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,September 30, 2019
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
Registrant’s telephone number
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 every Interactive Data File required to be submitted 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 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 | x | 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 9,November 12, 2019, the Company had 31,497,72331,403,162 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
2
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, 2018, as filed with the Securities and Exchange Commission.
3
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 September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| 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 | ||||||||||||||
| Net product sales ($12,277 and $8,207 sold to related parties for the three months ended September 30, 2019 and 2018) | $ | 100,542 | $ | 112,084 | ||||||||||||
| Cost of products sold ($6,474 and $4,659 purchased from related parties for the three months ended September 30, 2019 and 2018) | 83,225 | 96,718 | ||||||||||||||
| Gross profit | 14,045 | 21,639 | 17,317 | 15,366 | ||||||||||||
| Gain on other sales | 1,269 | 1,513 | 1,102 | 482 | ||||||||||||
| Less: Operating expenses | ||||||||||||||||
| Selling expenses | 3,085 | 5,827 | 3,563 | 3,353 | ||||||||||||
| General and administrative expenses | 4,590 | 4,424 | 4,429 | 3,708 | ||||||||||||
| Research and development expenses | 6,602 | 8,307 | 6,112 | 6,957 | ||||||||||||
| Total operating expenses | 14,277 | 18,558 | 14,104 | 14,018 | ||||||||||||
| Income from operations | 1,037 | 4,594 | 4,315 | 1,830 | ||||||||||||
| Other income, net | 1,407 | 621 | ||||||||||||||
| Other income/(expense), net | 171 | (461 | ) | |||||||||||||
| Interest expense | (568 | ) | (415 | ) | (787 | ) | (431 | ) | ||||||||
| Financial expense, net | (665 | ) | (765 | ) | ||||||||||||
| Financial income, net | 1,552 | 815 | ||||||||||||||
| Income before income tax expenses and equity in earnings of affiliated companies | 1,211 | 4,035 | 5,251 | 1,753 | ||||||||||||
| Less: Income taxes | 198 | 588 | 948 | 326 | ||||||||||||
| Equity in earnings of affiliated companies | 211 | 585 | ||||||||||||||
| Equity in loss of affiliated companies | (226 | ) | (1,049 | ) | ||||||||||||
| Net income | 1,224 | 4,032 | 4,077 | 378 | ||||||||||||
| Net loss attributable to non-controlling interests | (243 | ) | (280 | ) | ||||||||||||
| Net (loss)/income attributable to non-controlling interests | (172 | ) | 1 | |||||||||||||
| Net income attributable to parent company’s common shareholders | $ | 1,467 | $ | 4,312 | $ | 4,249 | $ | 377 | ||||||||
| Comprehensive income: | ||||||||||||||||
| Net income | $ | 1,224 | $ | 4,032 | $ | 4,077 | $ | 378 | ||||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation gain, net of tax | 6,363 | 13,242 | ||||||||||||||
| Comprehensive income | 7,587 | 17,274 | ||||||||||||||
| Comprehensive income attributable to non-controlling interests | 214 | 236 | ||||||||||||||
| Comprehensive income attributable to parent company | $ | 7,373 | $ | 17,038 | ||||||||||||
| Foreign currency translation loss, net of tax | (9,703 | ) | (13,012 | ) | ||||||||||||
| Comprehensive loss | (5,626 | ) | (12,634 | ) | ||||||||||||
| Comprehensive loss attributable to non-controlling interests | (892 | ) | (619 | ) | ||||||||||||
| Comprehensive loss attributable to parent company | $ | (4,734 | ) | $ | (12,015 | ) | ||||||||||
| Net income attributable to parent company’s common shareholders per share | ||||||||||||||||
| Basic – | $ | 0.05 | $ | 0.14 | ||||||||||||
| Basic - | $ | 0.13 | $ | 0.01 | ||||||||||||
| Diluted- | $ | 0.05 | $ | 0.14 | ||||||||||||
| Diluted - | $ | 0.13 | $ | 0.01 | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | 31,507,487 | 31,644,004 | 31,492,035 | 31,644,004 | ||||||||||||
| Diluted | 31,513,297 | 31,644,004 | 31,492,035 | 31,645,556 | ||||||||||||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
4
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)
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net product sales ($39,458 and $29,909 sold to related parties for the nine months ended September 30, 2019 and 2018) | $ | 315,483 | $ | 371,884 | ||||
| Cost of products sold ($18,108 and $20,336 purchased from related parties for the nine months ended September 30, 2019 and 2018) | 268,936 | 317,858 | ||||||
| Gross profit | 46,547 | 54,026 | ||||||
| Gain on other sales | 4,856 | 2,972 | ||||||
| Less: Operating expenses | ||||||||
| Selling expenses | 10,507 | 14,067 | ||||||
| General and administrative expenses | 13,453 | 12,574 | ||||||
| Research and development expenses | 19,351 | 23,349 | ||||||
| Total operating expenses | 43,311 | 49,990 | ||||||
| Income from operations | 8,092 | 7,008 | ||||||
| Other income, net | 1,131 | 760 | ||||||
| Interest expense | (2,086 | ) | (1,647 | ) | ||||
| Financial income, net | 2,439 | 947 | ||||||
| Income before income tax expenses and equity in earnings of affiliated companies | 9,576 | 7,068 | ||||||
