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CXDC > SEC Filings for CXDC > Form 10-Q on 14-May-2013All 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


14-May-2013

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 253 certifications from manufacturers in the automobile industry as of March 31, 2013. 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 121 professionals including 16 consultants, of which two consultants are members of Chinese Academy of Engineering, and one consultant 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 69 patents, one of which we have obtained the patent rights and the remaining 68 of which we have applications pending in China as of March 31, 2013.

Our products include seven categories: modified polypropylene (PP), modified engineering plastics, modified polyamides (PA), environmentally-friendly plastics, alloy plastics, polyether ether ketone (PEEK) and modified acrylonitrile butadiene styrene (ABS). The Company's products are primarily used in the production of exterior and interior trim and functional components of more than 24 automobile brands and 80 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 manufacturing bases in Harbin, Heilongjiang in the PRC. As of March 31, 2013, we had approximately 390,000 metric tons of production capacity across 83 automatic production lines utilizing German twin-screw extruding systems, automatic weighing systems and Taiwan conveyer systems, including the newly launched three additional factory buildings with 30 production lines completed the trial-run in December of 2012 and further expanded our annual capacity potential by approximately 135,000 metric tons and support our future growth in 2013 and beyond.


Highlights for the three-month period ended March 31, 2013 include:

Revenues were $171.0 million, an increase of 38.8% from $123.2 million in the first quarter of 2012
Gross profit was $29.2 million, a decrease of 6.4% from $31.2 million in the first quarter of 2012
Gross profit margin was 17.1%, compared to 25.3% in the first quarter of 2012
Net income was $14.5 million, compared to $20.6 million in the first quarter of 2012
Total volume shipped was 61,145 metric tons, up 33.4% from 45,835 metric tons in the first quarter of 2012

Results of Operations

The following table sets forth, for the periods indicated, statements of income
data in thousands of USD:

                                          Three-Month Period Ended March 31,
(in thousands, except percentages)          2013                     2012
                                     Amount           %        Amount         %
Revenues                           $   170,968        100 %   $ 123,177       100 %
Cost of revenues                   $   141,811         83 %   $  91,955        75 %
Gross profit                       $    29,157         17 %   $  31,222        25 %
Total operating expenses           $     8,558          5 %   $   5,003         4 %
O Operating income                 $    20,599         12 %   $  26,219        21 %
  Income before income taxes       $    19,451         11 %   $  27,124        22 %
Income tax expenses                $     5,000          2 %   $   6,562         5 %
Net income                         $    14,451          9 %   $  20,562        17 %

Revenues

Revenues were US$ 171.0 million in the first quarter of 2013, an increase of US$ 47.8 million, or 38.8%, compared to US$ 123.2 million in the same period of last year, due to a 33.4% increase in sales volume and a 4.0% increase in the average RMB selling price of our products. 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 additional 30 production lines in December 2012, 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 RMB selling price was due to the shift of product mix towards higher-end products.


Product Mix

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

(in millions,
except percentage)                 Three-Month Period Ended March 31,
                                    2013                          2012
                                                                                       Change
                                                                                         in          Change in
                          Amount              %           Amount           %           Amount            %
Modified
Polypropylene (PP)           57.3             33.5 %         64.6          52.4 %         (7.3 )         (11.3 )%

Engineering Plastics         39.7             23.2 %         24.8          20.1 %         14.9            60.1 %

Modified Polyamide
(PA)                         29.9             17.5 %         10.9           8.9 %         19.0           174.3 %

Environmentally
Friendly Plastics            25.9             15.1 %          9.7           7.9 %         16.2           167.0 %

Alloy Plastics               12.9              7.6 %          6.4           5.2 %          6.5           101.6 %

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                         4.8              2.8 %          4.8           3.9 %            -               -

   Sub-total                170.5             99.7 %        121.2          98.4 %         49.3            40.7 %

After-sales Service           0.5              0.3 %          2.0           1.6 %         (1.5 )         (75.0 )%
Total Revenues              171.0              100 %        123.2           100 %         47.8            38.8 %

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

(in MTs, except
percentage)                        Three-Month Period Ended March 31,
                                    2013                          2012
                                                                                       Change in       Change in
                            MT                %             MT             %               MT              %
Modified
Polypropylene (PP)         28,871             47.3 %       30,994          67.6 %         (2,123 )          (6.8 )%

Engineering Plastics        8,145             13.3 %        4,805          10.5 %          3,340            69.5 %

Modified Polyamide
(PA)                        6,369             10.4 %        2,213           4.8 %          4,156           187.8 %

Environmentally
Friendly Plastics          11,869             19.4 %        4,150           9.1 %          7,719           186.0 %

Alloy Plastics              4,121              6.7 %        1,893           4.1 %          2,228           117.7 %

Modified
Acrylonitrile
Butadiene Styrene
(ABS)                       1,770              2.9 %        1,780           3.9 %            (10 )          (0.6 ) %

Total sales volume         61,145              100 %       45,835           100 %         15,310            33.4 %

The Company has continued its shift of product mix to higher-end product categories such as modified polyamide (PA), environmentally-friendly plastics and engineering plastics 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 for clean energy vehicles promoted by the Chinese government 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-Month Period Ended March 31,                    Change
(in millions, except percentage)            2013                      2012              Amount            %
Gross Profit                          $            29.2         $            31.2     $      (2.0 )        (6.4) %
Gross Margin                                      17.1%                     25.3%                          (8.2) %

Gross profit was US$29.2 million in the quarter ended March 31, 2013 compared to US$31.2 million in the same period of 2012, representing a decrease of 6.4%. Our gross margin decreased to 17.1% during the quarter ended March 31, 2013 from 25.3% during the same quarter of 2012.

