UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20182019
Or
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to _________
Commission file number:000-33123
China Automotive Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 33-0885775 | |
(State or other jurisdiction of incorporation or | (I.R.S. employer identification number) | |
organization) |
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District
Jing Zhou City, Hubei Province, the People’s Republic of China
(Address of principal executive offices)
(86) 716- 412- 7912 | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | Smaller reporting company | x | |
Emerging growth company |
¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value | CAAS | The Nasdaq Capital Market |
As of May 10, 2018,9, 2019, the Company had 31,644,00431,497,723 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission.
PART I — FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS. |
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net product sales ($10,846 and $9,538 sold to related parties for the three months ended March 31, 2018 and 2017) | $ | 134,018 | $ | 119,308 | ||||||||||||
Cost of products sold ($8,249 and $7,363 purchased from related parties for the three months ended March 31, 2018 and 2017) | 112,379 | 97,679 | ||||||||||||||
Net product sales ($12,836 and $10,846 sold to related parties for the three months ended March 31, 2019 and 2018) | $ | 109,193 | $ | 134,018 | ||||||||||||
Cost of products sold ($5,504 and $8,249 purchased from related parties for the three months ended March 31, 2019 and 2018) | 95,148 | 112,379 | ||||||||||||||
Gross profit | 21,639 | 21,629 | 14,045 | 21,639 | ||||||||||||
Gain on other sales | 1,513 | 788 | 1,269 | 1,513 | ||||||||||||
Less: Operating expenses | ||||||||||||||||
Selling expenses | 5,827 | 4,068 | 3,085 | 5,827 | ||||||||||||
General and administrative expenses | 4,424 | 4,354 | 4,590 | 4,424 | ||||||||||||
Research and development expenses | 8,307 | 6,765 | 6,602 | 8,307 | ||||||||||||
Total operating expenses | 18,558 | 15,187 | 14,277 | 18,558 | ||||||||||||
Income from operations | 4,594 | 7,230 | 1,037 | 4,594 | ||||||||||||
Other income/(expense) | 621 | (254 | ) | |||||||||||||
Other income, net | 1,407 | 621 | ||||||||||||||
Interest expense | (415 | ) | (231 | ) | (568 | ) | (415 | ) | ||||||||
Financial (expense)/income, net | (765 | ) | 332 | |||||||||||||
Financial expense, net | (665 | ) | (765 | ) | ||||||||||||
Income before income tax expenses and equity in earnings of affiliated companies | 4,035 | 7,077 | 1,211 | 4,035 | ||||||||||||
Less: Income taxes | 588 | 1,190 | 198 | 588 | ||||||||||||
Equity in earnings of affiliated companies | 585 | 51 | 211 | 585 | ||||||||||||
Net income | 4,032 | 5,938 | 1,224 | 4,032 | ||||||||||||
Net (loss)/income attributable to non-controlling interests | (280 | ) | 224 | |||||||||||||
Net loss attributable to non-controlling interests | (243 | ) | (280 | ) | ||||||||||||
Net income attributable to parent company’s common shareholders | $ | 4,312 | $ | 5,714 | $ | 1,467 | $ | 4,312 | ||||||||
Comprehensive income: | ||||||||||||||||
Net income | $ | 4,032 | $ | 5,938 | $ | 1,224 | $ | 4,032 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation gain, net of tax | 13,242 | 1,629 | 6,363 | 13,242 | ||||||||||||
Comprehensive income | 17,274 | 7,567 | 7,587 | 17,274 | ||||||||||||
Comprehensive income attributable to non-controlling interests | 236 | 278 | 214 | 236 | ||||||||||||
Comprehensive income attributable to parent company | $ | 17,038 | $ | 7,289 | $ | 7,373 | $ | 17,038 | ||||||||
Net income attributable to parent company’s common shareholders per share | ||||||||||||||||
Basic – | $ | 0.14 | $ | 0.18 | $ | 0.05 | $ | 0.14 | ||||||||
Diluted- | $ | 0.14 | $ | 0.18 | $ | 0.05 | $ | 0.14 | ||||||||
Weighted average number of common shares outstanding | ||||||||||||||||
Basic | 31,644,004 | 31,644,004 | 31,507,487 | 31,644,004 | ||||||||||||
Diluted | 31,644,004 | 31,649,908 | 31,513,297 | 31,644,004 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
March 31, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 65,471 | $ | 86,346 | ||||
Pledged cash | 26,205 | 29,623 | ||||||
Accounts and notes receivable, net - unrelated parties | 242,574 | 237,519 | ||||||
Accounts and notes receivable, net - related parties | 21,701 | 18,825 | ||||||
Inventories | 90,202 | 88,021 | ||||||
Other current assets | 34,076 | 35,094 | ||||||
Total current assets | 480,229 | 495,428 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 137,033 | 129,853 | ||||||
Long-term investments | 33,433 | 32,620 | ||||||
Other non-current assets | 34,621 | 32,598 | ||||||
Total assets | $ | 685,316 | $ | 690,499 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term loans | $ | 65,888 | $ | 60,952 | ||||
Accounts and notes payable - unrelated parties | 187,612 | 205,643 | ||||||
Accounts and notes payable - related parties | 5,668 | 4,477 | ||||||
Accrued expenses and other payables | 45,897 | 47,032 | ||||||
Other current liabilities | 24,181 | 23,196 | ||||||
Total current liabilities | 329,246 | 341,300 | ||||||
Long-term liabilities: | ||||||||
Long-term government loan | 297 | 291 | ||||||
Other long-term payable | 7,977 | 8,726 | ||||||
Long-term tax payable | 29,503 | 29,503 | ||||||
Other non-current liabilities | 6,221 | 5,852 | ||||||
Total liabilities | $ | 373,244 | $ | 385,672 | ||||
Commitments and Contingencies (See Note 22) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued - 32,338,302 and 32,338,302 shares as of March 31, 2019 and December 31, 2018, respectively | $ | 3 | $ | 3 | ||||
Additional paid-in capital | 64,429 | 64,429 | ||||||
Retained earnings- | ||||||||
Appropriated | 11,104 | 11,104 | ||||||
Unappropriated | 212,906 | 211,439 | ||||||
Accumulated other comprehensive income | 7,761 | 1,855 | ||||||
Treasury stock - 840,579 and 711,698 shares as of March 31, 2019 and December 31, 2018, respectively | (3,295 | ) | (2,953 | ) | ||||
Total parent company stockholders' equity | 292,908 | 285,877 | ||||||
Non-controlling interests | 19,164 | 18,950 | ||||||
Total stockholders' equity | 312,072 | 304,827 | ||||||
Total liabilities and stockholders' equity | $ | 685,316 | $ | 690,499 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,224 | $ | 4,032 | ||||
Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,987 | 4,342 | ||||||
(Reversal)/accrual of provision for doubtful accounts | (355 | ) | 275 | |||||
Inventory write downs | 1,112 | 1,543 | ||||||
Deferred income taxes | (84 | ) | 33 | |||||
Equity in earnings of affiliated companies | (211 | ) | (585 | ) | ||||
Gain on fixed assets disposals | - | 12 | ||||||
Changes in operating assets and liabilities | ||||||||
(Increase)/decrease in: | ||||||||
Accounts and notes receivable | (1,977 | ) | 559 | |||||
Inventories | (1,233 | ) | (6,592 | ) | ||||
Other current assets | 2,387 | (128 | ) | |||||
Increase/(decrease) in: | ||||||||
Accounts and notes payable | (21,299 | ) | (11,950 | ) | ||||
Accrued expenses and other payables | (2,208 | ) | (4,031 | ) | ||||
Other current liabilities | 443 | 4,988 | ||||||
Net cash used in operating activities | (18,214 | ) | (7,502 | ) | ||||
Cash flows from investing activities: | ||||||||
(Decrease)/increase in other receivables | (249 | ) | 647 | |||||
Cash received from property, plant and equipment sales | 834 | 26 | ||||||
Payments to acquire property, plant and equipment (including $760 and $5,224 paid to related parties for the three months ended March 31, 2019 and 2018, respectively) | (8,777 | ) | (8,192 | ) | ||||
Payments to acquire intangible assets | (1,194 | ) | - | |||||
Purchase of short-term investments | (15,563 | ) | (1,414 | ) | ||||
Proceeds from maturities of short-term investments | 14,901 | 19,108 | ||||||
Cash received from repayment of the loan to a related party | - | 20,430 | ||||||
Net cash (used in)/provided by investing activities | (10,048 | ) | 30,605 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from bank loans | 15,275 | 19,672 | ||||||
Repayments of bank loans | (11,881 | ) | (31,037 | ) | ||||
Repayments of the borrowing for sale and leaseback transaction | (1,063 | ) | - | |||||
Repurchase of common shares | (342 | ) | - | |||||
Net cash provided by/(used in) financing activities | 1,989 | (11,365 | ) | |||||
Effects of exchange rate on cash, cash equivalents and pledged cash | 1,980 | 3,595 | ||||||
Net (decrease)/increase in cash, cash equivalents and pledged cash | (24,293 | ) | 15,333 | |||||
Cash, cash equivalents and pledged cash at beginning of the period | 115,969 | 96,093 | ||||||
Cash, cash equivalents and pledged cash at end of the period | $ | 91,676 | $ | 111,426 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
March 31, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 78,729 | $ | 64,558 | ||||
Pledged cash | 32,697 | 31,535 | ||||||
Short-term investments | 13,040 | 29,587 | ||||||
Accounts and notes receivable, net - unrelated parties | 282,072 | 274,989 | ||||||
Accounts and notes receivable, net - related parties | 22,661 | 19,086 | ||||||
Advance payments and others - unrelated parties | 12,208 | 12,790 | ||||||
Advance payments and others - related parties | 1,068 | 20,841 | ||||||
Inventories | 87,370 | 79,217 | ||||||
Total current assets | 529,845 | 532,603 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 132,899 | 126,033 | ||||||
Intangible assets, net | 632 | 661 | ||||||
Other receivables, net - unrelated parties | 1,624 | 2,188 | ||||||
Advance payment for property, plant and equipment - unrelated parties | 8,406 | 9,657 | ||||||
Advance payment for property, plant and equipment - related parties | 9,244 | 5,264 | ||||||
Long-term investments | 29,268 | 27,596 | ||||||
Deferred tax assets | 13,800 | 13,367 | ||||||
Total assets | $ | 725,718 | $ | 717,369 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Bank and government loans | $ | 63,176 | $ | 72,711 | ||||
Accounts and notes payable - unrelated parties | 230,036 | 233,048 | ||||||
Accounts and notes payable - related parties | 7,544 | 7,168 | ||||||
Customer deposits | 1,398 | 1,128 | ||||||
Accrued payroll and related costs | 7,841 | 8,577 | ||||||
Accrued expenses and other payables | 38,952 | 40,127 | ||||||
Accrued pension costs | 4,786 | 4,051 | ||||||
Taxes payable | 9,902 | 5,927 | ||||||
Amounts due to shareholders/directors | 364 | 343 | ||||||
Advances payable (current portion) | 398 | 383 | ||||||
Total current liabilities | 364,397 | 373,463 | ||||||
Long-term liabilities: | ||||||||
Long-term government loan | 318 | 306 | ||||||
Advances payable | 373 | 359 | ||||||
Long-term taxes payable | 32,719 | 32,719 | ||||||
Deferred tax liabilities | 4,508 | 4,393 | ||||||
Total liabilities | $ | 402,315 | $ | 411,240 | ||||
Commitments and Contingencies (See Note 27) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of March 31, 2018 and December 31, 2017, respectively | $ | 3 | $ | 3 | ||||
Additional paid-in capital | 64,406 | 64,406 | ||||||
Retained earnings- | ||||||||
Appropriated | 10,707 | 10,707 | ||||||
Unappropriated | 213,771 | 209,459 | ||||||
Accumulated other comprehensive income | 30,506 | 17,780 | ||||||
Treasury stock –694,298 and 694,298 shares as of March 31, 2018 and December 31, 2017, respectively | (2,907 | ) | (2,907 | ) | ||||
Total parent company stockholders' equity | 316,486 | 299,448 | ||||||
Non-controlling interests | 6,917 | 6,681 | ||||||
Total stockholders' equity | 323,403 | 306,129 | ||||||
Total liabilities and stockholders' equity | $ | 725,718 | $ | 717,369 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 4,032 | $ | 5,938 | ||||
Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,342 | 4,189 | ||||||
Accrual/(reversal) of provision for doubtful accounts | 275 | (19 | ) | |||||
Inventory write downs | 1,543 | 813 | ||||||
Deferred income taxes | 33 | (63 | ) | |||||
Equity in earnings of affiliated companies | (585 | ) | (51 | ) | ||||
Gain on fixed assets disposals | 12 | 17 | ||||||
Changes in operating assets and liabilities | ||||||||
(Increase)/decrease in: | ||||||||
Pledged cash | 72 | (2,618 | ) | |||||
Accounts and notes receivable | 559 | 2,480 | ||||||
Advance payments and others | (128 | ) | 52 | |||||
Inventories | (6,592 | ) | (1,444 | ) | ||||
Increase/(decrease) in: | ||||||||
Accounts and notes payable | (11,950 | ) | (1,592 | ) | ||||
Customer deposits | 246 | 123 | ||||||
Accrued payroll and related costs | (1,064 | ) | (431 | ) | ||||
Accrued expenses and other payables | (4,031 | ) | (1,467 | ) | ||||
Accrued pension costs | 576 | (247 | ) | |||||
Taxes payable | 5,230 | (3,318 | ) | |||||
Net cash (used in)/provided by operating activities | (7,430 | ) | 2,362 | |||||
Cash flows from investing activities: | ||||||||
Increase in other receivables | 647 | 20 | ||||||
Cash received from property, plant and equipment sales | 26 | 26 | ||||||
Payments to acquire property, plant and equipment (including $5,224 and $493 paid to related parties for the three months ended March 31, 2018 and 2017, respectively) | (8,192 | ) | (3,245 | ) | ||||
Purchase of short-term investments | (1,414 | ) | - | |||||
Proceeds from maturities of short-term investments | 19,108 | 2,433 | ||||||
Loan to a related party | - | (29,044 | ) | |||||
Cash received from repayment of the loan to a related party | 20,430 | - | ||||||
Net cash provided by/(used in) investing activities | 30,605 | (29,810 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from bank loans | 19,672 | 27,754 | ||||||
Repayments of bank loans | (31,037 | ) | (245 | ) | ||||
Net cash (used in)/provided by financing activities | (11,365 | ) | 27,509 | |||||
Effects of exchange rate on cash and cash equivalents | 2,361 | 150 | ||||||
Net (decrease)/increase in cash and cash equivalents | 14,171 | 211 | ||||||
Cash and cash equivalents at beginning of period | 64,558 | 31,092 | ||||||
Cash and cash equivalents at end of period | $ | 78,729 | $ | 31,303 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash paid for interest | $ | 223 | $ | 173 | ||||
Cash paid for income taxes | $ | 129 | $ | 325 |
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Non-cash investing activities:
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Property, plant and equipment recorded during the period for which there previously were advance payments | $ | 1,362 | $ | 6,360 | ||||
Accounts payable for acquiring property, plant and equipment | $ | 1,209 | $ | 610 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China automotive Systems, Inc. and Subsidiaries
Notes to Condensed Unaudited Consolidated Financial Statements
Three Months Ended March 31, 20182019 and 20172018
1. | Organization and business |
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the joint ventures described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate net interests in the following Sino-foreign joint ventures, wholly-owned subsidiaries and joint ventures organized in the People's Republic of China, the “PRC,” and Brazil as of March 31, 20182019 and December 31, 2017.2018.
