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

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
KEYP > SEC Filings for KEYP > Form 10-Q on 16-Aug-2013All Recent SEC Filings

Show all filings for KEYUAN PETROCHEMICALS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for KEYUAN PETROCHEMICALS, INC.


16-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Keyuan for the nine months ended March 31, 2013 and 2012 and should be read in conjunction with such financial statements and related notes included in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Operating through our wholly-owned subsidiaries, Ningbo Keyuan Plastics Co., Ltd. ("Ningbo Keyuan"), Ningbo Keyuan Petrochemicals Co., Ltd ("Ningbo Keyuan Petrochemicals"), Keyuan Synthetic Rubbers Co., Ltd ("Keyuan Synthetic Rubbers") and Guangxi Keyuan Co.,Ltd ("Guangxi Keyuan"), our operations include (i) a production facility with an annual petrochemical production capacity of 720,000 metric tons (MT) of a variety of petrochemical products, (ii) facilities for the storage and loading of raw materials and finished goods, and (iii) a manufacturing technology that can support our manufacturing process with relatively low raw material costs and high utilization and yields, all of which are led by a management team consisting of petrochemical experts with proven track records from some of China's largest state-owned enterprises in the petrochemical industry.

Due to China's growing demand for refined petrochemical products, we expanded our annual production capacity from 550,000 MT to 720,000 MT in April 2011. We also completed the construction of a Styrene-Butadience-Styrene (the "SBS") production facility with an annual production capacity of 70,000 MT in September 2011 and began initial trial production in October and November 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August 2012.

In January 2012, we signed a cooperation agreement with Fangchenggang City to build a new petrochemicals production facility, Guangxi Keyuan New Materials Industrial Park, in Guangxi Province (the "Guangxi Project"). Once the facility is fully operational, it is expected to have an annual production capacity of 400,000 metric tons of Acrylonitrile Butadiene Styrene (the "ABS") and related products. As of the date of this filing, we have been focused on the complex pre-construction government approval work and on research to improve the efficiency of the production of Guangxi Project since the signing of the agreement.


Our organization chart is as follows:

[[Image Removed]]

Our Facility and Equipment

Facility

As of March 31, 2013, we have invested a total of approximately $32.02 million in the construction and improvement of our production facility. Our current production facility encompasses approximately 1.3 million square feet, including 594,000 square feet for production and 19,500 square feet for laboratories and offices. We also acquired the land use right of an additional 1.2 million square feet of land in August 2010 for our future expansion.

We have a total of 100,000 MT of storage capacity, consisting of 50,000 MT of storage capacity for raw materials and 50,000 MT for finished products. As part of our expansion plan, we intend to add 80,000 MT of new storage capacity in 2013, after which our total storage capacity will be 180,000 MT. The Company entered into the first phase of construction of the new storage capacity in August 2012, and approximately 30,000 MT of new capacity has been completed through June 2013. The project is currently in the anti-rust treatment and commissioning stage.

We have an on-site ocean shipping dock with 5,000 MT of shipping capacity and a 10-truck loading facility. Approximately 90% of our feedstock and finished products use this shipping dock. We also have adjacent access to another shipping dock with an additional 50,000 MT of shipping capacity.


Equipment

Our major processing equipment includes the following:

? Heavy oil catalytic pyrolysis processing equipment - risers/generators/precipitators, fuel gas boilers, fractionating tower, absorbing re-absorbing and desorbing towers, heat exchangers, pumps, a stabilizing tower;

? Gas fractionation processing equipment - de-propanizing tower, refining propylene tower, de-ethanizination tower, heat exchangers, pumps;

? Ethylbenzene processing equipment - alkylation reactor, anti-alkylation reactor, dehydrogenation reactor, propylene absorbing tower, de-ethylene tower, ethylbenzene recovering tower, heating furnace for benzene, heating furnace for gas, steam overheating furnace, tail gas compressor, washing tower; and

? Liquefied petroleum gas (LPG) and sulfur recovery process - LPG desulfurization extraction tower, dry gas desulfurization tower, regenerating tower, LPG de-mecaptan extraction tower.

