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| SCHI.OB > SEC Filings for SCHI.OB > Form 10-Q on 11-Aug-2009 | All Recent SEC Filings |
11-Aug-2009
Quarterly Report
We sold substantially all remaining styrene inventory during the first
quarter of 2008. The decommissioning process was completed by the end of 2008,
and the associated costs incurred for 2007 and 2008 were $0.7 million and
$18.9 million, respectively. In July 2008, we announced a reduction in work
force in order to reduce our staffing to a level appropriate for our existing
operations and site development projects. As a result, we reduced our salaried
work force by 19 people and our hourly work force by 15 people. In accordance
with Statement of Financial Accounting Standards, or SFAS, No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," we recognized and paid
$1.4 million of severance costs in 2008. Additionally, as a result of our work
force reduction, we recorded a curtailment loss of $1.2 million for our benefit
plans in accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," in
2008.
We own the acetic acid and plasticizers manufacturing units located at our
Texas City facility. We lease a portion of our Texas City facility to Praxair,
who constructed a partial oxidation unit on that land. We also lease a portion
of our Texas City facility to S&L Cogeneration Company, a 50/50 joint venture
between us and Praxair Energy Resources, Inc., or Praxair Energy, who
constructed a cogeneration facility on that land. However, because our strategic
initiatives under consideration do not require utilization of the steam produced
by the cogeneration facility, we and Praxair Energy elected to terminate the
joint venture and have amended the joint venture agreement governing S&L
Cogeneration Company to extend its term until the later of November 30, 2009 or
upon completion of all final audits, and to address several matters related to
the sale of the cogeneration facility, the distribution of the joint venture's
assets and the termination and winding-up of its affairs. We lease space for our
principal offices located in Houston, Texas. We operate in two segments: acetic
acid and plasticizers.
Recent Developments
On June 4, 2009 our acetic acid plant was shut down for 42 days for a
scheduled turnaround to coincide with the required maintenance shutdown of our
carbon monoxide supplier. Capital projects installed in the acetic acid plant
during the shutdown included replacement of the acetic acid product column, two
exchangers and the distributive control systems, as well as consolidation of two
cooling towers and several smaller projects. Sterling's portion of the capital
cost of these projects totaled $5.5 million, of which $1.8 million was incurred
during the second quarter of 2009, with the balance incurred previously.
Maintenance work in the acetic acid and utilities departments during the
shutdown totaled $3.0 million and included the cleaning, inspection and repair
of a large number of columns, exchangers, control and block valves, instruments
and other miscellaneous repairs. As a result of the shutdown, the maximum
sustainable annual production rate of our acetic acid plant has increased from
approximately 1.2 billion pounds per year to approximately 1.3 billion pounds
per year, and we will be able to extend the unit turnaround interval.
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Revenues and loss from continuing operations
Our revenues were $26.9 million for the second quarter of 2009, a 44%
decrease from the $47.8 million in revenues we recorded for the second quarter
of 2008. We had a net loss from continuing operations of $3.4 million for the
second quarter of 2009, compared to a net loss from continuing operations of
$4.3 million in the second quarter of 2008.
Revenues from our acetic acid operations were $19.8 million in the second
quarter of 2009, a 49% decrease from the $39.2 million in revenues from these
operations in the second quarter of 2008. This decrease in acetic acid revenues
in the second quarter of 2009 was primarily due to reduced profit-sharing
revenue of approximately $9.0 million as a result of reduced margins and
slightly lower sales volumes compared to the second quarter of 2008.
Additionally, reimbursement of variable costs for the second quarter of 2009 was
lower by approximately $11.0 million due to the shutdown of our acetic acid unit
in June 2009 for scheduled maintenance work. Gross loss for our acetic acid
operations was $0.1 million for the second quarter of 2009 compared to gross
profit of $9.5 million for the second quarter of 2008. This decrease in gross
profit was primarily due to the reduced profit-sharing revenue discussed above.
Revenues from our plasticizers operations were $6.9 million in the second
quarter of 2009, a 19% decrease from the $8.5 million in revenues from these
operations in the second quarter of 2008. Our higher revenues for the second
quarter of 2008 were primarily due to a $1.9 million reimbursement of costs
during the quarter related to the closure of the phthalic anhydride, or PA,
unit. Gross profit from our plasticizers operations was $1.4 million for the
second quarter of 2009 compared to $1.2 million for the second quarter of 2008.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $3.3 million for the
second quarter of 2009 compared to $3.8 million for the second quarter of 2008.
This decrease was primarily due to decreased legal fees resulting from the
resolution of various lawsuits in the second quarter of 2009. These figures
exclude insurance reimbursements of $1.2 million which are recorded in other
income.
