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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 March 31, 2011
 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.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    76-0502785(State or other jurisdiction of
    
    (IRS Employer Identification No.)Incorporation or organization)333 Clay Street, Suite 3600Houston, Texas 77002-4109
    
    (713) 650-3700(Address of principal executive offices)
    
    (Registrants telephone number,including area code)
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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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 4.
    
    Controls and Procedures
    
    
    20PART II.  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 6.
    
    Exhibits
    
    
    20EX-10.1EX-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 March 31,2011
    
    
    2010Revenues
    
    $
    25,951
    
    
    $
    26,682Cost of goods sold
    
    
    22,822
    
    
    
    23,522Gross profit
    
    
    3,129
    
    
    
    3,160Selling, general and administrative expenses
    
    
    3,047
    
    
    
    2,894Impairment of long-lived assets
    
    
    
    
    
    
    290Interest and debt related expenses
    
    
    3,126
    
    
    
    3,607Interest income
    
    
    (92
    )
    
    
    (49
    )Other income
    
    
    (12,802
    )
    
    
    (76
    )Income (loss) from continuing operations before income tax
    
    
    9,850
    
    
    
    (3,506
    )Income tax expense (benefit)
    
    
    519
    
    
    
    (1,227
    )Income (loss) from continuing operations
    
    $
    9,331
    
    
    $
    (2,279
    )Income from discontinued operations, net of tax
expense of zero and $1,756, respectively
    
    
    2,330
    
    
    
    3,262Net income
    
    $
    11,661
    
    
    $
    983Preferred stock dividends
    
    
    4,681
    
    
    
    4,455Net income (loss) attributable to common stockholders
    
    $
    6,980
    
    
    $
    (3,472
    )Income (loss) per share of common stock attributable to
common stockholders, basic and diluted:Income (loss) from continuing operations
    
    $
    1.65
    
    
    $
    (2.38
    )Income from discontinued operations, net of tax
    
    
    0.82
    
    
    
    1.15Basic and diluted income (loss) per share
    
    $
    2.47
    
    
    $
    (1.23
    )Weighted average shares outstanding:Basic and diluted
    
    
    2,828,460
    
    
    
    2,828,460
  4




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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    106,070
    
    
    $
    121,281Short-term investments
    
    
    
    
    
    
    9,000Accounts and other receivables, net of allowance of $18 and $18, respectively
    
    
    25,786
    
    
    
    10,981Inventories, net
    
    
    3,620
    
    
    
    3,756Prepaid expenses and other current assets
    
    
    1,496
    
    
    
    2,424Assets of discontinued operations, net
    
    
    63
    
    
    
    306Total current assets
    
    
    137,035
    
    
    
    147,748Property, plant and equipment, net
    
    
    55,302
    
    
    
    55,743Other assets, net
    
    
    3,303
    
    
    
    3,908Total assets
    
    $
    195,640
    
    
    $
    207,399LIABILITIES AND STOCKHOLDERS DEFICIENCY IN ASSETSCurrent liabilities:Accounts payable
    
    $
    9,755
    
    
    $
    8,832Accrued liabilities
    
    
    15,059
    
    
    
    18,850Liabilities of discontinued operations
    
    
    12,382
    
    
    
    12,382Total current liabilities
    
    
    37,196
    
    
    
    40,064Long-term debt
    
    
    104,428
    
    
    
    119,428Long-term liabilities
    
    
    40,239
    
    
    
    42,678Long-term liabilities of discontinued operations
    
    
    7,533
    
    
    
    10,628Commitments and contingencies (Note 4)Redeemable preferred stock
    
    
    157,403
    
    
    
    152,722Stockholders 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
    
    
    84,496
    
    
    
    89,153Accumulated deficit
    
    
    (213,110
    )
    
    
    (224,771
    )Accumulated other comprehensive loss
    
    
    (22,573
    )
    