Our Products

We manufacture and supply a variety of petrochemical products, including BenzeneToluene-Xylene Aromatics (BTX Aromatics), propylene, styrene, liquid petroleum gas (LPG), Methyl Tertiary Butyl Ether (MTBE), Styrene butadiene styrene (SBS), and other petrochemicals, each of which is described below:

? BTX Aromatics: consists of benzene, toluene, xylene and other chemical components used for further processing into plastics, gasoline and solvent materials widely used in paint, ink, construction coating and pesticide;

? Propylene: a chemical intermediate which is one of the building blocks for an array of chemical and plastic products that are commonly used to produce polypropylene, acrylonitrile, oxo alcohols, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances;

? Styrene: a precursor to polystyrene and several copolymers widely used for packaging materials, construction materials, electronic parts, home appliances, household goods, home furnishings, toys, sporting goods and other products;

? LPG: a mixture of hydrocarbon gases used as fuel in heating appliances and vehicles. A replacement for chlorofluorocarbons as an aerosol propellant and a refrigerant which reduces damage to the ozone layer;

? MTBE & Other Chemicals: MTBE, oil slurry, sulphur and others which are used for a variety of applications including fuel components, refrigeration systems, fertilizers, insecticides and fungicides; and

? Styrene butadiene styrene (SBS): a thermoplastic elastomer with features similar to rubber, widely used in the manufacture of resin, shoes, tape, tubes and asphalt.

Production Capacity and Expansion

Our annual designed manufacturing capacity was 550,000 metric tons of a variety of petrochemical products at the end of 2010. We upgraded the catalytic pyrolysis processing equipment used in production facilities to expand the capacity from 550,000 MT to 720,000 MT. This capacity expansion project started in March 2011 and was completed in April 2011.

In September 2011, we completed building a new facility designed for producing Styrene-Butadience-Styrene (the "SBS"), one of the Styreneic Block Copolymers. SBS is a product with higher product margin with significant applications in the footwear, adhesive, polymer modification and modified asphalt industries. The SBS facility was built on part of the 1.2 million square feet of land for which we obtained the right of use in August 2010. The construction started in September, 2010 and was completed as scheduled in September 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August 2012. The designed capacity of the SBS facility allows for production of up to 70,000 metric tons per year. The SBS facility achieved a 41% utilization rate in 2012, as the first full year of production, and generated approximately $71.1 million in sales and $7.7 million in profit. We expect to generate net profit margins of 10% from our production of SBS once the facility reaches normal production levels, which means the actual production volume reach more than 80% of the design capacity. However, market conditions, the volatility of feedstock and SBS product prices can significantly impact the estimated profitability and we cannot guaranty that our SBS production will reach more than 80% of the design capacity in the near future.


The following chart depicts our production capacity in 2012:

[[Image Removed]]

Breakdown of 2012 Capability of 693,895 (MT)

Other than the utilization rate for SBS facility discussed above, the utilization rates for our other facilities are as follows:

? styrene production: 88%;

? propylene: 78%;

? LPG: 85%;

? BTX Aromatic: 105%; and

? MTBE & others: 50%


Most of our facilities have been operating since 2009, so the current utilization rates for each product (except for the newly developed SBS) has been optimized to achieve stable output, less raw material cost and less equipment maintenance. We also made slight adjustments to the utilization rate for the BTX Aromatic facility to reduce the output to achieve more stable production conditions. We have been working on existing equipment upgrades to achieve increased stabilized production. However, in order to develop our business to meet increasing customer demands, optimizing the utilization rates for our current facilities is not adequate to achieve our goals. More specifically, the increasing market demand in tire and auto parts has resulted in increasing market demand for styrene, ABS and SSBR; and higher requirements related to environmental protection imposed by the PRC government has lead to higher demand for transformer oil and catalytic cracking oil. Based on these market trends, rather than focusing on optimizing our current utilization rates for our different facilities, we have been focusing on the following improvements to our infrastructure to expand our manufacturing capacity:

a) an ABS production facility in Guangxi Province, which will have an annual production capacity of 400,000 MT of ABS. The Company began pre-construction activities in February 2012, and the first phase is expected to be completed by the forth quarter of 2014;

b) an oil catalytic cracking processing facility as an extension of our catalytic pyrolysis processing equipment, as well as the feed way of the main raw materials to produce synthetic rubber. This facility can reduce production costs and the market risk in the purchase of raw materials, and improve the stability and efficiency of project production to 200,000 MT of heavy oil per year;

c) an increased annual design capacity of our ethylene-styrene facility from 80,000 MT to 200,000 MT, among which 120,000 MT can be used for producing synthetic and 80,000 MT can be sold to downstream petrochemical companies. Ethylene-styrene is the main raw material (eg. Bezene) from the catalytic cracking oil processing facility to produce styrene. This facility can be considered the bridge between original products and high-value added products and will complete the integration of internal resources;

d) a transformer oil facility using hydrogen from the ethylene-styrene facility to complete a double hydrogenation process on original products (BTX Aromatic) for refining transformer oil, and producing high value transformer oil with a design capability of 100,000 MT per year; and

e) an SSBR (Solution Polymerized Styrene Butadiene Rubber) production facility with a design capability of 150,000 MT per year, that will use its own production process technology in synthetic rubber, combining styrene and butadiene, to produce SSBR. This product can be used as raw materials for tires, instead of imported hexakis (methoxymethy) melamine ("HMMM").

We registered our catalytic oil processing facility and transformer oil plant with the Ningbo local government in February 2013, and expect it to be completed and operational in late 2013, at which time we will be able to produce medical use and edible products such as tubes and chewing gum.

The total estimated cost of processing equipment for product refinement and the SSBR production facility is approximately $149.3 million, including $49.8 million for processing equipment and $99.5 million for the SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs. Upon full completion of our expansion, our total production capacity will reach 2,443,000 MT per year including, but not limited to, our current petrochemical production of 720,000 MT, styrene of 200,000 MT, catalytic cracking oil of 200,000 MT, ABS of 400,000 MT, SSBR of 150,000 MT and transformer oil of 100,000 MT. The following chart depicts the breakdown of our planned production capacity of 2,443,000 MT.


[[Image Removed]]

Capacity Breakdown after expansion projects (2,443,000 MT)

We are currently evaluating the timeline for our expansion projects. Our current estimate is as follows:

Expansion Project                   Expected Completion Date
Oil Catalytic Processing Facility       End of Q4, 2013
Ethylene-Styrene Facility               End of Q4, 2014
Transformer Oil Facility                End of Q4, 2014
SSBR production facility                End of Q4, 2015
ABS Production Facility                 End of Q4, 2014

Manufacturing and Sales

Our total production of finished products was 188.117 MT for the three months ended March 31, 2013, and we generated $210 million in revenue based on the sale of 184,581 MT of petrochemical products.

Results of Operations

The following table sets forth information from our statements of comprehensive income for the three months ended March 31, 2013 and 2012.