Impairment of long-lived assets
We recorded zero and $6.6 million for impairment of long-lived assets for the
three months ended June 30, 2009 and 2008, respectively. The $6.6 million
impairment in the second quarter of 2008 was for the write-down of the phthalic
anhydride, or PA, assets to zero as a result of the shutdown of the PA unit.
Interest and debt related expenses
We recorded $4.0 million and $4.7 million of interest and debt related
expenses for the three months ended June 30, 2009 and 2008, respectively. The
decrease for the three months ended June 30, 2009, compared to the three months
ended June 30, 2008, was primarily due to $0.3 million write-off of debt fees
resulting from the reduction of our commitment under our revolving credit
facility in the second quarter of 2008. The remaining decrease was due to
increased capitalized interest and reduced credit facility fees for the second
quarter of 2009 compared to the second quarter of 2008.
Interest income
We recorded $0.2 million of interest income in the second quarter of 2009
compared to $1.1 million in the second quarter of 2008. This decrease was due to
lower interest rates earned on our cash investments in 2009 compared to 2008.
Other income
Our other income was $1.5 million for the second quarter of 2009 compared to
zero for the second quarter of 2008. This increase in other income was primarily
due to the receipt of a previously disputed contractual payment and the
reimbursement from insurers of legal fees related to various lawsuits during the
second quarter of 2009.
Benefit for income taxes
During the second quarter of 2009, we recorded a net tax benefit of
$1.0 million for income taxes from continuing operations, compared to a net tax
expense of zero for income taxes from continuing operations for the second
quarter of 2008. The net tax benefit in the second quarter of 2009 was generated
as a result of utilizing income in discontinued operations to recognize a
portion of the benefit from losses generated in continuing operations. Our
continuing operations effective tax rate was 23.3% for the three month period
ended June 30, 2009 compared to an effective tax rate of zero for the period
ended June 30, 2008; and there was no change to the valuation allowance of
$52.0 million.
Income (loss) from discontinued operations, net of tax
During the second quarter of 2009, net income from discontinued operations,
net of tax was $1.9 million compared to a net loss of $1.6 million for the
second quarter of 2008. This improvement was primarily due to costs incurred for
completing the decommissioning of our styrene facility in 2008.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenues and loss from continuing operations
Our revenues were $58.3 million for the six-month period ended June 30, 2009,
a 32% decrease from the $86.1 million in revenues we recorded for the six-month
period ended June 30, 2008. We had a net loss from continuing operations of
$4.0 million in the first six months of 2009, compared to a net loss from
continuing operations of $5.2 million in the first six months of 2008.
Revenues from our acetic acid operations were approximately $43.6 million for
the six-month period ended June 30, 2009, a 36% decrease from the $68.1 million
in revenues from these operations for the six-month period ended June 30, 2008.
This decrease in acetic acid revenues in the first six months of 2009 was
primarily due to reduced profit-sharing revenue of approximately $8.0 million as
a result of lower sales volumes and reduced margins compared to the first six
months of 2008. Additionally, reimbursement of variable costs for the first six
months of 2009 was lower by approximately $17.0 million due to the shutdown of
our acetic acid unit in June 2009 for scheduled maintenance. Gross profit from
our acetic acid operations was $4.4 million for the first six months of 2009
compared to $13.5 million for the first six months of 2008. The decrease in
gross profit was primarily due to the reduced profit-sharing revenue discussed
above.
Revenues from our plasticizers operations were approximately $14.2 million
for the six-month period ended June 30, 2009, a 19% decrease from the
$17.5 million in revenues from these operations for the six-month period ended
June 30, 2008. Our higher revenues for the six-month period ended June 30, 2008
is primarily due to a $3.7 million reimbursement of costs in the first six
months of 2008 related to the closure of our PA unit. Gross profit from our
plasticizers operations was $2.7 million for the first six months of 2009
compared to $3.1 million for the first six months of 2008.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $7.2 million for the
six-month period ended June 30, 2009, compared to $6.2 million for the six-month
period ended June 30, 2008. This increase in 2009 was primarily due to increased
legal fees related to various lawsuits. These figures exclude insurance
reimbursements of $1.3 million which are recorded in other income.
Impairment of long-lived assets
We recorded zero and $6.6 million for impairment of long-lived assets for the
six months ended June 30, 2009 and 2008, respectively. The $6.6 million
impairment in the second quarter of 2008 was for the write-down of PA assets to
zero as a result of the shutdown of the PA unit.
Interest and debt related expenses
We recorded $8.0 million and $8.9 million of interest and debt related
expenses for the six months ended June 30, 2009 and 2008, respectively. The
decrease for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008, was primarily due to $0.3 million write-off of debt fees
resulting from the reduction of our commitment under our revolving credit
facility in the second quarter of 2008. The remaining decrease was due to
increased capitalized interest and reduced credit facility fees for first six
months of 2009 compared to the first six months of 2008.