    
    (22,531
    )Total stockholders deficiency in assets
    
    
    (151,159
    )
    
    
    (158,121
    )Total liabilities and stockholders deficiency in assets
    
    $
    195,640
    
    
    $
    207,399
  5




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STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
 Three months ended March 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    11,661
    
    
    $
    983Adjustments to reconcile net income to net cash from operating
activities:Stock compensation expense
    
    
    24
    
    
    
    24Bad debt expense
    
    
    
    
    
    
    21Benefit plan curtailment gain
    
    
    (374
    )
    
    
    (115
    )Depreciation and amortization
    
    
    2,452
    
    
    
    3,041Interest amortization
    
    
    194
    
    
    
    432Amortization of deferred revenue
    
    
    (3,096
    )
    
    
    (4,280
    )Impairment of long-lived assets
    
    
    
    
    
    
    290Gain on disposal of property, plant and equipment
    
    
    (74
    )
    
    
    (15
    )Loss (gain) on purchase of Senior Secured Notes
    
    
    972
    
    
    
    (6
    )Other
    
    
    15
    
    
    
    13Change in assets/liabilities:Accounts and other receivables
    
    
    (14,562
    )
    
    
    838Inventories
    
    
    121
    
    
    
    (21
    )Prepaid expenses and other current assets
    
    
    928
    
    
    
    823Other assets
    
    
    2
    
    
    
    (21
    )Accounts payable
    
    
    901
    
    
    
    (3,310
    )Accrued liabilities
    
    
    (3,791
    )
    
    
    (409
    )Long-term liabilities
    
    
    (2,106
    )
    
    
    1,609Net cash from operating activities
    
    
    (6,733
    )
    
    
    (103
    )Cash flows from investing activities:Capital expenditures for property, plant and equipment
    
    
    (2,304
    )
    
    
    (577
    )Net proceeds from the sale of property, plant and equipment
    
    
    389
    
    
    
    15Redemption of short-term investments
    
    
    9,000
    
    
    
    Net cash from investing activities
    
    
    7,085
    
    
    
    (562
    )Cash flows from financing activities:Purchase of Senior Secured Notes
    
    
    (15,563
    )
    
    
    (1,925
    )Net cash from financing activities
    
    
    (15,563
    )
    
    
    (1,925
    )Net decrease in cash and cash equivalents
    
    
    (15,211
    )
    
    
    (2,590
    )Cash and cash equivalents  beginning of year
    
    
    121,281
    
    
    
    123,778Cash and cash equivalents  end of period
    
    $
    106,070
    
    
    $
    121,188Supplemental disclosures of cash flow information:Interest paid
    
    $
    651
    
    
    $
    129Interest income received
    
    
    92
    
    
    
    49Cash 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
  Per Share Data
  2. Discontinued Operations
  7




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  Plasticizers-BASF
   March 31,
    
    
    December 31,2011
    
    
    2010(Dollars in Thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    63
    
    
    $
    306Total assets of discontinued operations
    
    $
    63
    
    
    $
    306Liabilities of discontinued operations:Liabilities of discontinued operations(1)
    
    $
    12,382
    
    
    $
    12,382Long-term liabilities of discontinued operations(2)
    
    
    7,533
    
    
    
    10,628Total liabilities of discontinued operations
    
    $
    19,915
    
    
    $
    23,010
 
 (1)
    
    Current portion of deferred income from the INEOS NOVA supply agreement that is being
amortized over the contractual non-compete period of five years using the straight-line
method.(2)
    
    Long-term portion of deferred income from the INEOS NOVA supply agreement that is being
amortized over the contractual non-compete period of five years using the straight-line
method.  8




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 Three months ended March 31,2011
    
    2010(Dollars in Thousands)Revenues
    
    $
    3,213
    
    
    $
    9,523Income before income taxes
    
    
    2,330
    
    
    
    5,018
 3. Long-Term Debt
       9




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  Debt Maturities
  4. Commitments and Contingencies
 Product Contracts:
  Legal Proceedings:
   10