| Less: Income taxes | 1,820 | 1,116 | ||||||
| Equity in loss of affiliated companies | (222 | ) | (546 | ) | ||||
| Net income | 7,534 | 5,406 | ||||||
| Net loss attributable to non-controlling interests | (692 | ) | (130 | ) | ||||
| Net income attributable to parent company’s common shareholders | $ | 8,226 | $ | 5,536 | ||||
| Comprehensive income: | ||||||||
| Net income | $ | 7,534 | $ | 5,406 | ||||
| Other comprehensive income: | ||||||||
| Foreign currency translation loss, net of tax | (10,221 | ) | (17,237 | ) | ||||
| Comprehensive loss | (2,687 | ) | (11,831 | ) | ||||
| Comprehensive loss attributable to non-controlling interests | (1,454 | ) | (814 | ) | ||||
| Comprehensive loss attributable to parent company | $ | (1,233 | ) | $ | (11,017 | ) | ||
| Net income attributable to parent company’s common shareholders per share | ||||||||
| Basic - | $ | 0.26 | $ | 0.17 | ||||
| Diluted - | $ | 0.26 | $ | 0.17 | ||||
| Weighted average number of common shares outstanding | ||||||||
| Basic | 31,498,553 | 31,644,004 | ||||||
| Diluted | 31,501,108 | 31,645,622 | ||||||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
5
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
| September 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 83,820 | $ | 86,346 | ||||
| Pledged cash | 18,491 | 29,623 | ||||||
| Accounts and notes receivable, net - unrelated parties | 212,390 | 237,519 | ||||||
| Accounts and notes receivable - related parties | 21,877 | 18,825 | ||||||
| Inventories | 87,175 | 88,021 | ||||||
| Other current assets | 23,229 | 35,094 | ||||||
| Total current assets | 446,982 | 495,428 | ||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | 137,673 | 129,853 | ||||||
| Long-term investments | 33,976 | 32,620 | ||||||
| Other non-current assets | 31,669 | 32,598 | ||||||
| Total assets | $ | 650,300 | $ | 690,499 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term loans | $ | 56,042 | $ | 60,952 | ||||
| Accounts and notes payable - unrelated parties | 168,839 | 205,643 | ||||||
| Accounts and notes payable - related parties | 7,889 | 4,477 | ||||||
| Accrued expenses and other payables | 41,635 | 47,032 | ||||||
| Other current liabilities | 23,176 | 23,196 | ||||||
| Total current liabilities | 297,581 | 341,300 | ||||||
| Long-term liabilities: | ||||||||
| Long-term government loans | 7,352 | 291 | ||||||
| Other long-term payable | 5,818 | 8,726 | ||||||
| Long-term tax payable | 26,693 | 29,503 | ||||||
| Other non-current liabilities | 7,950 | 5,852 | ||||||
| Total liabilities | $ | 345,394 | $ | 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 September 30, 2019 and December 31, 2018, respectively | $ | 3 | $ | 3 | ||||
| Additional paid-in capital | 64,429 | 64,429 | ||||||
| Retained earnings - | ||||||||
| Appropriated | 11,104 | 11,104 | ||||||
| Unappropriated | 219,665 | 211,439 | ||||||
| Accumulated other comprehensive income | (7,604 | ) | 1,855 | |||||
| Treasury stock - 885,867 and 711,698 shares as of September 30, 2019 and December 31, 2018, respectively | (3,396 | ) | (2,953 | ) | ||||
| Total parent company stockholders' equity | 284,201 | 285,877 | ||||||
| Non-controlling interests | 20,705 | 18,950 | ||||||
| Total stockholders' equity | 304,906 | 304,827 | ||||||
| Total liabilities and stockholders' equity | $ | 650,300 | $ | 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)
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 7,534 | $ | 5,406 | ||||
| Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 13,050 | 13,590 | ||||||
| (Reversal)/accrual of provision for doubtful accounts | (692 | ) | 253 | |||||
| Inventory write downs | 3,150 | 4,971 | ||||||
| Deferred income taxes | (601 | ) | (134 | ) | ||||
| Equity in loss of affiliated companies | 222 | 546 | ||||||
| (Gain)/loss on fixed assets disposals | (692 | ) | 6 | |||||
| Changes in operating assets and liabilities | ||||||||
| (Increase)/decrease in: | ||||||||
| Accounts and notes receivable | 16,243 | 29,758 | ||||||
| Inventories | (4,765 | ) | (18,220 | ) | ||||
| Other current assets | 4,745 | (1,604 | ) | |||||
| Increase/(decrease) in: | ||||||||
| Accounts and notes payable | (28,811 | ) | (28,744 | ) | ||||
| Accrued expenses and other payables | (4,374 | ) | 3,513 | |||||
| Long-term taxes payable | (2,810 | ) | - | |||||
| Other current liabilities | 1,882 | (334 | ) | |||||
| Net cash provided by operating activities | 4,081 | 9,007 | ||||||
| Cash flows from investing activities: | ||||||||
| Decrease in demand loans and employee housing loans included in other non-current assets | 185 | 453 | ||||||
| Cash received from property, plant and equipment sales | 1,164 | 263 | ||||||
| Payments to acquire property, plant and equipment (including $514 and $6,747 paid to related parties for the nine months ended September 30, 2019 and 2018, respectively) | (23,560 | ) | (24,295 | ) | ||||
| Payments to acquire intangible assets | (1,435 | ) | - | |||||
| Investment under equity method | (2,491 | ) | (5,957 | ) | ||||
| Purchase of short-term investments | (19,647 | ) | (19,974 | ) | ||||
