Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ARSD > SEC Filings for ARSD > Form 10-K on 18-Mar-2013All Recent SEC Filings

Show all filings for ARABIAN AMERICAN DEVELOPMENT CO | Request a Trial to NEW EDGAR Online Pro

Form 10-K for ARABIAN AMERICAN DEVELOPMENT CO


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

Statements in Items 7 and 7A, as well as elsewhere in or incorporated by reference in, this Annual Report on Form 10-K regarding the Company's financial position, business strategy and plans and objectives of the Company's management for future operations and other statements that are not historical facts, are "forward-looking statements" as that term is defined under applicable Federal securities laws. In some cases, "forward-looking statements" can be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "contemplates," "proposes," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such statements. Such risks, uncertainties and factors include, but are not limited to, general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; lawsuits; competition; industry cycles; feedstock, specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company's filings with the U.S. Securities and Exchange Commission, including this Annual Report on Form 10-K, all of which are difficult to predict and many of which are beyond the Company's control.

Overview

The following discussion and analysis of the Company's financial results, as well as the accompanying consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of the Company.

Business Environment and Risk Assessment

Petrochemical Operations

Worldwide petrochemical demand improved during 2012, and South Hampton benefitted from continued operational excellence and competitive advantages achieved through its business mix and focus on producing high quality products and outstanding customer service. However, during the fourth quarter of 2012 demand decreased due to a couple of customers experiencing production issues.

During 2012 feedstock prices peaked at the end of the first quarter, dropped to a low point at the end of the second quarter, and began a slow rise to the end of the year; however, while fluctuating, prices stayed within a range which allowed South Hampton to better manage margins. Therefore at the end of 2012, South Hampton had no anticipated feed requirements covered by derivative contracts.


Table of Contents

South Hampton has a strategy of moving larger volume customers to formula based pricing to reduce the effect of feedstock cost volatility. Under formula pricing, the price charged to the customer is based on a formula which includes, as a component the average cost of feedstock over the prior month. Product prices move in conjunction with feedstock prices without the necessity of announced price changes. Because the formulas use an average feedstock price from the prior month, the movement of prices trails the movement of costs, and formula pricing may or may not reflect South Hampton's actual feedstock cost for the month during which the product is actually sold. In addition, while formula pricing can benefit product margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing may actually improve margins as formula prices trail feed costs downward by approximately 30 days. The use of formula pricing has helped reduce volatility and increase the predictability of product margins. As previously noted, South Hampton continues to investigate alternative product pricing methods.

Liquidity and Capital Resources

Sources and Uses of Cash

Cash and cash equivalents increased by $2.8 million during the year ended
December 31, 2012. The change in cash and cash equivalents is summarized as
follows:

                                                   2012         2011         2010
Net cash provided by (used in)                          (in thousands)
 Operating activities                         $  21,373     $  4,056     $ 11,330
 Investing activities                           (10,185 )     (6,638 )     (3,149 )
 Financing activities                            (8,354 )      1,646       (3,023 )
Increase (decrease) in cash and equivalents   $   2,834     $   (936 )   $  5,158
Cash and cash equivalents                     $   9,508     $  6,674     $  7,610

Operating Activities

Operating activities generated cash of $21.4 million during fiscal 2012 as compared with $4.1 million of cash provided during fiscal 2011. Although the Company's net income decreased by $2.5 million from 2011 to 2012, the cash provided by operations increased by $17.3 million due primarily to the following factors:

Net income for 2012 included a non-cash equity in earnings from AMAK of $0.2 million and gain on equity issued in AMAK of $0.7 million as compared to equity in loss from AMAK $1.0 million and gain on equity issued in AMAK of $8.9 million in 2011;

Net income for 2012 included a non-cash depreciation charge of $3.6 million as compared to 2011 which included a non-cash depreciation charge of $3.2 million;

Net income for 2012 included a non-cash charge for an unrealized loss on financial contracts of approximately $0.2 million as compared to 2011 which included a non-cash charge for an unrealized gain on financial contracts of $0.2 million;

Trade receivables decreased approximately $7.4 million in 2012 (due to a 2.4% decrease in price per gallon and a 16.8% decrease in volume sold during the fourth quarter) as compared to an increase of approximately $12.0 million (due to a 63.3% increase in volume and a 13.8% increase in price per gallon in the fourth quarter) in 2011; and

Inventory increased approximately $0.4 million in 2012 (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost per gallon) as compared to an increase of approximately $3.5 million (due to a 27.5% increase in volume and a 12.4% increase in cost per gallon) in 2011.