Percentage Interest | Percentage Interest | |||||||||||||||
Name of Entity | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | ||||||||||||
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”1 | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”2 | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”3 | 70.00 | % | 70.00 | % | 70.00 | % | 70.00 | % | ||||||||
Universal Sensor Application Inc., “USAI”4 | 83.34 | % | 83.34 | % | 83.34 | % | 83.34 | % | ||||||||
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”5 | 85.00 | % | 85.00 | % | 85.00 | % | 85.00 | % | ||||||||
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”6 | 77.33 | % | 77.33 | % | 77.33 | % | 77.33 | % | ||||||||
Hubei Henglong Automotive System Group Co., Ltd, “Hubei Henglong”7 | 100.00 | % | 100.00 | % | ||||||||||||
JingzhouHenglong Automotive Technology (Testing) Center, “Testing Center”8 | 100.00 | % | 100.00 | % | ||||||||||||
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong”7 | 100.00 | % | 100.00 | % | ||||||||||||
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”8 | 100.00 | % | 100.00 | % | ||||||||||||
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong”9 | 70.00 | % | 70.00 | % | 70.00 | % | 70.00 | % | ||||||||
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”10 | 95.84 | % | 95.84 | % | 95.84 | % | 95.84 | % | ||||||||
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”11 | 85.00 | % | 85.00 | % | 85.00 | % | 85.00 | % | ||||||||
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”12 | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
Jingzhou Qingyan Intelligent Automotive Technology Rearch Institute Co., Ltd., “Jingzhou Qingyan”13 | 60.00 | % | 60.00 | % | ||||||||||||
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”13 | 60.00 | % | 60.00 | % | ||||||||||||
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”14 | 66.60 | % | 66.60 | % |
1. | Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles. |
2. | Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles. |
3. | Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles. |
4. | USAI was established in 2005 and mainly engages in the production and sales of sensor modules. |
5. | Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns. |
6. | Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems. |
7. | On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd. | |
8. | In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products. |
9. | On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts. |
10. | On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. |
11. | In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China. |
12. | In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics. |
13. | In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Rearch Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology. |
14. | In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd. (“Henglong KYB”), which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment. |
2. | Basis of presentation and significant accounting policies |
(a) | Basis of Presentation |
Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.
The condensed consolidated balance sheet as of December 31, 20172018 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented herein not misleading. For further information, please refer to the financial statements and the notes thereto included in the Company’s 2017 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 20182019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2018.2019.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian reais, “BRL,” its functional currency. In accordance with ASC Topic 830, “FASB Accounting Standards Codification”, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b) | Recent Accounting Pronouncements |
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address specific consequences of the recent U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”). The update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. The accounting update is effectiveOn January 1, 2019, with early adoption permitted,the Company adopted ASU 2016-02,Leases (as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and is to be applied either in2019-01), using the period of adoption or retrospectively to each period in which the effectmodified retrospective method. The impact of the change in the U.S. federal corporate income tax rate in the U.S. Tax Reform is recognized. The Company is currently evaluating the impactadoption of the new standard on the Company's consolidated financial statements.statements is discussed in “Significant Accounting Policies” below.
(c) | Significant Accounting Policies |
Net Product Sales The following significant accounting policies have been added or changed since the date of the Company’s 2018 Annual Report on Form 10-K.
Leases- On January 1, 2018,As described in the “Recent Accounting Pronouncements” section, the Company adopted ASU 2016-02, Leases, and other related ASUs (collectively, ASC Topic 606 “Revenue from Contracts with Customers”, and all related amendments,842) on January 1, 2019, using the modified retrospective method appliedof adoption.
The Company elected the transition method which allows entities to those contracts that wereinitially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not completedbeen restated. There is no material impact on the balance of retained earnings, right of use assets or associated lease liabilities as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented2019 due to the adoption of ASC 842. The Company elected the package of practical expedients permitted under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting practices under ASC Topic 605 “Revenue Recognition”.
Management has determined that the impact of the transition to the new standard is immaterial to the Company’s revenue recognition model since the vast majorityguidance within ASC 842, which includes not reassessing lease classification of our revenue recognition is based on point in time transfer of control. Accordingly, the Company has not made any adjustment to opening retained earnings.
Products sales to customers are made pursuant to master agreements entered into between the Company and its customers that provide for transfer of both title and risk of loss upon the Company’s delivery to the location specified in the contracts. The Company’s sales arrangements generally do not contain variable considerations and short-term in nature. A period of credit term is granted to the customers after the delivery and before making payment.existing leases. The Company recognizes revenue at a point in time based on management’s evaluation of whendid not elect the customer obtains control of the products. Revenue is recognized when all performance obligations under the terms of a contract with the customer are satisfied and control of the product has been transferred to the customer. Sales of goods typically do not include multiple product and/or service elements.
Revenue is measured as the amount of consideration management expects the Company to receive in exchange for transferring goods pursuant to the contracts. Value-added tax that the Company collects concurrent with revenue-producing activities is excluded from revenue. Incidental contract costs that are not material in the context of the delivery of goods and services are recognized as expense.
At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated price discounts based upon historical experience and related terms of customer arrangements. Where the Company has offered product warranties, the Company also establishes liabilities for estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liabilities are adjusted when experience indicates the expected outcome will differ from initial estimates of the liability.hindsight practical expedient.
The Company treats shipping and handling fees asdetermines if an arrangement is a fulfillment cost sincelease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the productseconomic benefits of the underlying asset and the right to direct how and for what purpose the asset is usually transferredused. The Company’s major plants and buildings are self-owned and limited temporary small offices were rented.
For leases with a term of 12 months or less, the Company makes an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The Company recognizes lease expenses for such leases on a straight-line basis over the customer after the delivery.lease term.
Revenue DisaggregationOperating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate present value is the Company’s incremental borrowing rate or, if available, the rate implicit in the lease. The Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the applicable country or region. The discount rate used by the Company for its operating lease was 4.49%.
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard is measured on the same basis as under the revenue standard, so management did not repeat the disaggregationThe operating lease right of revenue under both standards.
Contract Assets and Liabilities
Contractuse assets such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of our products and their respective manufacturing processes.
Contract liabilities are mainly customer deposits.
Customer Deposits
As of March 31, 2018, the Company has customer deposits of $1.4 million, of which $1.3 million was received in the first quarter of 2018. $1.0 million was recognized as net product sales revenue in the first quarter of 2018 that was included in other current assets and current portion of operating lease liabilities was included in other current liabilities and the balance of customer deposits as of December 31, 2017. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.
Practical Expedient and Exemptions
non-current portion was included in other non-current liabilities. The weighted average remaining lease term was 4 years. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers promised goods to the customers and when the customers pay for the goods will be within one year.
Except for the adoption of ASC Topic 606, there have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2017.
Short-term investments comprise time deposits with terms of three months or more which are due within one year and financial instruments with a variable interest rate indexed to the performance of underlying assets (“Wealth Management Financial Products”) with maturities within one year. The carrying values of time deposits approximate fair value because of their short maturities. The interest earned is recognized in the consolidated statements of income over the contractual term of the deposits. The Wealth Management Financial Products are measured at fair value and classified as Level 2 within the fair value measurement hierarchy. The fair values were measured by using directly or indirectly observable inputs in the marketplace. Changes in the fair value are reflected in other income in the consolidated statements of operations and comprehensive income.
The Company’s short-term investmentsfinance lease arrangements as of March 31, 2018 and December 31, 2017 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Time deposits | $ | 11,609 | $ | 12,019 | ||||
Wealth Management Financial Products measured at fair value | 1,431 | 17,568 | ||||||
Total | $ | 13,040 | $ | 29,587 |
As of March 31, 2018, the Company had pledged short-term investments of RMB 7.0 million, equivalent to approximately $1.1 million, to secure standby letters of credit under Bank of China and China CITIC Bank (Note 12). The use of the pledged short-term investments is restricted.
As of December 31, 2017, the Company had pledged short-term investments of RMB 13.0 million, equivalent to approximately $2.0 million, to secure standby letters of credit under HSBC Bank (Note 12) and China CITIC Bank. The use of the pledged short-term investments is restricted.2019.
