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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
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  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
incorporation or organization)
    
    (IRS Employer Identification No.)333 Clay Street, Suite 3600
Houston, Texas 77002-4109
    
    (713) 650-3700(Registrants telephone number,(Address of principal executive offices)
    
    including area code)
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act:
 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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TABLE OF CONTENTS  IMPORTANT INFORMATION REGARDING THIS FORM 10-QForward-Looking StatementsLetter of Deloitte & Touche LLPRule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  
 IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
   
 Forward-Looking Statements
  
    
    the cyclicality of the petrochemicals industry;
    
    current and future industry conditions;
    
    the extent and timing 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
business strategy, results of operations or financial position;
    
    the level of expected savings from our cost reduction initiatives;
    
    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 or renewals of existing contractual relationships;
    
    business strategies;
    
    growth opportunities;
    
    competitive position;
    
    expected financial position;
    
    future cash flows;
    
    future dividends;
    
    financing plans;
    
    budgets for capital and other expenditures;
    
    plans and objectives of management;
    
    outcomes of legal proceedings;
    
    compliance with applicable laws; and
    
    adequacy of insurance coverage or indemnification rights.
  
    
    the timing and extent of changes in commodity prices for our products and for raw materials;
    
    petrochemicals industry production capacity and operating rates;
    
    market conditions in the petrochemicals industry, including the supply-demand
balance for our products and regional differences in the costs of raw materials and
energy;
    
    competition, including competitive products, pricing pressures and regional variations in manufacturing costs;
    
    obsolescence of product lines and manufacturing processes;
    
    the timing and extent of changes in global economic and business conditions;
    
    increases in raw materials and energy costs, including the cost of natural gas;
    
    our ability to obtain raw materials, energy and ocean-going vessels at
competitive prices, in a timely manner and on acceptable terms;
 
 i




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##### Table of Contents




    
    regulatory initiatives and compliance with governmental regulations;
    
    compliance with environmental laws and 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 and economic conditions;
    
    risks of war, military operations, other armed hostilities, terrorist acts and embargoes;
    
    changes in technology, which could require significant capital expenditures in
order to maintain competitiveness or cause existing manufacturing processes to
become obsolete;
    
    effects of litigation;
    
    cost, availability and adequacy of insurance;
    
    adequacy of our sources of liquidity; and
    
    various other matters, many of which are beyond our control.
  Subsequent Events
  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
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 6. Exhibits
    
    
    20
 1




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PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 STERLING CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended March 31,2006
    
    
    2005(Unaudited)(Dollars in Thousands, except share data)Revenues
    
    $
    136,670
    
    
    $
    180,207Cost of goods sold
    
    
    148,523
    
    
    
    167,285Gross profit (loss)
    
    
    (11,853
    )
    
    
    12,922Selling, general and administrative expenses
    
    
    679
    
    
    
    2,504Other (income) expense
    
    
    (387
    )
    
    
    Interest and debt related expenses, net of
interest income
    
    
    2,388
    
    
    
    2,983Income (loss) from continuing operations
before income tax
    
    
    (14,533
    )
    
    
    7,435Provision (benefit) for income taxes
    
    
    (5,398
    )
    
    
    2,710Income (loss) from continuing operations
    
    $
    (9,135
    )
    
    $
    4,725Loss from discontinued operations (net of
tax benefit of $720 and $1,674,
respectively)
    
    
    (1,254
    )
    
    
    (2,919
    )Net income (loss)
    
    $
    (10,389
    )
    
    $
    1,806Preferred stock dividends
    
    
    1,932
    
    
    
    1,652Net income (loss) attributable to common
stockholders
    
    $
    (12,321
    )
    
    $
    154Income (loss) per share of common stock:Basic earnings per share:Income (loss) from continuing operations
    
    $
    (3.91
    )
    
    $
    1.09Loss from discontinued operations, net of tax
    
    
    (0.45
    )
    
    
    (1.04
    )Basic earnings per share
    
    $
    (4.36
    )
    
    $
    0.05Diluted earnings per share:Income (loss) from continuing operations
    
    $
    (3.91
    )
    
    $
    0.75Loss from discontinued operations, net of tax
    
    
    (0.45
    )
    
    
    (0.46
    )Diluted earnings per share
    
    $
    (4.36
    )
    
