-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FVzqanNCLBm+v7NuJOpt/SxFU0hyE9mPbnvUtfgU2GzgKbNMLyz//eQtKFeTyqOX uWZbeWpVfTNAptrBX9UKPw== 0000795662-95-000005.txt : 19950516 0000795662-95-000005.hdr.sgml : 19950516 ACCESSION NUMBER: 0000795662-95-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS INC CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760185186 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10059 FILM NUMBER: 95539791 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: 1200 SMITH ST SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 10-Q 1 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) 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 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)
March 31, September 30, 1995 1994 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 ======== ========
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)
Three Months Ended Six Months Ended March 31, March 31, 1995 1994 1995 1994 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 ======== ======== ======== ========
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)
Six Months Ended March 31, 1995 1994 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 ======== ========
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
Six Months Ended March 31, 1995 1994 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) ======== ========
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:
March 31, September 30, 1995 1994 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 ======= =======
4. Long-Term Debt Long-term debt consisted of the following:
March 31, September 30, 1995 1994 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 ======== ========
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:
NAME VOTES FOR VOTES WITHHELD 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
(b) Ratification of Independent Accountants:
VOTES FOR VOTES AGAINST ABSTENTIONS Coopers & Lybrand L.L.P. 43,985,271 27,677 262,499
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) EX-27 2 ARTICLE 5 FDS FOR 2ND QTR 10-Q
5 6-MOS SEP-30-1995 MAR-31-1995 117 0 174,015 0 56,789 241,406 465,469 179,895 595,512 172,203 0 603 0 0 162,663 595,512 544,576 544,576 402,690 402,690 16,480 0 9,715 115,691 37,354 78,337 0 0 0 78,337 1.41 1.41
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