GULF RESOURCES, INC. quarterly report, Q3 FY2014

Gulf Resources, Inc. — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2014; interim financial statements are unaudited. Gulf Resources manufactures and sells bromine and crude salt, and produces chemical products for oil-field, paper, and other industrial uses. All operations and assets are in China.

Financial performance and position

MetricThree months ended September 30, 2014Nine months ended September 30, 2014
Revenue$31.1 million$88.5 million
Gross profit / margin$9.2 million / 29.6%$25.2 million / 28.5%
Operating income$6.7 million$19.8 million
Net income$5.0 million$15.0 million
Diluted EPS$0.13$0.38
Operating cash flowNot presented for the quarter$32.5 million
  • Cash and liquidity: Cash was $131.9 million at September 30, up $24.0 million from year-end 2013. Working capital was approximately $174.9 million; current assets were $186.0 million against current liabilities of $11.1 million.
  • Cash flows: Nine-month investing outflows were $7.1 million, including $6.5 million of property and equipment purchases; financing outflows were $0.3 million, principally lease repayments. Cash increased by $24.0 million after a $1.0 million adverse exchange-rate effect.
  • Debt and commitments: Total liabilities were $13.9 million, including capital lease obligations with a $3.0 million present value. Contractual commitments also included $25.9 million of operating leases, $0.3 million of property-management fees, and $0.6 million of exploration-project expenditure.

Changes versus comparable periods

  • Third quarter: Revenue fell 5.6% year over year; gross profit declined 16%, and net income fell 38%. Operating income decreased 39%. Bromine revenue declined 6.5% and crude-salt revenue 32%, while chemical-products revenue rose 4.5%.
  • Quarterly gross margin was about 30%, versus 33% a year earlier. Crude salt moved to a $60,000 gross loss from $1.5 million gross profit; its selling price fell 36% to $27.88 per tonne. Bromine selling price fell 3% to $2,855 per tonne.
  • Nine months: Revenue was up 0.2%, but operating income fell 5% and net income fell 2%. Chemical-products revenue increased 14%, offsetting lower bromine revenue (down 5%) and crude-salt revenue (down 20%). Gross margin improved slightly to about 29% from 28%.
  • For the nine months, chemical-products operating income rose to $12.1 million; bromine operating income declined to $7.7 million, and crude salt contributed just $95,000. The crude-salt margin fell to 10% from 32% year over year.

Outlook, commentary, and risks

  • Management expected bromine and crude-salt selling prices to remain around third-quarter levels through the end of 2014 if China’s macroeconomic tightening policy continued.
  • Management said cash and operating cash flow should cover anticipated operating needs for the next 12 months, but additional capital may be needed for acquisitions, capacity expansion, and a proposed Sichuan bromine and crude-salt production line. The company anticipated seeking credit facilities; financing was not assured.
  • Management intended to retain cash for expansion and did not anticipate cash dividends in the foreseeable future. It also cited possible overseas cooperation and future share issuance or debt financing.
  • Unusual item: A $673,705 write-off of replaced protective shells and transmission-channel/duct equipment was recorded in 2014. The prior-year quarter included a $1.9 million factory-relocation gain, which did not recur.
  • Receivables and concentration: Accounts receivable rose 8% to $48.3 million; collection turnover increased to 144 days from 125 days for fiscal 2013. About 70% of receivables aged over 90 days was collected in October 2014. The top five customers represented 42.4% of sales; the top five suppliers provided 89.6% of raw materials.
  • Other risks: Substantially all cash was held with PRC banks and was uninsured or otherwise unprotected. The company reported land-use and property-title certificate gaps affecting certain land parcels and buildings. It had $237.5 million of PRC GAAP accumulated distributable earnings and had not recorded approximately $10.8 million of related withholding tax, based on its intent to reinvest earnings. The filing identifies China political and economic exposure and acquisition/expansion execution risks.
  • No legal proceedings were reported. Management concluded disclosure controls were effective; no material internal-control changes were reported. Risk-factor information was omitted under the company’s smaller-reporting-company status.

Important facts for investors to verify

  1. Whether bromine and especially crude-salt prices and margins stabilized after September 2014, and whether the assumed year-end price outlook was achieved.
  2. Subsequent collection of the aged receivables, customer credit quality, and continued reliance on a small group of customers and suppliers.
  3. Whether planned acquisitions, Sichuan development, and capacity projects proceeded—and how they were funded, given management’s stated potential need for external capital.
  4. The legal status and renewal/security of land-use rights and property certificates, and the practical availability of cash held in China, including potential tax consequences of repatriation.
  5. The $673,705 equipment write-off and capital spending on the enhancement project, including their effects on operating costs and future cash flows.