Highway Holdings Limited — FY2013 Form 20-F
Period and context. This is an annual report for the fiscal year ended March 31, 2013, not a standalone fourth-quarter filing. The company manufactures metal, plastic, electrical and electronic components and assemblies for OEM customers, primarily from its Shenzhen, China facility. Figures below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $21.933 million | $25.370 million |
| Gross profit / margin | $4.904 million / 22.4% | $5.121 million / 20.2% |
| Operating income / margin | $355,000 / 1.6% | $230,000 / 0.9% |
| Net income attributable to shareholders | $448,000 | $184,000 |
| Basic and diluted EPS | $0.12 | $0.05 |
| Cash from operating activities | $65,000 | $644,000 |
| Cash and cash equivalents at year-end | $4.634 million | $5.575 million |
| Working capital | $10.131 million | $10.221 million |
| Long-term loans | $112,000 | $374,000 |
| Total assets / equity | $15.352 million / $12.008 million | $16.579 million / $11.998 million |
No short-term borrowings were outstanding at March 31, 2013; $643,000 of cash was restricted as collateral. Operating cash flow fell sharply, as inventory reductions and earnings were largely offset by lower accounts payable, higher receivables and other working-capital uses. Investing cash outflow was $407,000 and financing cash outflow was $605,000, including $340,000 of cash dividends and $262,000 of loan repayments.
Material changes and business developments
- Revenue fell 13.5%, mainly because a U.S. customer’s plastic-product sales declined from $4.161 million in FY2012 to $867,000 in FY2013 after the customer shifted production to Mexico. Sales from other major customers partly offset the decline.
- Gross margin improved as the lost plastic-cover business was low margin and the company reduced labor and other costs. Gross profit nevertheless declined 4.2% because of lower sales. Lower selling, general and administrative expense helped raise operating income 54.3%.
- Metal stamping and mechanical OEM represented 66.8% of FY2013 sales; electric OEM represented 33.2%. Europe accounted for 61.5% of sales, while North America fell to 4.0%.
- The company reduced its Shenzhen leased space by returning buildings and reported facility utilization of about 75% of capacity. It continued automation efforts; its average workforce declined from about 1,200 in FY2008 to 339 in FY2013.
- The Xenon Automation joint venture ceased operations on March 31, 2013. The company agreed to transfer its interest to the other participants in May 2013 and disclosed a $50,000 impairment loss on amounts owed by the venture.
Outlook, risks and unusual items
- Outlook: Management planned to shift more labor-intensive assembly to a third-party facility in Yangon, Myanmar, following a satisfactory initial subcontracting arrangement. It was considering a larger investment or its own operation there, but had not yet established a Myanmar subsidiary. Management expected potential longer-term cost savings, while warning that duplicate tools and facilities could raise costs during transition. No quantified revenue or earnings guidance is provided.
- China regulatory and operating exposure: One major operation was converted to a wholly foreign-owned PRC enterprise, bringing additional taxes, VAT and compliance costs. Hi-Lite continued operating under a BFDC arrangement that authorities could terminate; conversion or closure could increase costs or disrupt operations.
- Customs deposits and liquidity: Deposits held by Chinese Customs were $613,000 at March 31, 2013 and about $1.440 million by June 25, 2013. Management said the requirement could result in deposits exceeding $3 million if it continued. Refund timing is uncertain, and deposits could be withheld for duties or penalties.
- Facilities: The Shenzhen leases were due to expire February 28, 2014; Hong Kong office leases were due to expire March 20, 2014. Nonrenewal or relocation could disrupt operations and increase costs.
- Customer and cost concentration: Three customers generated 56.7% of FY2013 sales. Higher Chinese wages, labor shortages, RMB appreciation, materials costs and intense OEM pricing competition could pressure margins. The company does not hedge currency exposure.
- Tax and other items: FY2013 included a $37,000 income tax benefit and a negative 9% effective tax rate, compared with a $186,000 tax expense and 50.3% effective rate in FY2012. Management attributed the change primarily to valuation allowance changes and prior-year reorganization-related taxes. Currency results shifted from a $126,000 gain in FY2012 to a $27,000 loss in FY2013.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Deloitte issued an unqualified opinion on the consolidated financial statements. Management judged disclosure controls and internal control over financial reporting effective; the audit firm did not provide an internal-control attestation.
Important facts for investors to verify
- Whether Chinese Customs releases or continues to require deposits, and how much cash is ultimately tied up or withheld.
- Renewal terms for the Shenzhen and Hong Kong leases, and the operational and financial cost of any relocation.
- Whether Hi-Lite can continue under its BFDC agreement, and the likely cost or disruption if it must convert or close.
- Whether Myanmar assembly can scale while meeting customer quality requirements and producing net savings after transition costs.
- Customer order trends and concentration, particularly the durability of the largest customer relationships and receivable collections.
- Actual performance against management’s cost-reduction plans, including wage, VAT, currency and automation impacts on margins and operating cash flow.