Interest income
We recorded $0.6 million of interest income for the first six months of 2009
compared to $2.4 million in the first six months of 2008. This decrease was due
to lower interest rates earned on our cash investments in 2009 compared to 2008.
Other income
Our other income was $2.7 million for the first six months of 2009 compared
to zero for the first six months of 2008. This increase in other income was
primarily due to the receipt of a previously disputed contractual payment and
the reimbursement of legal fees related to various lawsuits during the first six
months of 2009.
Benefit for income taxes
During the six month periods ended June 30, 2009 and 2008, we recorded net
tax benefit of $1.2 million and zero, respectively, for income taxes from
continuing operations. The net tax benefit in the six-month period ended
June 30, 2009, was generated as a result of utilizing income in discontinued
operations to recognize a portion of the benefit from losses generated in
continuing operations. Our continuing operations effective tax rate was 23.5%
for the six month period ended June 30, 2009, compared to an effective tax rate
of zero for the six month period ended June 30, 2008. For the six months ended
June 30, 2009, there was no change to our valuation allowance of $52.0 million.
Income (loss) from discontinued operations, net of tax
During the first six months of 2009, net income from discontinued operations,
net of tax was $3.6 million compared to a net loss of $7.9 million for the first
six months of 2008. This improvement was primarily due to costs incurred for
completing the decommissioning of our styrene facility in 2008.
Liquidity and Capital Resources
On March 29, 2007, we completed a private offering of $150 million aggregate
principal amount of unregistered 101/4% Senior Secured Notes due 2015, or our
Secured Notes, pursuant to a Purchase Agreement among us, Sterling Chemicals
Energy, Inc., or Sterling Energy, one of our former wholly-owned subsidiaries,
and Jefferies & Company, Inc. and CIBC World Markets Corp., as initial
purchasers. In connection with that offering, we entered into an indenture,
dated March 29, 2007, among us, Sterling Energy, as guarantor, and U. S. Bank
National Association, as trustee and collateral agent. On May 6, 2008, Sterling
Energy was merged with and into us. Upon consummation of the merger, Sterling
Energy no longer had independent existence and, consequently, our Secured Notes
are no longer guaranteed by Sterling Energy. Pursuant to a registration rights
agreement among us, Sterling Energy and the initial purchasers, we agreed to
exchange our unregistered Secured Notes for a new issue of substantially
identical debt securities registered under the Securities Act, to cause the
registration statement for the exchange offer to become effective by
December 24, 2007, and to complete the exchange offer within 50 days of the
effective date of the registration statement. On August 30, 2007, we made an
initial filing of the exchange offer registration statement. However, the
registration statement was not declared effective by December 24, 2007, and, as
a result, the interest rate on our Secured Notes increased by 0.25% per annum on
each of December 25, 2007, March 24, 2008 and June 22, 2008. The registration
statement was declared effective on August 13, 2008, and the exchange offer was
closed on September 19, 2008. As a result, the interest rate on our Secured
Notes reverted back to the face amount of 101/4% per annum when the exchange
offer closed. The additional interest incurred from December 25, 2007 through
the closing of the exchange offer was approximately $0.5 million and was paid on
April 1 and October 1, 2008.
Our indenture contains affirmative and negative covenants and customary
events of default, including payment defaults, breaches of covenants and certain
events of bankruptcy, insolvency and reorganization. If an event of default
occurs and is continuing, other than an event of default triggered upon certain
bankruptcy events, the trustee under our indenture or the holders of at least
25% in principal amount of our outstanding Secured Notes may declare our Secured
Notes to be due and payable immediately. Upon an event of default, the trustee
may also take actions to foreclose on the collateral securing our outstanding
Secured Notes, subject to the terms of an intercreditor agreement
dated March 29, 2007, among us, Sterling Energy, the trustee and The CIT
Group/Business Credit, Inc. Our indenture does not require us to maintain any
financial ratios or satisfy any financial maintenance tests. We are currently in
compliance with all of the covenants contained in our indenture.
Interest is due on our outstanding Secured Notes on April 1 and October 1 of
each year. Our outstanding Secured Notes, which mature on April 1, 2015, are
senior secured obligations and rank equally in right of payment with all of our
existing and future senior indebtedness. Subject to specified permitted liens,
our outstanding Secured Notes are secured (i) on a first priority basis by all
of our fixed assets and certain related assets, including, without limitation,
all property, plant and equipment and (ii) on a second priority basis by our
other assets, including, without limitation, accounts receivable, inventory,
capital stock of our domestic restricted subsidiaries, intellectual property,
deposit accounts and investment property.
