##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    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 000-50132
 
 Sterling Chemicals, Inc.
  Delaware
    
    76-0502785(State or other jurisdiction of 
Incorporation or organization)
    
    (IRS Employer Identification No.)
 333 Clay Street, Suite 3600
    
    (713) 650-3700Houston, Texas 77002-4109
    
    (Registrants telephone number,(Address of principal executive offices)
    
    including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### Table of Contents



IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
   Forward-Looking Statements
   Document Summaries
  Access to Filings
 http://www.sterlingchemicals.com
 1




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##### 








STERLING CHEMICALS, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 4T. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 6. Exhibits
    
    
    22EX-3.1EX-3.2EX-3.3EX-10.1EX-10.2EX-15.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 3




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Share Data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    30,899
    
    
    $
    27,179
    
    
    $
    93,018
    
    
    $
    85,497Cost of goods sold
    
    
    26,107
    
    
    
    24,932
    
    
    
    78,143
    
    
    
    76,514Gross profit
    
    
    4,792
    
    
    
    2,247
    
    
    
    14,875
    
    
    
    8,983Selling, general and administrative expenses
    
    
    2,247
    
    
    
    2,916
    
    
    
    7,364
    
    
    
    10,143Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    Interest and debt related expenses
    
    
    3,349
    
    
    
    3,984
    
    
    
    10,294
    
    
    
    11,955Interest income
    
    
    (101
    )
    
    
    (94
    )
    
    
    (226
    )
    
    
    (690
    )Other income
    
    
    (102
    )
    
    
    (234
    )
    
    
    (272
    )
    
    
    (2,923
    )Loss from continuing operations before income tax
    
    
    (601
    )
    
    
    (4,325
    )
    
    
    (2,575
    )
    
    
    (9,502
    )Benefit for income taxes
    
    
    
    
    
    
    (1,316
    )
    
    
    
    
    
    
    (2,533
    )Loss from continuing operations
    
    $
    (601
    )
    
    $
    (3,009
    )
    
    $
    (2,575
    )
    
    $
    (6,969
    )Income from discontinued operations, net of tax
expense of zero, $972, zero and $2,884,
respectively
    
    
    3,047
    
    
    
    1,805
    
    
    
    9,062
    
    
    
    5,355Net income (loss)
    
    $
    2,446
    
    
    $
    (1,204
    )
    
    $
    6,487
    
    
    $
    (1,614
    )Preferred stock dividends
    
    
    4,683
    
    
    
    4,271
    
    
    
    13,643
    
    
    
    12,312Net loss attributable to common stockholders
    
    $
    (2,237
    )
    
    $
    (5,475
    )
    
    $
    (7,156
    )
    
    $
    (13,926
    )Income (loss) per share of common stock
attributable
to common stockholders, basic and diluted:Loss from continuing operations
    
    $
    (1.87
    )
    
    $
    (2.58
    )
    
    $
    (5.73
    )
    
    $
    (6.81
    )Income from discontinued operations,
net of tax
    
    
    1.08
    
    
    
    0.64
    
    
    
    3.20
    
    
    
    1.89Basic and diluted loss per share
    
    $
    (0.79
    )
    
    $
    (1.94
    )
    
    $
    (2.53
    )
    
    $
    (4.92
    )Weighted average shares outstanding:Basic and diluted
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,460
  4




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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    124,377
    
    
    $
    123,778Accounts receivable, net of allowance of $58 and $58, respectively
    
    
    12,604
    
    
    
    14,614Inventories, net
    
    
    4,615
    
    
    
    5,268Prepaid expenses and other current assets
    
    
    2,634
    
    
    
    2,656Assets of discontinued operations
    
    
    
    
    
    
    24Total current assets
    
    
    144,230
    
    
    
    146,340Property, plant and equipment, net
    
    
    58,924
    
    
    
    68,182Other assets, net
    
    
    4,781
    
    
    
    5,643Total assets
    
    $
    207,935
    
    
    $
    220,165LIABILITIES AND STOCKHOLDERS DEFICIENCY IN ASSETSCurrent liabilities:Accounts payable
    
    $
    8,357
    
    
    $
    11,703Accrued liabilities
    
    
    22,506
    
    
    
    24,416Liabilities of discontinued operations
    
    
    12,382
    
    
    
    12,384Total current liabilities
    
    
    43,245
    
    
    
    48,503Long-term debt
    
    
    123,000
    
    
    
