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CXDC > SEC Filings for CXDC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CHINA XD PLASTICS CO LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CHINA XD PLASTICS CO LTD


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We make forward-looking statements in this report, in other materials we file with the Securities and Exchange Commission (the "SEC") or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation," regarding our future plans, strategies and expectations are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You are cautioned not to place undue reliance on these forward-looking statements because these forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Thus, our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the automotive modified plastics market specifically, legislative or regulatory changes that affect our business, including changes in regulation, the availability of working capital, the introduction of competing products, and other risk factors described herein. These risks and uncertainties, together with the other risks described from time-to-time in reports and documents that we filed with the SEC should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

China XD Plastics Company Limited ("China XD", "we", and the "Company", and "us" or "our" shall be interpreted accordingly) is one of the leading specialty chemical companies engaged in the research, development, manufacture and sale of modified plastics primarily for automotive applications in China. Through our wholly-owned operating subsidiaries in China, we develop modified plastics using our proprietary technology, manufacture and sell our products primarily for use in the fabrication of automobile parts and components. We have received 236 certifications from manufacturers in the automobile industry as of September 30, 2012. We are the only company certified as a National Enterprise Technology Center in modified plastics industry in Heilongjiang province. Our Research and Development (the "R&D") team consists of 103 professionals and 16 consultants, including two consultants who are members of Chinese Academy of Engineering, and one consultant who is the former chief scientist of Specialty Plastics Engineering Institute of Jilin University. As a result of the integration of our academic and technological expertise, we have a portfolio of 53 patents, one of which we have obtained the patent rights and the remaining 52 of which we have applications pending in China as of September 30, 2012.

Our products include seven categories: polypropylene (PP), acrylonitrile butadiene styrene (ABS), modified engineering plastics, polyamides (PA or nylon), environment-friendly plastics, specialty engineering plastics and polyether ether ketone (PEEK). The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 23 automobile brands and 70 automobile models manufactured in China, including Audi, Volkswagen, BMW, GM, Mazda, Toyota, Cherry, Geely and Hafei new energy vehicles. Our research center is dedicated to the research and development of modified plastics, and benefits from its cooperation with well-known scientists from prestigious universities in China. We operate three production bases in Harbin, Heilongjiang in the PRC. As of September 30, 2012, we had approximately 255,000 metric tons of production capacity across 58 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems. The construction of three additional workshops were recently completed and we are in the process of installing new production lines in these workshops, which would support our production capacity expansion beyond 2012. A launch of a trial run for these new production lines is expected in December 2012.


Highlights for the three months ended September 30, 2012 include:

? Revenue was US$163.3 million, an increase of 57.4% from US$103.8 million in the third quarter of 2011

? Gross profit was US$40.0 million, an increase of 50.9% from US$26.5 million in the third quarter of 2011

? Gross profit margin was 24.5%, compared to 25.6% in the third quarter of 2011

? Net income was US$25.3 million, compared to US$15.7 million in the third quarter of 2011

? Total volume shipped was 61,589 metric tons, up 57.7% from 39,057 metric tons in the third quarter of 2011

Results of Operations

The following table sets forth, for the periods indicated, statements of income
data in millions of US$:

(in millions,
except percentage)         Three Months Ended                       Nine Months Ended
                             September 30,           Change           September 30,           Change
                           2012          2011           %          2012          2011           %
Revenues                     163.3       103.8        57.4 %       431.2         267.7        61.1  %
Cost of revenues           (123.3)      (77.3)        59.6 %     (324.7)       (201.1)        61.4 %
Gross profit                  40.0        26.5        50.9 %       106.5          66.6        60.0  %
Total operating expenses     (7.7)       (5.8)        34.8 %      (20.4)        (14.1)        45.1  %
Operating income              32.3        20.7        55.4 %        86.1          52.5        64.1  %
Income before income
taxes                         33.4        20.1        65.8 %        90.1          53.8        67.6  %
Income tax expense           (8.1)       (4.4)        83.9 %      (21.5)        (11.8)        82.9  %
Net income                    25.3        15.7        60.7 %        68.6          42.0        63.3  %

Three Months Ended September 30, 2012 compared to three months ended September 30, 2011

Revenues

Revenues were US$163.3 million in the third quarter ended September 30, 2012, an increase of US$59.5 million, or 57.4%, compared to US$103.8 million in the same period of last year, due to approximately 57.7% increase in sales volume and 3.6% increase in the average selling price of our products on a constant dollar basis. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our newly installed twenty production lines in December 2011, as well as the marketing efforts to develop new customers. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. The increase of average selling price was due to the shift of product mix towards higher-end products as well as higher raw material prices that we have been able to effectively pass through to our customers.


