Huadi International Group Co., Ltd. — FY2022 Form 20-F Summary
Business context and reporting period
Huadi International Group Co., Ltd. is a Cayman Islands holding company whose principal operations are conducted through PRC subsidiaries, primarily Huadi Steel Group Limited. The Company manufactures and sells stainless steel seamless pipes, tubes, bars and related products used in oil and gas, power generation, automotive, chemical, medical, construction and other industrial applications. The Company reports under U.S. GAAP in U.S. dollars for the fiscal year ended September 30, 2022. Its ordinary shares trade on Nasdaq Capital Market under the symbol HUDI.
Substantially all operations, revenue and expenses are in China and denominated in RMB. China generated 84.69% of FY2022 sales; the United States generated 9.97%. The Company reported 13,239,182 ordinary shares outstanding at September 30, 2022 and 360 employees.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $76.37 million | $70.25 million | +8.71% |
| Gross profit | $11.14 million | $11.32 million | -1.63% |
| Gross margin | 14.91% | 16.11% | -120 bps |
| Operating income | $2.35 million | $2.58 million | -8.74% |
| Net income | $1.95 million | $2.56 million | -23.82% |
| Net income attributable to Huadi | $1.92 million | $2.53 million | -24.00% |
| Basic and diluted EPS | $0.15 | $0.21 | Decreased |
| Operating cash flow | $8.03 million | $(5.65) million | Improved by $13.68 million |
| Capital expenditures | $0.21 million | $0.90 million | Decreased |
FY2022 operating margin was approximately 3.1% and net margin was approximately 2.6%. Interest expense declined to $1.63 million from $2.06 million, while net other income declined to $1.40 million from $1.95 million. Other income included approximately $420,596 of dividend income, $355,925 of government grants and $564,283 of bad-debt recovery.
Cash and cash equivalents were $13.20 million, with an additional $1.35 million of restricted cash. Accounts receivable, net of allowance, was $19.66 million, and inventories were $24.87 million. Total current assets were $64.40 million versus current liabilities of $25.70 million, implying a current ratio of approximately 2.5x.
Total liabilities were $35.00 million and shareholders’ equity was $49.63 million. Debt consisted of $11.89 million of short-term bank borrowings and $9.30 million of long-term borrowings, for total bank borrowings of approximately $21.19 million. Short-term loans generally carried interest rates of 4.30% to 4.65% and long-term loans carried interest rates of approximately 4.35%. Certain borrowings were secured by assets and guaranteed by major shareholders and other parties.
Cash declined by approximately $2.11 million during FY2022. Operating cash flow was positive, but financing activities used $9.74 million, primarily because of approximately $9.90 million of net bank-loan repayments. The Company stated that existing cash, operating cash flow and available financing were expected to meet working-capital needs for at least the next twelve months, while acknowledging that additional capital may be needed for expansion.
Material changes versus the prior comparable period
- Revenue increased primarily because higher raw-material prices led to higher average selling prices and domestic sales increased more than 21.94%. International revenue declined 31.55% to approximately $11.72 million.
- Gross profit and gross margin declined as higher steel and nickel prices increased cost of sales. Raw materials and direct labor represent more than 80% of product cost.
- SG&A expense decreased 3.47% to $6.45 million, while R&D expense increased 13.29% to $2.33 million.
- Net income declined despite revenue growth, reflecting lower gross margin, lower other income and a $173,017 income-tax provision compared with an $89,000 tax benefit in FY2021.
- Operating cash flow turned positive, helped by collections and reductions in notes receivable and supplier advances. Accounts receivable declined by approximately $4.08 million, although inventory increased by approximately $4.65 million.
- Short-term borrowings declined from $33.46 million at September 30, 2021 to $11.89 million, while $9.30 million of long-term borrowings was added.
- Accumulated other comprehensive income declined by approximately $3.75 million because of foreign-currency translation losses, causing total comprehensive income to be negative $1.84 million despite positive net income.
