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 15-Nov-2013All Recent SEC Filings

Show all filings for KEYUAN PETROCHEMICALS, INC.

Form 10-Q for KEYUAN PETROCHEMICALS, INC.


15-Nov-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 September 30, 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, as amended.

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 ("ABS") and related products. On August 9, 2013, we received approval for the Guangxi Project from the local government of Fangchengang City. On August 28, 2013, the project's opening ceremony was held to officially announce the commencement of engineering and building construction for the project. The preliminary investigation for foundation piling was completed at the end of October, and we are in the process of land leveling which we expect to complete by the end of 2013. We expect that the construction of facilities and piping lines' installation will be completed by the end of 2014 if the work progresses according to the current schedule.


Our organization chart is as follows:

[[Image Removed]]

Our Facility and Equipment

Facility

As of September 30, 2013, we have invested a total of approximately $ 44.8 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 a part of our expansion plan, we intend to add 50,000 MT of new storage capacity in 2013, after which our total storage capacity will be 150,000 MT. We began the first phase of construction of the new storage capacity in August 2012, and approximately 34,000 MT of new capacity has been completed through June 2013. The installation of pilings and pumps for storage tanks was completed at the end of October 2013. The project is currently in the anti-rust treatment and heating insulation 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, and a stabilizing tower;

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

? Liquefied petroleum gas (LPG) and sulfur recovery process - LPG desulfurization extraction tower, dry gas desulfurization tower, regenerating tower, and 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 MT of a variety of petrochemical products at the end of 2010. We upgraded the catalytic pyrolysis processing equipment used in our production facilities to expand the capacity from 550,000 MT to 720,000 MT. The capacity expansion project started in March 2011 and was completed in April 2011.

In September 2011, we completed building a new facility designed to produce 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 MT per year. We adjusted the planned production capacity to 58,000 MT in 2013, considering market conditions, the supply of raw materials and the routine maintenance that takes place every two years. The SBS facility achieved an 81% utilization rate for the nine months ended September 30,2013, and generated approximately $65.5 million in sales and $9.3million in profit.


The following chart depicts our main product's production capacity for nine months ended September 30, 2013:

[[Image Removed]]

Breakdown of the total capability of 413,655 MT for main products for the nine months ended September 30, 2013

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

? styrene production: 71%;

? propylene: 71%;

? LPG: 90%;

? BTX Aromatic: 91%; and

? MTBE & others: 60%

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 led 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, as of the date of this filing, we are currently in the process of doing land leveling. The first phase is expected to be completed by the fourth 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, of which 120,000 MT can be used for producing synthetic materials and 80,000 MT can be sold to downstream petrochemical companies. 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; Construction of the main facility column was completed at the end of October 2013, and we are aiming to finish the assembly and installation by the end of 2013; 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. The foundation piling work was completed in July 2013 and as of the date of this filing we have also completed construction of the main body of the facility and 40% of pipe installation. We expect the overall catalytic oil processing facility to be completed by the end of 2013, and to commence operations in January 2014, 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 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 (a total of 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 135,810 MT for the three months ended September 30, 2013, and we generated $ 150 million in revenue based on the sale of 129,066 MT of petrochemical products.

Our total production of finished products was 413,655 MT for the nine months ended September 30, 2013, and we generated $ 454 million in revenue based on the sale of399,645 MT of petrochemical products.

Results of Operations

The following table sets forth information from our statements of comprehensive income for the three and nine months ended September 30, 2013 and 2012.


Comparison of the three and nine months ended in September 30, 2013 and 2012 (in

thousands)

                          For the three months            Year to Year Comparison             For the nine months           Year to Year Comparison
                           Ended September 30,          Increase           Percentage         Ended September 30,          Increase         Percentage
                           2013           2012         /(Decrease)           change            2013          2012         /(Decrease)         change

Sales                   $   150,286       164,347           (14,061 )             (8.6 )%      453,775       532,098           (78,323 )         (14.72 )%

Cost of sales               140,030       160,472           (20,442 )           (12.74 )%      432,389       512,330           (79,941 )         (15.60 )%

Gross profit                 10,256         3,875             6,381             164.67 %        21,386        19,768             1,618             8.18 %

