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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 June 30, 2007
 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(State or other jurisdiction of 
incorporation or organization)
    
    76-0502785(IRS Employer Identification No.)333 Clay Street, Suite 3600
Houston, Texas 77002-4109(Address of principal executive offices)
    
    (713) 650-3700(Registrants telephone number,
including area code)
 þ o
  o o þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 þ o
 o þ




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IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
   Forward-Looking Statements
  
    
    the cyclicality of the petrochemicals industry;
    
    current and future industry conditions and their effect on our results of operations or financial position;
    
    the extent, timing and impact of expansions of production capacity of our
products, by us or by our competitors;
    
    the potential effects of market and industry conditions and cyclicality on our
competitiveness, business strategy, results of operations or financial position;
    
    the adequacy of our liquidity;
    
    our environmental management programs and safety initiatives;
    
    our market sensitive financial instruments;
    
    future uses of, and requirements for, financial resources;
    
    future contractual obligations;
    
    future amendments, renewals or terminations of existing contractual relationships;
    
    business strategies;
    
    growth opportunities;
    
    competitive position;
    
    expected financial position;
    
    future cash flows or dividends;
    
    budgets for capital and other expenditures;
    
    plans and objectives of management;
    
    outcomes of legal proceedings;
    
    compliance with applicable laws;
    
    our reliance on marketing partners;
    
    adequacy of insurance coverage or indemnification rights;
    
    the timing and extent of changes in commodity prices for our products or raw materials;
    
    petrochemicals industry production capacity or operating rates;
    
    increases in the cost of, or our ability to obtain, raw materials or energy;
    
    regulatory initiatives and compliance with governmental laws or regulations,
including environmental laws or regulations;
    
    customer preferences;
    
    our ability to attract or retain high quality employees;
    
    operating hazards attendant to the petrochemicals industry;
    
    casualty losses, including those resulting from weather related events;
    
    changes in foreign, political, social or economic conditions;
    
    risks of war, military operations, other armed hostilities, terrorist acts or embargoes;
    
    changes in technology, which could require significant capital expenditures in
order to maintain competitiveness or could cause existing manufacturing processes to
become obsolete;
    
    cost, availability or adequacy of insurance; and
    
    various other matters, many of which are beyond our control.
 i




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Document Summaries
  Access to Filings
  ii




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STERLING CHEMICALS, INC.
INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 6. Exhibits
    
    
    21Letter of Deloitte & Touche LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  1




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PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 STERLING CHEMICALS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)(Dollars in Thousands, Except Share Data)Revenues
    
    $
    253,484
    
    
    $
    150,385
    
    
    $
    450,604
    
    
    $
    287,056Cost of goods sold
    
    
    244,005
    
    
    
    144,903
    
    
    
    430,961
    
    
    
    293,426Gross profit (loss)
    
    
    9,479
    
    
    
    5,482
    
    
    
    19,643
    
    
    
    (6,370
    )Selling, general and administrative expenses
    
    
    3,838
    
    
    
    3,101
    
    
    
    7,395
    
    
    
    3,780Other (income) expense
    
    
    839
    
    
    
    (3,337
    )
    
    
    839
    
    
    
    (3,724
    )Interest and debt related expenses, net of
interest income
    
    
    4,361
    
    
    
    2,515
    
    
    
    7,745
    
    
    
    4,903Income (loss) from continuing operations
before income tax
    
    
    441
    
    
    
    3,203
    
    
    
    3,664
    
    
    
    (11,329
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    (4,332
    )Income (loss) from continuing operations
    
    $
    441
    
    
    $
    2,137
    
    
    $
    3,664
    
    
    $
    (6,997
    )Loss from discontinued operations (net of
tax benefit of zero, $364, zero and $1,085,
respectively)
    
    
    887
    
    
    
    496
    
    
    
    1,441
    
    
    
    1,751Net income (loss)
    
    $
    (446
    )
    