These sources of cash were partially offset by the following decreases in cash provided by operations:

Net income for 2012 included non-cash compensation charges of $0.5 million as compared to $0.9 million in 2011;


Table of Contents

Prepaid expenses and other assets increased $0.9 million in 2012 (primarily due to an increase in prepaid insurance) as compared to a decrease of $0.1 million in 2011 (due to expensing of prepaid pipeline services, marketing and insurance);

Income tax receivable increased approximately $1.2 million in 2012 (due to an overpayment of estimated taxes) as compared to a decrease of $0.2 million in 2011;

Other liabilities increased $0.4 million in 2012 (due to the receipt of funds from toll processing customers for modifications of toll processing facilities within the plant) as compared to an increase of $1.6 million in 2011 (due to the receipt of funds from a toll processing customer for construction of a pilot plant); and

Accounts payable and accrued liabilities decreased approximately $0.2 million in 2012 (primarily due to decreases in accruals for freight and utilities partially offset by an increase in the accrual for derivative settlements and raw material purchases) while in 2011 the same accounts increased by $4.2 million (primarily due to an increase in accruals for raw material purchases, freight, and compensation).

Operating activities generated cash of approximately $4.1 million during fiscal 2011 as compared with cash provided of approximately $11.3 million during fiscal 2010. Although the Company's net income increased by $11.8 million from 2010 to 2011, the cash provided by operations decreased $17.3 million due primarily to the following factors:

Net income for 2011 included a non-cash equity in loss from AMAK charge of $1.0 million and gain on equity issued in AMAK of $8.9 million as compared to an equity in loss from AMAK charge of $0.9 million in 2010;

Trade receivables for 2011 increased approximately $12.0 million (due to increased sales volume and selling price) as compared to a decrease of $1.1 million in 2010;

Notes receivable for 2011 decreased approximately $0.04 million (due to the payoff of the note) as compared to a decrease of $0.4 million in 2010;

As the result of an increase in volume and cost, the increase in inventory was approximately $3.5 million in 2011 as compared to an increase of about $0.9 million in 2010; and

In 2010 the Company received an income tax refund of $4.5 million which had been recognized as a non-cash credit (increase in tax receivable) in 2009 as compared to income tax receivable in 2011 of $0.2 million.

These sources of decreased operating cash flow were partially offset by the following increases in the cash provided by operations:

Net income for 2011 included a non-cash depreciation charge of $3.2 million as compared to 2010 which included a non-cash depreciation charge of $2.6 million, a change of $0.6 million;

Net income for 2011 included non-cash compensation charges of $0.9 million as compared to $0.8 million in 2010, a change of $0.1 million;

Net income for 2011 included non-cash amortization charges of $0.3 million as compared to $0 in 2010, a change of $0.3 million;

Net income for 2011 included a non-cash deferred tax benefit of $3.2 million as compared to 2010 which included a non-cash deferred tax benefit of $0.7 million;

Other liabilities increased for 2011 by $1.6 million (due to the receipt of funds from Gevo for construction of the hydrocarbon processing demonstration unit) as compared to $0 in 2010;

Accounts payable and accrued liabilities increased for 2011 by approximately $4.2 million (due to an increase in the amount owed for feedstock, freight, taxes, and compensation) while in 2010 there was a decrease of about $0.5 million (due to the decrease in the amount owed for federal income tax); and


Table of Contents

Accrued liabilities in Saudi Arabia decreased approximately $0.1 million in 2011 (due to the payment of amounts owed for termination benefits to Saudi employees) as compared to a decrease of $0.2 million in 2010 (also due to the payment of amounts owed for termination benefits to Saudi employees).

Investing Activities

Cash used by investing activities during fiscal 2012 was approximately $10.2 million, representing an increase of approximately $3.5 million over the corresponding period of 2011. During 2012 we advanced $2.0 million to AMAK for interim, short-term funding that remains outstanding. In May and June 2011 we advanced $0.8 million for the same purpose which was subsequently repaid in August 2011.