Accounts and notes receivable, net |
The Company’s accounts and notes receivable, net as of March 31, 20182019 and December 31, 20172018 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Accounts receivable - unrelated parties | $ | 166,627 | $ | 166,889 | $ | 150,415 | $ | 149,100 | ||||||||
Notes receivable - unrelated parties(1) (2) | 116,867 | 109,183 | ||||||||||||||
Notes receivable - unrelated parties(1)(2) | 94,255 | 90,412 | ||||||||||||||
Total accounts and notes receivable- unrelated parties | 283,494 | 276,072 | 244,670 | 239,512 | ||||||||||||
Less: allowance for doubtful accounts - unrelated parties | (1,422 | ) | (1,083 | ) | (2,096 | ) | (1,993 | ) | ||||||||
Accounts and notes receivable, net - unrelated parties | 282,072 | 274,989 | 242,574 | 237,519 | ||||||||||||
Accounts and notes receivable, net - related parties | 22,661 | 19,086 | ||||||||||||||
Accounts and notes receivable - related parties | 21,701 | 18,825 | ||||||||||||||
Accounts and notes receivable, net | $ | 304,733 | $ | 294,075 | $ | 264,275 | $ | 256,344 |
(1) | Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by |
(2) | As of March 31, 2019 and December 31, 2018, the Company |
(3) | Provision for doubtful accounts and notes receivable amounted to |
The Company’s advance payments and others as of March 31, 2018 and December 31, 2017 consisted of the following (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Advance payments and others - unrelated parties | $ | 13,258 | $ | 13,801 | ||||
Less: allowance for doubtful accounts – unrelated parties | (1,050 | ) | (1,011 | ) | ||||
Advance payments and others, net – unrelated parties | 12,208 | 12,790 | ||||||
Advance payments and others - related parties(1) | 1,068 | 20,841 | ||||||
Total advance payments and others | $ | 13,276 | $ | 33,631 |
Inventories |
The Company’s inventories as of March 31, 20182019 and December 31, 20172018 consisted of the following (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Raw materials | $ | 22,705 | $ | 20,033 | $ | 29,206 | $ | 27,190 | ||||||||
Work in process | 19,329 | 17,951 | 12,340 | 11,932 | ||||||||||||
Finished goods | 45,336 | 41,233 | 48,656 | 48,899 | ||||||||||||
Total | $ | 87,370 | $ | 79,217 | $ | 90,202 | $ | 88,021 |
Provision forThe write down of inventories amounted to $1.5$1.1 million and $0.8$1.5 million for the three months ended March 31, 20182019 and 2017,2018, respectively.
The Company’s other receivables as of March 31, 2018 and December 31, 2017 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31,2017 | |||||||
Other receivables - unrelated parties(1) | $ | 1,116 | $ | 1,109 | ||||
Other receivables - employee housing loans(2) | 619 | 1,187 | ||||||
Less: allowance for doubtful accounts - unrelated parties | (111 | ) | (108 | ) | ||||
Other receivables, net - unrelated parties | $ | 1,624 | $ | 2,188 |
March 31, 2018 | December 31, 2017 | |||||||
Other receivables - related parties(1) | $ | 608 | $ | 585 | ||||
Less: allowance for doubtful accounts - related parties | (608 | ) | (585 | ) | ||||
Other receivables, net - related parties | $ | - | $ | - |
Long-term investments |
In January 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns 50% of the equity in Beijing Henglong and can exercise significant influence over Beijing Henglong’s operating and financial policies. The Company accounted for Beijing Henglong’s operational results using the equity method. As of March 31, 20182019 and December 31, 2017,2018, the Company had $4.3 million and $4.1$4.2 million, respectively, of net equity in Beijing Henglong.
In September 2014, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Suzhou Venture Fund”, which mainly focuses on investments in emerging automobiles and parts industries. Hubei Henglong has committed to make investments of RMB 50.0 million, equivalent to approximately $8.0$7.4 million, in the Suzhou Venture Fund in three installments. As of March 31, 2018,2019, Hubei Henglong has completed a capital contribution of RMB 50.0 million, equivalent to approximately $8.0$7.4 million, representing 12.5% of the Suzhou Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Suzhou Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of March 31, 20182019 and December 31, 2017,2018, the Company had $11.3$10.0 million and $10.3$9.7 million, respectively, of net equity in the Suzhou Venture Fund.
In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million, equivalent to approximately $18.0 million, in three installments, representing 23.5% of the Chongqing Venture Fund in three installments.Fund’s shares. As of March 31, 2018,2019, Hubei Henglong has completed a capital contribution of RMB 84.0 million, equivalent to approximately $13.4 million, representing 23.5% of the Chongqing Venture Fund’s shares.$12.5 million. As a limited partner, Hubei Henglong has more than virtually no influence over the Chongqing Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of March 31, 20182019 and December 31, 2017,2018, the Company had $13.2$13.3 million and $12.7$13.1 million, respectively, of net equity in the Chongqing Venture Fund.
In October 2016, Hubei Henglong invested RMB 3.0 million, equivalent to approximately $0.4 million, to establish a joint venture company, Chongqing Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”, with five other parties. The Company owns 30% of the equity in Chongqing Jinghua, and can exercise significant influence over Chongqing Jinghua’s operating and financial policies. The Company accounts for Chongqing Jinghua’s operational results withusing the equity method. As of March 31, 20182019 and December 31, 2017,2018, the Company had $0.5$0.2 million and $0.5$0.2 million, respectively, of net equity in Chongqing Jinghua.
In March 2018, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”. Hubei Henglong has committed to make investments of RMB 76.0 million, equivalent to approximately $11.5 million, in three installments, representing 27.1% of the Hubei Venture Fund’s shares. As of March 31, 2019, Hubei Henglong has completed a capital contribution of RMB 38.0 million, equivalent to approximately $5.6 million. As a limited partner, Hubei Henglong has more than virtually no influence over the Hubei Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of March 31, 2019 and December 31, 2018, the Company had $5.6 million and $5.5 million, respectively, of net equity in the Hubei Venture Fund.
The Company’s consolidated financial statements reflect the net income of non-consolidated affiliates of $0.6$0.2 million and $0.1$0.6 million for the three months ended March 31, 2019 and 2018, and 2017, respectively.
Property, plant and equipment, net |
The Company’s property, plant and equipment, net as of March 31, 20182019 and December 31, 20172018 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Costs: | ||||||||||||||||
Land use rights and buildings | $ | 65,655 | $ | 63,173 | $ | 62,846 | $ | 60,593 | ||||||||
Machinery and equipment | 178,073 | 165,863 | 198,351 | 192,538 | ||||||||||||
Electronic equipment | 6,138 | 5,819 | 5,858 | 5,810 | ||||||||||||
Motor vehicles | 5,151 | 4,945 | 4,933 | 4,852 | ||||||||||||
Construction in progress | 23,671 | 22,352 | 15,214 | 12,526 | ||||||||||||
Total amount of property, plant and equipment | 278,688 | 262,152 | 287,202 | 276,319 | ||||||||||||
Less: Accumulated depreciation(1) | (145,789 | ) | (136,119 | ) | (150,169 | ) | (146,466 | ) | ||||||||
Total amount of property, plant and equipment, net(2)(3) | $ | 132,899 | $ | 126,033 | $ | 137,033 | $ | 129,853 |
(1) | As of March 31, |
(2) | Depreciation charges were |
(3) | Interest costs capitalized for the three months ended March 31, |
The Company’s intangible assets as of March 31, 2018, and December 31, 2017 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Costs: | ||||||||
Patent technology | $ | 2,191 | $ | 2,108 | ||||
Management software license | 1,498 | 1,441 | ||||||
Total intangible assets | 3,689 | 3,549 | ||||||
Less: Amortization(1) | (3,057 | ) | (2,888 | ) | ||||
Total intangible assets, net | $ | 632 | $ | 661 |
In accordance with the provisions ofASC Topic 740, “Income Taxes”, the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of estimated deferred income tax assets as of March 31, 2018 and December 31, 2017 are as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Losses carry forward (U.S.)(1) | $ | 3,464 | $ | 3,580 | ||||
Losses carry forward (Non-U.S.)(1) | 2,800 | 2,178 | ||||||
Product warranties and other reserves | 5,608 | 5,264 | ||||||
Property, plant and equipment | 4,836 | 4,607 | ||||||
Share-based compensation | 156 | 156 | ||||||
Bonus accrual | 224 | 287 | ||||||
Other accruals | 1,510 | 1,535 | ||||||
Deductible temporary difference related to revenue recognition | 232 | 465 | ||||||
Others | 1,415 | 1,353 | ||||||
Total deferred tax assets, net | 20,245 | 19,425 | ||||||
Less: Valuation allowance | (6,445 | ) | (6,058 | ) | ||||
Total deferred tax assets, net of valuation allowance | $ | 13,800 | $ | 13,367 |
Loans consist of the following as of March 31, 20182019 and December 31, 20172018 (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Short-term bank loans(1) | $ | 15,744 | $ | 9,948 | ||||
Short-term bank loans(2) (3) (4) | 29,858 | 30,454 | ||||||
Short-term bank loans(5) | 14,393 | 29,248 | ||||||
Short-term government loan(6) | 3,181 | 3,061 | ||||||
Total short-term bank and government loans | $ | 63,176 | $ | 72,711 | ||||
Long-term government loan(7) | 318 | 306 | ||||||
Total bank and government loans | $ | 63,494 | $ | 73,017 |
March 31, 2019 | December 31, 2018 | |||||||
Short-term bank loans(1) | $ | 58,462 | $ | 53,667 | ||||
Short-term government loan(2) | 7,426 | 7,285 | ||||||
Total short-term bank and government loans | $ | 65,888 | $ | 60,952 | ||||
Long-term government loan (3) | 297 | 291 | ||||||
Total bank and government loans | $ | 66,185 | $ | 61,243 |
(1) | These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note |
| ||
|
On October 27, 2017, Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB |
On October 27, 2017, Hubei Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 140.0 million (equivalent to |
(2) | On |
(3) | On November 13, 2017, the Company received a Chinese government loan of RMB 2.0 million, equivalent to approximately $0.3 million, with an interest rate of 4.75% per annum, which will mature on November 12, 2020. |
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest or trigger early repayment. The Company complied with such financial covenants as of March 31, 2019, and believes it will continue to comply with them.
Accounts and notes payable |
The Company’s accounts and notes payable as of March 31, 20182019 and December 31, 20172018 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Accounts payable - unrelated parties | $ | 142,420 | $ | 149,200 | $ | 115,355 | $ | 124,610 | ||||||||
Notes payable - unrelated parties(1) | 87,616 | 83,848 | 72,257 | 81,033 | ||||||||||||
Accounts and notes payable- unrelated parties | 230,036 | 233,048 | 187,612 | 205,643 | ||||||||||||
Accounts payable - related parties | 7,544 | 7,168 | 5,668 | 4,477 | ||||||||||||
Balance at end of period | $ | 237,580 | $ | 240,216 | ||||||||||||
Balance at end of the period | $ | 193,280 | $ | 210,120 |
(1) | Notes payable represent accounts payable in the form of notes issued by the Company. The notes are endorsed by banks to ensure that noteholders will be paid after maturity. The Company has pledged cash deposits, short-term investments, notes receivable and certain property, plant and equipment to secure notes payable granted by banks. |
Accrued expenses and other payables |
The Company’s accrued expenses and other payables as of March 31, 20182019 and December 31, 20172018 are summarized as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Accrued expenses | $ | 7,671 | $ | 7,944 | ||||
Accrued interest | 178 | 1,347 | ||||||
Other payables | 902 | 1,803 | ||||||
Warranty reserves(1) | 30,201 | 29,033 | ||||||
Total | $ | 38,952 | $ | 40,127 |
March 31, 2019 | December 31, 2018 | |||||||
Accrued expenses | $ | 6,884 | $ | 8,341 | ||||
Accrued interest | 748 | 423 | ||||||
Current portion of other long-term payable (See Note 10) | 3,529 | 3,400 | ||||||
Other payables | 2,579 | 3,783 | ||||||
Warranty reserves(1) | 32,157 | 31,085 | ||||||
Total | $ | 45,897 | $ | 47,032 |
(1) | The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances. |
For the three months ended March 31, 20182019 and 2017,2018, and for the year ended December 31, 2017,2018, the warranties activities were as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||||
2018 | 2017 | 2017 | 2019 | 2018 | 2018 | |||||||||||||||||||
Balance at beginning of the period | $ | 29,033 | $ | 26,225 | $ | 26,225 | $ | 31,085 | $ | 29,033 | $ | 29,033 | ||||||||||||
Additions during the period | 4,248 | 3,076 | 23,354 | 2,776 | 4,248 | 24,102 | ||||||||||||||||||
Settlement within period, by cash or actual materials | (4,206 | ) | (3,419 | ) | (22,034 | ) | ||||||||||||||||||
Settlement within period | (2,294 | ) | (4,206 | ) | (20,599 | ) | ||||||||||||||||||
Foreign currency translation loss/(gain) | 1,126 | (144 | ) | 1,488 | 590 | 1,126 | (1,451 | ) | ||||||||||||||||
Balance at end of the period | $ | 30,201 | $ | 25,738 | $ | 29,033 | $ | 32,157 | $ | 30,201 | $ | 31,085 |
The Company’s taxes payable as of MarchOn January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and December 31, 2017 are summarizedsimultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was $13.6 million and the sales price was $14.9 million. Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over 4 years with a quarterly lease payment of $1.1 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as follows (figures are in thousands of USD):
March 31, 2018 | December 31, 2017 | |||||||
Value-added tax payable | $ | 5,187 | $ | 1,813 | ||||
Income tax payable | 3,739 | 3,450 | ||||||
Other tax payable | 976 | 664 | ||||||
Long-term taxes payable(1) | 32,719 | 32,719 | ||||||
Total | $ | 42,621 | $ | 38,646 |
a sale. Therefore, the transaction is accounted for as a financing transaction by the Company. As of March 31, 20182019, $3.5 million is recognized as other payable (See Note 9) and December 31, 2017, advances$8.0 million is recognized as other long-term payable byto the Company were $0.8 million and $0.7 million, respectively.buyer-lessor according to the contract term.