    $
    1,641
    
    
    $
    2,223
    
    
    $
    (8,748
    )Preferred stock dividends
    
    
    2,351
    
    
    
    2,009
    
    
    
    4,611
    
    
    
    3,941Net loss attributable to common stockholders
    
    $
    (2,797
    )
    
    $
    (368
    )
    
    $
    (2,388
    )
    
    $
    (12,689
    )Income (loss) per share of common stock,
basic and diluted:Income (loss) from continuing operations
    
    $
    (0.68
    )
    
    $
    0.05
    
    
    $
    0.33
    
    
    $
    (3.87
    )Loss from discontinued operations, net of tax
    
    
    (0.31
    )
    
    
    (0.18
    )
    
    
    (0.51
    )
    
    
    (0.62
    )Earnings per share, basic and diluted
    
    $
    (0.99
    )
    
    $
    (0.13
    )
    
    $
    (0.84
    )
    
    $
    (4.49
    )Weighted average shares outstanding:Basic and diluted :
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,460
    
    
    
    2,828,463
  2




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STERLING CHEMICALS, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)(Dollars in Thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    57,142
    
    
    $
    20,690Accounts receivable, net of allowance of $2,118 and $1,987,
respectively
    
    
    92,667
    
    
    
    63,289Inventories, net
    
    
    41,401
    
    
    
    62,078Prepaid expenses
    
    
    1,186
    
    
    
    3,215Deferred tax asset
    
    
    3,044
    
    
    
    3,044Assets of discontinued operations
    
    
    
    
    
    
    20Total current assets
    
    
    195,440
    
    
    
    152,336Property, plant and equipment, net
    
    
    82,883
    
    
    
    83,833Other assets, net
    
    
    16,635
    
    
    
    9,654Total assets
    
    $
    294,958
    
    
    $
    245,823LIABILITIES AND STOCKHOLDERS DEFICIENCY IN ASSETSCurrent liabilities:Accounts payable
    
    $
    43,851
    
    
    $
    39,123Accrued liabilities
    
    
    21,831
    
    
    
    22,872Current portion of long-term debt
    
    
    
    
    
    
    Liabilities of discontinued operations
    
    
    217
    
    
    
    217Total current liabilities
    
    
    65,899
    
    
    
    62,212Long-term debt
    
    
    150,000
    
    
    
    100,579Deferred tax liability
    
    
    3,044
    
    
    
    Deferred credits and other liabilities
    
    
    37,250
    
    
    
    49,291Redeemable preferred stock
    
    
    61,118
    
    
    
    56,507Commitments and contingencies (Note 6)Stockholders equity:Common stock, $.01 par value
    
    
    28
    
    
    
    28Additional paid-in capital
    
    
    179,909
    
    
    
    184,500Accumulated deficit
    
    
    (211,391
    )
    
    
    (213,614
    )Accumulated other comprehensive income
    
    
    9,101
    
    
    
    6,320Total stockholders deficiency in assets
    
    
    (22,353
    )
    
    
    (22,766
    )Total liabilities and stockholders deficiency in assets
    
    $
    294,958
    
    
    $
    245,823
  3




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STERLING CHEMICALS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months ended June 30,2007
    
    
    2006(Unaudited)(Dollars in Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    2,223
    
    
    $
    (8,748
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    5,490
    
    
    
    16,255Interest amortization
    
    
    375
    
    
    
    200Lower-of-cost-or-market adjustment
    
    
    1,318
    
    
    
    Loss on investment
    
    
    839
    
    
    
    Gain on disposal of property, plant and equipment
    
    
    (182
    )
    
    
    Deferred tax benefit
    
    
    
    
    
    
    (5,477
    )Other
    
    
    20
    
    
    
    115Change in assets/liabilities:Accounts receivable
    
    
    (29,358
    )
    
    
    4,454Inventories
    
    
    19,359
    
    
    
    (10,051
    )Prepaid expenses
    
    
    2,029
    
    
    
    1,882Other assets
    
    
    1,976
    
    
    