During fiscal 2012 we purchased transport trucks and trailers for $1.0 million, land surrounding the facility for $0.2 million, increased/improved tankage for $0.4 million, made various facility improvements for $0.8 million, converted a processing tower for $0.5 million, made purchases for expansion of the pipeline of $4.2 million and purchased other equipment for $1.0 million.

Cash used for investing activities during fiscal 2011 was approximately $6.6 million, representing an increase of approximately $3.5 million over the corresponding period of 2010. Capital expenditures increased approximately 124.9% from 2010 to 2011. During fiscal 2011 approximately $1.9 million was expended for the construction of a hydrocarbon processing demonstration unit in connection with the Gevo contract. In addition expenditures were made for the following: $0.6 million for land surrounding the petrochemical facility, $1.0 million for tankage, $0.3 million to refurbish the Cyclo Unit, $0.2 million for construction equipment, $0.2 million for a maintenance warehouse, and $2.3 million for other equipment.

Approximately $0.25 million in cash was used for the South Hampton/STTC merger in 2010. See Note 1 to the Consolidated Financial Statements.

Financing Activities

Cash used by financing activities during fiscal 2012 was approximately $8.4 million versus cash provided of $1.6 million during the corresponding period of 2011. During 2012 the Company drew $2.0 million on its line of credit for working capital purposes and made principal payments of $10.5 million on its line of credit and term debt.

Cash provided by financing activities during fiscal 2011 increased approximately $4.7 million compared to the corresponding period of 2010. We made principal payments on long-term debt during 2011 of $2.0 million on our line of credit and $2.5million on term loans. Additions to long term debt of $6.0 million were from draws on the line of credit.

Credit Agreement

On May 25, 2006, South Hampton entered into a Credit Agreement, as amended, with Bank of America. We were in compliance with all of our financial covenants as of December 31, 2012, under the Credit Agreement except for the capital expenditure limit which was waived by Bank of America. All of our obligations under the Credit Agreement are fully and unconditionally secured pursuant to a perfected first priority security interest on all of South Hampton's assets. As of December 31, 2012, the Credit Agreement provided for an aggregate principal amount of up to $32 million available through the following facilities: (i) $18 million revolving credit facility which includes a $3 million sublimit for use in the hedging program and a $9 million sublimit for the issuance of standby or commercial letters of credit; and (ii) $14 million term loan (advanced as a $10 million loan and a $4 million loan) obtained in 2007 to finance the expansion of South Hampton's petrochemical facility. The revolving credit facility matures on June 30, 2015, and the term loan matures on October 31, 2018.

Under the terms of the Credit Agreement, accrued and unpaid interest is due and payable in arrears on the first business day of each month on any outstanding borrowings at the lower of: (i) the higher of the federal funds rate plus 0.50% or the prime rate plus applicable margin, or (ii) the rate equal to the British Bankers Association LIBOR plus the applicable margin. The applicable margin is determined from TOCCO's most recent compliance certificate and current financials based on the following:


Table of Contents

Level        Leverage      Applicable   Applicable   Applicable
             Ratio         Margin for   Margin for   Margin for
                           Base Rate   LIBOR Loans   Commitment
                             Loans                      Fee
I            Greater than   (0.50%)       2.00%        0.25%
             or equal to
             1.5:1.0
II           Less than      (0.75%)       1.75%        0.25%
             1.5:1.0 but
             greater than
             or equal to
             1.0:1.0
III          Less than      (1.00%)       1.50%        0.25%
             1.0:1.0

In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with respect to the $10.0 million floating rate term loan under the credit facility. The notional amount of the interest rate swap was $5,750,000 at December 31, 2012. The Company receives credit for payments of variable rate interest made on the term loan at the loan's variable rates which are based upon the London InterBank Offered Rate (LIBOR), and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap. The swap agreement terminates on December 15, 2017. We designated the interest rate swap agreement as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging. The derivative instrument is reported at fair value with any changes in fair value reported within other comprehensive income (Loss) in our Statement of Stockholders' Equity. At December 31, 2012, Accumulated Other Comprehensive Loss net of $312,276 tax was $579,940 related to this transaction.

Our average floating interest rate on debt outstanding under our credit facility at December 31, 2012, was 2.25%. The Credit Agreement includes customary representations and warranties made by us to Bank of America.

