Euro Tech Holdings Company Limited (NASDAQ: CLWT) — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone 2019 Q4 filing. Financial amounts below are in U.S. dollars; “$000” means thousands. The company reports under U.S. GAAP. Its principal activities are distributing and manufacturing water-treatment, laboratory and process-control products, and providing water and wastewater engineering services, primarily in Hong Kong and China.
Financial performance and position
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | $17,399,000 | $20,104,000 | Down 13.5% |
| Gross profit / margin | $4,417,000 / 25.4% | $3,699,000 / 18.4% | Gross profit rose 19.4%; margin improved 7 percentage points |
| Selling and administrative expenses | $4,853,000 | $4,751,000 | Up 2.1% |
| Operating loss | $440,000 | $1,059,000 | Loss narrowed |
| Consolidated net loss | $210,000 | $61,000 | Loss widened |
| Net income (loss) attributable to company shareholders | ($146,000) | $88,000 | Shifted to a loss |
| Operating cash flow | ($266,000) | ($1,345,000) | Cash use decreased |
| Cash and cash equivalents at year-end | $5,991,000 | $5,267,000 | Excludes restricted cash |
| Working capital | $5,350,000 | $6,013,000 | Down $663,000 |
| Total assets / shareholders’ equity | $22,213,000 / $15,337,000 | $23,065,000 / $15,545,000 | Both decreased |
- Trading and manufacturing revenue was $11.877 million, down from $13.770 million; engineering revenue was $5.522 million, compared with $6.334 million in the segment table. Management attributed the decline mainly to lower large-system sales.
- Cost of revenue fell to 74.6% of revenue from 81.6%. The filing attributes the margin improvement to fewer lower-margin large-system sales and improved engineering contract margins.
- Investing cash flow was an outflow of $169,000 in 2019; financing cash flow was an inflow of $565,000, mainly from increased bank borrowings. In 2018, investing cash flow included $4.889 million of proceeds from the sale of the Jia Huan affiliate interest.
- At year-end, bank borrowings were $565,000. Operating lease liabilities totaled $386,000 ($170,000 current and $216,000 long-term). Available banking facilities were approximately $897,000; some were used for guarantees and import loans and the facilities were secured.
- Restricted cash was $729,000 at year-end, bringing cash plus restricted cash to $6.720 million. Accounts receivable, net, declined to $3.586 million from $5.089 million, while $2.091 million was past due at year-end, including $608,000 at least 91 days past due.
Material changes and unusual items
- Revenue fell 13.5%, but gross profit improved as the gross margin recovered from the unusually low 2018 level. Operating losses narrowed, while the company still reported a consolidated net loss.
- 2018 results included a one-time $1.522 million gain on disposal of the Jia Huan affiliate interest. The filing identifies this gain as a key reason the parent-shareholder result moved from income in 2018 to a loss in 2019.
- Equity in affiliate results improved to $137,000 of income from a $932,000 loss in 2018. The company’s 19.4%-owned affiliate Blue Sky contributed income in 2019 after a substantial 2018 loss.
- Engineering backlog was $8.611 million at year-end 2019, versus $4.303 million a year earlier. The filing cautions that backlog may be canceled or changed and may not predict future results.
- The company issued bonus shares in October 2019 at one share for every two held. It also granted options for 51,000 shares at $2.60 per share, exercisable from January 2022.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management plans to continue cost controls and shift emphasis toward engineering, manufacturing, chemical reagents and ballast-water treatment products. It anticipated up to $300,000 in FY2020 R&D spending on ballast-water and water-testing products.
- The ballast-water port-treatment prototype was completed and undergoing tests at various ports. Management planned promotion in China and Southeast Asia but warned that orders and commercial acceptance were uncertain.
- The filing describes COVID-19 as a potentially material risk to 2020 operations, including project delays, supply and delivery disruption, and impeded sales visits. Management said it was cutting costs and conserving cash, including salary reductions, and referred to an indefinite suspension of quarterly dividends pending greater confidence.
- Management and the auditor’s financial-statement opinion identify uncertainty about the effects of coronavirus; the notes state that it creates uncertainty regarding the group’s ability to continue as a going concern. Management expected new customer contracts to alleviate that uncertainty.
- Subsequent events: the company sold a Hong Kong property in February 2020 for approximately $1.859 million, recognizing an estimated $1.429 million gain. It declared and paid a special cash dividend of approximately $1.299 million in March 2020. The board said it did not presently intend regular cash dividends in the foreseeable future.
- Customer concentration is significant: the three largest customers represented approximately 34% of 2019 revenue, and one customer represented 19%. One supplier accounted for 53% of 2019 purchases. The company also faces competition, currency and China/Hong Kong political and regulatory risks, and limited hedging options.
- The company reported no material litigation and no goodwill impairment for 2019. Management assessed disclosure controls and internal control over financial reporting as effective at December 31, 2019; the auditor did not express an opinion on internal control.
Most important facts for investors to verify
- Whether the $8.611 million engineering backlog converts to recognized revenue and cash, and whether project margins hold up.
- Collection status and credit quality of the $2.091 million of past-due receivables, especially amounts at least 91 days overdue and customer concentration.
- COVID-19’s actual effect on contracts, new sales, cash flow and the going-concern assessment, including whether new contracts provide the expected support.
- Liquidity after the March 2020 special dividend and property sale, and the terms, collateral and availability of bank facilities.
- Commercial test results, required approvals and customer demand for the ballast-water port system and related products; the filing does not provide a firm sales forecast.
- Dividend policy: distinguish the 2020 special dividend already paid from future regular dividends, which management did not expect to declare in the foreseeable future.