    (1,512
    )Accounts payable
    
    
    5,243
    
    
    
    (14,432
    )Accrued liabilities
    
    
    (1,041
    )
    
    
    (6,597
    )Other liabilities
    
    
    (9,260
    )
    
    
    (4,778
    )Net cash used in operating activities
    
    
    (969
    )
    
    
    (28,689
    )Cash flows used in investing activities:Capital expenditures
    
    
    (4,350
    )
    
    
    (8,093
    )Proceeds from the sale of assets
    
    
    182
    
    
    
    Cash used for methanol dismantling
    
    
    
    
    
    
    (94
    )Net cash used in investing activities
    
    
    (4,168
    )
    
    
    (8,187
    )Cash flows from financing activities:Repayment of tendered Old Secured Notes
    
    
    (100,579
    )
    
    
    Proceeds from the issuance of New Secured Notes
    
    
    150,000
    
    
    
    Debt issuance costs
    
    
    (7,832
    )
    
    
    Net cash provided by financing activities
    
    
    41,589
    
    
    
    Net increase (decrease) in cash
    
    
    36,452
    
    
    
    (36,876
    )Cash and cash equivalents  beginning of year
    
    
    20,690
    
    
    
    42,197Cash and cash equivalents  end of period
    
    $
    57,142
    
    
    $
    5,321Supplemental disclosures of cash flow information:Interest paid, net of interest income received
    
    $
    4,001
    
    
    $
    5,204Cash paid for income taxes
    
    
    299
    
    
    
    60
  4




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
  2. Stock-Based Compensation
   3. Discontinued Operations
   June 30, 2007
    
    December 31, 2006(Dollars in Thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    
    
    
    $
    20Liabilities of discontinued operations:Accrued liabilities
    
    
    217
    
    
    
    217
  Three months ended June 30,
    
    Six months ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Revenues
    
    $
    
    
    
    $
    154
    
    
    $
    
    
    
    $
    1,005Loss before income taxes
    
    
    887
    
    
    
    860
    
    
    
    1,441
    
    
    
    2,836
 5




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Accrued as of
    
    Additional
    
    
    
    
    
    Accrued as ofDecember 31, 2006
    
    accruals
    
    Cash payments
    
    June 30, 2007Severance accrual
    
    $
    217
    
    
    $
    
    
    
    $
    
    
    
    $
    217
 4. Inventories
 June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)Inventories:Finished products
    
    $
    15,339
    
    
    $
    38,485Raw materials
    
    
    21,953
    
    
    
    17,841Inventories at lower-of-cost-or-market
    
    
    37,292
    
    
    
    56,326Inventories under exchange agreements
    
    
    43
    
    
    
    1,818Stores and supplies, net
    
    
    4,066
    
    
    
    3,934$
    41,401
    
    
    $
    62,078
 5. Long-Term Debt
  1
  6




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
      6. Commitments and Contingencies
 Product Contracts:
  Environmental Regulations:
  7




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
      Legal Proceedings:
  8




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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
     9




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 7. Income Taxes
    8. Pension Plans and Other Postretirement Benefits
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in Thousands)Service cost
    
    $
    153
    
    
    $
    131
    
    
    $
    305
    
    
    $
    325Interest cost
    
    
    1,782
    
    
    
    1,810
    
    
    
    3,565
    
    
    
    3,615Expected return on plan assets
    
    
    (2,025
    )
    
    
    (1,750
    )
    
    
    (4,050
    )
    
    
    (3,500
    )Curtailment gain
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )
    
    
    Net pension costs (benefit)
    
    $
    (190
    )
    
    $
    191
    
    
    $
    (280
    )
    
    $
    440
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in Thousands)Service cost
    
    $
    19
    
    
    $
    41
    
    
    $
    65
    
    
    $
    94Interest cost
    
    
    329
    
    
    
    387
    
    
    
    693
    
    
    
    775Amortization of
unrecognized costs
    
    
    (375
    )
    
    
    (288
    )
    
    
    (717
    )
    