The Credit Agreement contains customary, affirmative and negative covenants requiring us to take certain actions and restricting us from taking others. Such covenants include but are not limited to (i) restrictions on certain payments, including dividends, (ii) the use of the loan proceeds only for certain purposes, and (iii) limitations on the occurrence of liens, certain investments, and/or subsidiary indebtedness (subject to certain exceptions).

In addition the Credit Agreement contains certain financial covenants, which include but are not limited to:

? Maintaining a minimum EBITDA of $8.5 million at end of each trailing four fiscal quarter period;

? Maintaining a maximum leverage ratio of 2.0:1.0 measured at end of each fiscal quarter;

? Prohibition of unfinanced capital expenditures in excess of $6.0 million for trailing four fiscal quarter period; and

? Limitations on dividends paid to the parent company of 30% of EDITDA.

The Credit Agreement contains standard default triggers, which include but are not limited to (i) default on certain of our other indebtedness, (ii) the entry of certain judgments against South Hampton and its subsidiaries, and (iii) a change in the control of the Company. Upon the occurrence of any event of default Bank of America may take certain actions including declaring any outstanding amount due and payable. The Company obtained a waiver for 2012 from Bank of America for its capital expenditures in excess of the $6.0 million limit.

On November 30, 2010, as part of the consideration for the acquisition of STTC, South Hampton issued a $300,000 note to Nicholas N. Carter, our President and CEO, with a 3-year term bearing interest at 4.0% per annum. Principal and interest are payable annually on November 30th of each year. As of December 31, 2012, the principal amount of the note was $100,000.

Results of Operations

Comparison of Years 2012, 2011, 2010

The tables containing financial and operating information set forth below are presented to facilitate the discussion of the results of operations, and should not be considered a substitute for, and should be read in conjunction with, the audited consolidated financial statements.


Table of Contents
                                          2012          2011       Change      %Change
                                                (in thousands)
Petrochemical Product Sales          $ 218,512     $ 194,620     $ 23,892         12.3 %
Processing                               4,346         4,897         (551 )      (11.3 %)
Gross Revenue                        $ 222,858     $ 199,517     $ 23,341         11.7 %

Volume of sales (thousand gallons)      63,553        54,256        9,297         17.1 %

Cost of Sales                        $ 192,100     $ 173,600     $ 18,500         10.7 %
Total Operating Expense*                39,532        35,314        4,218         11.9 %
Natural Gas Expense*                     3,914         5,266       (1,352 )      (25.7 %)
Operating Labor Costs*                  10,437         8,764        1,673         19.1 %
Transportation Costs*                   15,881        13,234        2,647         20.0 %
General & Administrative Expense        12,782        11,778        1,004          8.5 %
Depreciation**                           3,573         3,220          353         11.0 %

Capital Expenditures                 $   8,143     $   6,518     $  1,625         24.9 %

*Included in cost of sales
**Includes $3,053 and $2,744 for 2012 and 2011 which is included in operating

expenses

                                          2011          2010       Change      %Change
                                                (in thousands)
Petrochemical Product Sales          $ 194,620     $ 133,579     $ 61,041         45.7 %
Transloading Sales                           -           854         (854 )     (100.0 %)
Processing                               4,897         4,677          220          4.7 %
Gross Revenue                        $ 199,517     $ 139,110     $ 60,407         43.4 %

Volume of sales (thousand gallons)      54,256        46,721        7,535         16.1 %

Cost of Sales                        $ 173,600     $ 121,895     $ 51,705         42.4 %
Total Operating Expense*                35,314        28,597        6,717         23.5 %
Natural Gas Expense*                     5,266         4,991          275          5.5 %
Operating Labor Costs*                   8,764         7,905          859         10.9 %
Transportation Costs*                   13,234         9,205        4,029         43.8 %
General & Administrative Expense        11,778        10,930          848          7.7 %
Depreciation**                           3,220         2,705          515         19.0 %

Capital Expenditures                 $   6,518     $   2,899     $  3,619        124.8 %

*Included in cost of sales
**Includes $2,744 and $2,271 for 2011 and 2010 which is included in operating expenses

Gross Revenue

2011-2012

Revenues increased from 2011 to 2012 by approximately 11.7% primarily due to an increase in sales volume of 17.1% offset by a decrease in the average selling price of 4.1% and an 11.3% decrease in processing revenue.

2010-2011

Revenues increased from 2010 to 2011 by approximately 43.4% primarily due to an increase in the average selling price of 24.7% and an increase in sales volume of 16.1%.