| Proceeds from maturities of short-term investments | 27,040 | 26,793 | ||||||
| Government subsidy received for purchase of property, plant and equipment | 1,898 | - | ||||||
| Cash received from long-term investment | 579 | - | ||||||
| Cash received from repayment of the loan to a related party | - | 20,430 | ||||||
| Net cash used in investing activities | (16,267 | ) | (2,287 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from bank and government loans | 54,675 | 67,938 | ||||||
| Repayments of bank and government loans | (52,486 | ) | (69,025 | ) | ||||
| Proceeds from sale and leaseback transaction | - | 11,758 | ||||||
| Repayments of the borrowing for sale and leaseback transaction | (3,143 | ) | (2,181 | ) | ||||
| Dividends paid to non-controlling interest holders of non-wholly owned subsidiaries | (333 | ) | (524 | ) | ||||
| Cash received from capital contributions by non-controlling interest holder | 3,542 | 15,728 | ||||||
| Repurchase of common shares | (443 | ) | - | |||||
| Net cash provided by financing activities | 1,812 | 23,694 | ||||||
| Effects of exchange rate on cash, cash equivalents and pledged cash | (3,284 | ) | (4,603 | ) | ||||
| Net (decrease)/increase in cash, cash equivalents and pledged cash | (13,658 | ) | 25,811 | |||||
| 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 | $ | 102,311 | $ | 121,904 | ||||
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
Notes to Condensed Unaudited Consolidated Financial Statements
Three Months and Nine Months Ended March 31,September 30, 2019 and 2018
| 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,September 30, 2019 and December 31, 2018.
| Percentage Interest | ||||||||
| Name of Entity | March 31, 2019 | December 31, 2018 | ||||||
| Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”1 | 100.00 | % | 100.00 | % | ||||
| Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”2 | 100.00 | % | 100.00 | % | ||||
| Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”3 | 70.00 | % | 70.00 | % | ||||
| Universal Sensor Application Inc., “USAI”4 | 83.34 | % | 83.34 | % | ||||
| Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”5 | 85.00 | % | 85.00 | % | ||||
| Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”6 | 77.33 | % | 77.33 | % | ||||
| 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 | % | ||||
| CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”10 | 95.84 | % | 95.84 | % | ||||
| Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”11 | 85.00 | % | 85.00 | % | ||||
| Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”12 | 100.00 | % | 100.00 | % | ||||
| 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 | % | ||||
| Percentage Interest | ||||||||
| Name of Entity | September 30, 2019 | December 31, 2018 | ||||||
| Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”1 | 100.00 | % | 100.00 | % | ||||
| Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”2 | 100.00 | % | 100.00 | % | ||||
| Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”3 | 70.00 | % | 70.00 | % | ||||
| Universal Sensor Application Inc., “USAI”4 | 83.34 | % | 83.34 | % | ||||
| Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”5 | 85.00 | % | 85.00 | % | ||||
| Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”6 | 77.33 | % | 77.33 | % | ||||
| 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 | % | ||||
| CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”10 | 95.84 | % | 95.84 | % | ||||
| Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”11 | 85.00 | % | 85.00 | % | ||||
| Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”12 | 100.00 | % | 100.00 | % | ||||
| 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 | % | ||||
| Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”15 | 51.00 | % | - | |||||
| 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 |
| 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. |
| 15. | In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd. (“Wuhan Hyoseong”), which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong 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 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, 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, 2018 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.
The results of operations for the three months and nine months ended March 31,September 30, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 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 |
On January 1, 2019, the Company adopted ASU 2016-02,Leases (as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and 2019-01), using the modified retrospective method. The impact of the adoption of the new standard on the consolidated financial statements is discussed in “Significant Accounting Policies” below.
| (c) | Significant Accounting Policies |
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- As described in the “Recent Accounting Pronouncements” section, the Company adopted ASU 2016-02, Leases, and other related ASUs (collectively, ASC 842)“ASC 842”) on January 1, 2019, using the modified retrospective method of adoption.