The decrease of gross margin was primarily due to:

(i) an average 7.0% discount off the original prices during the first quarter of 2013 to early-paying distributors. To be eligible for the discounts, our distributors must make payments earlier than our standard credit term, which we believe improved our cash flow situation and enhanced our ability to timely satisfy our capital requirements for our Sichuan project. The major purpose of this marketing strategy is to further penetrate East China market and prepare our market entry to the Southwest region. As a result, revenues contribution from East China grew to 30.1% during the first quarter of 2013 compared to 19.5% in the first quarter of 2012. We plan to reduce the discounts to 5% during this year.

(ii) a 1.4% increase in shipping expenses as a percentage of revenues during the three-month period ended March 31, 2013 as we started managing logistics to better serve our customers in a more timely manner to increase sales. Such arrangement is expected to continue in the future.

General and Administrative Expenses

                                          Three-Month Period Ended March 31,                    Change
(in millions, except percentage)            2013                       2012             Amount            %
General and Administrative Expenses   $            3.5           $            2.4     $       1.1           45.8 %
as a percentage of revenues                        2.0 %                      1.9 %                          0.1 %

General and administrative (G&A) expenses were US$3.5 million in the quarter ended March 31, 2013 compared to US$2.4 million in the same period in 2012, representing an increase of 45.8%, or US$1.1 million. This increase is primarily due to increase of payroll resulting from an increase of both average salary and headcount. On a percentage basis, G&A expenses in the first quarter of 2013 increased to 2.0% of revenues from 1.9% in the first quarter of 2012.


Research and Development Expenses

                                          Three-Month Period Ended March 31,                    Change
(in millions, except percentage)            2013                       2012             Amount            %
Research and Development Expenses     $            5.0           $            2.5     $       2.5            100 %
as a percentage of revenues                        3.0 %                      2.0 %                          1.0 %

Research and development ("R&D") expenses were US$5.0 million during the quarter ended March 31, 2013 compared with US$2.5 million during the same period in 2012, an increase of US$2.5 million, or 100%, 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 March 31, 2013, the number of ongoing research and development projects was 134. The consumption of raw materials for these projects accounted for 90% of total R&D expenses for the quarter ended March 31, 2013.

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 and medical devices.

Operating Income

Total operating income was US$20.6 million in the quarter ended March 31, 2013
compared to US$26.2 million in the same period of 2012, representing a decrease
of 21.4% or US$5.6 million. This decrease is primarily due to lower gross
profit, and higher G&A and R&D expenses.

Other Income (Expense)

Interest Income (Expenses)

                                          Three-Month Period Ended March 31,                   Change
(in millions, except percentage)            2013                      2012              Amount           %
Interest Income                       $             1.1         $             1.0     $      0.1           10.0 %
Interest Expenses                                 (2.9)                     (0.5)          (2.4)          480.0 %
Net Interest Income (Expenses)        $           (1.8)         $             0.5     $    (2.3)          460.0 %
as a percentage of revenues                       (1.1) %                     0.4 %                       (1.5) %

Net interest expense was US$1.8 million in the quarter ended March 31, 2013, compared to net interest income of US$0.5 million in the same period of 2012, primarily due to increase of short-term loans to meet the need of operating activities. The average loan balance for the three months ended March 31, 2013 was US$176.8 million as compared to US$25.1 million as of that of the prior year, leading to US$2.4 million more interest expense.


Income Taxes

                                          Three-Month Period Ended March 31,                   Change
(in millions, except percentage)            2013                      2012              Amount           %
Income before Income Taxes            $            19.5         $            27.1     $    (7.6)          (28.0 )%
Income Tax Expense                                (5.0)                     (6.5)            1.5          (23.1 )%
Effective income tax rate                         25.7%                     24.2%                           1.5 %

The effective income tax rates for the three-month periods ended March 31, 2013 and 2012 were 25.7% and 24.2%, respectively. The effective income tax rate for the three-month period ended March 31, 2013 differs from the PRC statutory income tax rate of 25% primarily due to the increase of valuation allowance against deferred income tax assets and tax rate differential for non-PRC entities.

Our PRC subsidiaries have US$239.6 million of cash and cash equivalents, restricted cash and time deposits as of March 31, 2013, which is planned to be indefinitely 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$14.5 million in the first quarter of 2013 compared to net income of US$20.6 million in the same quarter of 2012.