Petrochemical Product Sales

2011-2012

Petrochemical product sales increased 12.3% from 2011 to 2012 due to an increase in total sales volume of 17.1% as noted above offset by a decrease in the average selling price of 4.1%. Since approximately 50% of our sales are based


Table of Contents

upon formulas derived from market prices of raw materials and those prices declined in 2012, our average selling price declined. 2010-2011

Petrochemical product sales increased 45.7% from 2010 to 2011 due to an increase in the average selling price of 24.7% and an increase in sales volume of 16.1%. Average selling price rose due to the increase in raw material costs which influences the calculation of selling prices. Sales volume increased due to growth in market share and the use of our products in emerging technologies. Numerous contracts were initiated and/or renewed during 2011.

Processing

2011-2012

Processing revenues decreased 11.3% from 2011 to 2012 due to one of our tolling customer's inability to obtain raw material which impacted their run rates. The Petrochemical Company remains dedicated to maintaining a certain level of toll processing business in the facility and continues to pursue opportunities.

2010-2011

Processing revenues increased 4.7% from 2010 to 2011 primarily due to one of our toll customers running above take or pay minimum during 2011.

Cost of Sales (includes but is not limited to raw materials, total operating expense, natural gas, operating labor and transportation)

2011-2012

Cost of Sales increased 10.7% from 2011 to 2012 due in part to a 13.3% increase in volumes processed and hedging losses of $1.8 million partially offset by a 6.8% decrease in the average cost per gallon of feedstock. We use natural gasoline as feedstock which is the heavier liquid remaining after butane and propane are removed from liquids produced by natural gas wells. The material is a commodity product in the oil/petrochemical markets and generally is readily available. The price of natural gasoline normally correlates approximately 93% with the price of crude oil. We are investigating alternative feedstock sources which contain lower percentages of less desirable components in an effort to reduce the amount of byproduct sold into fuel markets at lower prices, thereby increasing overall profitability.

2010-2011

Cost of Sales increased 42.4% from 2010 to 2011 due to higher feedstock prices which increased an average of 30.7% and an increase in volume purchased of 17.7%. Cost of Sales was reduced by $0.4 million in 2011 and $0.2 million in 2010, respectively for net gains the Company recorded on feedstock and natural gas contracts purchased to hedge against changes in commodity prices.

Changes in other components of Cost of Sales are detailed below. See Note 20 of Notes to the Consolidated Financial Statements.

Total Operating Expense (includes but is not limited to natural gas, operating labor and transportation)

2011-2012

Total Operating Expense for the Petrochemical Company increased 11.9% from 2011 to 2012. Natural gas, labor and transportation are the largest individual expenses in this category.

The cost of natural gas purchased decreased 25.7% from 2011 to 2012 due to a decrease in the average per unit cost. The average price per MMBTU for 2012 was $3.03 whereas, for 2011 the average per-unit cost was $4.32. The decreased cost was partially offset by increased volume which increased to approximately 1,285,000 MMBTU from about 1,224,000 MMBTU.


Table of Contents

Operating labor costs were higher by 19.1% because the Company added approximately 8 employees year over year. Increased manpower was required by increases in production, product shipments, and loading of iso-containers for foreign sales which require special handling. Some of the cost of additional personnel was borne by our tolling customer, Gevo, per the toll processing arrangement which became operational in the fourth quarter of 2011. Additionally, a number of temporary personnel were hired to allow the maintenance department to accomplish budgeted maintenance and capital projects in a timely manner.

Transportation costs were higher by 20.0% primarily due to an increase in rail freight. These costs are recovered through the Company's selling price. Higher transportation costs accounted for 62.8% of the increase in operating expense.

2010-2011

Total Operating Expense for the Petrochemical Company increased 23.5% from 2010 to 2011.

The cost of natural gas purchased increased 5.5% from 2010 to 2011 due to an increase in the volume used of 13.6% offset by lower average per-unit costs of 8.6%. The average price per MMBTU for 2011 was $4.32; whereas, for 2010 the per-unit cost was $4.73. Volume purchased increased from 1,077,000 MMBTU to 1,224,000 MMBTU.

Operating labor increased approximately 10.9% due to a 15.8% increase in personnel and a 34.2% increase in profit sharing.

. . .

  Add ARSD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ARSD - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.