The Company elected the transition method, which allows entities to initially apply the requirements of ASC 842 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 been restated. There is no material impact on the balance of retained earnings, right of use assets or associated lease liabilities as of January 1, 2019 due to the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases. The Company did not elect the hindsight practical expedient.
The Company determines if an arrangement is a lease 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 economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. 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 lease term.
Operating 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%.
The operating lease right of use assets wasof $0.4 million as of September 30, 2019 were included in other current assets andassets. The current portion of operating lease liabilities of $0.1 million as of September 30, 2019 was included in other current liabilities and the non-current portion of $0.3 million was included in other non-current liabilities. The lease expenses recognized for the three and nine months ended September 30, 2019 were $2,573 and $9,236, respectively. The weighted average remaining lease term was 43 years. The Company doesdid not have finance lease arrangements as of March 31,September 30, 2019.
| 3. | Accounts and notes receivable, net |
The Company’s accounts and notes receivable, net as of March 31,September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Accounts receivable - unrelated parties | $ | 150,415 | $ | 149,100 | $ | 121,748 | $ | 149,100 | ||||||||
| Notes receivable - unrelated parties(1)(2) | 94,255 | 90,412 | ||||||||||||||
| Total accounts and notes receivable- unrelated parties | 244,670 | 239,512 | ||||||||||||||
| Notes receivable - unrelated parties (1) (2) | 92,739 | 90,412 | ||||||||||||||
| Total accounts and notes receivable - unrelated parties | 214,487 | 239,512 | ||||||||||||||
| Less: allowance for doubtful accounts - unrelated parties(3) | (2,096 | ) | (1,993 | ) | (2,097 | ) | (1,993 | ) | ||||||||
| Accounts and notes receivable, net - unrelated parties | 242,574 | 237,519 | 212,390 | 237,519 | ||||||||||||
| Accounts and notes receivable - related parties | 21,701 | 18,825 | 21,877 | 18,825 | ||||||||||||
| Accounts and notes receivable, net | $ | 264,275 | $ | 256,344 | $ | 234,267 | $ | 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 banks or third parties. |
| (2) | As of |
| (3) | Provision for doubtful accounts and notes receivable recognized in the consolidated statements of operations amounted to |
| 4. | Inventories |
The Company’s inventories as of March 31,September 30, 2019 and December 31, 2018 consisted of the following (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Raw materials | $ | 29,206 | $ | 27,190 | $ | 23,021 | $ | 27,190 | ||||||||
| Work in process | 12,340 | 11,932 | 9,292 | 11,932 | ||||||||||||
| Finished goods | 48,656 | 48,899 | 54,862 | 48,899 | ||||||||||||
| Total | $ | 90,202 | $ | 88,021 | $ | 87,175 | $ | 88,021 | ||||||||
The write down of inventories amounted to $1.1$0.9 million and $1.5 million for the three months ended March 31,September 30, 2019 and 2018, respectively, and $3.2 million and $5.0 million for the nine months ended September 30, 2019 and 2018, respectively.
| 5. | 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 accountedaccounts for Beijing Henglong’s operational results using the equity method. As of March 31,September 30, 2019 and December 31, 2018, the Company had $4.3$4.5 million and $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 makemade investments of RMB 50.0 million, equivalent to approximately $7.4 million, in the Suzhou Venture Fund in three installments. As of March 31, 2019, Hubei Henglong has completed a capital contribution of RMB 50.0 million, equivalent to approximately $7.4$7.3 million, representing 12.5% of the Suzhou Venture Fund’s shares. In April 2019, the Suzhou Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received RMB 3.9 million, equivalent to approximately $0.6 million. 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,September 30, 2019 and December 31, 2018, the Company had $10.0$8.3 million and $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$17.5 million, in three installments, representing 23.5% of the Chongqing Venture Fund’s shares. In May 2019, Hubei Henglong and the other parties agreed to reduce Hubei Henglong’s aggregate commitment from RMB 120.0 million to RMB 100.0 million, representing 18.5% of the Chongqing Venture Fund’s shares. In May 2019, Hubei Henglong made an additional investment of RMB 16.0 million, equivalent to approximately $2.3 million. As of March 31,September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 84.0100.0 million, equivalent to approximately $12.5$14.5 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,September 30, 2019 and December 31, 2018, the Company had $13.3$14.6 million and $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 venturean associate 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 using the equity method. As of March 31,September 30, 2019 and December 31, 2018, the Company had $0.2$0.1 million and $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$11.1 million, in three installments, representing 27.1% of the Hubei Venture Fund’s shares. As of March 31,September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 38.0 million, equivalent to approximately $5.6$5.5 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,September 30, 2019 and December 31, 2018, the Company had $5.6$5.3 million and $5.5 million, respectively, of net equity in the Hubei Venture Fund.
In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares and can exercise significant influence over Jiangsu Intelligent’s operational and financial policies. The Company accounts for Jiangsu Intelligent’s operational results using the equity method. As of September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 1.0 million, equivalent to approximately $0.1 million. As of September 30, 2019, the Company had $0.1 million of net equity in Jiangsu Intelligent.