Operating expenses
Selling expenses                466           251               215              85.66 %           869           892               (23 )          (2.58 )%
General and
administrative
expenses                      3,397         2,127             1,270              59.71 %         8,988         7,394             1,594            21.56 %
Total operating
expenses                      3,863         2,378             1,485              62.45 %         9,857         8,268             1,589           (19.22 )%

Income from
operations                    6,393         1,497             4,896             327.05 %        11,529        11,482                47             0.41 %

Other income
(expenses):
Interest income:              2,461         1,519               942              62.01 %         6,363         4,341             2,022            46.58 %
Interest expense             (4,481 )      (5,864 )           1,383             (23.58 )%      (14,601 )     (13,173 )          (1,428 )          10.84 %
Foreign exchange gain
(loss), net                   1,044           331               713             215.41 %        (7,249 )         (33 )          (7,216 )       21866.67 %
Non-operating income
(expenses)                   (1,342 )      (5,439 )           4,097             (75.33 )%       (2,437 )      (5,656 )           3,219           (56.91 )%
Total other
(expenses) Income            (2,318 )      (9,453 )           7,135             (75.48 )%       (3,426 )     (14,521 )          11,095           (76.41 )%

Income (loss) before
income taxes                  4,075        (7,956 )          12,031            (151.22 )%        8,103        (3,039 )          11,142          (366.63 )%
Income tax expense            1,284        (1,018 )           2,302            (226.13 )%        2,891           991             1,900           191.73 %
Net Income(Loss)              2,791        (6,938 )           9,729             (140.3 )%        5,212        (4,030 )           9,242          (229.33 )%
Other comprehensive
income
Foreign currency
translation
adjustment                      538          (827 )           1,365            (165.05 )%        2,170          (697 )           2,867          (411.33 )%
Comprehensive income
(loss)                  $     3,329     $  (7,765 )   $      11,094            (142.87 )%   $    7,382     $  (4,727 )   $      12,109          (256.17 )%


Sales: Our sales for the three months ended September 30, 2013 were approximately $150 million, compared to $164 million for the three months ended September 30, 2012, a decrease of $14 million, or 8.6 %. The decrease was mainly due to lower sales quantities as a result of the 40-day production interruption in the quarter ended June 30, 2013. It takes a short period of time for the facilities and equipment to reach to their optimum conditions after routine maintenance. We sold 129,066 tons of petrochemical and rubber products at an average price of $1,094 and $1,888 per metric ton, respectively, in the three months ended September 30, 2013, compared to 155,249 metric tons of petrochemical products and rubber products at an average price of $982 and $2,423 per metric ton, respectively, in the three months ended September 30, 2012. The average sales price for petrochemical products for the three months ended September 30, 2013 increased by approximately 11% compared to the same period of 2012. Petrochemical segment revenues for three months ended September 30, 2013 account for 86% of the total revenue. Although the average selling price for petrochemical products during the three months ended September 30, 2013 is higher than the same period in 2012, the overall quantity of products sold decreased by 15%, which caused total sales for the three months ended September 30, 2013 to decline.

Sales for the nine months ended September 30, 2013 were approximately $454 million, compared to $532 million for the nine months ended September 30, 2012, a decrease of $78 million, or 14.7%. The decrease in revenue was due to the 40-day facilities interruption for the routine inspection and maintenance in the quarter ended June 30, 2013, which maintenance is normally performed in every two years. The average selling prices for petrochemical products and rubber products for the nine months ended September 30, 2013 were $1,059 and $2,142 per ton, respectively, compared with selling prices of $ 1,043 for petrochemical and $ 2,512 for rubber products in the same period in 2012. For the nine months ended September 30, 2013 sales in the petrochemical segment account for approximately 86% of total revenue. There was no significant change in the average selling prices for petrochemical products for the nine months ended September 30, 2013, of $1,059 per ton, compared to average selling prices of petrochemical products for the nine months ended September 30, 2012, of $1,043 per ton.

Cost of Sales: Our overall cost of sales was approximately $140 million for the three months ended September 30, 2013, or 93% of sales, as compared to the cost of approximately $160million, or 98% of sales for the three months ended September 30, 2012. Our cost of sales is 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 decrease in the cost of sales was mainly due to the lower sales quantities due to the routine inspection and maintenance of our facilities in the quarter ended June 30, 2013.