On December 19, 2002, we entered into a Revolving Credit Agreement, or our
revolving credit facility, with The CIT Group/Business Credit, Inc., as
administrative agent and a lender, and certain other lenders. Under our
revolving credit facility, we and Sterling Energy were co-borrowers and were
jointly and severally liable for any indebtedness thereunder. After the merger
of Sterling Energy with and into us, Sterling Energy ceased to be a co-borrower
under our revolving credit facility. Our revolving credit facility is secured by
first priority liens on all of our accounts receivable, inventory and other
specified assets. On March 29, 2007, we amended and restated our revolving
credit facility to, among other things, extend the term of our revolving credit
facility until March 29, 2012, reduce the maximum commitment thereunder to
$50 million, make certain changes to the calculation of the borrowing base and
lower the interest rates and fees charged thereunder. Borrowings under our
revolving credit facility bear interest, at our option, at an annual rate of a
base rate plus 0.0% to 0.50% or the LIBOR rate plus 1.50% to 2.25%, depending on
our borrowing availability at the time. We are also required to pay an aggregate
commitment fee of 0.375% per year (payable monthly) on any unused portion of our
revolving credit facility. Available credit under our revolving credit facility
is subject to a monthly borrowing base of 70% of eligible accounts receivable
plus 65% of eligible inventory. In response to the expected continued lower
levels of accounts receivable and inventory, as well as our lesser need for a
working capital facility, we reduced our commitment under our revolving credit
facility to $25 million on June 30, 2008. On November 7, 2008, we further
amended our revolving credit facility to substantially reduce restrictions,
subject to minimum liquidity requirements, on investment of cash and other
assets, payment of cash dividends, repurchase of debt and equity securities,
modification of preferred stock terms, entry into affiliated transactions,
disposition of assets and engagement in certain business activities. We paid the
administrative agent an amendment fee plus expenses totaling approximately
$0.1 million in connection with this amendment.
CIT Group, Inc., the administrative agent and a lender under our revolving
credit facility, has incurred significant rating downgrades due to liquidity
concerns. The bank recently announced that it had entered into a $3 billion loan
facility provided by a group of its major bondholders and that it intends to
commence a comprehensive restructuring of its liabilities to provide additional
liquidity and further strengthen its capital position. We are closely monitoring
this situation; we do not believe it will have a material impact on our
financial condition or our ability to fund operations.
As of June 30, 2009, total credit available under our revolving credit
facility was $9.1 million, there were no loans outstanding and we had
$3.5 million in letters of credit outstanding, resulting in borrowing
availability of $5.6 million. Pursuant to Emerging Issues Task Force Issue
No. 95-22, "Balance Sheet Classification of Borrowings under Revolving Credit
Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement," any balances outstanding under our revolving credit facility would
be classified as a current portion of long-term debt.
Our revolving credit facility contains numerous covenants and conditions,
including, but not limited to, restrictions on our ability to incur
indebtedness, create liens, sell assets, make investments of cash and other
assets, make capital expenditures, engage in mergers and acquisitions and pay
cash dividends. Our revolving credit facility also includes various
circumstances and conditions that would, upon their occurrence and subject in
certain cases to notice and grace periods, create an event of default
thereunder. Our revolving credit facility does not require us to maintain any
financial ratios or satisfy any financial maintenance tests. We are currently in
compliance with all of the covenants contained in our revolving credit facility.
Our liquidity (i.e., cash and cash equivalents plus total credit available
under our revolving credit facility) was $156.4 million at June 30, 2009, a
decrease of $10.8 million compared to our liquidity at December 31, 2008. This
decrease was primarily due to a $5.9 million decrease in our borrowing base as a
result of the reduction in accounts receivable from December 31, 2008, and $6.4
million for capital expenditures during the first six months of 2009.
Distress in the financial markets during 2008 and 2009 has had an adverse
impact on financial market activities including, among other things, volatility
in security prices, diminished liquidity and credit availability, rating
downgrades of certain investments and declining valuations of others. We have
assessed the implications of these factors on our current business and
determined that there has not been a significant impact to our financial
condition, results of operations or liquidity during the second quarter of 2009.
Our cash is invested in highly rated money market funds, which are guaranteed by
the US Department of Treasury under its Temporary Guarantee Program for Money
Market Funds. We believe that our cash on hand and cash generated from
continuing operations, along with credit available under our revolving credit
facility, will be sufficient to meet our short-term and long-term liquidity
needs for the reasonably foreseeable future.
Working Capital
Our working capital was $137.0 million as of June 30, 2009, a decrease of
$9.0 million from our working capital of $146.0 million as of December 31, 2008.
This decrease was primarily due to a $7.7 million accrual for interest related
to our Secured Notes, capital expenditures of $6.4 million, shutdown costs of
. . .
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