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
   5. Income Taxes
  6. Employee Benefits
  Three months ended March 31,2011
    
    
    2010(Dollars in Thousands)Interest cost
    
    $
    1,642
    
    
    $
    1,745Expected return on plan assets
    
    
    (1,303
    )
    
    
    (1,160
    )Amortization
    
    
    205
    
    
    
    191Net pension cost
    
    $
    544
    
    
    $
    776
  Three months ended March 31,2011
    
    
    2010(Dollars in Thousands)Service cost
    
    $
    7
    
    
    $
    10Interest cost
    
    
    80
    
    
    
    95Prior service costs
    
    
    (544
    )
    
    
    (544
    )Curtailment gain
    
    
    (374
    )
    
    
    (115
    )Net plan benefit
    
    $
    (831
    )
    
    $
    (554
    )
   11




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 7. Operating Segment and Sales Information
  8. Fair Value Measurements
 Fair Value of Financial Instruments
  March 31, 2011
    
    December 31, 2010Carrying
    
    
    
    
    
    CarryingValue
    
    Fair Value
    
    Value
    
    Fair Value10.25% senior secured notes due April 2015
    
    $
    104,428
    
    
    $
    108,605
    
    
    $
    119,428
    
    
    $
    123,011
  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
 12




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
    
    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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Plasticizers-BASF
 Recent Developments
   Results of Operations
  Three months ended March 31,2011
    
    2010(Dollars in Thousands)Revenues
    
    $
    25,951
    
    
    $
    26,682Cost of goods sold
    
    
    22,822
    
    
    
    23,522Gross profit
    
    
    3,129
    
    
    
    3,160Selling, general and administrative expenses
    
    
    3,047
    
    
    
    2,894Impairment of long-lived assets
    
    
    
    
    
    
    290Interest and debt related expenses
    
    
    3,126
    
    
    
    3,607Interest income
    
    
    (92
    )
    
    
    (49
    )Other income
    
    
    (12,802
    )
    
    
    (76
    )Income tax expense (benefit)
    
    
    519
    
    
    
    (1,227
    )Income (loss) from continuing operations
    
    
    9,331
    
    
    
    (2,279
    )Income from discontinued operations, net of tax
expense of zero and $1,756, respectively
    
    
    2,330
    
    
    
    3,262
 Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 Revenues and gross profit
  16




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Impairment of long-lived assets
  Interest and debt related expenses
  Other income
  Income
tax expense (benefit)
  Income from discontinued operations, net of tax
  Liquidity and Capital Resources
 General
  17




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Debt
    18




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Business Strategy
 Cash Flow
  Critical Accounting Policies, Use of Estimates and Assumptions
 19




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
   Changes in Internal Controls over Financial Reporting.
 
 PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
  ExhibitNumber
    
    
    
    Description of Exhibit10.1
    
    
    
    Amended and Restated $5,000,000
Revolving Line of Credit for letters of credit from JPMorgan Chase
Bank, N.A. to Sterling Chemicals, Inc.15.1
    
    
    
    Letter of Grant Thornton LLP regarding unaudited interim financial information.31.1
    
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.
 20




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ExhibitNumber
    
    
    
    Description of Exhibit31.2
    
    
    
    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.
 21




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SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date:  May 13, 2011
    By
    /s/ JOHN V. GENOVAJohn V. GenovaPresident and Chief Executive OfficerDate:  May 13, 2011
    By
    /s/ DAVID J. COLLINSDavid J. CollinsSenior Vice President and Chief Financial Officer
(Principal Financial Officer) 22




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EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Description of Exhibit*10.1
    
    
    
    Amended and Restated $5,000,000
Revolving Line of Credit for letters of credit from JPMorgan Chase
Bank, N.A. to Sterling Chemicals, Inc.*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.
 
 *
    
    Filed or furnished herewith 23