Highway Holdings Limited — FY2018 Form 20-F
Period clarification: This is an annual report for the fiscal year ended March 31, 2018, not a standalone 2017 Q4 filing. It does not provide clear standalone fourth-quarter financial results. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in thousands.
Business context
Highway Holdings manufactures metal, plastic and electronic components, subassemblies and products for OEM customers. Its principal manufacturing operations are in Shenzhen, China, with labor-intensive assembly and some manufacturing conducted through its 84%-owned Myanmar subsidiary. Europe generated 75.4% of FY2018 sales. The company reports metal stamping/mechanical OEM and electric OEM segments.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $19,166 | $19,603 |
| Gross profit / margin | $6,742 / 35.2% | $5,570 / 28.4% |
| Operating income / margin | $1,938 / 10.1% | $761 / 3.9% |
| Net income attributable to shareholders | $1,550 | $527 |
| Basic and diluted EPS | $0.41 | $0.14 |
| Operating cash flow | $2,388 | $2,224 |
| Cash and cash equivalents at year-end | $11,267 | $10,028 |
| Working capital | $10,864 | $10,200 |
| Total assets / total equity | $18,130 / $11,790 | $17,552 / $11,310 |
| Long-term debt | None reported | None reported |
FY2018 operating cash flow was supported by earnings and collection of receivables, partly offset by increased inventory and lower accounts payable. Investing activities used $142; financing activities used $1,031, primarily for dividends. Capital expenditures were $271. The company reported no bank loans and no bank credit facilities; its working-capital ratio was 2.7 to 1.
Changes versus FY2017
- Sales declined $437, or 2.2%, following a 14.5% decrease in FY2017. Management attributed the continuing weakness mainly to reduced orders from certain European customers and product-mix changes, amid rising China manufacturing costs.
- Gross profit rose $1,172 despite lower sales. Management cited higher-margin tooling orders, automation, fewer China workers, and shifting assembly to Myanmar. Tooling orders were an important contributor, so the improved margin may not represent a recurring run rate.
- SG&A was nearly unchanged at $4,804. Operating income increased $1,177, or 155%, and shareholder net income rose to $1,550 from $527.
- Non-operating income included a $63 foreign-exchange gain and a $50 gain on disposal of an automation line; FY2017 had a $19 foreign-exchange loss and no comparable disposal gain.
- Income tax expense increased to $512 from $236; the effective tax rate declined to 24.6% from 31.0%, reflecting differences in non-deductible items and other tax factors.
Outlook, risks and unusual items
- Management said FY2019 sales could be below FY2017 unless the company attracts new customers or receives increased orders from existing customers. No quantified revenue or earnings guidance was provided.
- Kayser Myanmar’s existing factory lease was due to expire in December 2018 and would not be renewed. A proposed Yangon facility lease and required government approvals were uncertain; planned relocation, upgrades and construction were estimated at $1.8–$2.0 million, mainly in FY2019. The company expected to fund these costs from cash, while warning it had no committed bank borrowing facility.
- Shenzhen factory leases expire in February 2020. Non-renewal or unfavorable terms could require relocation and substantial employee termination payments; the company said it had accrued for such payments.
- Customer concentration is substantial: three customers accounted for 78% of FY2018 sales, and the five largest customers accounted for 89.7%. The largest single customer represented 51.4% of sales. Major-customer receivable exposure is also concentrated.
- Costs and operating uncertainty include rising wages and regulation in China and Myanmar, labor shortages and strikes, customer limits on Myanmar sourcing, Myanmar’s human-rights-related reputational risks, and foreign-exchange exposure. The company does not hedge currencies.
- The board adopted a shareholder rights plan in April 2018, after year-end. It generally activates when a person or group reaches 15% ownership and may deter or delay a change of control.
- Management reported effective disclosure controls and internal control over financial reporting as of March 31, 2018. The auditor issued an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness. The filing also describes limits on PCAOB inspection of audit work relating to China operations.
- The company expected adoption of the new revenue standard in FY2019 to have no material financial-statement impact, with expanded revenue disclosures. It anticipated that the new lease standard would add right-of-use assets and lease liabilities to the balance sheet.
Most important facts for investors to verify
- Whether FY2018 margin improvement persists without unusually large tooling orders and the automation-line disposal gain.
- Myanmar facility lease approvals, actual relocation and construction costs, timing, and any disruption to production or customer orders.
- Renewal prospects and terms for the Shenzhen leases expiring in February 2020, including potential employee termination cash requirements.
- Customer retention, order trends, and the ability to reduce sales and receivables concentration.
- Cash availability after dividends and Myanmar investment; the filing reports no bank credit facilities despite planned expenditures.
- Dividend figures differ across the filing: the financial statements show FY2018 dividends of $0.32 per share, while narrative disclosure says four FY2018 payments totaled $0.29 per share. Verify declared versus paid amounts and timing.