile derivatives by the Far East market (primarily
acrylic fiber and ABS) resulted in the lower acrylonitrile
sales volumes and prices.
In response to lower demand, the Company's acrylonitrile
unit operated at approximately 72% of rated capacity during
the first six months of fiscal 1996 and 63% during the
second quarter compared to approximately 98% and 112% for
the corresponding periods of fiscal 1995. In addition, the
acrylonitrile unit was shut down for most of March for
scheduled maintenance and installation of the first phase of
a state-of-the-art distributive control system. As a result,
profits decreased because of higher fixed cost per pound
produced. The shutdown has been completed and should result
in increased efficiencies and stronger operating fundamentals
in the future.
The prices of propylene and ammonia, which are the major raw
materials used to make acrylonitrile, were approximately 22%
and 19% lower, respectively, in the first six months of
fiscal 1996 than in the corresponding period in fiscal 1995.
These decreases helped to offset some of the decrease in
selling prices discussed above, but margins still declined
substantially.
OTHER PETROCHEMICAL PRODUCTS: The profitability of the
Company's other petrochemical products (acetic acid,
plasticizers, lactic acid, tertiary butylamine and sodium
cyanide) in the first six months of fiscal 1996 increased
approximately 110% over the first six months of fiscal 1995.
The improved profitability resulted primarily from the
Company's plasticizer products (dedicated 100% to BASF),
which enjoyed strong market conditions and low raw material
prices during the first half of fiscal 1996. Revenues during
the first six months of fiscal 1996 from the Company's other
petrochemical products decreased approximately 24% to $69
million. The decrease in revenues was due to the acetic acid
unit being shut down for most of the first quarter of fiscal
1996 for expansion of the unit from 600 million pounds to
nearly 800 million pounds annual capacity and for
installation of a distributive control system.
While the expansion of the acetic acid unit is substantially
complete, the additional capacity will not be fully utilized
until the completion of the partial oxidation plant under
construction by Praxair, Inc. at the Company's Texas City
facility early in the third quarter of fiscal 1996. The
partial oxidation plant will supply raw materials to the
Company's acetic acid unit.
The Company's methanol plant, which is currently under
construction, is expected to be operational in the fourth
quarter of fiscal 1996. In connection with the construction
of this plant, the Company has incurred approximately $3.7
million in start-up expenses during the first six months of
fiscal 1996.
The Company has decided to stop producing lactic acid at its
Texas City, Texas facility by the end of the third quarter
of fiscal 1996. In the second quarter of fiscal 1996, the
Company wrote off the remaining net book value and expensed
other related costs resulting in a $3.6 million charge
against earnings ($0.04 per share, after taxes).
PULP CHEMICALS:
Revenues from the Company's pulp chemical business for the
first six months of fiscal 1996 increased by approximately
11% to $76 million compared to the first six months of
fiscal 1995. The increase in revenues resulted primarily
from an increase in sodium chlorate average sales prices of
approximately 14%. Sales volume decreased approximately 2%
from the year ago period. Sodium chlorate has experienced
higher sales prices and improved margins as a result of
improved demand due to increased chlorine dioxide
utilization in pulp bleaching. Royalty revenues in the first
six months of fiscal 1996 from installed generator
technology increased approximately 8% over the first six
months of fiscal 1995 as a result of higher customer
operating rates and increased capacity. Net income for the
pulp chemical business in the first half of fiscal 1996 was
$8.3 million or $0.15 per share compared to $3.3 million or
$0.06 per share for the first half of fiscal 1995.
For the second quarter of fiscal 1996, revenues for the
Company's pulp chemical business were $37 million,
approximately 2% higher than in the second quarter of fiscal
1995. Net income in the second quarter of fiscal 1996 was
$3.3 million or $0.06 per share compared to $2.9 million or
$0.05 per share for the second quarter of fiscal 1995.
Although average sales prices and margins for sodium
chlorate and royalty revenues from the Company's installed
generator technology were higher during the second quarter
of fiscal 1996 compared to the same period in fiscal 1995, a
decrease in sales volumes of approximately 9% and a $3.0
million charge for stock appreciation rights resulting from
the increase in the Company's stock price offset most of
this improvement.
The Company's sodium chlorate plants operated at
approximately 92% of rated capacity during the second
quarter and for the first six months of fiscal 1996 compared
to nearly 100% for the same period in fiscal 1995. The lower
operating rate resulted from recent weakness in paper
demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling,
general and administrative ("SG&A") expenses for the first
six months of fiscal 1996 were $22.8 million compared to
$16.5 million in the first six months of fiscal 1995. An
increase in the expense related to the stock appreciation
rights program of $6.2 million accounted for the increase in
SG&A expenses.
