Gulf Resources, Inc. — Q2 2013 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2013. The company manufactures and sells bromine, crude salt, and chemical products through subsidiaries in China. All operations and assets are in the PRC.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $32.85 million | $31.31 million | $55.36 million | $55.12 million |
| Gross profit / margin | $9.59 million / 29% | $9.93 million / 32% | $14.11 million / 25% | $16.62 million / 30% |
| Operating income / margin | $7.38 million / 22% | $7.63 million / 24% | $9.98 million / 18% | $12.21 million / 22% |
| Net income | $5.36 million | $5.69 million | $7.24 million | $8.98 million |
| Diluted EPS | $0.14 | $0.16 | $0.19 | $0.26 |
| Operating cash flow | Not presented quarterly | $20.71 million | $2.34 million |
At June 30, cash was $86.42 million, up from $65.24 million at year-end 2012; working capital was approximately $119.9 million. Total liabilities were $14.44 million, including $3.00 million of capital lease obligations. No other conventional borrowings are reported. Cash is largely held in PRC bank accounts and is not insured or otherwise protected. The company reported no material off-balance-sheet arrangements.
Changes and operating drivers
- Q2 revenue increased 5%, driven by 18% growth in chemical products; bromine revenue was nearly flat and crude salt revenue declined 4%. Six-month revenue was up just 0.4%: chemical products rose 11%, while bromine fell 6%.
- Profitability weakened: six-month gross profit declined 15% and net income fell 19%. Management cited lower bromine selling prices, higher depreciation following facility enhancements, and higher general and administrative expenses.
- Average bromine selling price fell 12% in Q2 and 13% for the half year, attributed to PRC economic tightening and competitive pricing. Crude salt sales volume fell 12% in Q2 and 6% year to date. Chemical products benefited from demand for oil-and-gas and paper additives; pesticide additives were weaker for the half year.
- Q2 general and administrative expense rose 77%, primarily from $527,400 of stock-based compensation and a $366,028 unrealized intercompany currency loss. For the half year, stock-based compensation was $532,300 and the unrealized currency loss was $431,147.
- Operating cash flow improved year over year, with the company attributing the difference mainly to lower working-capital use than in 2012. Cash increased by $21.18 million in the first half, including a positive $1.37 million foreign-exchange effect. Investing cash outflow was $0.59 million, principally prepaid land leases; financing outflow was $0.30 million for lease repayments.
Outlook, risks, and unusual items
- Management expected bromine prices and margins, and crude salt prices, to remain around then-current levels through the end of 2013 if PRC economic tightening continued. These are conditional expectations, not formal earnings guidance.
- Management said available funds and operating cash flow should cover ongoing needs for the next 12 months, but anticipated that expansion—including bromine property acquisitions, increased chemical capacity, and development in Sichuan—could require additional financing. It may seek credit facilities or issue debt or equity; funding is not assured. No cash dividends were anticipated in the foreseeable future.
- Concentration risks are significant: the top five suppliers accounted for 82.6% of first-half raw-material purchases; the top five customers represented 40.3% of first-half sales. One customer accounted for 12.5% of first-half revenue. Management warned that losing key supplier or customer relationships could have a severe near-term impact.
- Accounts receivable rose 9% from year-end, and collection turnover lengthened from 104 days in FY2012 to 122 days for the first half. Management reported that all receivables aged over 90 days at June 30 were collected in July 2013 and recorded no doubtful-account allowance.
- The company could not obtain land-use certificates for certain township-owned parcels, nor ownership certificates for buildings and salt pans on them. Related carrying values were approximately $1.17 million for land leases and $39.18 million for buildings and salt pans.
- A securities class action was subject to a settlement agreement executed April 30, 2013, pending court approval. The company could not estimate total costs and expected insurance reimbursement to the extent covered.
- Other notable items: the 2012 period included a $911,995 asset write-off that did not recur in 2013; 2013 other operating income included $171,092 of insurance compensation for prior legal fees. Factory No. 11, acquired in late 2012, resumed production in March 2013.
Important facts for investors to verify
- Whether bromine pricing and margins stabilized as management expected, and whether chemical-products growth continued.
- Subsequent collection of receivables, customer concentration, and the durability of supplier relationships.
- Funding plans and terms for the company’s proposed acquisitions and expansion, including any new debt or equity issuance.
- Court approval and financial consequences of the class-action settlement, and the extent of insurance coverage.
- Legal status and potential exposure related to land-use and property certificates, and the safety of cash held in PRC banks.