The following table summarizes the breakdown of revenues by product mix in millions of US$:

                                                      Revenues
(in millions, except percentage)      For the Three Months Ended September 30,
                                           2012                       2011
                                                                                      Change
                                                                                        in     Change in
                                  Amount             %         Amount          %      Amount       %
Modified Polypropylene (PP)           80.1         49.0 %          42.5      41.1 %     37.6      87.9 %

Engineering Plastics                  32.9         20.1 %          20.8      20.1 %     12.1      57.9 %

Modified Polyamide (PA)               12.9          7.9 %           6.8       6.5 %      6.1      90.6 %

Alloy Plastics                        10.5          6.5 %           9.9       9.5 %      0.6       6.7 %

Environment Friendly Plastics         18.4         11.3 %           9.9       9.5 %      8.5      86.2  %

Modified Acrylonitrile Butadiene
Styrene (ABS)                          6.9          4.2 %           7.8       7.5 %     (0.9 )   (10.8 )%

   Sub-total                         161.7         99.0 %          97.7      94.2 %     64.0      65.5 %

After-sales Service                    1.6          1.0 %           6.1       5.8 %     (4.5 )   (73.1 )%
Total Revenues                       163.3          100 %         103.8       100 %     59.5      57.4 %

The following table summarizes the breakdown of metric tons (MT) by product mix:

                                                      Sales Volume
(in MTs, except percentage)             For the Three Months Ended September 30,
                                             2012                          2011
                                                                                          Change in      Change in
                                    MT                  %             MT           %          MT              %
Modified Polypropylene (PP)         38,469            62.6 %        22,763       58.3 %       15,706         69.0 %

Engineering Plastics                 6,661            10.8 %         4,385       11.2 %        2,276         51.9 %

Polyamide (PA)                       2,737             4.4 %         1,580        4.0 %        1,157         73.3 %

Alloy Plastics                       2,972             4.8 %         3,232        8.3 %        (260)        (8.0) %

Environment Friendly
Plastics                             8,140            13.2 %         4,365       11.2 %        3,775         86.5 %

Modified Acrylonitrile
Butadiene Styrene (ABS)              2,610             4.2 %         2,732        7.0 %        (122)        (4.5) %

Total sales volume                  61,589             100 %        39,057        100 %       22,532         57.7 %

The Company has continued its shift of product mix to higher-end product categories such as Environmental Friendly Plastics and Polyamide (PA) as well as enhance gross margin of other product categories, including Modified Polypropylene (PP), Engineering Plastics, Alloy Plastics, and Modified Acrylonitrile Butadiene Styrene (ABS) by focusing on applications used in higher-end car models, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end cars made by automotive manufacturers from China and Germany, US and Japan joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.


Gross Profit and Gross Margin

                                         Three Months Ended September 30,                  Change
(in millions, except percentage)           2012                    2011             Amount          %
Gross Profit                          $          40.0         $          26.5      $    13.5         50.9 %

Gross Margin 24.5 % 25.6 % (1.1) %

Gross profit was US$40.0 million in the third quarter ended September 30, 2012 compared to US$26.5 million in the same period of 2011, representing an increase of 50.9%. Our gross margin decreased to 24.5% in the third quarter ended September 30, 2012 from 25.6% during the same quarter of 2011. The decrease was mainly attributed to increase of the price of raw materials, increase of depreciation, and increase of production related payroll expenses this year, partially offset by our efforts in developing and selling more higher value-added automotive modified plastics towards high-end products as a percentage of total sales in the third quarter ended September 30, 2012.

General and Administrative Expenses

                                          Three Months Ended September 30,                 Change
(in millions, except percentage)           2012                      2011            Amount         %
General and Administrative Expenses   $           2.2           $           2.3     $  (0.1)        (0.9) %
as a percentage of revenues                       1.4 %                     2.2 %                   (0.8) %

General and administrative (G&A) expenses were US$2.2 million in the third quarter ended September 30, 2012 which is consistent with the US$2.3 million in the same period in 2011.

Research and Development Expenses

                                          Three Months Ended September 30,                  Change
(in millions, except percentage)           2012                      2011            Amount          %
Research and Development Expenses     $           5.5           $           3.5     $     2.0         57.4 %

as a percentage of revenues 3.4 % 3.4 % (0.0) %

Research and development ("R&D") expenses were US$5.5 million during the quarter ended September 30, 2012 compared with US$3.5 million during the same period in 2011, an increase of US$2.0 million, or 57.4%, reflecting increased research and development activities on new products primarily in consumption of raw materials for various experiments for automotive applications from automobile manufacturers as well as other non-automotive applications.