    125,000Long-term liabilities
    
    
    38,998
    
    
    
    41,084Long-term liabilities of discontinued operations
    
    
    13,724
    
    
    
    23,010Commitments and contingencies (Note 4)Redeemable preferred stock
    
    
    148,171
    
    
    
    134,528Stockholders deficiency in assets:Common stock, $.01 par value (shares authorized 100,000,000;
shares issued
and outstanding 2,828,460)
    
    
    28
    
    
    
    28Additional paid-in capital
    
    
    93,378
    
    
    
    106,948Accumulated deficit
    
    
    (234,293
    )
    
    
    (240,780
    )Accumulated other comprehensive loss
    
    
    (18,316
    )
    
    
    (18,156
    )Total stockholders deficiency in assets
    
    
    (159,203
    )
    
    
    (151,960
    )Total liabilities and stockholders deficiency in assets
    
    $
    207,935
    
    
    $
    220,165
  5




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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
 Nine months ended September 30,2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    6,487
    
    
    $
    (1,614
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Stock compensation expense
    
    
    73
    
    
    
    284Bad debt expense
    
    
    21
    
    
    
    Benefit plan curtailment gain
    
    
    (115
    )
    
    
    Depreciation and amortization
    
    
    9,430
    
    
    
    7,289Interest amortization
    
    
    844
    
    
    
    830Amortization of deferred revenue
    
    
    (12,839
    )
    
    
    (10,911
    )Impairment of long-lived assets
    
    
    290
    
    
    
    Gain on disposal of property, plant and equipment
    
    
    (96
    )
    
    
    (362
    )Other
    
    
    468
    
    
    
    (358
    )Change in assets/liabilities:Accounts receivable
    
    
    2,013
    
    
    
    12,994Inventories
    
    
    338
    
    
    
    (99
    )Prepaid expenses and other current assets
    
    
    22
    
    
    
    (678
    )Other assets
    
    
    (51
    )
    
    
    (10
    )Accounts payable
    
    
    (3,116
    )
    
    
    (1,003
    )Accrued liabilities
    
    
    (1,912
    )
    
    
    (1,880
    )Long-term liabilities
    
    
    1,422
    
    
    
    1,441Net cash provided by operating activities
    
    
    3,279
    
    
    
    5,923Cash flows used in investing activities:Capital expenditures for property, plant and equipment
    
    
    (857
    )
    
    
    (8,972
    )Net proceeds from the sale of property, plant and equipment
    
    
    102
    
    
    
    362Net cash used in investing activities
    
    
    (755
    )
    
    
    (8,610
    )Cash flows used in financing activities:Purchase of Senior Secured Notes
    
    
    (1,925
    )
    
    
    Net cash used in financing activities
    
    
    (1,925
    )
    
    
    Net increase (decrease) in cash
    
    
    599
    
    
    
    (2,687
    )Cash and cash equivalents  beginning of year
    
    
    123,778
    
    
    
    156,126Cash and cash equivalents  end of period
    
    $
    124,377
    
    
    $
    153,439Supplemental disclosures of cash flow information:Interest paid
    
    $
    6,514
    
    
    $
    8,449Interest income received
    
    
    226
    
    
    
    690Cash received for income taxes
    
    
    598
    
    
    
    
  6




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation and Accounting Policies
  Reclassifications and Revisions
  Property Plant and Equipment Impairment
  2. Discontinued Operations
   7




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 September 30,
    
    
    December 31,2010
    
    
    2009Assets of discontinued operations:Accounts receivable, net of allowance of $44 and $23 respectively
    
    $
    
    
    
    $
    24Liabilities of discontinued operations:(1)Current portion of deferred revenue
    
    $
    12,382
    
    
    $
    12,384Long-term portion of deferred revenue
    
    
    13,724
    
    
    
    23,010Total
    
    $
    26,106
    
    
    $
    35,394
 
 (1)
    
    As of September 30, 2010, amounts represent deferred income from the NOVA
supply agreement that is being amortized over the contractual non-compete period of five years
using the straight-line method.  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in Thousands)Revenues
    
    $
    3,096
    
    
    $
    3,096
    
    
    $
    9,287
    
    
    $
    9,502Income before income taxes
    
    
    3,047
    
    
    
    2,777
    
    
    
    9,062
    
    
    
    8,239
 3. Long-Term Debt
 1 4
    8




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
    Debt Maturities
  4. Commitments and Contingencies
 Product Contracts:
  Legal Proceedings:
  9