Selected Balance Sheet Data as of March 31, 2013 and December 31, 2012:

                                       March 31,       December 31,
                                          2013             2012                 Change
(in millions, except percentage)                                          Amount          %
Cash and cash equivalents                    113.7              83.8         29.9         35.7 %
Restricted cash                               14.0              16.9         (2.9 )      (17.2 )%
Time deposits                                111.9              48.0         63.9        133.1 %
Accounts receivable, net of
allowance for doubtful accounts              151.3             143.8          7.5          5.2 %
Inventories                                   84.4              78.3          6.1          7.8 %
Property, plant and equipment, net           219.5             223.8         (4.3 )       (1.9 )%
Total assets                                 707.7             611.6         96.1         15.7 %
Short-term bank loans                        191.6             162.1         29.5         18.2 %
Accounts payable                              56.0               7.1         48.9        688.7 %
Bills payable                                 20.5              15.8          4.7         29.7 %
Income tax payable                             8.0               8.5         (0.5 )       (5.9 )%
Accrued expenses and other current
liabilities                                   32.7              34.4         (1.7 )       (4.9 )%
Redeemable Series D convertible
preferred stock                               97.6              97.6            -            -
Stockholders' equity                         280.0             264.4         15.6          5.9 %


Our financial condition continues to improve as measured by an increase of 5.9% in stockholders' equity as of March 31, 2013 compared to December 31, 2012. Accounts payable increased by 688.7% due to the 30 days payment terms renegotiated with our raw material suppliers, a shift from prepayment to suppliers in the past, in order to strengthen our working capital.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary uses of cash have been to finance working capital needs and capital expenditures for new production lines. We have financed these requirements primarily from cash generated from operations, short-term bank borrowings, and the issuance of our convertible preferred stocks and other equity financings. As of March 31, 2013 and December 31, 2012, we had US$113.7 million and US$83.8 million, respectively, in cash and cash equivalents, which were primarily deposited with banks in China (including Hong Kong). As of March 31, 2013, we had US$191.6 million outstanding short-term bank loans, including US$95.2 million unsecured loans, US$72.4 million loans secured by accounts receivable, and US$24.0 million loans secured by time deposits. These loans bear a weighted average interest rate of 6.0% per annum and have terms of no longer than one year and do not contain any renewal terms. We have historically been able to make repayments when due. In addition, we obtained lines of credit from below banks during 2012 and 2013.

A summary of lines of credit for the three-month period ended March 31, 2013 and the remaining lines of credit as of March 31, 2013 is as below:

(in millions)                                       March 31, 2013
                                                                                Remaining
                                     Lines of Credit, Obtained                  Available
Name of Financial
Institution                 Date of Approval        RMB            USD             USD
Bank of Communication       January 5, 2013          100.0          16.1                0.0
Bank of Longjiang,
Heilongjiang                March 14, 2013           200.0          32.2                0.0
Bank of China               March 14, 2013           350.0          56.4               24.4
HSBC                        June 28, 2012             93.2          15.0                2.0
China Guangfa Bank          August 28, 2012           30.0           4.8                0.0
Industrial and Commercial
Bank of China               October 11, 2012         300.0          48.3                0.0
Agriculture Bank of China   December 7, 2012         200.0          32.2                0.0
China Construction Bank     December 19, 2012        175.0          28.2               15.3
Total                                              1,448.2         233.2               41.7

We have historically been able to make repayments when due. In addition, as of March 31, 2013, we have contractual obligations to pay (i) lease commitments in the amount of US$1.6 million, including US$0.6 million due in 2013; (ii) plant construction in the amount of US$27.8 million; (iii) warehouse construction in the amount of US$0.8 million; and (iv) equipment acquisition in the amount of US$1.5 million, all of capital commitments are due in 2013.

We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings.

We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all.


The following table sets forth a summary of our cash flows for the periods indicated.

                                                  Three-Month Period Ended
                                                          March 31,
(in millions US$)                                  2013               2012
Net cash provided by operating activities           68.8                4.5
Net cash used in investing activities              (68.4)                -
Net cash provided by (used in) financing
activities                                          28.9              (12.7)
Effect of foreign currency exchange rate
changes on cash and cash equivalents                 0.6               (0.1)
Net increase (decrease) in cash and cash
equivalents                                         29.9               (8.3)
Cash and cash equivalents at the beginning
of period                                           83.8               135.5
Cash and cash equivalents at the end of
period                                              113.7              127.2

Operating Activities

Net cash provided by operating activities increased to US$68.8 million for the three-month period ended March 31, 2013 from US$4.5 million for the three-month period ended March 31, 2012, primarily due to (i) the increase of approximately US$69.9 million in cash collected from our customers for the three-month period ended March 31, 2013 resulting from increasing sales during the period, and (ii) an increase of approximately US$5.6 million in cash operating expenditures, including raw material purchases, rental and personnel costs for the three-month period ended March 31, 2013.

Investing Activities

Net cash used in the investing activities was US$68.4 million for the . . .

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