Comparison of the three ended March 31, 2013 and 2012 (in thousands)

                                             For the three months             Year to Year Comparison
                                                Ended March 31,            Increase           Percentage
                                              2013           2012         /(Decrease)           change

Sales                                      $   209,554     $ 183,325     $      26,229               14.31 %

Cost of sales                                  200,732       173,852            26,880               15.46 %

Gross profit                                     8,822         9,473              (651 )             (6.87 )%

Operating expenses
Selling expenses                                   167           253               (86 )             33.99 %
General and administrative expenses              2,970         2,610               360                13.8 %
Total operating expenses                         3,137         2,863               274                9.57 %

Income from operations                           5,685         6,610              (925 )                14 %

Other income (expenses):
Interest income                                    751           939              (188 )               (20 )%
Interest expense, net                           (3,396 )       4,379              1001                  22 %
Foreign exchange gain (loss), net                1,553          (178 )           1,731                (972 )%
Non-operating income (expenses)                   (380 )          (8 )            (372 )             4,650 %
Total other expenses                            (1,472 )      (3,626 )           2,154              (59.41 )%

Income before income taxes                       4,213         2,984             1,229               41.18 %
Income tax expense                               1,295         1,346               (51 )                 4  %
Net Income                                       2,918         1,638             1,280               78.14 %
Other comprehensive income
Foreign currency translation adjustment            531           577               (46 )                 8 %
Comprehensive income                       $     3,449         2,215             1,234                  55 %

Sales: Our sales for the three months ended March 31, 2013 were approximately $209.6 million, compared to sales of $183.3 million for the three months ended March 31, 2012, an increase of $26.3 million, or 14.31%. The substantial increase in our sales was due to the higher capacity utilization coupled with higher sales volume for our products compared to the comparable period in 2012. In the three months ended March 31, 2013 we sold 184,581 metric tons of chemical products at an average price of $1,135 per metric ton, as compared to the sale of 155,235 metric tons of chemical products at an average price of $1,181 per metric ton in the three months ended March 31, 2012. This represents a 19% increase in overall metric tons sold.


Cost of Sales: Our overall cost of sales was approximately $200.7 million for the three months ended March 31, 2013, or 96% of sales, as compared to cost of sales of approximately $173.9 million, or 95% of sales for the three months ended March 31, 2012. Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene, butadiene and carbinol), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The increase in the cost of sales was due to the higher sales volume in 2013.

Energy required for production of our products consists of water, electricity and steam, the costs of which are attributed to cost of sales rather than operating expense. The supply prices of these energy sources in China have historically been very stable as a result of PRC government policy. Accordingly, the potential impact of changing energy costs to our production is minimal. Following are the costs for water, electricity and stream for the three months ended March 31, 2013 and 2012 (amounts in thousands):

For the Three Months Ended

                          March 31,
                  2013                2012
               (Unaudited)         (Unaudited)
Water                   395                 278
Electricity           3,268               2,377
Steam                     -               1,198

Total energy cost was approximately $4,159 for the three months ended March 31, 2013, which constitutes approximately 2% of sales. Total energy cost was approximately $14,110 in fiscal year 2012, which constitutes approximately 1.8% of sales.


Gross Profit: Gross profit for the three months ended March 31, 2013 was approximately $8.82 million as compared to $9.5 million for the comparable period in 2012, a decrease of approximately $0.65 million, or 6.87%. The decrease was mainly due to the increased cost of sales of $200.7 million in 2013 compared to $173.9 million in the same period in 2012.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $3.1 million, or 1.5% of sales for the three months ended March 31, 2013 as compared to $2.9 million, or 1.56% of sales for the comparable period in 2012, an increase of approximately $0.12 million. The increase was due to general increases in welfare expenses and business development expenses.

Interest Income/Expense (net): For the three months ended March 31, 2013, interest income and interest expense were approximately $0.75 million and $3.4 million, respectively; as compared to interest income and interest expense of approximately $0.9 million and $4.4 million, respectively, for the comparable period in 2012. The decrease in interest income / expense was mainly due to the lower interest rates.

Net Income/loss: Net income was approximately $2.9 million for the three months ended March 31, 2013, as compared to net income of approximately $1.6 million in the same period in 2012, an increase of $1.3 million, or 78%. This increase was mainly due to the decrease of financial expense in 2013, compared to the same period of 2012.

Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income and amounted to $0.5 million for the three months ended March 31, 2013. The balance sheet amounts, at March 31, 2013 and 2012, with the exception of equity, were translated at RMB6.27668 and RMB 6.29723 to 1.00 U.S. dollar respectively. The equity accounts were translated at their historical rates. The average translation rates applied to income statement accounts for the three months ended March 31, 2013 and 2012 were RMB 6.26566 and RMB 6.31313, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

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

                                               For the Three Months Ended
                                                        March 31,
                                                2013                2012
                                             (Unaudited)         (Unaudited)
Net cash used in operating activities              67,118              30,018
Net cash used in investing activities              11,382              10,353
Net cash provided by financing activities          75,026              55,847


Net cash used in operating activities was approximately $67.1 million for the three months ended March 31, 2013, as compared approximately $30 million for the same period in 2012. The increase was primarily caused by the increase in inventory, accounts payables, pre-payment to suppliers and consumption tax refunds receivable.

Net cash used in investing activities was approximately $11.4 million and $10.4 million for the three months ended March 31, 2013 and 2012, respectively. Net cash used in investing activities was primarily focused on payments for the infrastructure construction and the expansion of our facility. As we move forward with our expansion, it is expected that net cash used in investing activities will be consistent throughout 2013.

Net cash provided by financing activities amounted to approximately $75,026 million for the three months ended March 31, 2013. Net cash used in financing activities amounted to approximately $55.8 million for the same period in 2012. For the three months ended March 31, 2013, the net cash provided by financing activities was primarily through increased short-term bank borrowings.

The Company's consolidated financial statements for the three months ended March 31, 2013, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company's consolidated financial statements as of and for the year ended December 31, 2012, includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company's ability to continue as a going concern.

In order to operate our business efficiently, we rely primarily on short-term bank financings to fund the purchase of raw materials. As of March 31, 2013, we had approximately $443 million of short-term bank borrowing. Short-term bank borrowings and bills payable were approximately $397.8 million as of December 31, 2012, and have increased to approximately $557 million as of March 31, 2013, and continued to increase to $677 million as of July 31, 2013. If one or more of these banks revoke their line of credit or fail to renew such line of credit when it is due, it would impact our capacity to continue to purchase raw materials in the amounts necessary to continue production at our current capacity. Management expects that short-term bank financing will continue to be available through at least the end of March 31, 2014. In addition, our major raw materials supplier provided short-term financing to us of approximately $29 million during 2012, of which $20 million was included in accounts payable at December 31, 2012 and was repaid on January 21, 2013. Interest paid for this financing amounted to approximately $0.43 million. In addition, on December 27, 2012, the supplier provided a non-interest bearing advance of approximately $10 million to the Company, that was repaid in full on January 8, 2013. Of the total amount of short-term financing of $800 million during 2012, approximately $39 million was from our major supplier, and additional short-term financing of approximately $75.3 million was provided by the supplier through July 2013. The Company believes the short-term financing from the supplier, which currently makes up a large proportion of our overall financing, has significantly impacted our liquidity by providing additional financing for our operations. The short-term financing is facilitated through the use of available letters of credit and our lines of credit, and enables lower costs of trade financing. We believe that we are in compliance with the terms of letters of credit with the banks and as of the date of this filing have not identified violations of the terms of our letters of credit due to short-term financing from vendors. However, due to the fact that we do not currently have established policies and procedures to provide for a complete and timely analysis of possible contingencies associated with short-term financings from suppliers and the evaluation of legal and regulatory considerations related to those business activities, we cannot assure that a full evaluation will not reveal violations of the terms of letters of credit. We intend to perform an evaluation to ensure full compliance. In addition to the forms of the letters of credit filed as Exhibits 10.52 and 10.53 in the amendment to registration statement on Form S-1, filed with the SEC on September 26, 2012, we hereby file another form of letter of credit in this Form 10-Q as Exhibit 10.3.

. . .

  Add KEYP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for KEYP - 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.