In June 2019, the Company invested RMB 8.0 million, equivalent to approximately $1.2 million, to establish an associate company, “Henglong Tianyu”, with Jingzhou Tianyu Auto Parts Co., Ltd. The Company owns 40% of the equity in Henglong Tianyu, and can exercise significant influence over Henglong Tianyu’s operating and financial policies. The Company accounts for Henglong Tianyu’s operational results using the equity method. As of September 30, 2019, the Company had $1.1 million of net equity in Henglong Tianyu.
The Company’s consolidated financial statements reflect the net incomeloss of non-consolidated affiliates of $0.2 million and $0.6$0.5 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively.
| 6. | Property, plant and equipment, net |
The Company’s property, plant and equipment, net as of March 31,September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Costs: | ||||||||||||||||
| Land use rights and buildings | $ | 62,846 | $ | 60,593 | $ | 62,964 | $ | 60,593 | ||||||||
| Machinery and equipment | 198,351 | 192,538 | 193,509 | 192,538 | ||||||||||||
| Electronic equipment | 5,858 | 5,810 | 5,687 | 5,810 | ||||||||||||
| Motor vehicles | 4,933 | 4,852 | 4,800 | 4,852 | ||||||||||||
| Construction in progress | 15,214 | 12,526 | 21,825 | 12,526 | ||||||||||||
| Total amount of property, plant and equipment | 287,202 | 276,319 | 288,785 | 276,319 | ||||||||||||
| Less: Accumulated depreciation(1) | (150,169 | ) | (146,466 | ) | (151,112 | ) | (146,466 | ) | ||||||||
| Total amount of property, plant and equipment, net(2)(3) | $ | 137,033 | $ | 129,853 | $ | 137,673 | $ | 129,853 | ||||||||
| (1) |
| (2) | As of |
| (3) | Interest costs capitalized for the three months ended |
| 7. | Loans |
Loans consist of the following as of March 31,September 30, 2019 and December 31, 2018 (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Short-term bank loans(1) | $ | 58,462 | $ | 53,667 | $ | 35,661 | $ | 29,146 | ||||||||
| Short-term government loan(2) | 7,426 | 7,285 | ||||||||||||||
| Short-term bank loans(2) | 20,381 | 24,521 | ||||||||||||||
| Short-term government loan(3) | - | 7,285 | ||||||||||||||
| Total short-term bank and government loans | $ | 65,888 | $ | 60,952 | $ | 56,042 | $ | 60,952 | ||||||||
| Long-term government loan (3) | 297 | 291 | ||||||||||||||
| Long-term government loans (4)(5) | 7,352 | 291 | ||||||||||||||
| Total bank and government loans | $ | 66,185 | $ | 61,243 | $ | 63,394 | $ | 61,243 | ||||||||
| (1) | These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note 6). As of |
| (2) | On October 27, 2017, Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 224.0 million (equivalent to
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 |
| On September 27, 2018, the Company received a Chinese government loan of RMB 50.0 million, equivalent to approximately | |
| On August 7 and September 3, 2019, the Company received Chinese government loans of RMB 20.0 million and RMB 30.0 million, equivalent to approximately $2.8 million and $4.2 million, respectively, both with an interest rate of 3.80% per annum, which will mature on June 30, 2021. Henglong pledged RMB 51.8 million, equivalent to approximately $7.3 million, of notes receivable as security for these government loans (See Note 3). | |
| (5) | 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 and/or trigger early repayment. The Company complied with such financial covenants as of March 31,September 30, 2019, and believes it will continue to comply with them.
