Solutia comfortable with liquidity position, preparing for soft sales

By Jennifer Lanning Drey

Portland, Ore., May 7 - Solutia Inc. is comfortable with its liquidity position following the closing of a $74 million term loan by its German subsidiary but believes a soft sales environment and step-down in its leverage covenant will reduce its cushion later in the year, James Sullivan, chief financial officer of Solutia, said during the company's first-quarter earnings conference call.

"Cash generation, debt reduction and liquidity preservation continue to be key focus areas for the company," Sullivan said.

Solutia's leverage as calculated under the leverage covenant was 3.57 at March 31, compared to a maximum allowable level of 4.75. The covenant steps down to 4.25 at the end of the third quarter.

First-quarter cash provided by continuing operations was $30 million, compared to a use of cash of $36 million in the comparable period of 2008. The increase was attributable to improvements in working capital, lower incentive payments and decreased funding of pension and post-retirement benefit plans.

Sullivan said cash interest was also down quarter over quarter, reflecting the payoff of its $400 million bridge facility last summer and changes in the debt capital structure of the company post emergence from bankruptcy.

Increased cash, lower debt

As a result of the strong cash generation, Solutia increased its 2009 target range for cash from operations less capital spending to $50 million to $100 million, up from a previously projected $25 million to $75 million.

Net debt was $1.31 billion at the end of the period, down $50 million from year-end. The debt included $1.19 billion on Solutia's term loan, $27 million of short-term debt and $137 million on the revolver.

Solutia had cash and cash equivalents of $35 million at Dec. 31.

Due to a significant decline in working capital in the first quarter, the available borrowing base under Solutia's revolver was reduced to $340 million.

Solutia said $66 million of net proceeds received from the May 5 closing of the German term loan were used to reduce revolver borrowings.

Solutia also previously said it plans to use proceeds from the sale of its nylon business to repay revolver borrowings. Under the sale agreement, Solutia will receive $50 million in cash and a 2% equity stake in a new company formed to hold substantially all of the assets of the nylon business. The sale is expected to close in the second quarter.

The company had total liquidity of $163 million at March 31.

Revenues fall, as expected

As expected by the company, Solutia's first-quarter results were adversely impacted by continued weak demand and customer de-stocking, which resulted in decreased revenues and adjusted EBITDA as compared to the first quarter of 2008.

Solutia reported net sales of $339 million for the first quarter, compared with net sales of $517 million in the first quarter of 2008. Adjusted EBITDA decreased to $56 million in the first quarter compared to $95 million in the year-earlier quarter.

"There can be no doubt about it, the downturn in the global economy had a tremendous impact on our businesses in the first quarter," Jeffry N. Quinn, chief executive officer of Solutia, said during the call.

The company responded to the headwinds with a near-term plan to protect liquidity, which included reducing capital spending to maintenance levels and lowering headcount, Quinn said.

Solutia is a St. Louis-based performance materials and specialty chemicals company.

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