As of September 30, 2012, the number of ongoing research and development projects is 147. We expect to complete and realize economic benefits on approximately 30% of the projects in the near term. The remaining projects are expected to be carried out for a longer period. The majority of the projects are in the field of modified plastics in automotive applications and the rest are in advanced fields such as ships, airplanes, high-speed rail, medical devices, etc.

Operating Income

Total operating income was US$32.3 million in the quarter ended September 30, 2012, compared to US$20.7 million in the same period of 2011, representing an increase of 55.4% or US$11.6 million. This increase is primarily due to higher gross profit, partially offset by higher R&D expenses.


Other Income (Expense)

Interest Income (Expenses)
                                       Three Months Ended September 30,               Change
(in millions, except percentage)            2012                  2011         Amount          %
Interest Income                       $            1.4         $      0.2     $    1.2        595.0%
Interest Expenses                                (1.2)              (0.5)        (0.7)         136.1 %
Net Interest Income (Expenses)        $            0.2         $    (0.3)     $    0.5       (187.0) %
as a percentage of revenues                        0.2 %            (0.3) %                      0.5 %

Net interest income was US$0.2 million in the quarter ended September 30, 2012, compared to net interest expenses of US$0.3 million in the same period of 2011, primarily due to US$1.4 million interest income generated from time deposits in the third quarter of 2012.

Change in Fair Value of Warrants Liabilities

                                    Three Months Ended September
                                                 30,                           Change
(in millions, except percentage)       2012                2011         Amount          %
Change in Fair Value of Warrants

Liabilities $ 0.9 $ (0.3) $ 1.2 347.6 % as a percentage of revenues 0.5 % (0.3) % 0.8 %

Change in fair value of warrants liabilities was a gain of US$0.9 million in the quarter ended September 30, 2012, compared to a loss of US$0.3 million in the same period of 2011, primarily due to the change of fair value of warrants driven by the fluctuation of our stock price in respective periods. On a percentage basis, change in fair value of warrants liabilities in the third quarter of 2012 increased to 0.5% of revenues from 0.3% in the third quarter of 2011.

Income Taxes

                                    Three Months Ended September 30,              Change
(in millions, except percentage)         2012                  2011         Amount         %
Income before Income Taxes         $           33.4         $     20.1     $   13.3         65.8 %
Income Tax Expense                            (8.1)              (4.4)        (3.7)         83.9 %
Effective income tax rate                      24.3 %             21.9 %                     2.4 %

The effective income tax rates for the three-month periods ended September 30, 2012 and 2011 were 24.3% and 21.9%, respectively. The effective income tax rate for the three-month period ended September 30, 2012 differs from the PRC statutory income tax rate of 25% primarily due to the additional 50% deduction against taxable income for certain eligible research and development expenses incurred by our research centers.

Our PRC subsidiaries have US$106.2 million of cash and cash equivalents, restricted cash and time deposits as of September 30, 2012, which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of our PRC subsidiaries.

Net Income

As a result of the above factors, we had a net income of US$25.3 million in the third quarter of 2012, compared to net income of US$15.7 million in the same quarter of 2011.


Nine Months Ended September 30, 2012 compared to nine months ended September 30, 2011

Revenues

Revenues were US$431.2 million for the nine months ended September 30, 2012, an increase of US$163.5 million, or 61.1%, compared to US$267.7 million in the same period of last year, due to approximately 46.7% increase in sales volume and 10.9% increase in the average selling price of our products on a constant dollar basis. The increase of sales volume was driven by the strong demand of modified plastics in the PRC market and higher penetration of our business in our existing markets supported by our newly installed twenty production lines in December 2011, as well as the marketing efforts to develop new customers. Such increase in demand was driven by increasing demand for middle and high-end automobiles by Chinese consumers, continuing substitution of imported modified plastics by domestic suppliers, as well as the increase of plastic content on the per-vehicle-basis in China. The increase of average selling price was due to the shift of product mix towards higher-end products as well as higher raw material prices that we have been able to effectively pass through to our customers.