| 8. | Accounts and notes payable |
The Company’s accounts and notes payable as of March 31,September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | |||||||
| Accounts payable - unrelated parties | $ | 115,355 | $ | 124,610 | ||||
| Notes payable - unrelated parties(1) | 72,257 | 81,033 | ||||||
| Accounts and notes payable- unrelated parties | 187,612 | 205,643 | ||||||
| Accounts payable - related parties | 5,668 | 4,477 | ||||||
| Balance at end of the period | $ | 193,280 | $ | 210,120 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| Accounts payable - unrelated parties | $ | 108,285 | $ | 124,610 | ||||
| Notes payable - unrelated parties(1) | 60,554 | 81,033 | ||||||
| Accounts and notes payable - unrelated parties | 168,839 | 205,643 | ||||||
| Accounts payable and notes payable - related parties | 7,889 | 4,477 | ||||||
| Total | $ | 176,728 | $ | 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 |
| 9. | Accrued expenses and other payables |
The Company’s accrued expenses and other payables as of March 31,September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Accrued expenses | $ | 6,884 | $ | 8,341 | $ | 6,618 | $ | 8,341 | ||||||||
| Accrued interest | 748 | 423 | 235 | 423 | ||||||||||||
| Current portion of other long-term payable (See Note 10) | 3,529 | 3,400 | 3,480 | 3,400 | ||||||||||||
| Other payables | 2,579 | 3,783 | 1,015 | 3,783 | ||||||||||||
| Warranty reserves(1) | 32,157 | 31,085 | 30,287 | 31,085 | ||||||||||||
| Total | $ | 45,897 | $ | 47,032 | $ | 41,635 | $ | 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 and nine months ended March 31,September 30, 2019 and 2018, and for the year ended December 31, 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2019 | 2018 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||
| Balance at beginning of the period | $ | 31,085 | $ | 29,033 | $ | 29,033 | $ | 30,936 | $ | 29,779 | $ | 31,085 | $ | 29,033 | ||||||||||||||
| Additions during the period | 2,776 | 4,248 | 24,102 | 4,563 | 5,012 | 12,064 | 14,877 | |||||||||||||||||||||
| Settlement within period | (2,294 | ) | (4,206 | ) | (20,599 | ) | ||||||||||||||||||||||
| Foreign currency translation loss/(gain) | 590 | 1,126 | (1,451 | ) | ||||||||||||||||||||||||
| Settlement within the period | (4,338 | ) | (5,851 | ) | (11,921 | ) | (14,557 | ) | ||||||||||||||||||||
| Foreign currency translation gain | (874 | ) | (1,127 | ) | (941 | ) | (1,540 | ) | ||||||||||||||||||||
| Balance at end of the period | $ | 32,157 | $ | 30,201 | $ | 31,085 | $ | 30,287 | $ | 27,813 | $ | 30,287 | 27,813 | |||||||||||||||
| 10. | Other long-term payable |
On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was $13.6RMB 91.3 million (equivalent to $12.9 million as of September 30, 2019) and the sales price was $14.9 million.RMB 100 million (equivalent to $14.1 million as of September 30, 2019). 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 $1.1approximately $1.0 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 a sale. Therefore, the transaction iswas accounted for as a financing transaction by the Company. As of March 31,September 30, 2019, $3.5 million iswas recognized as other payable (See Note 9) and $8.0$5.8 million iswas recognized as other long-term payable to the buyer-lessor according to the contract term.
| 11. | Additional paid-in capital |
The Company’s positions in respect of the amounts of additional paid-in capital for the three and nine months ended March 31,September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Balance at beginning of the period | $ | 64,429 | $ | 64,406 | $ | 64,429 | $ | 64,406 | $ | 64,429 | $ | 64,406 | ||||||||||||
| Balance at end of the period | $ | 64,429 | $ | 64,406 | $ | 64,429 | $ | 64,406 | $ | 64,429 | $ | 64,406 | ||||||||||||
Assumptions used to estimate the fair value of the stock options on the grant date are as follows:
| Issuance Date | Expected volatility | Risk-free rate | Expected term (years) | Dividend yield | ||||||||||||
| December 5, 2018 | 44.72 | % | 2.79 | % | 5 | 0.00 | % | |||||||||
The stock options granted during 2018 were exercisable immediately. Their aggregate fair value on the grant date using the Black-Scholes option pricing model was $0.02 million. For the year ended December 31, 2018, the Company recognized stock-based compensation expenses of $0.02 million.
| 12. | 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 shareholders. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang, USAI, Jielong, Wuhu, Hubei Henglong, Henglong KYB, Chongqing Henglong and ChongqingWuhan Hyoseong are $10.0 million (equivalent to RMB 82.0 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) and $2.9 million (equivalent to RMB 20.0 million), respectively.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended March 31,September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Balance at beginning of the period | $ | 11,104 | $ | 10,707 | $ | 11,104 | $ | 10,830 | $ | 11,104 | $ | 10,707 | ||||||||||||
| Appropriation of retained earnings | - | - | - | 123 | ||||||||||||||||||||
| Balance at end of the period | $ | 11,104 | $ | 10,707 | $ | 11,104 | $ | 10,830 | $ | 11,104 | $ | 10,830 | ||||||||||||
Unappropriated
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and nine months ended March 31,September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Balance at beginning of the period | $ | 211,439 | $ | 209,459 | $ | 215,416 | $ | 214,495 | $ | 211,439 | $ | 209,459 | ||||||||||||
| Net income attributable to parent company | 1,467 | 4,312 | 4,249 | 377 | 8,226 | 5,536 | ||||||||||||||||||
| Appropriation of retained earnings | - | - | - | (123 | ) | |||||||||||||||||||
| Balance at end of the period | $ | 212,906 | $ | 213,771 | $ | 219,665 | $ | 214,872 | $ | 219,665 | $ | 214,872 | ||||||||||||
| 13. | Accumulated other comprehensive income |
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and nine months ended March 31,September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Balance at beginning of the period | $ | 1,855 | $ | 17,780 | $ | 1,379 | $ | 13,619 | $ | 1,855 | $ | 17,780 | ||||||||||||
| Foreign currency translation adjustment attributable to parent company | 5,906 | 12,726 | (8,983 | ) | (12,392 | ) | (9,459 | ) | (16,553 | ) | ||||||||||||||
| Balance at end of the period | $ | 7,761 | $ | 30,506 | $ | (7,604 | ) | $ | 1,227 | $ | (7,604 | ) | $ | 1,227 | ||||||||||
| 14. | 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. | |||
| 15. | Non-controlling interests |