The amounts are special subsidies made by the Chinese government to the Company to offset the costs and charges related to the improvement of production capacities and improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are recorded as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances payable when received and will be recorded as a deduction of related expenses and cost when the conditions are met.
The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.
Additional paid-in capital |
The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 20182019 and 2017, and the year ended December 31, 20172018, are summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | |||||||||||
2018 | 2017 | 2017 | ||||||||||
Balance at beginning of the period | $ | 64,406 | $ | 64,764 | $ | 64,764 | ||||||
Acquisition of the non-controlling interest in Brazil Henglong(1) | - | - | (458 | ) | ||||||||
Share-based compensation(2) | - | - | 100 | |||||||||
Balance at end of the period | $ | 64,406 | $ | 64,764 | $ | 64,406 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance at beginning of the period | $ | 64,429 | $ | 64,406 | ||||
Balance at end of the period | $ | 64,429 | $ | 64,406 |
Assumptions used to estimate the fair value of the stock options on the grant datesdate are as follows:
Issuance Date | Expected volatility | Risk-free rate | Expected term (years) | Dividend yield | Expected volatility | Risk-free rate | Expected term (years) | Dividend yield | ||||||||||||||||||||||||
August 16, 2017 | 139.2 | % | 1.79 | % | 5 | 0.00 | % | |||||||||||||||||||||||||
December 5, 2018 | 44.72 | % | 2.79 | % | 5 | 0.00 | % |
The stock options granted during 20172018 were exercisable immediately. Their aggregate fair value on the grant date using the Black-Scholes option pricing model was $0.1$0.02 million. For the year ended December 31, 2017,2018, the Company recognized stock-based compensation expenses of $0.1$0.02 million.
Retained earnings |
Appropriated
Pursuant to the relevant PRC laws, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements, other than the financial statement that was prepared in accordance with generally accepted accounting principles in the United States of America, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.
When the statutory surplus reserve reaches 50% of the registered capital of a company, additional reserve is no longer required. However, the reserve cannot be distributed to joint venture partners.shareholders. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang, USAI, Jielong, Wuhu, Hubei Henglong, Henglong KYB and Chongqing are $10.0 million, $4.2 million (equivalent to RMB 35.0 million), $8.1 million (equivalent to RMB 67.5 million), $2.6 million, $6.0 million, $3.8 million (equivalent to RMB 30.0 million), $39.0 million, $41.7 million (equivalent to RMB 320.0 million) and $9.5 million (equivalent to RMB 60.0 million), respectively.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three months ended March 31, 20182019 and 2017, and the year ended December 31, 20172018, are summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2018 | 2017 | 2017 | 2019 | 2018 | ||||||||||||||||
Balance at beginning of the period | $ | 10,707 | $ | 10,549 | $ | 10,549 | $ | 11,104 | $ | 10,707 | ||||||||||
Appropriation of retained earnings | - | - | 158 | |||||||||||||||||
Balance at end of the period | $ | 10,707 | $ | 10,549 | $ | 10,707 | $ | 11,104 | $ | 10,707 |
Unappropriated
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 20182019 and 2017, and the year ended December 31, 20172018, are summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2018 | 2017 | 2017 | 2019 | 2018 | ||||||||||||||||
Balance at beginning of the period | $ | 209,459 | $ | 228,963 | $ | 228,963 | $ | 211,439 | $ | 209,459 | ||||||||||
Net income attributable to parent company | 4,312 | 5,714 | (19,346 | ) | 1,467 | 4,312 | ||||||||||||||
Appropriation of retained earnings | - | - | (158 | ) | ||||||||||||||||
Balance at end of the period | $ | 213,771 | $ | 234,677 | $ | 209,459 | $ | 212,906 | $ | 213,771 |
Accumulated other comprehensive income |
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three months ended March 31, 20182019 and 2017, and the year ended December 31, 20172018, are summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2018 | 2017 | 2017 | 2019 | 2018 | ||||||||||||||||
Balance at beginning of the period | $ | 17,780 | $ | (892 | ) | $ | (892 | ) | $ | 1,855 | $ | 17,780 | ||||||||
Other comprehensive income related to the non-controlling interests acquired by the Company | - | - | (67 | ) | ||||||||||||||||
Foreign currency translation adjustment attributable to parent company | 12,726 | 1,575 | 18,739 | 5,906 | 12,726 | |||||||||||||||
Balance at end of the period | $ | 30,506 | $ | 683 | $ | 17,780 | $ | 7,761 | $ | 30,506 |
Treasury stock | ||
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On December 5, 2018, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share through December 4, 2019. During the three months ended March 31, 2019, the Company repurchased 128,881 shares of the Company’s common stock for cash consideration of $0.3 million on the open market. As of March 31, 2019 and December 31, 2018, the Company had cumulatively repurchased 840,579 shares and 711,698 shares, respectively, of the Company’s common stock since inception. The repurchased shares are presented as “treasury stock” on the balance sheet. | ||
15. | Non-controlling interests |
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 20182019 and 2017, and the year ended December 31, 20172018, are summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | Year Ended December 31, | |||||||||||
2018 | 2017 | 2017 | ||||||||||
Balance at beginning of the period | $ | 6,681 | $ | 5,412 | $ | 5,412 | ||||||
(Loss)/income attributable to non-controlling interests | (280 | ) | 224 | 707 | ||||||||
Dividends declared to the non-controlling interest holders of joint-venture companies | - | - | (608 | ) | ||||||||
Acquisition of the non-controlling interest in Brazil Henglong | - | - | 458 | |||||||||
Other comprehensive income related to the non-controlling interests acquired by the Company | - | - | 67 | |||||||||
Foreign currency translation adjustment attributable to non-controlling interests | 516 | 54 | 645 | |||||||||
Balance at end of the period | $ | 6,917 | $ | 5,690 | $ | 6,681 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance at beginning of the period | $ | 18,950 | $ | 6,681 | ||||
Loss attributable to non-controlling interests | (243 | ) | (280 | ) | ||||
Foreign currency translation adjustment attributable to non-controlling interests | 457 | 516 | ||||||
Balance at end of the period | $ | 19,164 | $ | 6,917 |
Gain on other salesRevenue Disaggregation
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 24.
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.
Contract liabilities are mainly consistedcustomer deposits.
Customer Deposits
As of net amount retained from salesMarch 31, 2019 and December 31, 2018, the Company has customer deposits of materials, property, plant$0.7 million and equipment, and scraps. For$0.8 million, respectively. During the three months ended March 31, 2018, gain on other sales amounted to $1.52019, $3.2 million as compared towas received and $3.2 million (including $0.8 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the three months ended March 31, 2017, representing an increaseCompany under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of $0.7 million. The increase was mainly due to increased sales volume of materials.the customer deposit liability.
Financial |
During the three months ended March 31, 20182019 and 2017,2018, the Company recorded financial income,expense, net which is summarized as follows (figures are in thousands of USD):
Three Months Ended March 31, | ||||||||||||||||
2018 | 2017 | Three Months Ended March 31, | ||||||||||||||
2019 | 2018 | |||||||||||||||
Interest income | $ | 374 | $ | 481 | $ | 764 | $ | 374 | ||||||||
Foreign exchange loss, net | (1,037 | ) | (29 | ) | (1,250 | ) | (1,037 | ) | ||||||||
Bank fees | (102 | ) | (120 | ) | (179 | ) | (102 | ) | ||||||||
Total financial (expense)/income, net | $ | (765 | ) | $ | 332 | |||||||||||
Total financial expense, net | $ | (665 | ) | $ | (765 | ) |
Income tax |
PRC Corporate Income Tax
The Company’s subsidiaries registered in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the government, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong would be subject to withholding tax at a rate of 10% if Genesis could not obtain the Hong Kong tax resident certificate from the Hong Kong Inland Revenue Department. If Genesis obtains the Hong Kong tax resident certificate, owns directly at least 25% of the shares of the foreign invested enterprise and is qualified as the beneficial owner, it could benefit from a lower rate of 5%.
According to PRC tax regulation, the Company should withhold income taxes for the profits distributed from the PRC subsidiaries to Genesis, the subsidiaries’ holding company incorporated in Hong Kong. For the profits that the PRC subsidiaries intended to distribute to Genesis, the Company accrues the withholding income tax as deferred tax liabilities. As of March 31, 2018, the Company has recognized deferred tax liabilities of $4.5 million for the undistributed profits of $45.4 million which are expected to be distributed to Genesis in the future. The Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries indefinitely. As of March 31, 2018 and December 31, 2017, the Company still had undistributed earnings of approximately $308.9 million and $294.2 million, respectively, from investment in the PRC subsidiaries that are considered indefinitely reinvested. Had the undistributed earnings been distributed to Genesis and not indefinitely reinvested, the tax provision as of March 31, 2018 and December 31, 2017 of approximately $30.9 million and $29.4 million, respectively, would have been recorded.
In 2014, Jiulong was awarded the title of “High& New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High& New Technology Enterprise” in 2017. Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Henglong was awarded the title of “High& New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High& New Technology Enterprise” in 2017. Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Hubei Henglong was awarded the title of “High& New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High& New Technology Enterprise” in 2017. Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Wuhu was awarded the title of “High& New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High& New Technology Enterprise” in 2017. Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2015, Shenyang was awarded the title of “High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% from 2015 to 2017. The Company estimated the applied tax rate in 2018 to be 15% as it is probable to pass the re-assessment in 2018 and continue to qualify as “High & New Technology Enterprise”.
In 2013, Jielong was awarded the title of “High& New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% from 2016 to 2018.
According to the New CIT, USAI, Wuhan Chuguanjie, Shanghai Henglong, Testing Center and Chongqing Henglong are subject to income tax at a rate of 25%.
Brazil Corporate Income Tax
Based on Brazilian income tax laws, Brazil Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate of 10% for the part of taxable income over $0.12 million, equivalent to approximately BRL 0.24 million. The Company had no assessable income in Brazil as of March 31, 2018 and December 31, 2017.
Hong Kong Corporate Income Tax
The profits tax rate of Hong Kong is 16.5%. No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong as of March 31, 2018 and December 31, 2017.
U.S. Corporate Income Tax
The Company is a Delaware corporation that is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for taxable years beginning after December 31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years. Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum.
The U.S. Tax Reform also includes provisions for a new tax on Global Intangible Low-Taxed Income, “GILTI”, effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
The Company’s management is still evaluating the effect of the U.S. Tax Reform on the Company. Management may update its judgment of that effect based on its continuing evaluation and on future regulations or guidance issued by the U.S. Department of the Treasury, and specific actions the Company may take in the future.
To the extent that portions of the Company’s U.S. taxable income, such as Subpart F income or GILTI, are determined to be from sources outside of the U.S., subject to certain limitations, the Company may be able to claim foreign tax credits to offset its U.S. income tax liabilities. If dividends that the Company receives from its subsidiaries are determined to be from sources outside of the U.S., subject to certain limitations, the Company will generally not be required to pay U.S. corporate income tax on those dividends. Any liabilities for U.S. corporate income tax will be accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments will be made when required by U.S. law.