    $
    0.29Weighted average shares outstanding:Basic
    
    
    2,828,466
    
    
    
    2,825,718Diluted
    
    
    2,828,466
    
    
    
    6,285,010
  2




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STERLING
CHEMICALS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)(Dollars in Thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,032
    
    
    $
    42,197Accounts receivable, net of allowance of $458 and $953,
respectively
    
    
    49,475
    
    
    
    57,261Inventories, net
    
    
    52,303
    
    
    
    39,094Prepaid expenses
    
    
    3,258
    
    
    
    4,888Deferred tax asset
    
    
    2,801
    
    
    
    2,802Assets of discontinued operations
    
    
    703
    
    
    
    1,791Total current assets
    
    
    126,572
    
    
    
    148,033Property, plant and equipment, net
    
    
    226,158
    
    
    
    230,018Other assets, net
    
    
    9,086
    
    
    
    8,543Total assets
    
    $
    361,816
    
    
    $
    386,594LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    43,071
    
    
    $
    43,912Accrued liabilities
    
    
    18,275
    
    
    
    23,690Liabilities of discontinued operations
    
    
    4,353
    
    
    
    3,826Total current liabilities
    
    
    65,699
    
    
    
    71,428Long-term debt
    
    
    100,579
    
    
    
    100,579Deferred tax liability
    
    
    2,078
    
    
    
    8,196Deferred credits and other liabilities
    
    
    75,171
    
    
    
    77,804Redeemable preferred stock
    
    
    50,235
    
    
    
    48,302Commitments and contingencies (Note 7)Stockholders equity:Common stock, $.01 par value
    
    
    28
    
    
    
    28Additional paid-in capital
    
    
    190,709
    
    
    
    192,551Accumulated deficit
    
    
    (118,344
    )
    
    
    (107,955
    )Accumulated other comprehensive loss
    
    
    (4,339
    )
    
    
    (4,339
    )Total stockholders equity
    
    
    68,054
    
    
    
    80,285Total liabilities and stockholders equity
    
    $
    361,816
    
    
    $
    386,594
  3




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STERLING
CHEMICALS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months ended March 31,2006
    
    
    2005(Unaudited)(Dollars in Thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (10,389
    )
    
    $
    1,806Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    8,441
    
    
    
    6,607Interest amortization
    
    
    100
    
    
    
    100Lower-of-cost-or-market adjustment
    
    
    901
    
    
    
    1,990Deferred tax provision (benefit)
    
    
    (6,117
    )
    
    
    1,037Other
    
    
    91
    
    
    
    157Change in assets/liabilities:Accounts receivable
    
    
    9,553
    
    
    
    15,438Inventories
    
    
    (14,789
    )
    
    
    (1,947
    )Prepaid expenses
    
    
    1,630
    
    
    
    1,430Other assets
    
    
    (1,095
    )
    
    
    (944
    )Accounts payable
    
    
    1,192
    
    
    
    (15,412
    )Accrued liabilities
    
    
    (4,833
    )
    
    
    (3,878
    )Other liabilities
    
    
    (2,633
    )
    
    
    (3,055
    )Net cash provided by (used in) operating activities
    
    
    (17,948
    )
    
    
    3,329Cash flows used in investing activities:Capital expenditures
    
    
    (6,162
    )
    
    
    (1,619
    )Cash used for methanol dismantling
    
    
    (55
    )
    
    
    (295
    )Net cash used in investing activities
    
    
    (6,217
    )
    
    
    (1,914
    )Cash flows from financing activities:Net repayments on the Revolver
    
    
    
    
    
    
    (2,640
    )Net decrease in cash
    
    
    (24,165
    )
    
    
    (1,225
    )Cash and cash equivalents  beginning of year
    
    
    42,197
    
    
    
    1,901Cash and cash equivalents  end of period
    
    $
    18,032
    
    
    $
    676Supplemental disclosures of cash flow information:Interest paid, net of interest income received
    
    $
    64
    
    
    $
    690Cash paid for income taxes
    
    
    
    
    
    
    13
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STERLING
CHEMICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
   2. Stock-Based Compensation
  ,
    5




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STERLING CHEMICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Three months ended March 31, 2005Dollars in Thousands, Except Share DataNet income (loss)
attributable to common
stockholders, as reported
    