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and nine months ended March 31,September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Balance at beginning of the period | $ | 18,950 | $ | 6,681 | $ | 19,493 | $ | 5,948 | $ | 18,950 | $ | 6,681 | ||||||||||||
| Loss attributable to non-controlling interests | (243 | ) | (280 | ) | ||||||||||||||||||||
| Net income/(loss) attributable to non-controlling interests | (172 | ) | 1 | (692 | ) | (130 | ) | |||||||||||||||||
| Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries | - | - | (333 | ) | (538 | ) | ||||||||||||||||||
| Contribution by non-controlling shareholder of Henglong KYB | - | 15,728 | - | 15,728 | ||||||||||||||||||||
| Contribution by non-controlling shareholder of Wuhan Hyoseong | 2,104 | - | 3,542 | - | ||||||||||||||||||||
| Foreign currency translation adjustment attributable to non-controlling interests | 457 | 516 | (720 | ) | (600 | ) | (762 | ) | (664 | ) | ||||||||||||||
| Balance at end of the period | $ | 19,164 | $ | 6,917 | $ | 20,705 | $ | 21,077 | $ | 20,705 | $ | 21,077 | ||||||||||||
| 16. | Net product sales |
Revenue 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.
17
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 customer deposits.
Customer Deposits
As of March 31,September 30, 2019 and December 31, 2018, the Company has customer deposits of $0.7$2.1 million and $0.8 million, respectively.respectively, which were included in other current liabilities on the consolidated balance sheets. During the threenine months ended March 31,September 30, 2019, $3.2$7.7 million was received and $3.2$6.4 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 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.
| 17. | Financial |
During the three months ended March 31,September 30, 2019 and 2018, and the nine months ended September 30, 2019 and 2018, the Company recorded financial expense,income, net which is summarized as follows (figures are in thousands of USD):
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Interest income | $ | 764 | $ | 374 | ||||
| Foreign exchange loss, net | (1,250 | ) | (1,037 | ) | ||||
| Bank fees | (179 | ) | (102 | ) | ||||
| Total financial expense, net | $ | (665 | ) | $ | (765 | ) | ||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Interest income | $ | 661 | $ | 644 | $ | 2,138 | $ | 1,588 | ||||||||
| Foreign exchange gain, net | 1,105 | 852 | 709 | 210 | ||||||||||||
| Bank fees | (214 | ) | (681 | ) | (408 | ) | (851 | ) | ||||||||
| Total financial income, net | $ | 1,552 | $ | 815 | $ | 2,439 | $ | 947 | ||||||||
| 18. | Income tax |
The Company’s effective tax rates were 16.4%18.1% and 14.7% in18.6% for the three months ended March 31,September 30, 2019 and 2018, respectively, and 19.0% and 15.8% for the nine months ended September 30, 2019 and 2018, respectively. The increasechanges in effective tax rate was primarily due to the increase in the valuation allowance providedwere $0.2 million and $0.1 million for loss-making entities.the three and nine months ended September 30, 2019, respectively.
| 19. | 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 calculations of basic and diluted income per share attributable to the parent company for the three months ended March 31,September 30, 2019 and 2018, were as follows (figures are in thousands of USD, except share and per share amounts):
| Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income attributable to the parent company’s common shareholders – Basic and Diluted | $ | 1,467 | $ | 4,312 | ||||||||||||
| Net income attributable to the parent company’s common shareholders - Basic and Diluted | $ | 4,249 | $ | 377 | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares outstanding | 31,507,487 | 31,644,004 | 31,492,035 | 31,644,004 | ||||||||||||
| Dilutive effects of stock options | 5,810 | - | - | 1,552 | ||||||||||||
| Denominator for dilutive income per share - Diluted | 31,513,297 | 31,644,004 | 31,492,035 | 31,645,556 | ||||||||||||
| Net income per share attributable to parent company’s common shareholders - Basic | $ | 0.05 | $ | 0.14 | $ | 0.13 | $ | 0.01 | ||||||||
| Net income per share attributable to parent company’s common shareholders - Diluted | $ | 0.05 | $ | 0.14 | $ | 0.13 | $ | 0.01 | ||||||||
The calculations of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 2019 and 2018, were as follows (figures are in thousands of USD, except share and per share amounts):
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Numerator: | ||||||||
| Net income attributable to the parent company’s common shareholders - Basic and Diluted | $ | 8,226 | $ | 5,536 | ||||
| Denominator: | ||||||||
| Weighted average shares outstanding | 31,498,553 | 31,644,004 | ||||||
| Dilutive effects of stock options | 2,555 | 1,618 | ||||||
| Denominator for dilutive income per share - Diluted | 31,501,108 | 31,645,622 | ||||||
| Net income per share attributable to parent company’s common shareholders - Basic | $ | 0.26 | $ | 0.17 | ||||
| Net income per share attributable to parent company’s common shareholders - Diluted | $ | 0.26 | $ | 0.17 | ||||
As of March 31,September 30, 2019 and 2018, the exercise prices for 112,50030,000 shares and 112,500 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,September 30, 2019 and 2018, respectively, andrespectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
As of September 30, 2019 and 2018, the exercise prices for 22,500 shares and 112,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the nine months ended September 30, 2019 and 2018, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
| 20. | 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", 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. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law, China-based subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until 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 discretion of 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 threenine months ended March 31,September 30, 2019, the Company’s five largest customers accounted for 44.0%48.3% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 23.3% and 10.1%. As of September 30, 2019, approximately 11.3% of accounts receivable were from trade transactions with the aforementioned customers and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
During the nine months ended September 30, 2018, the Company’s five largest customers accounted for 39.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 18.1%19.2%. As of March 31, 2019,September 30, 2018, approximately 6.2%6.7% 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.
