Gulf Resources, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The unaudited statements are prepared under U.S. GAAP. Gulf Resources operates in China through bromine, crude salt, chemical products and natural gas segments; natural gas generated no revenue. Amounts are U.S. dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $47.53m | $47.60m | $80.32m | $82.10m |
| Gross profit / margin | $20.60m / 43% | $18.41m / 39% | $33.17m / 41% | $29.02m / 35% |
| Operating income | $18.48m | $17.33m | $29.30m | $26.00m |
| Net income | $13.75m | $13.20m | $21.83m | $19.66m |
| EPS, diluted | $0.29 | $0.28 | $0.47 | $0.42 |
- Q2 revenue was essentially flat year over year; net income rose 4%. For the first half, revenue declined 2%, while net income increased 11%.
- Margin improvement was driven chiefly by lower bromine raw-material costs and lower depreciation and amortization in bromine and crude salt. Q2 operating income rose 7%; first-half operating income rose 13%.
- Chemical-products revenue fell 6% in the first half as sales volumes declined across product categories. Bromine and crude-salt revenue rose 2% and 6%, respectively.
- Cash and cash equivalents were $176.30m at June 30, up from $163.88m at year-end 2016. Current assets were $268.81m and current liabilities $22.44m; reported working capital was approximately $246.4m.
- First-half operating cash flow was $9.50m, down from $17.47m, and below net income of $21.83m, primarily because accounts receivable absorbed cash. Investing outflow was $0.88m and financing outflow $0.27m. Currency translation increased reported cash by $4.07m.
- Total liabilities were $24.66m, including $2.34m of capital lease obligations; the filing reports no material conventional borrowings. The company had $4.82m of Q2 income-tax expense and $7.64m for the first half.
Changes, outlook and risks
- Accounts receivable rose 68% from December 31, 2016, to $86.86m. Average collection turnover increased from 124 days in 2016 to 156 days in the first half of 2017. Management extended credit terms for some customers to as long as 240 days; approximately 15% of quarter-end receivables and 27% of receivables more than 90 days old were collected in July.
- Management said available cash and operating cash flows should meet anticipated operating needs for the next 12 months. It intends to retain cash for possible acquisitions, bromine and crude-salt enhancements, and development of Sichuan resources. No quantified earnings or revenue guidance was provided.
- Bromine annual production capacity was reported at 42,808 tonnes, down from 47,347 tonnes; utilization improved to 50% in Q2 and 43% for the first half. Management cited declining bromine concentration in brine and said weather delayed planned 2017 crude-salt-field enhancement work; it expected to resume work in Q3 and Q4, weather permitting.
- Customer and supplier concentration is material: the top five customers represented 35% of first-half sales, and the top five suppliers supplied 67.5% of first-half raw materials. Management warns that loss of these relationships could have a severe near-term impact.
- Most cash is held in PRC financial institutions and is uninsured or otherwise unprotected. All operations and assets are in China, exposing the business to PRC political and economic risks. The filing also identifies land/property documentation issues: approximately 54.97 square kilometers of leased land lacked land-use certificates, and buildings and salt pans with a $34.91m carrying value lacked ownership certificates.
- Unrecognized withholding tax on accumulated PRC subsidiary earnings was $14.11m; management said it intends to reinvest earnings and does not expect near-term dividends. The company reported no impairment indicators for long-lived assets, no legal proceedings, and no material change to risk factors from its 2016 Form 10-K.
- General and administrative expense increased 104% in Q2 and 29% in the first half, mainly reflecting unrealized foreign-exchange losses on intercompany balances versus gains in 2016. The company reported disclosure controls effective at period-end and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Receivable aging, subsequent collections and the sustainability of extended customer credit terms, particularly given the decline in operating cash flow.
- Whether bromine-field enhancements proceed as planned, and how declining brine concentration and lower stated capacity affect future production.
- Customer and supplier concentration, including the ability to maintain key commercial relationships.
- Legal rights and documentation for land, buildings and salt pans, and the potential consequences of the identified certificate gaps.
- Cash availability and deployment plans, including whether funds held in PRC banks can be accessed as needed and whether expansion or acquisition plans proceed.