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
    5. Income Taxes
  6. Employee Benefits
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in Thousands)Interest cost
    
    $
    1,745
    
    
    $
    1,828
    
    
    $
    5,235
    
    
    $
    5,484Expected return on plan assets
    
    
    (1,159
    )
    
    
    (1,512
    )
    
    
    (3,479
    )
    
    
    (4,538
    )Amortization
    
    
    191
    
    
    
    863
    
    
    
    574
    
    
    
    2,591Net pension cost
    
    $
    777
    
    
    $
    1,179
    
    
    $
    2,330
    
    
    $
    3,537
 10




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##### Table of Contents



STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  Nine months endedThree months ended September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in Thousands)Service cost
    
    $
    10
    
    
    $
    12
    
    
    $
    30
    
    
    $
    34Interest cost
    
    
    93
    
    
    
    121
    
    
    
    281
    
    
    
    363Amortization of unrecognized costs
    
    
    (540
    )
    
    
    (542
    )
    
    
    (1,624
    )
    
    
    (1,624
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    Net plan benefit
    
    $
    (437
    )
    
    $
    (409
    )
    
    $
    (1,428
    )
    
    $
    (1,227
    )
   7. Operating Segment and Sales Information
  Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in Thousands)Revenues:Acetic acid
    
    $
    24,522
    
    
    $
    20,892
    
    
    $
    73,482
    
    
    $
    64,527Plasticizers
    
    
    6,122
    
    
    
    6,032
    
    
    
    18,766
    
    
    
    20,205Other
    
    
    255
    
    
    
    255
    
    
    
    770
    
    
    
    765Total
    
    $
    30,899
    
    
    $
    27,179
    
    
    $
    93,018
    
    
    $
    85,497Segment gross profit (loss):Acetic acid
    
    $
    3,925
    
    
    $
    43
    
    
    $
    11,216
    
    
    $
    4,484Plasticizers
    
    
    1,748
    
    
    
    1,511
    
    
    
    5,129
    
    
    
    4,235Other
    
    
    (881
    )
    
    
    693
    
    
    
    (1,470
    )
    
    
    264Total
    
    
    4,792
    
    
    
    2,247
    
    
    
    14,875
    
    
    
    8,983Selling, general and administrative expenses
    
    
    2,247
    
    
    
    2,916
    
    
    
    7,364
    
    
    
    10,143Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    Interest and debt related expenses
    
    
    3,349
    
    
    
    3,984
    
    
    
    10,294
    
    
    
    11,955Interest income
    
    
    (101
    )
    
    
    (94
    )
    
    
    (226
    )
    
    
    (690
    )Other income
    
    
    (102
    )
    
    
    (234
    )
    
    
    (272
    )
    
    
    (2,923
    )Loss from continuing operations before income
tax
    
    $
    (601
    )
    
    $
    (4,325
    )
    
    $
    (2,575
    )
    
    $
    (9,502
    )Depreciation and amortization expenses:Acetic acid
    
    $
    2,029
    
    
    $
    2,114
    
    
    $
    5,951
    
    
    $
    5,473Plasticizers
    
    
    874
    
    
    
    342
    
    
    
    2,466
    
    
    
    979Other(1)
    
    
    342
    
    
    
    330
    
    
    
    1,013
    
    
    
    837Total
    
    $
    3,245
    
    
    $
    2,786
    
    
    $
    9,430
    
    
    $
    7,289Capital expenditures:Acetic acid
    
    $
    
    
    
    $
    1,472
    
    
    $
    144
    
    
    $
    5,179Other  plant infrastructure
    
    
    82
    
    
    
    1,120
    
    
    
    713
    
    
    
    3,793Total
    
    $
    82
    
    
    $
    2,592
    
    
    $
    857
    
    
    $
    8,972
 
 (1)
    
    Includes depreciation and amortization expenses for discontinued operations of
less than $0.1 million for each of the three and nine-month periods ended September 30, 2010
and 2009, respectively. 11




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 September 30, 2010
    
    
    December 31, 2009(Dollars in Thousands)Total assets:Acetic acid
    
    $
    32,956
    
    
    $
    35,362Plasticizers
    
    
    2,349
    
    
    
    5,412Other(1)
    
    
    172,630
    
    
    
    179,391Total
    
    $
    207,935
    
    
    $
    220,165
 
 (1)
    