Our overall cost of sales was approximately $432 million for the nine months ended September 30, 2013, or 95% of sales, as compared to approximately $512 million, or 96% of sales for the nine months ended September, 30, 2012. In the nine months ended September 30, 2013, our average cost of finished products was $1,075 per metric ton, as compared to $1,062 per metric ton in the nine months ended September 30, 2012, an increase of 1.2%. The decreased cost of sale and increased unit cost were due to the routine inspection and maintenance of our facilities in the quarter ended June 30, 2013, which led to lower production and higher maintenance costs.

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. The following are the costs for water, electricity and stream for the nine months ended September 30, 2013 and 2012 (amounts in thousands):

                                                          For the Nine Months Ended
                                                                September 30
                                                           2013               2012
                                                       (Unaudited)        (Unaudited)
                                         Water                1,035                980
                                         Electricity          9,855              7,527
                                         Steam                1,506              1,498

Total energy cost was approximately $12,396 for the nine months ended September 30, 2013, which constitutes approximately 2.73 % of sales. Total energy cost was approximately $10,005 for the nine months ended September 30, 2012, which constitutes approximately 1. 88% of sales.

Gross Profit: Gross profit for the three months ended September 30, 2013 for the petrochemical segment and the rubber segment was approximately $9.1 million and $1.2 million, respectively, as compared to $3.3 million and $0.6 million, respectively, for the comparable period in 2012, an increase of approximately $6.4 million, or 164.7%. The increase was due to increases in selling prices in the petrochemical segment of approximately 11%, from $1,094 per MT for the three months ended September 30, 2013 compared with $982 per MT in the comparable period ended September 30, 2012, and the reduced cost of sales due to the routine inspection and maintenance.


Gross profit for the nine months ended September 30, 2013 for petrochemical segment and rubber segment was approximately $12.1 million and $ 9.3 million respectively, as compared to $15.6 million and $4.2 million, respectively, for the comparable period in 2012. Our total combined gross margin increased from 3.7% for the nine months ended September 30, 2012 to 4.7 % for the nine months ended September 30, 2013. The main reason for the increase in the gross margin is the higher average selling prices as discussed above.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $3.9 million, or 2.6% of sales for the three months ended September 30, 2013, as compared to $2.4 million, or 1.4% of sales for the comparable period in 2012, an increase of $1.5 million or 62.4 %. The increase was mainly due to the PRC government's new water conservancy tax policy implementation in 2013, which tax is now 0.1% of sales instead of a previous maximum of $33,000, and increased staff welfare expenses and meals and entertainment expenses.

Operating expenses, including selling expenses, and general and administrative expenses, were approximately $9.9 million, or 2.2 % of sales for the nine months ended September 30, 2013, as compared to $8.3 million, or 1.6 % of sales for the comparable period in 2012, an increase of $1.6 million or 19 %. The increase was mainly due to general increases in welfare expenses and the PRC government's new water conservancy tax policy implementation in 2013, which is now 0.1% of Sales instead of a previous maximum of $33,000.

Interest Income/Expense (net): For the three months ended September 30, 2013, interest income and interest expense were approximately $2.5 million and $4.5 million, respectively; as compared to interest income and interest expense of approximately $1.5 million and $5.9 million, respectively, for the comparable period in 2012. The increase in interest income was mainly due to increased deposits for bank loan, and the decrease in interest expense was mainly due to less discounting of bills in the period.

For the nine months ended September 30, 2013, the interest income and interest expense were approximately $6.4 million and $14.6 million, respectively; as compared to the interest income and interest expense of approximately $4.3 million and $13.2 million, respectively, for the comparable period in 2012. The increase in interest income and expense was mainly due to increased borrowings and deposits.

Net Income(Loss): Net Income was approximately $2.8 million for the three months ended September 30, 2013, as compared to net loss of approximately $6.9 million in the same period in 2012, an increase of $9.7 million, or 140%. This increase was mainly due to the higher gross profit for the three months ended September 30 2013, compared to the same period in 2012.

. . .

  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
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.