One-Time Transition Tax Related to U.S. Tax Reform
In the fourth quarter of 2017, the Company recognized a one-time transition tax of $35.6 million that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years commencing in April 2018. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued by the U.S. Department of the Treasury, and specific actions the Company may take in the future.
The Company’s effective tax rate was 14.6% forrates were 16.4% and 14.7% in the three months ended March 31, 2019 and 2018, compared with 16.8%respectively. The increase in effective tax rate was primarily due to the increase in the valuation allowance provided for the three months ended March 31, 2017.loss-making entities.
Income per share |
Basic income per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.
The calculationcalculations of basic and diluted income per share attributable to the parent company for the three months ended March 31, 2019 and 2018, and 2017, waswere as follows (figures are in thousands of USD, except share and per share amounts):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to the parent company’s common shareholders – Basic and Diluted | $ | 4,312 | $ | 5,714 | $ | 1,467 | $ | 4,312 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | 31,644,004 | 31,644,004 | 31,507,487 | 31,644,004 | ||||||||||||
Dilutive effects of stock options | - | 5,904 | 5,810 | - | ||||||||||||
Denominator for dilutive income per share – Diluted | 31,644,004 | 31,649,908 | ||||||||||||||
Denominator for dilutive income per share - Diluted | 31,513,297 | 31,644,004 | ||||||||||||||
Net income per share attributable to parent company’s common shareholders – Basic | $ | 0.14 | $ | 0.18 | ||||||||||||
Net income per share attributable to parent company’s common shareholders – Diluted | $ | 0.14 | $ | 0.18 | ||||||||||||
Net income per share attributable to parent company’s common shareholders - Basic | $ | 0.05 | $ | 0.14 | ||||||||||||
Net income per share attributable to parent company’s common shareholders - Diluted | $ | 0.05 | $ | 0.14 |
As of March 31, 20182019 and 2017,2018, the exercise prices for 112,500 shares and 90,000112,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended March 31, 20182019 and 2017,2018, respectively, and these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
Significant concentrations |
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account,"account", which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange for settlement of such "current account" transactions without pre-approval. However, pursuant to applicable regulations, foreign-invested enterprisesRegulations in China may paythe PRC currently permit payment of dividends of a PRC company only out of their accumulated profits if any,as determined in accordance with theaccounting standards and regulations in China. Under PRC law. In calculating accumulated profits, foreign investment enterprises in Chinalaw, China-based subsidiaries are required to allocateset aside at least 10% of their annual net incomeafter-tax profit based on PRC accounting standards each year if any, to fund certain reserve funds, including mandated employee benefits funds, unless thesetheir general reserves have reacheduntil the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the registered capitaldiscretion of the enterprises.their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
Transactions other than those that fall under the "current account" and that involve conversion of RMB into foreign currency are classified as "capital account" transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions require prior approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as USD, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the PRC, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s PRC subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
The Company grants credit to its customers in the ordinary course of its business, including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Jinjie and Jingzhou Yude, which are related parties of the Company. The Company’s customers are mostly located in the PRC.
During the three months ended March 31, 2019, the Company’s five largest customers accounted for 44.0% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 18.1%. As of March 31, 2019, approximately 6.2% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
During the three months ended March 31, 2018, the Company’s five largest customers accounted for 41.9% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 18.9%. As of March 31, 2018, approximately 4.8% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
During the three months ended March 31, 2017, the Company’s five largest customers accounted for 40.4% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 12.9%. As of March 31, 2017, approximately 5.1% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
Related party transactions and balances |
Related party transactions are as follows (figures are in thousands of USD):
Related sales
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Merchandise sold to related parties | $ | 10,846 | $ | 9,538 | $ | 12,836 | $ | 10,846 | ||||||||
Materials and others sold to related parties | 461 | 446 | ||||||||||||||
Rental income obtained from related parties | 102 | 14 | 80 | 102 | ||||||||||||
Materials and others sold to related parties | 446 | 300 | ||||||||||||||
Total | $ | 11,394 | $ | 9,852 | $ | 13,377 | $ | 11,394 |
Related purchases
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Materials purchased from related parties | $ | 8,249 | $ | 7,363 | ||||
Equipment purchased from related parties | 1,248 | 3,012 | ||||||
Others purchased from related parties | 49 | 267 | ||||||
Total | $ | 9,546 | $ | 10,642 |
Loan transaction to a related party
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Related party loan | $ | - | $ | 29,044 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Materials purchased from related parties | $ | 5,504 | $ | 8,249 | ||||
Equipment purchased from related parties | 760 | 1,248 | ||||||
Others purchased from related parties | 11 | 49 | ||||||
Total | $ | 6,275 | $ | 9,546 |
Related receivables
March 31, 2018 | December 31, 2017 | |||||||
Accounts and notes receivable from related parties | $ | 22,661 | $ | 19,086 |
March 31, 2019 | December 31, 2018 | |||||||
Accounts and notes receivable from related parties | $ | 21,701 | $ | 18,825 |
Related advances and loan balance
March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Advance payments for property, plant and equipment to related parties | $ | 9,244 | $ | 5,264 | $ | 3,819 | $ | 8,723 | ||||||||
Advance payments and others to related parties | 1,068 | 20,841 | 1,100 | 1,281 | ||||||||||||
Total | $ | 10,312 | $ | 26,105 | $ | 4,919 | $ | 10,004 |
Related payables
March 31, 2018 | December 31, 2017 | |||||||
Accounts and notes payable | $ | 7,544 | $ | 7,168 |
March 31, 2019 | December 31, 2018 | |||||||
Accounts and notes payable | $ | 5,668 | $ | 4,477 |
These transactions were consummated under similar terms as those with the Company's third party customers and suppliers.
As of May 10, 2018,9, 2019, Hanlin Chen, the Company’s Chairman, owns 56.4% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
Commitments and contingencies |
Legal proceedings
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu, Arthur Wong, Guangxun Xu and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. Management expects the impact of the suit on the Company’s consolidated financial statements to be immaterial.
Other than as described above, (a) the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition,proceedings and (b) no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of March 31, 20182019 (figures are in thousands of USD):
Payment obligations by period | Payment obligations by period | |||||||||||||||||||||||||||||||||||||||||||
2018 (1) | 2019 | 2020 | 2021 | Thereafter | Total | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
Obligations for investment contracts(1) | $ | 9,351 | $ | 3,626 | $ | 4,835 | $ | - | $ | - | $ | 17,812 | $ | 10,990 | $ | - | $ | - | $ | - | $ | 10,990 | ||||||||||||||||||||||
Obligations for purchasing and service agreements | 22,483 | 11,540 | - | - | - | 34,023 | 30,558 | 3,894 | - | - | 34,452 | |||||||||||||||||||||||||||||||||
Total | $ | 31,834 | $ | 15,166 | $ | 4,835 | $ | - | $ | - | $ | 51,835 | $ | 41,548 | $ | 3,894 | $ | - | $ | - | $ | 45,442 |
(1) | In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million, equivalent to approximately
In March 2018, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”. Hubei Henglong has committed to make |
Off-balance sheet arrangements |
As of March 31, 20182019 and December 31, 2017,2018, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
On April 27, 2018, Hubei Henglong entered into a joint venture contract (the “JV Contract”) with KYB (China) Investment Co., Ltd. (“KYB China”), pursuant to which the parties will establish a joint venture company, Hubei Henglong KYB Automobile Electric Steering System Co., Ltd. (the “JV Company”) under the laws of the People’s Republic of China, for the purpose of manufacturing and sales of automotive electric steering systems (“EPS”) and other automotive parts.
Pursuant to the JV Contract, the total investment amount of the JV Company is RMB 960 million and its registered capital is RMB 320 million. Hubei Henglong and KYB China will contribute RMB 213.12 million and RMB 106.88 million to JV Company, respectively, and they will make such capital payments within ninety days from the establishment date of the JV Company (the “Establishment Date”). If a party fails to pay its due capital contribution within thirty days after the expiration of the 90-day period, the other party shall be entitled to terminate the JV Contract unilaterally or pay the unpaid part of the contribution.
After the parties have paid their respective capital contributions to the JV Company, the JV Company will be owned 66.6% and 33.4% by Hubei Henglong and KYB China, respectively.
Segment reporting |
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2018 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for interinter- segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of March 31, 2019, the Company had 13 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis). The other seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of intelligent automotive technology (Jingzhou Qingyan).
As of March 31, 2018, the Company had 12 product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after salesafter-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of intelligent automotive technology (Jingzhou Qingyan). Since the revenues, net income and net assets of these six sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.”
As of March 31, 2017, the Company had 11 product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other six sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), and manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the revenues, net income and net assets of these seven sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.”
The Company’s product sector information for the three months ended March 31, 20182019 and 2017,2018, is as follows (figures are in thousands of USD):
Net Product Sales | Net Income (Loss) | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Henglong | $ | 40,964 | $ | 68,896 | $ | (2,121 | ) | $ | (312 | ) | ||||||
Jiulong | 22,122 | 27,445 | 1,168 | 455 | ||||||||||||
Shenyang | 4,895 | 6,348 | (299 | ) | (618 | ) | ||||||||||
Wuhu | 6,998 | 4,636 | (175 | ) | (397 | ) | ||||||||||
Hubei Henglong | 28,175 | 33,393 | 1,372 | 3,089 | ||||||||||||
Henglong KYB | 19,954 | - | (396 | ) | - | |||||||||||
Other Entities | 17,296 | 17,898 | 1,455 | 794 | ||||||||||||
Total Segments | 140,404 | 158,616 | 1,004 | 3,011 | ||||||||||||
Corporate | - | - | (301 | ) | 564 | |||||||||||
Eliminations | (31,211 | ) | (24,598 | ) | 521 | 457 | ||||||||||
Total | $ | 109,193 | $ | 134,018 | $ | 1,224 | $ | 4,032 |
Net Product Sales | Net Income (Loss) | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Henglong | $ | 68,896 | $ | 70,834 | $ | (312 | ) | $ | 3,319 | |||||||
Jiulong | 27,445 | 22,287 | 455 | 1,390 | ||||||||||||
Shenyang | 6,348 | 8003 | (618 | ) | 462 | |||||||||||
Wuhu | 4,636 | 6,108 | (397 | ) | (70 | ) | ||||||||||
Hubei Henglong | 33,393 | 18,134 | 3,089 | 238 | ||||||||||||
Other Sectors | 17,898 | 12,711 | 794 | 642 | ||||||||||||
Total Segments | 158,616 | 138,077 | 3,011 | 5,981 | ||||||||||||
Corporate | - | - | 564 | (168 | ) | |||||||||||
Eliminations | (24,598 | ) | (18,769 | ) | 457 | 125 | ||||||||||
Total | $ | 134,018 | $ | 119,308 | $ | 4,032 | $ | 5,938 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relations with more than sixty vehicle manufacturers, including JAC Motors, Changan Automobile Group, BAIC Group, SAIC Group and Dongfeng Auto Group, the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd., the largest state owned car manufacturer in China; BYD Auto Co., Ltd. and Zhejiang Geely Automobile Co., Ltd., the largest privately owned car manufacturers in China. The PRC-based joint ventures of General Motors (GM), Volkswagen, Citroen and Chrysler North America are all key customers. Starting in 2008, the Company has supplied power steering pumps and power steering gear to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gears to Chrysler North America since 2009.
Most of the Company’s production and research and development institutes are located in China. The Company has approximately 3,000 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing work to improve its operations and business structure and achieve profitable growth.
Corporate Structure
The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016.
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
· | It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and |
· | Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations. |
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance Sheet Caption | Critical Estimate Item | Nature of Estimates Required | Assumptions/Approaches Used | Key Factors | ||||
Accrued liabilities and other long-term liabilities
| Warranty obligations
| Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs. | The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers. | ·OEM sourcing ·OEM policy decisions regarding warranty claims
| ||||
Property, plant and equipment, intangible assets and other long-term assets | Valuation of long- lived assets and investments
| The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines. | The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. | ·Future production estimates ·Customer preferences and decisions | ||||
Accounts receivable | Allowance for doubtful accounts | The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts. | The Company estimates the collectability of the receivables based on the future cash flows using historical experiences. | ·Customer credit |
Balance Sheet Caption | Critical Estimate Item | Nature of Estimates Required | Assumptions/Approaches Used | Key Factors |
Inventory
| Write-down of inventory
| The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories. | The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. | ·Future production estimates ·Customer preferences and decisions |
Deferred income taxes
| Recoverability of deferred tax assets
| The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction. | The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations. | ·Tax law changes ·Variances in future projected profitability, including by taxing entity
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In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above, including provision of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this Report.report.