Some of the information contained in this Results of
Operations section may be forward looking and involves risks and
uncertainties that could significantly impact
anticipated results. The Company's outlook is based
predominately on its interpretation of what it considers key
economic and market assumptions, many of which have been
discussed above. Factors that could cause actual results to
differ materially from current expectations include:
worldwide economic activity, particularly in the Far East,
changes in the markets of the Company's major purchased raw
materials; significant plant operating problems at one of
the Company's facilities or one of the Company's
competitors', suppliers' or customers' facilities; changes
in China's economic, tax or monetary policies; or changes in
federal, state, or provincial environmental regulations.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital was $69 million at March 31, 1996, down
slightly from $75 million at September 30, 1995. Higher
styrene sales volumes in March 1996 compared to September
1995 resulted in a $12 million increase in accounts
receivable. The high styrene sales volume as well as the
acrylonitrile shutdown in March 1995 were the primary
reasons for an $9 million decrease in inventory. Cash and
cash equivalents decreased $30 million primarily as a result
of expenditures in the first half of fiscal 1996 in
connection with the Company's three-year $200 million
capital program.
CASH FLOW
Net cash provided by operations was $16.2 million during the
first six months of fiscal 1996 compared to $52.5 million
for the corresponding period in fiscal 1995. The decrease
was primarily attributable to the decreased earnings
partially offset by lower payments for interest and income
taxes. The Company's long-term debt increased by
approximately $7 million, on a net basis, during the first
six months of fiscal 1996. The increase was primarily due to
$17 million which was borrowed to finance the construction
of the Valdosta, Georgia sodium chlorate plant for the pulp
chemical business.
CAPITAL EXPENDITURES
Capital expenditures for the first six months of fiscal 1996
were $49 million compared to $16 million in the same period
last year. The capital expenditures in the first half of
fiscal 1996 were primarily for the expansion of the acetic
acid unit, the ongoing construction of the methanol plant
and the Valdosta, Georgia sodium chlorate plant. As of March
31, 1996, the Company has spent approximately half of its
three-year $200 million capital plan. During the remainder
of fiscal 1996, the Company expects to spend an additional
$50 - $60 million on capital expenditures. The remaining
fiscal 1996 expenditures will primarily be for the methanol
plant and for a portion of the new sodium chlorate plant in
Valdosta, Georgia, which will be completed in fiscal 1997.
The Company expects to fund its fiscal 1996 petrochemical
business capital expenditures from operating cash flow and
its $125 million revolving credit facility, as needed. The
Company will utilize the chlorate plant credit agreement,
entered into in September 1995, to finance the construction
of its Georgia chlorate plant.
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, ammonia and methanol), although the Company has a
methanol plant under construction at Texas City.
These materials are all commodity petrochemicals and the
price for each can fluctuate widely for a variety of
reasons, including changes in the availability of these
products because of major capacity additions or significant
plant operating problems.
The Company has several long-term arrangements with ethylene
suppliers that provide for the majority of its anticipated
requirements for purchased ethylene. 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 or disposal systems or
for other matters.
The Company's prior negotiations with Monsanto with respect
to the scope of Monsanto's obligations to the Company for
pre-acquisition environmental conditions at the Company's
Texas City facility under applicable state and federal laws
and the indemnification provisions of the Assets Purchase
Agreement are no longer ongoing. The negotiations did not
produce any change in the parties respective rights and
obligations.
For further information on environmental and safety matters,
please refer to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1995.
LEGAL PROCEEDINGS
The information under "Legal Proceedings" in 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 the notes to
condensed consolidated financial statements herein is hereby
incorporated by reference in response to this item.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held January
24, 1996 the Company's seven nominees for directors were
elected and the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the fiscal year
ending September 30, 1996 was ratified.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three
months ended March 31, 1996. However, on April 26, 1996,
the Company filed a report on Form 8-K announcing that it
had entered into a definitive agreement for the sale of the
Company to an investment group formed by The Sterling Group,
Inc. and The Unicorn Group Inc. Under the terms of the
agreement, shareholders may elect to receive $12.00 per
share in cash, or retain part or all of their shares in the
Company, subject to a 5,000,000 share maximum, and proration
to the extent aggregate elections exceed 5,000,000 shares.
The transaction is expected to be concluded by late August
of this year, and is subject to customary closing
conditions, including shareholder approval.
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 13, 1996 (signature appears here)
J. Virgil Waggoner
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1996 (signature appears here)
Jim P. Wise
Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
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