Gulf Resources, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; interim financial statements are unaudited. The company operates in China across bromine, crude salt, chemical products and natural gas.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $23.84 million | $38.81 million | $104.16 million | $120.91 million |
| Gross profit / margin | $9.32 million / 39% | $15.70 million / 40% | $42.50 million / 41% | $44.72 million / 37% |
| Operating income | $4.84 million | $13.96 million | $34.13 million | $39.95 million |
| Net income | $3.43 million | $10.52 million | $25.25 million | $30.18 million |
| Diluted EPS | $0.07 | $0.23 | $0.54 | $0.65 |
| Operating cash flow | — | $23.48 million | $29.21 million |
Q3 revenue declined 39% year over year, and net income fell 67%. For the first nine months, revenue declined 14% and net income fell 16%. Lower sales volumes across the product lines—attributed to a Chinese economic slowdown, customer production interruptions and the company’s factory shutdown—were the principal headwinds. Nine-month gross margin increased to 41% from 37%, but Q3 margin edged down to 39% from 40%.
Cash, liquidity and debt: Cash was $193.39 million at September 30, up from $163.88 million at December 31, 2016. Working capital was approximately $261.1 million. Operating cash flow was $23.48 million; investing outflows were $1.48 million, and cash increased by $29.50 million, including a favorable $7.78 million foreign-exchange effect. Accounts receivable rose 39% to $71.79 million; inventory declined 59% to $2.43 million. Total liabilities were $9.73 million, including capital lease obligations of $2.43 million; the filing reports no other significant borrowing. Management said available funds and operating cash flows should cover anticipated needs for the next 12 months.
Material developments, outlook and risks
- Mandatory shutdown and remediation: Local authorities ordered all factories to stop production on September 1, 2017 for safety and environmental rectification. The company reclassified $1.88 million of September direct labor and factory overhead, including depreciation, from cost of revenue to G&A.
- Expected cost and timing: On October 27, the company and the government agreed on a remediation plan for the bromine business that the company estimates will cost approximately $35 million. Management expected bromine rectification to be completed and operations to resume by the end of March 2018, while seeking to restart some facilities earlier. A rectification plan for the chemical business remained under discussion as of the filing date. These are expectations, not assurances.
- Segment results: Q3 bromine and chemical-products revenue each fell 40%; crude-salt revenue fell 11%. For nine months, bromine revenue fell 12%, chemical-products revenue fell 16%, and crude-salt revenue was essentially flat. Lower volume was the key factor; selling prices increased for bromine and crude salt over the nine-month period.
- Receivables and customer exposure: Average receivable turnover lengthened to 162 days from 138 days. The company extended some customer terms to as long as 240 days and reported that approximately 30% of receivables over 90 days old at quarter-end were collected in October. Management recorded no doubtful-account allowance. The top five customers represented 35.2% of nine-month sales; one customer accounted for 12.6%.
- Other risks and items: Substantially all cash is held with PRC financial institutions and is uninsured or otherwise unprotected. The company also disclosed supplier concentration (top five suppliers provided 68.2% of nine-month raw-material purchases), and land-use/property certificates are unavailable for certain operating sites and assets. Foreign-currency translation affected reported results and comprehensive income. No legal proceedings were reported; management concluded disclosure controls were effective.
- Guidance: No formal revenue or earnings guidance is provided. Management expects to fund the estimated remediation spending from cash and intends to retain cash for business expansion and development.
Important facts for investors to verify
- Progress, final scope and actual cost of safety and environmental work; government approval and timing of production restarts, especially for the chemical business.
- Receivable collections after October 2017, given the larger balance, extended payment terms and the absence of an allowance.
- Cash availability and transferability, given its concentration in PRC banks and the planned remediation expenditure.
- Ongoing customer and supplier concentration, and whether market demand and sales volumes recover after the shutdown.
- Legal status and operational implications of land-use and property rights documentation for affected sites.