    Components of Other are presented in the table below: September 30, 2010
    
    
    December 31, 2009(Dollars in Thousands)Other:Corporate:Cash
    
    $
    124,377
    
    
    $
    123,778Other
    
    
    13,422
    
    
    
    17,677Plant infrastructure:Property, plant and equipment, net
    
    
    34,831
    
    
    
    37,912Assets of discontinued operations
    
    
    
    
    
    
    24Total
    
    $
    172,630
    
    
    $
    179,391
 8. Fair Value Measurements
 Fair Value of Financial Instruments
  September 30, 2010
    
    
    December 31, 2009Carrying Value
    
    
    Fair Value
    
    
    Carrying Value
    
    
    Fair ValueSecured Notes
    
    $
    123,000
    
    
    $
    120,540
    
    
    $
    125,000
    
    
    $
    119,400
  12




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##### Table of Contents



STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 Nonrecurring Fair Value Measurements
  9. New Accounting Standards
 Adoption of Accounting Standards:
  
    
    a reporting entity disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers; and
 
    
    a reporting entity present separately information about purchases, sales,
issuances and settlements in the reconciliation for fair value measurements using
significant unobservable inputs.
  
    
    for purposes of reporting fair value measurements for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the appropriate
classes of assets and liabilities; and
 
    
    a reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements.
  13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Business Overview
      14




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15




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Results of Operations
 Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 Revenues and loss from continuing operations
    Selling, general and administrative expenses
  Interest and debt related expenses
 1 4
 Other income
  Benefit for income taxes
  16




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##### Table of Contents



Income from discontinued operations, net of tax
  Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 Revenues and loss from continuing operations
    Selling, general and administrative expenses
  17




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##### Table of Contents



Impairment of long-lived assets
  Interest and debt related expenses
  Interest income
  Other income
  Benefit for income taxes
  Income from discontinued operations, net of tax
  Liquidity and Capital Resources
 General
  18




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Debt
      19




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Cash Flow
  Critical Accounting Policies, Use of Estimates and Assumptions
  
 Item 4T. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 20




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Changes in Internal Controls over Financial Reporting.
 21




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PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
  ExhibitNumber
    
    
    
    Description of Exhibit*3.1
    
    
    
    Amendment to Line Letter dated as of September 10, 2010 between Sterling
Chemicals, Inc. and JPMorgan Chase Bank, N.A.*3.2
    
    
    
    Security Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A.*3.3
    
    
    
    Pledge Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A.+*10.1
    
    
    
    Fifth Amended and Restated Severance Pay Plan.+*10.2
    
    
    
    Sterling Chemicals, Inc. Savings and Investment Plan.*15.1
    
    
    
    Letter of Grant Thornton LLP regarding unaudited interim financial information.*31.1
    
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.*31.2
    
    
    
    Rule 13a-14(a) Certification of the Principal Financial Officer.*32.1
    
    
    
    Section 1350 Certification of the Chief Executive Officer.*32.2
    
    
    
    Section 1350 Certification of the Principal Financial Officer.
 
 +
    
    Management contracts or compensatory plans or arrangements*
    
    Filed or furnished herewith 22




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##### Table of Contents



SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date:  November 9, 2010
    By                /s/ JOHN V. GENOVAJohn V. GenovaPresident and Chief Executive Officer Date:  November 9, 2010
    By                /s/ DAVID J. COLLINSDavid J. CollinsSenior Vice President and Chief Financial Officer
(Principal Financial Officer) 23




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Description of Exhibit*3.1
    
    
    
    Amendment to Line Letter dated as of September 10, 2010 between Sterling
Chemicals, Inc. and JPMorgan Chase Bank, N.A.*3.2
    
    
    
    Security Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A.*3.3
    
    
    
    Pledge Agreement dated as of September 13, 2010 between Sterling Chemicals,
Inc. and JPMorgan Chase Bank, N.A.+*10.1
    
    
    
    Fifth Amended and Restated Severance Pay Plan.+*10.2
    
    
    
    Sterling Chemicals, Inc. Savings and Investment Plan.*15.1
    
    
    
    Letter of Grant Thornton LLP regarding unaudited interim financial information.*31.1
    
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.*31.2
    
    
    
    Rule 13a-14(a) Certification of the Principal Financial Officer.*32.1
    
    
    
    Section 1350 Certification of the Chief Executive Officer.*32.2
    
    
    
    Section 1350 Certification of the Principal Financial Officer.
 
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    Management contracts or compensatory plans or arrangements*
    
    Filed or furnished herewith 24