    $
    154Add: Stock-based employee
compensation expense
included in reported net
income (loss), net of
related tax effects
    
    
    128Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    (130
    )Pro forma net income (loss)
    
    $
    152Basic income (loss) per
share attributable to
common stockholders:As reported
    
    $
    0.05Pro forma
    
    
    0.05Diluted income (loss) per
share attributable to
common stockholders:As reported
    
    $
    0.29Pro forma
    
    
    0.29
 3. Discontinued Operations
    March 31, 2006
    
    
    December 31, 2005(Unaudited)(Dollars in Thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    24
    
    
    $
    963Inventories
    
    
    679
    
    
    
    376Other assets
    
    
    
    
    
    
    452Total
    
    $
    703
    
    
    $
    1,791Liabilities of discontinued operations:Accrued liabilities
    
    $
    4,353
    
    
    $
    3,826
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STERLING CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Three months ended March 31,2006
    
    
    2005(Unaudited)(Dollars in Thousands)Revenues
    
    $
    851
    
    
    $
    35,286Loss before income taxes
    
    
    1,975
    
    
    
    4,593
  Accrued as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued as ofDecember 31, 2005
    
    
    Additional accruals
    
    
    Cash payments
    
    
    Other
    
    

March 31, 2006Severance accrual.
    
    $
    477
    
    
    $
    315
    
    
    $
    (288
    )
    
    $
    
    
    
    $
    504DSIDA contractual
obligation
    
    
    2,853
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    2,902DSIDA dismantling costs
    
    
    496
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    720Product payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227
    
    
    
    227Totals
    
    $
    3,826
    
    
    $
    588
    
    
    $
    (288
    )
    
    $
    227
    
    
    $
    4,353
 4. Inventories
 March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Finished products
    
    $
    25,796
    
    
    $
    30,162Raw materials
    
    
    14,408
    
    
    
    7,974Inventories under exchange agreements
    
    
    8,308
    
    
    
    (2,807
    )Stores and supplies, net
    
    
    3,791
    
    
    
    3,765$
    52,303
    
    
    $
    39,094
 7




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STERLING
CHEMICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 5. Earnings Per Share
  Three months ended March 31,2006
    
    
    2005(Dollars in Thousands, Except Share Data)Basic income (loss) per share:Income (loss) from continuing operations
attributable to common shareholders
    
    $
    (11,067
    )
    
    $
    3,073Loss from discontinued operations
    
    
    (1,254
    )
    
    
    (2,919
    )Net income (loss), net of tax
    
    $
    (12,321
    )
    
    $
    154Weighted average shares outstanding
    
    
    2,828,466
    
    
    
    2,825,718Earnings per common share:Income (loss) from continuing operations
attributable to common shareholders
    
    $
    (3.91
    )
    
    $
    1.09Loss from discontinued operations
    
    
    (0.45
    )
    
    
    (1.04
    )Net income (loss)
    
    $
    (4.36
    )
    
    $
    0.05Diluted income (loss) per share:Income (loss) from continuing operations
attributable to common shareholders
    
    $
    (11,067
    )
    
    $
    3,073Loss from discontinued operations
    
    
    (1,254
    )
    
    
    (2,919
    )Net income (loss), net of tax
    
    
    (12,321
    )
    
    
    154Add: preferred stock dividends
    
    
    
    
    
    
    1,652Income (loss) for purposes of computing diluted
earnings per share
    
    $
    (12,321
    )
    
    $
    1,806Weighted average common shares outstanding
    
    
    2,828,466
    
    
    
    2,825,718Dilutive impact of stock options
    
    
    
    
    
    
    89,554Dilutive impact of preferred stock, if converted.
    