Product Mix

The following table summarizes the breakdown of revenues by product mix in
millions of US$:

(in millions,                               Revenues
except percentage)           For the Nine months Ended September 30,
                                 2012                          2011
                                                                                Change in      Change in
                       Amount              %            Amount         %         Amount            %
Modified
Polypropylene (PP)         216.1            50.2 %        138.1        51.6 %        78.0            56.5 %

Engineering
Plastics                    83.5            19.4 %         44.6        16.7 %        38.9            87.2 %

Polyamide (PA)              36.1             8.4 %         17.1         6.4 %        19.0           111.0 %

Alloy Plastics              29.9             6.9 %         19.0         7.1 %        10.9            57.4 %

Environment
Friendly Plastics           43.2            10.0 %         20.4         7.6 %        22.8           111.7 %

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                       16.6             3.8 %         15.7         5.8 %         0.9             5.8 %

   Sub-total               425.4            98.7 %        254.9        95.2 %       170.5            66.9 %

After-sales
Service                      5.8             1.3 %         12.8         4.8 %        (7.0 )         (55.1 )%
Total Revenues             431.2             100 %        267.7         100 %       163.5            61.1 %

The following table summarizes the breakdown of metric tons (MT) by product mix:

                                        Sales Volume
(in MTs, except
percentage)                For the Nine Months Ended September 30,
                               2012                         2011
                                                                               Change in       Change in
                         MT               %            MT            %             MT              %
Modified
Polypropylene
(PP)                     103,817           64.5 %      75,049        68.3 %        28,768            38.3 %

Engineering
Plastics                  16,587           10.3 %       9,700         8.8 %         6,887            71.0 %

Polyamide (PA)             7,486            4.6 %       4,182         3.8 %         3,304            79.0 %

Alloy Plastics             8,360            5.2 %       6,373         5.8 %         1,987            31.2 %

Environment
Friendly Plastics         18,890           11.6 %       9,026         8.2 %         9,864           109.3 %

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                      6,150            3.8 %       5,652         5.1 %           498             8.8 %

Total sales
volume                   161,290            100 %     109,982         100 %        51,308            46.7 %


The Company has continued its shift of product mix to higher-end product categories such as Engineering Plastics, Environmental Friendly Plastics and Polyamide (PA) as well as enhance gross margin of other product categories, including Modified Polypropylene (PP), Alloy Plastics, and Modified Acrylonitrile Butadiene Styrene (ABS) by focusing on applications used in higher-end car models, primarily due to (i) the increasing demand of advanced modified plastics in luxury automobile models in China, (ii) the stronger demand promoted by Chinese government for clean energy vehicles and (iii) stronger sales of higher-end cars made by automotive manufacturers from China and Germany, US and Japan joint ventures, which tend to use more and higher-end modified plastics in quantity per vehicle in China.

Gross Profit and Gross Margin

                                     Nine Months Ended
                                       September 30,                 Change
(in millions, except percentage)      2012          2011       Amount        %

Gross Profit $ 106.5 $ 66.6 $ 39.9 60.0 % Gross Margin 24.7 % 24.9 % (0.2 )%

Gross profit was US$106.5 million for the nine months ended September 30, 2012 compared to US$66.6 million in the same period of 2011, representing an increase of 60.0%. Our gross margin decreased to 24.7% in the nine months ended September 30, 2012 from 24.9% during the same period of 2011. The decrease was mainly attributed to increase of the price of raw materials, increase of depreciation, and increase of production related payroll expenses this year, partially offset by our efforts in developing and selling more higher value-added automotive modified plastics towards high-end products as a percentage of total sales in the nine months ended September 30, 2012.

General and Administrative Expenses

                                         Nine Months Ended
                                            September 30,                 Change
(in millions, except percentage)        2012            2011         Amount        %
General and Administrative Expenses   $     7.6       $     4.8     $    2.8       59.7 %
as a percentage of revenues                 1.8 %           1.8 %                   0.0 %

General and administrative (G&A) expenses were US$7.6 million for the nine months ended September 30, 2012 compared to US$4.8 million in the same period in 2011, representing an increase of 59.7%, or US$2.8 million. This increase is primarily due to increase of payroll resulting from increase in average salary and increased headcount. On a percentage basis, G&A expenses for the nine months ended September 30, 2012 remain stable at 1.8% of revenues for the nine months ended September 30, 2012 and 2011.

Research and Development Expenses

                                      Nine months Ended
                                        September 30,                 Change
(in millions, except percentage)       2012          2011       Amount         %
Research and Development Expenses   $     12.5       $ 9.1     $    3.4        38.0 %
as a percentage of revenues                2.9 %       3.4 %                  (0.5) %

. . .
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