Highway Holdings Limited — FY2022 Form 20-F
Reporting period: The filing is an annual report for the fiscal year ended March 31, 2022, not a standalone 2021 fourth-quarter report. Amounts below are U.S. dollars; financial statements use U.S. GAAP.
Business context
Highway Holdings manufactures metal, plastic and electronic components, subassemblies and products for OEM customers. Its Shenzhen, China facility focuses mainly on engineering, tooling and automated production; labor-intensive manufacturing and assembly are concentrated at its 84%-owned Yangon, Myanmar subsidiary. Europe remained its largest customer market.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $12.365 million | $9.168 million |
| Gross profit / margin | $3.770 million / 30.5% | $2.707 million / 29.5% |
| Operating income (loss) | $567,000 | ($616,000) |
| Net income (loss), consolidated | $467,000 | ($454,000) |
| Net income (loss) attributable to shareholders | $443,000 | ($461,000) |
| Operating cash flow | ($164,000) | ($104,000) |
Revenue increased 34.9% year over year, reflecting a return toward normal factory operations, stronger European demand and initial deliveries of an electronic product for a new U.S. customer. Gross margin improved by 1.0 percentage point; SG&A decreased 3.6% to $3.203 million. Basic and diluted earnings per share were $0.11, versus a loss of $0.12 in FY2021.
Cash and cash equivalents were $6.010 million at year-end, down from $7.757 million; an additional $1.075 million was held in time deposits. Working capital was $7.140 million and the current ratio was 2.38. The company reported no outstanding bank loans, but also had no bank credit facilities. Investing cash outflow was $1.195 million, including placement of time deposits and equipment purchases; financing cash outflow was $549,000, mainly dividends. Lease liabilities totaled $1.201 million. Accrued employee termination/social-benefit liabilities were $1.462 million.
Material changes versus FY2021
- Revenue rebounded from the prior-year decline and the company returned to operating and net profitability.
- Sales mix shifted: metal stamping and mechanical OEM represented 58.3% of sales, up from 56.6%; electric OEM represented 41.7%, down from 43.4%.
- North American sales rose to 11.5% of revenue from 3.4%; European sales fell to 70.9% from 79.3%. Hong Kong/China remained 17.0%.
- Accounts receivable, net rose to $2.260 million from $973,000, partly reflecting extended payment terms for a new significant customer. The company recorded a $51,000 expected-credit-loss provision.
- Cash from operations remained negative despite the return to profit, principally reflecting a $1.346 million increase in receivables and other working-capital movements.
Outlook, risks and unusual items
The company provided no numerical revenue or earnings guidance. It said FY2023 results would remain exposed to COVID-related restrictions, Myanmar political instability, supply-chain shortages and shipping costs. Management indicated that easing supply constraints could support higher production, but timing and impact were uncertain.
- Myanmar exposure: The Yangon operation generated 47% of FY2022 revenue. An European customer informed the company it would stop sourcing products made at that factory starting in 2023; other customers may impose similar limits amid human-rights and supply-chain rules. Political unrest, currency volatility, banking limitations and operational disruption remain material risks.
- Customer and credit concentration: Three customers generated 76.6% of FY2022 sales. The four largest year-end receivable balances accounted for 88.1% of receivables. A new customer represented 30.3% of receivables; its $1.0 million rolling credit facility was collateralized, with $699,000 used and $301,000 available at year-end.
- Operations and costs: Semiconductor and other component shortages, inflation, labor costs, shipping delays and currency movements may pressure output, margins and collections. The Shenzhen facility lease expires in February 2023, and renewal or relocation terms were uncertain.
- Controls and audit oversight: Management concluded internal control over financial reporting and disclosure controls were ineffective at March 31, 2022. Material weaknesses involved Myanmar cash controls, accounting staffing and transaction-review policies. The auditor issued an unqualified opinion on the financial statements, but the Hong Kong-based auditor was on the PCAOB list of firms it could not fully inspect; the company warned of possible future trading restrictions under the HFCAA.
- Dividends: The company paid $0.06 per share in October 2021 and $0.06 in November 2021; a further $0.05 per share was paid April 8, 2022. Future dividends are discretionary.
- Other items: No material pending legal proceedings or material subsequent events were reported. No impairment charge was recorded for long-lived assets in FY2022, though their recoverability was identified as a critical audit matter.
Important facts for investors to verify
- Whether the affected European customer’s Myanmar sourcing exit begins as disclosed in 2023, and whether other customers change factory-location requirements.
- Collection and collateral quality for the new customer’s receivables and credit facility, along with subsequent receivables aging and expected-loss provisions.
- Progress in remediating Myanmar internal-control weaknesses and whether the company’s reporting controls become effective.
- Auditor PCAOB inspection status and any SEC or Nasdaq developments under the HFCAA.
- Renewal or relocation outcome for the Shenzhen lease, and the cash required for any move or workforce restructuring.
- Liquidity after dividends and investment spending, given negative operating cash flow and the absence of committed bank borrowing facilities.