Euro Tech Holdings Company Limited — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2012; this is an annual report, not a quarterly filing. Euro Tech distributes and manufactures water, laboratory and environmental equipment and provides water and wastewater engineering services, principally in Hong Kong and mainland China. The financial statements are audited and presented in U.S. dollars under U.S. GAAP. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $21.645 million | $20.213 million |
| Gross profit / margin | $6.165 million / 28.5% | $4.891 million / 24.2% |
| Operating loss | $59,000 | $1.674 million |
| Income (loss) before tax | $13,000 | ($1.204 million) |
| Consolidated net loss | $120,000 | $10,000 |
| Net income (loss) attributable to Euro Tech | ($429,000); EPS ($0.21) | $521,000; EPS $0.25 |
| Cash from (used in) operating activities | $2.794 million | ($1.915 million) |
| Cash and cash equivalents at year-end | $7.468 million | $5.339 million |
| Working capital | $5.706 million | $5.730 million |
| Total assets / shareholders’ equity | $24.947 million / $17.756 million | $23.864 million / $17.909 million |
Revenue rose 7.1%, driven by engineering revenue growth of $2.003 million, which more than offset a $571,000 decline in trading and manufacturing. Engineering revenue was $10.779 million; trading and manufacturing revenue was $10.866 million. Engineering generated $401,000 of operating income, while trading and manufacturing recorded a $301,000 operating loss. The improved gross margin reflected better margins in both activities and a higher engineering contribution.
Operating cash flow improved substantially, supported by lower receivables and prepayments and increases in payables. Investing activities used $632,000, including a $593,000 increase in restricted cash for customer performance guarantees; capital expenditures were $41,000. Financing activities used $33,000, primarily for treasury-share purchases. The company reported no bank indebtedness at year-end. It had banking facilities of about $1.538 million, including amounts for guarantees; approximately $285,000 was used for bank guarantees. Restricted cash was $839,000.
Changes, outlook and material matters
- Euro Tech’s attributable result moved from income of $521,000 in 2011 to a loss of $429,000 in 2012, despite stronger revenue and operating results. The filing attributes the change chiefly to the absence of 2011’s $328,000 property-disposal gain and a sharp fall in affiliate earnings: equity-method profit was $9,000 versus $1.131 million, primarily because of delayed major projects at Blue Sky.
- Research and development expense, largely for the ballast water treatment system (BWTS), rose to approximately $930,000 from $200,000. Management anticipated a further $600,000 of R&D spending in 2013 and said product development might not yield a recovery of costs for about two years.
- Management’s 2013 priorities included cost control, concentrating trading operations in Hong Kong, Macau and Guangdong, and targeting break-even at manufacturing facilities. Management reported three engineering contracts received in the first quarter of 2013, worth about $2.3 million. These are forward-looking expectations, not assured results.
- The BWTS passed land-based testing in 2012; shipboard testing and PRC certification were expected, with certification targeted for the fourth quarter of 2013. Management cautioned that future revenues were uncertain.
- Blue Sky, a 20%-owned affiliate with separate financial statements included in the filing, reported 2012 revenue of RMB281.203 million and a net loss of RMB1.501 million, compared with revenue of RMB291.992 million and net income of RMB39.390 million in 2011. Its year-end short-term borrowings were RMB60 million. These are Blue Sky figures, not Euro Tech consolidated debt.
- A court decision in a fatal 2010 traffic-accident case assigned the company 30% liability for the subcontractor’s liability, amounting to approximately $52,000. Management said it was considering not appealing; a deceased employee’s family also sought additional compensation, with discussions deferred pending finalization of the litigation.
- The company’s cash-dividend policy remains to retain earnings; the board did not intend to declare dividends in the foreseeable future. Non-cancellable operating lease obligations were $262,000, mostly payable in 2013.
Risks and governance
Key risks include reliance on short-term or informal distribution arrangements and suppliers that may sell directly or through competing distributors; competition and pressure on margins; concentration of operations and customers in the PRC and Hong Kong; foreign-exchange exposure; and PRC economic, regulatory, currency-control and legal uncertainty. The company said it did not adequately hedge foreign-exchange positions, and reported no derivatives outstanding at year-end. T.C. Leung, CEO and chairman, beneficially controlled approximately 51.2% of ordinary shares, creating control and minority-shareholder risks. The company also disclosed a potential PFIC classification for U.S. tax purposes in 2012, but said the determination was uncertain.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2012; the auditor did not audit or express an opinion on internal controls. The independent auditor issued an unqualified opinion on the consolidated financial statements. The company effected a 2-for-11 reverse split in January 2012 to regain NASDAQ bid-price compliance; it reported that compliance was restored in February 2012.
Important facts for investors to verify
- Whether engineering growth and contract execution continue, and whether the reported $2.3 million of first-quarter 2013 contracts convert to recognized revenue and cash collection.
- Whether the $2.794 million of 2012 operating cash flow is repeatable: it depended materially on working-capital movements, including higher payables.
- Blue Sky’s deterioration, its project delays and borrowings, and how its results affect Euro Tech’s equity-method earnings and investment value.
- BWTS shipboard testing, certification, commercialization prospects and further R&D funding needs.
- Collection of receivables, including balances more than 90 days past due, and the status and ultimate cost of the accident-related claims.
- Continuing vendor relationships, foreign-exchange exposure, available credit facilities and any restrictions on moving PRC subsidiary assets to the parent.