Results of Operations
Results of Operations— - Three Months Ended March 31, 20182019 and 20172018
Net Product Sales | Cost of Products Sold | |||||||||||||||||||||||||||||||
(in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | 2018 | 2017 | Change | |||||||||||||||||||||||||||
Henglong | $ | 68,896 | $ | 70,834 | $ | (1,938 | ) | -2.7 | % | $ | 62,047 | $ | 61,462 | $ | 585 | 1.0 | % | |||||||||||||||
Jiulong | 27,445 | 22,287 | 5,158 | 23.1 | 24,535 | 19,100 | 5,435 | 28.5 | ||||||||||||||||||||||||
Shenyang | 6,348 | 8,003 | (1,655 | ) | -20.7 | 6,306 | 6,707 | (401 | ) | -6.0 | ||||||||||||||||||||||
Wuhu | 4,636 | 6,108 | (1,472 | ) | -24.1 | 4,351 | 5,687 | (1,336 | ) | -23.5 | ||||||||||||||||||||||
Hubei Henglong | 33,393 | 18,134 | 15,259 | 84.1 | 25,025 | 12,870 | 12,155 | 94.4 | ||||||||||||||||||||||||
Other Sectors | 17,898 | 12,711 | 5,187 | 40.8 | 14,985 | 10,746 | 4,239 | 39.4 | ||||||||||||||||||||||||
Total Segments | 158,616 | 138,077 | 20,539 | 14.9 | 137,249 | 116,572 | 20,677 | 17.7 | ||||||||||||||||||||||||
Elimination | (24,598 | ) | (18,769 | ) | (5,829 | ) | 31.1 | (24,870 | ) | (18,893 | ) | (5,977 | ) | 31.6 | ||||||||||||||||||
Total | $ | 134,018 | $ | 119,308 | $ | 14,710 | 12.3 | % | $ | 112,379 | $ | 97,679 | $ | 14,700 | 15.0 | % |
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | Change | Change% | |||||||||||||
Net product sales | $ | 109,193 | $ | 134,018 | $ | (24,825 | ) | -18.5 | % | |||||||
Cost of products sold | 95,148 | 112,379 | (17,231 | ) | -15.3 | |||||||||||
Net gain on other sales | 1,269 | 1,513 | (244 | ) | -16.1 | |||||||||||
Selling expenses | 3,085 | 5,827 | (2,742 | ) | -47.1 | |||||||||||
General and administrative expenses | 4,590 | 4,424 | 166 | 3.8 | ||||||||||||
Research and development expenses | 6,602 | 8,307 | (1,705 | ) | -20.5 | |||||||||||
Operating income | 1,037 | 4,594 | (3,557 | ) | -77.4 | |||||||||||
Other income, net | 1,407 | 621 | 786 | 126.6 | ||||||||||||
Interest expense | (568 | ) | (415 | ) | (153 | ) | 36.9 | |||||||||
Financial expense, net | (665 | ) | (765 | ) | 100 | -13.1 | ||||||||||
Income before income tax expenses and equity in earnings of affiliated companies | 1,211 | 4,035 | (2,824 | ) | -70.0 | |||||||||||
Income taxes | 198 | 588 | (390 | ) | -66.3 | |||||||||||
Net income | 1,224 | 4,032 | (2,808 | ) | -69.6 | |||||||||||
Net loss attributable to non-controlling interest | (243 | ) | (280 | ) | 37 | -13.2 | ||||||||||
Net income attributable to parent company’s common shareholders | 1,467 | 4,312 | (2,845 | ) | -66.0 | % |
Net Product Sales and Cost of Products Sold
Net Product Sales | Cost of Products Sold | |||||||||||||||||||||||||||||||
(in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
Henglong | $ | 40,964 | $ | 68,896 | $ | (27,932 | ) | -40.5 | % | $ | 40,742 | $ | 62,047 | $ | (21,305 | ) | -34.3 | % | ||||||||||||||
Jiulong | 22,122 | 27,445 | (5,323 | ) | -19.4 | 18,837 | 24,535 | (5,698 | ) | -23.2 | ||||||||||||||||||||||
Shenyang | 4,895 | 6,348 | (1,453 | ) | -22.9 | 4,546 | 6,306 | (1,760 | ) | -27.9 | ||||||||||||||||||||||
Wuhu | 6,998 | 4,636 | 2,362 | 50.9 | 6,745 | 4,351 | 2,394 | 55.0 | ||||||||||||||||||||||||
Hubei Henglong | 28,175 | 33,393 | (5,218 | ) | -15.6 | 21,920 | 25,025 | (3,105 | ) | -12.4 | ||||||||||||||||||||||
Henglong KYB | 19,954 | - | 19,954 | - | 19,130 | - | 19,130 | - | ||||||||||||||||||||||||
Other Entities | 17,296 | 17,898 | (602 | ) | -3.4 | 14,624 | 14,985 | (361 | ) | -2.4 | ||||||||||||||||||||||
Total Segments | 140,404 | 158,616 | (18,212 | ) | -11.5 | 126,544 | 137,249 | (10,705 | ) | -7.8 | ||||||||||||||||||||||
Elimination | (31,211 | ) | (24,598 | ) | (6,613 | ) | 26.9 | (31,396 | ) | (24,870 | ) | (6,526 | ) | 26.2 | ||||||||||||||||||
Total | $ | 109,193 | $ | 134,018 | $ | (24,825 | ) | -18.5 | % | $ | 95,148 | $ | 112,379 | $ | (17,231 | ) | -15.3 | % |
Net Product Sales
Net product sales were $134.0$109.2 million for the three months ended March 31, 2018,2019, compared to $119.3$134.0 million for the same period in 2017,2018, representing an increasea decrease of $14.7$24.8 million, or 12.3%18.5%.
The Company’s net product sales were affected by the change in the product mix. Net sales of traditional steering products and parts were $109.0$87.0 million for the three months ended March 31, 2018,2019, compared to $89.5$109.0 million for the same period in 2017,2018, representing an increasea decrease of $19.5$22.0 million, or 21.8%20.2%. Net sales of EPSelectric power steering (“EPS”) were $25.0$22.2 million for the three months ended March 31, 2018, compared to $29.82019 and $25.0 million for the same period in 2017,2018, representing a decrease of $4.8$2.8 million, or 16.1%11.2%. As a percentage of net sales, sales of EPS were 20.3% for the three months ended March 31, 2019, compared to 18.7% for the same period in 2018.
The decrease in net product sales was due to the effects of three major factors: i) the decrease in sales volume led to a sales decrease of $8.6 million due to the soft demand in the China domestic brand automobile market; ii) the decrease in average selling price of steering gears led to a sales decrease of $7.5 million; and iii) the depreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year, resulting in a sales decrease of $8.7 million.
Further analysis by segment (before elimination) is as follows:
Further analysis by segment (before elimination) is as follows:
Cost of Products Sold
For the three months ended March 31, 2019, the cost of products sold was $95.1 million, compared to $112.4 million for the same period of 2018, representing a decrease of $17.3 million, or 15.4%. Hubei Henglong’s products are mainly sold to Chrysler and Ford. The significant increasedecrease in thecost of sales of Hubei Henglong was mainly due to the new products developed for Chrysler and Ford that began mass production ateffect of the end of 2017. An increasefollowing major factors: i) the decrease in sales volumes ledwith a cost of sales decrease of $5.3 million; ii) the decrease in unit cost with a cost of sales decrease of $4.4 million; and iii) the depreciation of the RMB against the U.S. dollar with a cost of sales decrease of $7.6 million. Further analysis is as follows:
• | Cost of products sold for Jiulong was $18.8 million for the three months ended March 31, 2019, compared to $24.5 million for the same period of 2018, representing a decrease of $5.7 million, or 23.3%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.7 million, a decrease in unit cost resulting in a cost of sales decrease of $2.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.4 million. |
Cost of Products Sold
For the three months ended March 31, 2018, the cost of products sold was $112.4 million, compared to $97.7 million for the same period of 2017, representing an increase of $14.7 million, or 15.0%. The increaseresulting in the cost of products sold was mainly due to the effect of an increase in sales volumes which led to a cost of products soldsales increase of $5.1$2.6 million, and an increasea decrease in unit cost which led toresulting in a cost of products sold increasesales decrease of $3.9 million. The$4.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led toresulting in a cost of products sold increasesales decrease of $5.7$0.4 million.
Further analysis is as follows:
Gross margin was $15.0 million12.9% for the three months ended March 31, 2018,2019, compared to $10.7 million16.1% for the same period of 2017,2018, representing an increasea decrease of $4.3 million, or 40.2%3.2%, primarilymainly due to the increasedecrease in sales volumes of Jielong.
Gross margin was 16.1%selling price and the changes in the product mix for the three months ended March 31, 2018, compared to 18.1% for the same period of 2017, representing a decrease of 2.0%, mainly due to the changes in the product mix and the increase in the cost of raw materials for the three months ended March 31, 2018.
Gain on Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the three months ended March 31, 2018, gain on other sales amounted to $1.5 million, as compared to $0.8 million for the three months ended March 31, 2017, representing an increase of $0.7 million, or 87.5%. The increase was mainly due to increased sales volume of materials.2019.
Selling Expenses
Selling expenses were $5.8$3.1 million for the three months ended March 31, 2018,2019, as compared to $4.1$5.8 million for the same period of 2017,2018, representing an increasea decrease of $1.7$2.7 million, or 41.5%46.6%, which was mainly due to increaseddecreased logistics fees as a result of decreased sales transactions and marketing expenses related to the increase in revenue.lower priced logistics suppliers.
General and Administrative Expenses
General and administrative expenses were $4.4$4.6 million for the three months ended March 31, 2018, substantially consistent with2019, as compared to $4.4 million for the same period of 2017.2018, representing an increase of $0.2 million, or 4.5%, which was mainly due to the increased payroll expenses.
Research and Development Expenses
Research and development expenses were $6.6 million for the three months ended March 31, 2019, as compared to $8.3 million for the three months ended March 31, 2018, as comparedrepresenting a decrease of $1.7 million, or 20.5%, which was mainly due to $6.8cost control on research and development expenditures.
Other Income, Net
Other income, net was $1.4 million for the three months ended March 31, 2017, representing an increase of $1.5 million, or 22.1%, which was mainly due to increased expenditures on R&D activities for EPS products.
The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive basis. In the past several years, the Company has continued to purchase advanced manufacturing equipment for newly developed products, hiring senior technicians and actively seeking external technical support.
Income from Operations
Income from operations was $4.6 million for the three months ended March 31, 2018,2019, compared to $7.2 million for the three months ended March 31, 2017, representing a decrease of $2.6 million, or 36.1%, including an increase of $0.7 million in gain on other sales and an increase of $3.3 million in operating expenses.
Other Income/(Expense), Net
Other income, net wasof $0.6 million for the three months ended March 31, 2018, compared to other expense, net of $0.3 million for the three months ended March 31, 2017, representing an increase of $0.9$0.8 million, primarily as a result ofdue to an increase in the unspecific purpose subsidies being recognized in the first quarter of 2018.2019.
Interest Expense
Interest expense was $0.6 million for the three months ended March 31, 2019, compared to interest expense of $0.4 million for the three months ended March 31, 2018, compared to interest expense of $0.2 million for the three months ended March 31, 2017, representing an increase of $0.2 million, primarily due to the new bank loans borrowed in 20182019 and higher interest rates.
Financial (Expense)/Income, Net
Financial expense, net, was $0.8 million for the three months ended March 31, 2018, compared to financial income, net, of $0.3 million for the three months ended March 31, 2017, representing an increase of $1.1 million, which was mainly due to the increased foreign exchange loss related to the depreciation of the U.S. dollar in the first quarter of 2018 because of the Company’s increased revenue from customers located in the United States.
Income Before Income Tax Expenses and Equity in Earnings of Affiliated Companies
Income before income tax expenses and equity in earnings of affiliated companies was $4.0 million for the three months ended March 31, 2018, compared to $7.1 million for the three months ended March 31, 2017, representing a decrease of $3.1 million, or 43.7%, which was mainly due to a decrease in operating income of $2.6 million, an increase in other income of $0.9 million, an increase in interest expense of $0.2 million and an increase in financial expense of $1.1 million.