    
    (576
    )Net plan costs (benefit)
    
    $
    (27
    )
    
    $
    140
    
    
    $
    41
    
    
    $
    293
  10




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STERLING CHEMICALS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 9. New Accounting Standards
   11




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Business Overview
       13




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Results of Operations
 Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
 Revenues and income from continuing operations
    Selling, general and administrative expenses
  Other Income (expense)
  Interest and debt related expenses, net of interest income
  14




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Provision (benefit) for income taxes
  Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 Revenues and income (loss) from continuing operations
    15




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Other income (expense)
  Selling, general and administrative expenses
  Interest and debt related expenses, net of interest income
  Provision (benefit) for income taxes
  Liquidity and Capital Resources
  16




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1
     17




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Working Capital
  Cash Flow
  Capital Expenditures
  Contractual Cash Obligations
  Critical Accounting Policies, Use of Estimates and Assumptions
  18




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New Accounting Standards
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 1 4
 
 Item 4. Controls and Procedures
    19




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PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
    
    seven of our incumbent directors were re-elected; and
    
    the appointment of Deloitte & Touche LLP as our independent registered accounting
firm for the fiscal year ending December 31, 2007 was ratified and approved.
   Director
    
    For
    
    WithheldByron J. Haney
    
    
    4,082,960
    
    
    
    0Philip M. Sivin
    
    
    4,082,960
    
    
    
    0Karl W. Schwarzfeld
    
    
    4,082,960
    
    
    
    0Steven L. Gidumal
    
    
    4,082,960
    
    
    
    0
  Director
    
    For
    
    WithheldRichard K. Crump
    
    
    6,219,042
    
    
    
    644,349John W. Gildea
    
    
    6,653,761
    
    
    
    209,630Dr. Peter Ting Kai Wu
    
    
    6,653,756
    
    
    
    209,635
  For
    
    Against
    
    Abstain6,860,338
    
    
    3,009
    
    
    
    44
  20




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Item 6. Exhibits
  ExhibitNumber
    
    
    
    Description of Exhibit3.1
    
    -
    
    Restated Bylaws of Sterling Chemicals, Inc. (incorporated herein by reference
from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2007).10.1
    
    -
    
    Articles of Agreement between Sterling Chemicals, Inc., its successors and
assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas,
May 1, 2007 to May 1, 2012 (incorporated herein by reference from Exhibit 10.5 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).10.2
    
    -
    
    Tenth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees Pension
Plan (incorporated herein by reference from Exhibit 10.6 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2007).**15.1
    
    -
    
    Letter of Deloitte & Touche 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 Chief Financial Officer**32.1
    
    -
    
    Section 1350 Certification of the Chief Executive Officer**32.2
    
    -
    
    Section 1350 Certification of the Chief Financial Officer
 
 **
    
    Filed or furnished herewith 21




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SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date: August 14, 2007
    By
    /s/ RICHARD K. CRUMPRichard K. CrumpPresident and Chief Executive OfficerDate: August 14, 2007
    By
    /s/ JOHN R. BEAVERJohn R. BeaverSenior Vice President-Finance and Chief Financial Officer
(Principal Financial Officer) 22




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EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Description of Exhibit3.1
    
    -
    
    Restated Bylaws of Sterling Chemicals, Inc. (incorporated herein by reference
from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2007).10.1
    
    -
    
    Articles of Agreement between Sterling Chemicals, Inc., its successors and
assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas,
May 1, 2007 to May 1, 2012 (incorporated herein by reference from Exhibit 10.5 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).10.2
    
    -
    
    Tenth Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees Pension
Plan (incorporated herein by reference from Exhibit 10.6 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2007).**15.1
    
    -
    
    Letter of Deloitte & Touche 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 Chief Financial Officer**32.1
    
    -
    
    Section 1350 Certification of the Chief Executive Officer**32.2
    
    -
    
    Section 1350 Certification of the Chief Financial Officer
 
 **
    
    Filed or furnished herewith