Flexible Solutions International Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
The company develops, manufactures and markets specialty chemicals, including energy and water conservation products and biodegradable thermal polyaspartate polymers used in petroleum, chemical, utility, mining, agriculture and consumer applications. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with U.S. dollar reporting and comparison to the same periods in 2017.
Financial performance and condition
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Sales | $4.14 million | $4.72 million | $8.34 million | $9.39 million |
| Gross profit | $1.54 million | $1.88 million | $3.50 million | $3.98 million |
| Gross margin | 37.1% | 39.8% | 42.0% | 42.4% |
| Income before other items and tax | $565,988 | $735,516 | $1.58 million | $1.79 million |
| Net income | $2.14 million | $273,623 | $2.84 million | $3.53 million |
| Net income per diluted share | $0.18 | $0.02 | $0.24 | $0.30 |
Second-quarter net income included a $1.72 million after-tax gain on involuntary disposition related to the final insurance payment for the 2017 Taber plant fire. Six-month net income also included a $1.71 million after-tax insurance gain. Excluding this unusual item, operating profitability declined year over year.
Cash provided by operating activities was $1.27 million in the first six months of 2018, compared with cash used in operations of $407,527 in the prior-year period. Investing cash flow was $2.41 million, primarily reflecting $2.43 million of insurance proceeds, while capital expenditures were $24,680. Financing cash flow was negative $64,237, including $100,597 of loan repayments. Foreign-exchange movements reduced cash by $230,249. Ending cash and equivalents were $10.31 million, up from $6.91 million at December 31, 2017.
At June 30, 2018, total assets were $20.12 million and working capital was $14.66 million. Total debt was $501,492, consisting of a $250,000 line-of-credit balance and $251,492 of term debt. The revolving credit facility permits borrowings up to the lesser of $3.0 million or a borrowing-base formula and bears interest at 5.5%. The company was in compliance with all loan covenants. Term debt is scheduled to be fully repaid by September 2019.
Material changes versus the prior comparable period
- Sales declined 12.4% in the second quarter and 11.2% for the first six months, as customer orders decreased for both product lines.
- Six-month sales of energy and water conservation products declined to $198,392 from $475,018; biodegradable polymers and chemical additives sales declined to $8.14 million from $8.91 million.
- Gross profit decreased 18.3% in the quarter and 11.9% year to date. Gross margin was broadly stable but lower year over year.
- Income before other items and income tax declined 23.1% in the quarter and 11.7% for the first six months.
- Operating expenses decreased 15.3% in the quarter and 12.0% year to date. Lower commissions and professional fees were partly offset by higher administrative salaries, research spending and travel.
- Currency-exchange gains reduced operating expenses by $114,505 in the quarter and $200,639 year to date, compared with currency-exchange expenses in the prior-year periods.
- Cash improved substantially because of positive operating cash flow and the final insurance payment. The company also reduced term debt by $100,597 during the first six months.
- Three customers represented 44% of six-month sales and 47% of accounts receivable at June 30, 2018, compared with 59% and 65%, respectively, in the prior comparable disclosures.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue, earnings or other numerical guidance. Management states that it has sufficient cash resources for the coming year and does not anticipate material capital requirements during the twelve months ending December 31, 2018, other than disclosed commitments.
Key factors affecting future results include crude-oil prices and the cost of imported aspartic acid, potential tariffs and related customer price increases, activity in the oil and gas industry, drought conditions affecting agricultural demand, customer concentration, foreign-currency movements and competition. The company does not hedge its currency exposure.
The February 2017 fire destroyed the Taber plant building and contents. The company received a final insurance payment of $2.43 million during the first six months of 2018, producing the $1.71 million after-tax gain. The filing states that no material contingencies or impairment charges were identified beyond disclosed matters. Lease commitments total approximately $634,960 through 2021. Revenue recognition adoption under ASC 606 had no material impact; the company was evaluating the future impact of the new lease standard.
Management concluded that disclosure controls and procedures were effective as of June 30, 2018 and that no material change occurred in internal control over financial reporting during the quarter or six-month period.
Important facts for investors to verify
- Separate recurring operating performance from the $1.71 million after-tax insurance gain included in six-month net income.
- Confirm the sustainability of demand after the 11.2% year-to-date sales decline and assess order trends by product line.
- Review customer concentration, including the 44% share of six-month sales from three customers and 47% share of receivables.
- Verify the borrowing-base terms, 5.5% interest rate, covenant compliance and scheduled repayment of term debt.
- Assess exposure to imported raw-material costs, tariffs, crude-oil prices, oil-and-gas activity, drought conditions and unhedged foreign exchange.
- Review the company’s ability to realize its $1.02 million deferred tax asset and the assumptions supporting that balance.
- Evaluate the impact of lease accounting adoption and the company’s remaining lease commitments.