Income Taxes
Income tax expense was $0.6$0.2 million for the three months ended March 31, 2018, compared to $1.22019, consistent with $0.6 million of income tax expense for the three months ended March 31, 2017, representing a decrease of $0.6 million, or 50.0%.2018. The income before income tax decreased to $4.0$1.2 million for the three months ended March 31, 20182019 from $7.1$4.0 million for the same period in 20172018 and the effective tax rate decreasedincreased to 14.6%16.4% from 16.8%14.6% for the same period in 2017 primarily due to utilization of certain net operating losses for which a valuation allowance was provided in prior periods.2018.
Net Income
Net income was $4.0 million for the three months ended March 31, 2018, compared to net income of $5.9 million for the three months ended March 31, 2017, representing a decrease of $1.9 million, or 32.2%, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies of $3.1 million, a decrease in income tax of $0.6 million and an increase in equity in earnings of affiliated companies of $0.5 million.
Net (Loss)/IncomeLoss Attributable to Non-controlling Interests
Net loss attributable to non-controlling interests amounted to $0.2 million for the three months ended March 31, 2019, compared to $0.3 million for the three months ended March 31, 2018, as compared to net income attributable to non-controlling interests of $0.2 million for the three months ended March 31, 2017.2018.
The Company owns equity interests in nine non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. All of the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s consolidated financial statements as of March 31, 2018 and 2017, and the share of the income attributable to the holders of the non-controlling interests was presented as net income attributable to non-controlling interest.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $1.5 million for the three months ended March 31, 2019, compared to $4.3 million for the three months ended March 31, 2018, compared to net income attributable to parent company’s common shareholders of $5.7 million for the three months ended March 31, 2017, representing a decrease of $1.4$2.8 million, which was mainly due to a decrease in net income of $1.9 million and a decrease in net income attributable to non-controlling interests of $0.5$2.8 million.
Privatization Proposal
On August 2, 2017, the Company issued a press release announcing the appointment by the special committee (the “Special Committee”) of the Company’s board of directors (the “Board”) of Houlihan Lokey Capital, Inc. as its financial advisor and Kirkland & Ellis as its U.S. legal counsel in connection with its review and evaluation of the previously announced preliminary non-binding proposal letter that the Board received on May 14, 2017 from Mr. Hanlin Chen, the Chairman of the Board of the Company, relating to a possible “going private” transaction, as well as in connection with its review and evaluation of any other sale, merger, business combination or other corporate transaction, with Mr. Chen or any other party, and any other strategic alternatives.
As previously announced, Mr. Chen has submitted a preliminary non-binding proposal to the Board to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by Mr. Chen for $5.45 per share of common stock in cash. Mr. Chen and his affiliates currently beneficially own approximately 56.4% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The proposal is expressly conditioned on approval by a special committee of the Board comprised of independent directors and is subject to a non-waivable condition requiring approval by a majority vote of the Company’s unaffiliated stockholders. The Special Committee, consisting of Mr. Arthur Wong, Mr. Robert Tung and Mr. Guangxun Xu, is empowered to, and will be responsible for, among other things, investigating, evaluating, negotiating and making a recommendation to the Board with respect to the proposal. The Special Committee is also empowered to retain its own independent advisors to assist in the evaluation of the proposal and any alternative proposals.
The Board cautions the Company's shareholders, and others considering trading in its securities, that it has only received a proposal. No decision has been made with respect to the Company's response to the proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with Mr. Chen or any other transaction will be approved or consummated. The Company is not obligated to make, and does not at this time anticipate making, any further public statements about this matter or the activities of the special committee unless and until either the Company enters into a definitive agreement for a transaction or the special committee determines that no such transaction will be effected.
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of March 31, 2018,2019, the Company had cash and cash equivalents and short-term investments of $91.8$84.1 million, compared to $94.1$103.9 million as of December 31, 2017,2018, representing a decrease of $2.3$19.8 million, or 2.4%19.1%. Short-term investments included pledged short-term investments of $1.1 million and $2.0 million as of March 31, 2018 and December 31, 2017, respectively.
The Company had working capital (total current assets less total current liabilities) of $165.4$151.0 million as of March 31, 2018,2019, compared to $159.1$154.1 million as of December 31, 2017,2018, representing an increasea decrease of $6.3$3.1 million, or 4.0%2.0%.
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
The Company believes that, in view of its current cash position, the cash expected to be generated from the operations and funds available from bank borrowings as detailed in subsequent paragraphs will be sufficient to meet its working capital and capital expenditure requirements, including the repayment of bank loans, for at least twelve months commencing from the date of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banker’s acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay all existing borrowings under such facilities within one year. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such one year facilities can be extended for another year.
The Company had short-term loans of $63.2 million, long-term loans of $0.3$65.9 million (See Note 12)7) and bankers’ acceptances of $87.6$72.3 million (See Note 13)8) as of March 31, 2018.2019.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Owing to depreciation, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances will be reduced by approximately $13.2$12.0 million over the next 12 months. If the Company wishes to obtain the same amount of bank loans and banker's acceptances, it will have to provide additional mortgages of $13.2$12.0 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $9.4$8.4 million, which is 71.3%70.0%, the mortgage rate, of $13.2$12.0 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
Bank | Due Date | Amount Available(4) | Amount Used | Assessed Mortgage Value(5) | ||||||||||||
1. Comprehensive credit facilities | Hubei Bank | Nov-2019 | $ | 28,625 | $ | 7,789 | $ | 60,012 | ||||||||
2. Comprehensive credit facilities | Shanghai Pudong Development Bank (1) | Jan-2019 | 19,084 | 6,582 | 18,605 | |||||||||||
3. Comprehensive credit facilities | China CITIC Bank (1) | Oct-2018 | 81,900 | 39,257 | 15,795 | |||||||||||
China CITIC Bank | Jul-2019 | 2,863 | 2,863 | 5,881 | ||||||||||||
4. Comprehensive credit facilities | China Everbright Bank | Dec-2018 | 4,771 | 4,535 | 8,143 | |||||||||||
5. Comprehensive credit facilities | ICBC Macau | Nov-2018 | 25,167 | 20,000 | 25,278 | |||||||||||
6. Comprehensive credit facilities | Bank of China (1)(6) | Apr-2018 | 23,855 | 16,384 | - | |||||||||||
7. Comprehensive credit facilities | China Merchants Bank(1)(6) | Apr-2018 | 15,903 | 5,348 | - | |||||||||||
8. Comprehensive credit facilities | Taishin International Bank | Mar-2019 | 10,000 | 9,858 | 13,331 | |||||||||||
Total | $ | 212,168 | $ | 112,616 | (2) | $ | 147,045 | (3) |
Bank Arrangements
As of March 31, 2018,2019, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):
Bank | Due Date | Amount Available(4) | Amount Used(2) | Assessed Mortgage Value(3) | |||||||||||
1. Comprehensive credit facilities | Hubei Bank | Nov-2019 | $ | 26,732 | $ | 18,808 | $ | 56,043 | |||||||
2. Comprehensive credit facilities | Shanghai Pudong Development Bank(1) | Jan-2019 | 16,968 | 16,968 | 17,374 | ||||||||||
3. Comprehensive credit facilities | China CITIC Bank | Jul-2019 | 3,416 | 2,672 | 5,492 | ||||||||||
China CITIC Bank(1) | Oct-2019 | 75,741 | 39,452 | 14,750 | |||||||||||
4. Comprehensive credit facilities | China Everbright Bank | Dec-2019 | 4,455 | 3,843 | 7,604 | ||||||||||
5. Comprehensive credit facilities | Bank of Chongqing | Sep-2021 | 743 | 554 | 2,320 | ||||||||||
6. Comprehensive credit facilities | Bank of China(1) | Sep-2019 | 19,455 | 9,749 | - | ||||||||||
7. Comprehensive credit facilities | Hankou Bank(1) | Nov-2019 | 14,850 | 1,297 | - | ||||||||||
8. Comprehensive credit facilities | China Merchants Bank(1) | Mar-2020 | 22,277 | 7,802 | - | ||||||||||
9. Comprehensive credit facilities | Agriculture Bank of China | Mar-2020 | 1,040 | 149 | 4,126 | ||||||||||
Total | $ | 185,677 | $ | 101,294 | $ | 107,709 |
(1) |
(2) | “Amount |
(3) | In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of March 31, |
(4) | |
(5) | The pledged cash deposits were not included in the assessed mortgage value. |
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
The Company’s loan terms range from six7 months to 36 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Equipment with an assessed value of approximately $60.0$56.0 million as security for its revolving comprehensive credit facility with Hubei Bank.
2. Land use rights and buildings with an assessed value of approximately $18.6$17.4 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
3. Land use rights and buildings with an assessed value of approximately $15.8$14.8 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.
4. Land use rights and buildings with an assessed value of approximately $5.9$5.5 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.
5. Land use rights and buildings with an assessed value of approximately $8.1$7.6 million as security for its comprehensive credit facility with China Everbright Bank.
6. On April 20, 2017, the Company entered into a Credit AgreementLand use rights and buildings with ICBC Macau to obtain a non-revolvingan assessed value of approximately $2.3 million as security for its comprehensive credit facility in the amountwith Bank of $20.0 million, the “ICBC Macau Credit Facility”. The ICBC Macau Credit Facility expired on May 12, 2018 and was extended to November 11, 2018. As security for the ICBC Macau Credit Facility, the Company was required to provide ICBC Macau with a standby letter of credit for a total amount of not less than $25.3 million if the credit facility is fully drawn.Chongqing.
On May 5, 2017, the Company drew down the full amount of $20.0 million under the ICBC Macau Credit Facility and provided a standby letter of credit issued by ICBC Jingzhou for an amount of $25.3 million in favor of ICBC Macau. The standby letter of credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 158.9 million, equivalent to approximately $25.3 million. The Company also paid an arrangement fee of $0.04 million to ICBC Jingzhou.
7. On April 25, 2017, Great Genesis entered into aLand use rights and buildings with an assessed value of approximately $4.1 million as security for its comprehensive credit facility agreement with TaishinAgricultural Bank to obtain a non-revolving credit facility in the amount of $10.0 million, the “Taishin Bank Credit Facility”. The Taishin Bank Credit Facility expired on April 25, 2018 and was extended to March 20, 2019. The Taishin Bank Credit Facility has an annual interest rate of 2.7%. Interest is paid quarterly and the principal repayment is payable at maturity. As security for the Taishin Bank Credit Facility, the Company’s subsidiary Henglong is required to provide Taishin Bank with a standby letter of credit for a total amount of not less than $10.0 million if the Taishin Bank Credit Facility is fully drawn.China.
On April 28, 2017, Great Genesis drew down the full amount of $9.9 million under the Taishin Bank Credit FacilityShort-term and provided a standby letter of credit issued by China CITIC Bank Wuhan branch for an amount of $10.0 million in favor of Taishin Bank. Henglong’s standby letter of credit issued by China CITIC Bank Wuchang branch is collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.8 million, equivalent to approximately $12.7 million.
Cash Requirements
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments (in thousands of USD). The Company has not included information on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closely reflecting the Company’s levels of production, and are not long-term in nature (being less than three months in length).
Payment Due Dates | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 Years | ||||||||||||||||
Short-term loan including interest payable | $ | 64,226 | $ | 63,883 | $ | 343 | $ | - | $ | - | ||||||||||
Notes payable(1) | 87,616 | 87,616 | - | - | - | |||||||||||||||
Taxes payable and withholding tax liabilities due to U.S. Tax Reform | 39,516 | 3,161 | 6,322 | 6,322 | 23,711 | |||||||||||||||
Obligation for investment contract(2) | 17,812 | 9,351 | 3,626 | 4,835 | - | |||||||||||||||
Other contractual purchase commitments, including service agreements | 34,023 | 22,483 | 11,540 | - | - | |||||||||||||||
Total | $ | 243,193 | $ | 186,494 | $ | 21,831 | $ | 11,157 | $ | 23,711 |
|
Short-term Bank and GovernmentLong-term Loans
The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of March 31, 20182019 (figures are in thousands of USD).