Guidance, outlook, risks, contingencies and unusual items
Management did not provide numerical revenue, earnings or margin guidance. Management expected the negative effects of COVID-19 restrictions to ease in FY2023 as China reopened its economy, but the filing states that FY2022 experienced raw-material procurement and delivery delays, weaker customer orders and significantly higher nickel prices.
- Commodity and margin risk: Steel and nickel prices, energy costs, freight costs and the ability to pass cost increases through to customers materially affect profitability.
- Customer and working-capital risk: Customers generally receive approximately 180 days of credit. FY2022 accounts receivable turnover was approximately 108 days, and one customer represented 20.95% of total accounts receivable. No customer represented more than 10% of FY2022 revenue.
- Supplier and related-party concentration: Two suppliers represented 26.71% and 18.06% of FY2022 purchases. Taizhou Huadi Industrial Ltd., a related party, supplied $4.65 million of raw materials and purchased $1.99 million of products. One supplier represented 72.62% of accounts payable.
- China and regulatory risk: Substantially all operations are in China, exposing the Company to PRC economic conditions, industrial policy, environmental rules, capital controls, foreign-exchange restrictions and evolving overseas-listing and data regulations. Counsel advised that no CSRC or CAC approval was currently required based on the Company’s business and limited personal-data activities, but future requirements remain uncertain.
- Liquidity and refinancing risk: The Company relies significantly on short-term revolving bank loans, many of which mature within one year. Renewal and availability of financing are not assured.
- Dividend restrictions: No dividends or cash transfers had been made from subsidiaries to the holding company as of the filing date. PRC subsidiaries must generally reserve at least 10% of after-tax income until statutory reserves reach 50% of registered capital. The Company does not expect to pay dividends in the foreseeable future.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at September 30, 2022 because the Company lacked sufficient accounting and finance personnel with U.S. GAAP experience. The planned remediation was to hire personnel with relevant U.S. GAAP reporting and control experience. The auditor was not engaged to audit internal control effectiveness.
- Litigation: One product-liability-related matter was settled for RMB631,791 in August 2022. A separate contract and payment dispute remained subject to appeal according to the filing. The financial-statement notes state that no pending legal proceedings were outstanding at September 30, 2022, creating a disclosure inconsistency that should be reviewed.
- Subsequent events: On November 9, 2022, the Company completed a registered direct offering of 1,000,000 ordinary shares for approximately $25 million of gross proceeds before expenses. On December 8, 2022, Jianping Xiang replaced Qin Li as chief financial officer.
Most important facts for an investor to verify
- Reconcile the filing’s share counts: 13,239,182 shares were outstanding at September 30, 2022, while 14,239,182 were reported after the November 2022 offering and subsequent events.
- Assess the sustainability of FY2022 operating cash flow and whether inventory growth, customer collections and the 108-day receivable cycle remain manageable.
- Confirm renewal, collateral and guarantee terms for the $11.89 million of short-term loans and repayment capacity for total bank borrowings of $21.19 million.
- Evaluate the effect of steel and nickel prices, domestic versus international sales mix and the Company’s ability to pass higher costs to customers.
- Review the material internal-control weakness, remediation progress and whether any additional deficiencies or restatements have been identified.
- Investigate the apparent inconsistency between the legal-proceedings narrative and the financial-statement note stating that no proceedings were pending at year-end.
- Review related-party purchases, sales, balances, guarantees and approval procedures, particularly transactions with Taizhou Huadi Industrial Ltd.
- Verify the use and regulatory transferability of proceeds from the November 2022 offering and the impact of the additional shares on dilution and control.
- Consider PRC capital-control, dividend-repatriation, foreign-exchange, regulatory and Nasdaq/HFCAA risks. The filing states that the auditor, TPS Thayer, is headquartered in the United States and subject to PCAOB inspection.