    
    
    
    
    
    3,369,738Weighted average common shares outstanding
assuming dilution
    
    
    2,828,466
    
    
    
    6,285,010Earnings per common share assuming dilution:Income (loss) attributable to common shareholders
    
    $
    (3.91
    )
    
    $
    0.75Loss from discontinued operations
    
    
    (0.45
    )
    
    
    (0.46
    )Net income (loss)
    
    $
    (4.36
    )
    
    $
    0.29
  6. Long-Term Debt
  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. Commitments and Contingencies
 Product Contracts:
  Environmental Regulations:
      10




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STERLING
CHEMICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Legal Proceedings:
   Other:
   11




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STERLING
CHEMICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 8. Pension Plans and Other Postretirement Benefits
  Three months ended March 31,2006
    
    
    2005(Dollars in Thousands)Service cost
    
    $
    194
    
    
    $
    202Interest cost
    
    
    1805
    
    
    
    1,669Expected return on plan assets
    
    
    (1,750
    )
    
    
    (1,667
    )Net pension costs
    
    $
    249
    
    
    $
    204
  Three months ended March 31,2006
    
    
    2005Service cost
    
    $
    53
    
    
    $
    99Interest cost
    
    
    388
    
    
    
    Amortization of
unrecognized costs
    
    
    (288
    )
    
    
    Net plan costs
    
    $
    153
    
    
    $
    99
 12




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 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 March 31, 2006 Compared to Three Months Ended March 31, 2005
 Revenues and Income (Loss) from Continuing Operations
    Selling, General and Administrative (SG&A) Expenses
  Provision (Benefit) for Income Taxes
  Liquidity and Capital Resources
   16




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3 8
      Working Capital
  Cash Flow
  17




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Capital Expenditures
  Contractual Cash Obligations
  Critical Accounting Policies, Use of Estimates and Assumptions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   18




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19




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PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
  ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    -
    
    Certificate of Ownership and Merger merging Sterling Chemicals Holdings, Inc.
into Sterling Chemicals, Inc. (incorporated by reference from Exhibit 2.1 to our
Annual Report on Form 10-K for the fiscal year ended September 30, 2002).2.2
    
    -
    
    Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et al., dated
October 14, 2002 (incorporated by reference from Exhibit 2.1 to our Form 8-K filed
on November 26, 2002).2.3
    
    -
    
    First Modification to Joint Plan of Reorganization of Sterling Chemicals
Holdings, Inc., et al., dated November 18, 2002 (incorporated by reference from
Exhibit 2.2 to our Form 8-K filed on November 26, 2002).3.1
    
    -
    
    Amended and Restated Certificate of Incorporation of Sterling Chemicals, Inc.
(conformed copy) (incorporated by reference from Exhibit 3.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2005).3.2
    
    -
    
    Restated Certificate of Designations, Preferences, Rights and Limitations of
Series A Convertible Preferred Stock of Sterling Chemicals, Inc. (incorporated by
reference from Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003).3.3
    
    -
    
    Restated Bylaws of Sterling Chemicals, Inc. (conformed copy) (incorporated by
reference from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2003).**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 20




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SIGNATURES
  STERLING CHEMICALS, INC.
(Registrant)Date: May 10, 2006
    By  /s/ RICHARD K. CRUMPRichard K. CrumpPresident and Chief Executive Officer Date: May 10, 2006
    By  /s/ PAUL G. VANDERHOVENPaul G. VanderhovenSenior Vice President-Finance and Chief Financial Officer
(Principal Financial Officer) 21




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EXHIBIT INDEX
 ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    -
    
    Certificate of Ownership and Merger merging Sterling Chemicals Holdings, Inc.
into Sterling Chemicals, Inc. (incorporated by reference from Exhibit 2.1 to our
Annual Report on Form 10-K for the fiscal year ended September 30, 2002).2.2
    
    -
    
    Joint Plan of Reorganization of Sterling Chemicals Holdings, Inc., et al., dated
October 14, 2002 (incorporated by reference from Exhibit 2.1 to our Form 8-K filed
on November 26, 2002).2.3
    
    -
    
    First Modification to Joint Plan of Reorganization of Sterling Chemicals
Holdings, Inc., et al., dated November 18, 2002 (incorporated by reference from
Exhibit 2.2 to our Form 8-K filed on November 26, 2002).3.1
    
    -
    
    Amended and Restated Certificate of Incorporation of Sterling Chemicals, Inc.
(conformed copy) (incorporated by reference from Exhibit 3.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2005).3.2
    
    -
    
    Restated Certificate of Designations, Preferences, Rights and Limitations of
Series A Convertible Preferred Stock of Sterling Chemicals, Inc. (incorporated by
reference from Exhibit 3.2 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003).3.3
    
    -
    
    Restated Bylaws of Sterling Chemicals, Inc. (conformed copy) (incorporated by
reference from Exhibit 3.3 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2003).**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 22