Bank Government | Purpose | Borrowing Date | Borrowing Term (Months) | Annual Interest Rate | Date of Interest Payment | Due Date | Amount Payable on Due Date | Purpose | Borrowing Date | Borrowing Term (Months) | Annual Interest Rate | Date of Interest Payment | Due Date | Amount Payable on Due Date | ||||||||||||||||||||||||||
Taishin International Bank (1) | Working Capital | Apr 28, 2017 | 12 | 2.65 | % | Pay quarterly | Apr 23, 2018 | 9,858 | ||||||||||||||||||||||||||||||||
ICBC Macau (2) | Working Capital | May 5, 2017 | 12 | Libor 3 months +1.30 | % | Pay quarterly | May 4, 2018 | 20,000 | ||||||||||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Aug 17, 2017 | 12 | 1.50 | % | Pay in arrear | Aug 16, 2018 | 3,181 | ||||||||||||||||||||||||||||||||
Bank of China (Jingzhou Shashi) | Working Capital | Sep 28, 2017 | 12 | 4.57 | % | Pay monthly | Sep 27, 2018 | 7,952 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Nov 1, 2017 | 12 | 5.22 | % | Pay monthly | Nov 1, 2018 | 2,385 | ||||||||||||||||||||||||||||||||
Wuhu Municipal Science and Technology Bureau | Working Capital | Nov 13, 2017 | 36 | 4.75 | % | Pay quarterly | Nov 12, 2020 | 318 | Working Capital | Nov 13, 2017 | 36 | 4.75 | % | Pay quarterly | Nov 12, 2020 | 297 | ||||||||||||||||||||||||
Bank of China (Jingzhou Shashi) | Working Capital | Jan 4, 2018 | 6 | 3.50 | % | Pay in arrear | Jun 28, 2018 | 3,817 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 25, 2018 | 6 | 5.02 | % | Pay in arrear | Jul 23, 2018 | 4,697 | Working Capital | Aug 10, 2018 | 12 | 3.93 | % | Pay in arrear | Aug 9, 2019 | 1,713 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 26, 2018 | 6 | 5.02 | % | Pay in arrear | Jul 24, 2018 | 3,287 | Working Capital | Aug 10, 2018 | 12 | 3.84 | % | Pay in arrear | Aug 9, 2019 | 4,002 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 26, 2018 | 6 | 5.02 | % | Pay in arrear | Jul 24, 2018 | 939 | Working Capital | Aug 21, 2018 | 12 | 3.63 | % | Pay in arrear | Aug 20, 2019 | 3,438 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 29, 2018 | 6 | 5.13 | % | Pay in arrear | Jul 26, 2018 | 2,972 | Working Capital | Aug 21, 2018 | 12 | 3.98 | % | Pay in arrear | Aug 20, 2019 | 7,138 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 30, 2018 | 6 | 5.79 | % | Pay in arrear | Jul 26, 2018 | 2,498 | Working Capital | Aug 22, 2018 | 12 | 3.98 | % | Pay in arrear | Aug 20, 2019 | 3,855 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jan 31, 2018 | 12 | 5.22 | % | Pay monthly | Jan 31, 2019 | 1,590 | Working Capital | Aug 23, 2018 | 12 | 3.79 | % | Pay in arrear | Aug 22, 2019 | 2,861 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Sep 6, 2018 | 12 | 4.01 | % | Pay in arrear | Sep 5, 2019 | 1,128 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Sep 7, 2018 | 12 | 3.95 | % | Pay in arrear | Sep 6, 2019 | 857 | ||||||||||||||||||||||||||||||||
Shanghai Pudong Development Bank | Working Capital | Sep 21, 2018 | 10 | 5.23 | % | Pay monthly | Jul 20, 2019 | 4,455 | ||||||||||||||||||||||||||||||||
Shanghai Pudong Development Bank | Working Capital | Sep 21, 2018 | 10 | 5.23 | % | Pay monthly | Jul 20, 2019 | 1,931 | ||||||||||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Sep 27, 2018 | 9 | 3.48 | % | Pay in arrear | Jun 28, 2019 | 7,426 | ||||||||||||||||||||||||||||||||
Hubei Bank | Working Capital | Oct 19, 2018 | 12 | 5.22 | % | Pay monthly | Oct 19, 2019 | 2,970 | ||||||||||||||||||||||||||||||||
Bank of Chongqing | Working Capital | Oct 29, 2018 | 12 | 5.66 | % | Pay monthly | Oct 28, 2019 | 206 | ||||||||||||||||||||||||||||||||
Bank of China | Working Capital | Nov 23, 2018 | 12 | 4.57 | % | Pay monthly | Nov 22, 2019 | 2,970 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Nov 28, 2018 | 7 | 5.22 | % | Pay monthly | Jul 8, 2019 | 2,228 | ||||||||||||||||||||||||||||||||
Bank of China | Working Capital | Dec 19, 2018 | 12 | 4.57 | % | Pay monthly | Dec 18, 2019 | 2,970 | ||||||||||||||||||||||||||||||||
Bank of Chongqing | Working Capital | Dec 28, 2018 | 12 | 5.66 | % | Pay monthly | Dec 24, 2019 | 97 | ||||||||||||||||||||||||||||||||
Bank of Chongqing | Working Capital | Jan 30, 2019 | 12 | 5.66 | % | Pay monthly | Jan 29, 2020 | 81 | ||||||||||||||||||||||||||||||||
Bank of Chongqing | Working Capital | Mar 5, 2019 | 12 | 5.66 | % | Pay monthly | Mar 3, 2020 | 170 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 9, 2020 | 1,076 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 11, 2020 | 2,094 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.62 | % | Pay in arrear | Mar 13, 2020 | 4,154 | ||||||||||||||||||||||||||||||||
China Merchants Bank | Working Capital | Mar 18, 2019 | 12 | 5.00 | % | Pay monthly | Mar 18, 2020 | 6,757 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar 26, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 24, 2020 | 1,162 | ||||||||||||||||||||||||||||||||
Agriculture Bank of China | Working Capital | Mar 27, 2019 | 12 | 4.35 | % | Pay monthly | Mar 26, 2020 | 149 | ||||||||||||||||||||||||||||||||
Total | $ | 63,494 | $ | 66,185 |
The Company must use the loans for the purpose described in the table. For the bank loans of $4.5 million and $1.9 million, respectively, with Shanghai Pudong Development Bank, the bank loan of $8.0$6.8 million with China Merchants Bank, the bank loan of $0.1 million with Agriculture Bank of China, (Jingzhou Shashi), the bank loansloan of $ 2.4$3.0 million and $1.6with Hubei Bank, the bank loan of $2.2 million respectively, with China CITIC Bank, and the government loan of $0.3 million with Wuhu Municipal Science and Technology Bureau, if the Company fails to do so, it will be charged a penalty interest at 50% to 100% of the specified loan rate listed in the table above or early repayment will be triggered. Except for the loan granted by ICBC Macau as disclosed in the section “Capital Source” above, theThe Company has to pay interest at the interest rate described in the table on the 20th of each month quarter or semiannual period,quarter, as applicable. If the Company fails to do so, it will be charged compound interest at the specified rate in the above table. The Company has to repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged a penalty interest at 30% toof the specified loan rate for bank loans with Bank of China, and penalty interest at 50% of the specified loan rate.rate for bank loans with other banks.
Management believes that theThe Company complied with such financial covenants as of March 31, 2018,2019, and believes it will continue to comply with them.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 20182019 (figures are in thousands of USD):
Purpose | Term (Month) | Due Date | Amount Payable on Due Date | Term (Months) | Due Date | Amount Payable on Due Date | ||||||||||||
Working Capital | 6 | Apr. 2018 | 17,114 | 6 | Apr. 2019 | $ | 14,783 | |||||||||||
Working Capital | 6 | May 2018 | 15,475 | 6 | May 2019 | 11,945 | ||||||||||||
Working Capital | 6 | Jun. 2018 | 12,342 | 6 | Jun. 2019 | 14,662 | ||||||||||||
Working Capital | 6 | Jul. 2018 | 18,865 | 6 | Jul. 2019 | 11,859 | ||||||||||||
Working Capital | 6 | Aug. 2018 | 1,207 | 6 | Aug. 2019 | 10,856 | ||||||||||||
Working Capital | 6 | Sep. 2018 | 22,613 | 6 | Sep. 2019 | 8,152 | ||||||||||||
Total (See Note 13) | $ | 87,616 | ||||||||||||||||
Total (See Note 8) | $ | 72,257 |
(1) | The notes payable were repaid in full on their respective due dates. |
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash in the designated account of the bank on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged a penalty interest at 50% of the loan rate that is published by the People’s Bank of China for the same period. The Company complied with such financial covenants as of March 31, 2018,2019, and believes it will continue to comply with them.
Cash Flows
(a) | Operating Activities |
Net cash used in operating activities for the three months ended March 31, 20182019 was $7.4$18.2 million, compared with net cash provided byused in operating activities of $2.4$7.5 million for the same period of 2017,2018, representing a decreasean increase in net cash flowoutflow of $9.8$10.7 million, which was mainly due to the net effect of (1) the decrease in net income excluding non-cash items by $1.2$4.0 million and (2) the increase in cash outflows from movements of operating assets and liabilities by $8.6 million. The increase in cash outflows was primarily due to the offsetting effect of (1) the increase in cash inflows due to the movement of pledged deposits by $2.7 million, and (2) the increase in cash inflows due to the movement of taxes payable by $8.5 million, offset by (3) the decrease in cash inflows due to the movement of accounts and notes receivable by $1.9 million, (4) the increase in cash outflows due to the movement of inventories by $5.1 million, (5) the increase in cash outflows due to the movement of accrued expenses and other payables by $2.6 million and (6) the increase in cash outflows due to the movement of accounts and notes payable by $10.4$6.7 million.
(b) | Investing Activities |
Net cash provided byused in investing activities during the three months ended March 31, 20182019 was $30.6$10.0 million, as compared to net cash usedprovided by investing activities of $29.8$30.6 million for the same period of 2017,2018, representing an increase of cash inflowsoutflows by $60.4$40.7 million, which was mainly due to (1) a decrease in cash used in the loan to a related party by $29.0 million, (2) an increase in proceeds from maturities of short-term investments by $16.7 million, and (3) an increase in cash inflows due to the repayment of the loan to a related party by $20.4 million offset by (4) an increase in purchases of property, plant and equipment of $4.9 million and (5)(2) an increase in cash used in purchases ofpayment to purchase short-term investments of $1.4by $14.1 million.
(c) | Financing Activities |
Net cash used inprovided by financing activities for the three months ended March 31, 20182019 was $11.4$2.0 million, compared to net cash provided by financing activitiesused of $27.5$11.4 million for the same period of 2017,2018, representing an increase in cash outflowsinflows by $38.9$13.4 million, which was mainly due to the net effect of (1) decreased proceeds of $8.1 million from bank loans by $4.4 million, an increase in repayment of the borrowing for sale and (2) increasedleaseback by $1.1 million and the decrease in repayments of bank loansloan by $30.8$19.2 million.
Off-Balance Sheet Arrangements
As of March 31, 20182019 and December 31, 2017,2018, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 regarding this matter.
ITEM 4. | CONTROLS AND PROCEDURES. |
A. | Disclosure Controls and Procedures |
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2018,2019, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.2019.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
B. | Changes in Internal Control Over Financial Reporting |
There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 20182019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
PART II. — OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu, Arthur Wong, Guangxun Xu and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint.
Other than as described above, (a) the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition,proceedings and (b) no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 1A. | RISK FACTORS. |
There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 20172018 Annual Report on Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
None.
ITEM 6. | EXHIBITS. |
INDEX TO EXHIBITS
(i) | Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income, | ||
(ii) | Condensed Unaudited Consolidated Balance Sheets, | ||
(iii) | Condensed Unaudited Consolidated Statements of Cash Flows, and | ||
(iv) | related notes | ||
* | filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA AUTOMOTIVE SYSTEMS, INC. | ||||
(Registrant) | ||||
Date: May | 9, 2019 | By: | /s/Qizhou Wu | |
Qizhou Wu | ||||
President and Chief Executive Officer | ||||
Date: May | 9, 2019 | By: | /s/Jie Li | |
Jie Li | ||||
Chief Financial Officer |