Euro Tech Holdings Company Limited — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018. This is an annual report, not a quarterly filing; standalone fourth-quarter results are not clearly provided. Financial amounts below are in U.S. dollars, generally thousands, unless stated otherwise. The company distributes and manufactures water-treatment, laboratory and environmental equipment and provides water and wastewater engineering services, principally in Hong Kong and China.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $20.104 million | $17.350 million |
| Gross profit / gross margin | $3.699 million / 18.4% | $4.413 million / 25.4% |
| Operating loss | $(1.059) million | $(0.574) million |
| Net income (loss), consolidated | $(61,000) | $367,000 |
| Net income attributable to Euro Tech | $88,000; $0.04 per share | $473,000; $0.23 per share |
| Operating cash flow | $(1.345) million | $652,000 |
| Cash and cash equivalents at year-end | $5.267 million | $3.380 million |
| Working capital | $6.013 million | $2.986 million |
| Total assets / shareholders’ equity | $23.065 million / $15.545 million | $23.737 million / $17.107 million |
- Revenue rose 15.9%, driven primarily by larger trading and manufacturing system sales. Trading and manufacturing revenue was $13.770 million, up from $11.001 million; engineering revenue was $6.334 million, approximately flat.
- Cost of revenue increased to 81.6% of revenue from 74.6%. Management attributed weaker gross margin to lower-margin large system sales and competitive pressure on engineering contracts. Gross profit fell 16.2% despite higher sales.
- Selling and administrative expenses declined 4.5% to $4.751 million. Research and development expense was approximately $184,000, versus $163,000 in 2017.
- FY2018 cash from investing activities was $5.083 million, including $4.889 million of net proceeds from the Jia Huan stake sale. Financing activities used $1.540 million, including a $1.443 million special dividend and debt repayment. Cash growth therefore reflected asset-sale proceeds despite negative operating cash flow.
- Year-end current assets were $13.533 million and current liabilities $7.520 million. Receivables rose to $5.089 million from $3.808 million; $349,000 was at least 91 days past due. Restricted cash was $1.330 million, held for performance guarantees.
- Euro Tech reported no bank borrowings at year-end (2017: $97,000) and no material bank indebtedness in FY2018. It had banking facilities of approximately $897,000, with some capacity used for guarantees and import loans. This does not include debt of equity-method affiliate Blue Sky.
Material changes and unusual items
- The company sold its 20% interest in Jia Huan in May 2018 for RMB31.3 million, recognizing a $1.522 million gain. The sale generated $4.889 million net cash proceeds; the buyer was the spouse of Jia Huan’s remaining majority owner.
- Equity in affiliates swung from $831,000 of income in 2017 to a $932,000 loss in 2018. Blue Sky contributed a $786,000 loss, associated with lower sales after a major customer filed for bankruptcy liquidation. Jia Huan contributed losses through its disposal date.
- The $312,000 income-tax credit in 2018, compared with $28,000 of tax expense in 2017, was primarily attributed to over-provision of prior-year taxes. The disposal gain and tax credit helped offset operating and affiliate losses.
- A special cash dividend of approximately $1.443 million was paid in June 2018. Management stated it did not presently expect to declare cash dividends in the foreseeable future.
Outlook, risks and contingencies
- Management planned to continue streamlining costs, focus trading activities in Hong Kong, Macau and Guangdong, and develop manufacturing, chemical reagents and ballast-water treatment products. Past cost-reduction efforts had not yet proved successful.
- The company expected to spend up to an additional $200,000 on research and development in FY2019, including ballast-water treatment and water-testing products. A government grant supported a port/barge ballast-water prototype, expected to be completed before the end of 2019. Commercial revenue and profitability from these initiatives are uncertain.
- Management said approximately 85% of backlog was expected to be recognized as revenue over the next 12 months. This is an estimate subject to contract execution, costs, customer acceptance and collection.
- Key risks include continued competitive pressure and margin erosion; reliance on major suppliers, with one supplier representing 55% of purchases in 2018; and customer concentration, with the two largest customers representing 22% of revenue and one customer 15%.
- Other material exposures include currency movements (the company does not currently adequately hedge), PRC/Hong Kong economic and regulatory conditions, currency controls, and limits on repatriating PRC funds. The company also disclosed possible PFIC status for U.S. tax purposes.
- Shanghai Environmental pursued approximately $334,000 in overdue receivables in PRC court; the filing says judgment was awarded but collection had not occurred by year-end. Separately, the financial-statement notes disclose a civil claim against Shanghai Environmental for approximately $291,000, for which management said provision was made; the proceeding was unresolved.
- The filing identifies ongoing negotiations over unapproved contract change orders and claims, which could lead to revenue reversals or cost changes. It also describes environmental compliance, litigation, supplier, and limited insurance risks. Management reported disclosure controls and internal control over financial reporting as effective; the external auditor did not provide an ICFR audit opinion.
Important facts for investors to verify
- Whether the higher revenue can translate into improved margins and positive operating cash flow, given the FY2018 margin decline and cash used in operations.
- Receivables collectability, especially the $334,000 court-awarded balance, and the status and accounting treatment of the separate $291,000 claim.
- Blue Sky’s recovery prospects after its major customer’s bankruptcy, and the carrying value and liquidity of Euro Tech’s remaining affiliate investment.
- Actual backlog, new orders, prototype completion, required regulatory approvals and commercial demand for ballast-water products; confirm the timing and assumptions behind the 85% backlog estimate.
- Liquidity availability after the special dividend, including restrictions on $1.330 million of cash, PRC statutory restrictions on net assets, and the terms and security for banking facilities.
- Supplier and customer relationship continuity, foreign-exchange exposure, and any dilution or governance effects from the 2019 equity incentive plan.