| 21. | 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 September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Merchandise sold to related parties | $ | 12,836 | $ | 10,846 | $ | 12,277 | $ | 8,207 | ||||||||
| Materials and others sold to related parties | 461 | 446 | 353 | 380 | ||||||||||||
| Rental income obtained from related parties | 80 | 102 | 85 | 130 | ||||||||||||
| Total | $ | 13,377 | $ | 11,394 | $ | 12,715 | $ | 8,717 | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Merchandise sold to related parties | $ | 39,458 | $ | 29,909 | ||||
| Materials and others sold to related parties | 1,250 | 1,324 | ||||||
| Rental income obtained from related parties | 286 | 277 | ||||||
| Total | $ | 40,994 | $ | 31,510 | ||||
Related purchases
| Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Materials purchased from related parties | $ | 5,504 | $ | 8,249 | $ | 6,474 | $ | 4,659 | ||||||||
| Equipment purchased from related parties | 760 | 1,248 | 405 | 1,636 | ||||||||||||
| Others purchased from related parties | 11 | 49 | 7 | 358 | ||||||||||||
| Total | $ | 6,275 | $ | 9,546 | $ | 6,886 | $ | 6,653 | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Materials purchased from related parties | $ | 18,108 | $ | 20,336 | ||||
| Equipment purchased from related parties | 2,676 | 4,921 | ||||||
| Others purchased from related parties | 28 | 615 | ||||||
| Total | $ | 20,812 | $ | 25,872 | ||||
Related receivables
| March 31, 2019 | December 31, 2018 | |||||||
| Accounts and notes receivable from related parties | $ | 21,701 | $ | 18,825 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| Accounts and notes receivable from related parties | $ | 21,877 | $ | 18,825 | ||||
Related advances and loan balanceadvance payments
| March 31, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Advance payments for property, plant and equipment to related parties | $ | 3,819 | $ | 8,723 | $ | 2,811 | $ | 8,723 | ||||||||
| Advance payments and others to related parties | 1,100 | 1,281 | 1,069 | 1,281 | ||||||||||||
| Total | $ | 4,919 | $ | 10,004 | $ | 3,880 | $ | 10,004 | ||||||||
Related payables
| March 31, 2019 | December 31, 2018 | |||||||
| Accounts and notes payable | $ | 5,668 | $ | 4,477 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| Accounts and notes payable | $ | 7,889 | $ | 4,477 | ||||
These transactions were consummated under similar terms as those with the Company's third party customers and suppliers.
As of May 9,November 12, 2019, Hanlin Chen, 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.
| 22. | 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. The motion to dismiss was denied on July 17, 2019. The directors of the Company will continue to answer this 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 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,September 30, 2019 (figures are in thousands of USD):
| Payment obligations by period | Payment obligations by period | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | Thereafter | Total | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||||||||||||
| Obligations for investment contracts(1) | $ | 10,990 | $ | - | $ | - | $ | - | $ | 10,990 | $ | 5,655 | $ | 283 | $ | - | $ | - | $ | 5,938 | ||||||||||||||||||||
| Obligations for purchasing and service agreements | 30,558 | 3,894 | - | - | 34,452 | 18,302 | 1,733 | 194 | - | 20,229 | ||||||||||||||||||||||||||||||
| Total | $ | 41,548 | $ | 3,894 | $ | - | $ | - | $ | 45,442 | $ | 23,957 | $ | 2,016 | $ | 194 | $ | - | $ | 26,167 | ||||||||||||||||||||
| (1) |
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 |
| In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares. As of September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 1.0 million, equivalent to approximately $0.1 million. According to the agreement, the remaining capital commitment of RMB 4.0 million, equivalent to approximately $0.6 million, will be paid upon capital calls. |
| 23. | Off-balance sheet arrangements |
As of March 31,September 30, 2019 and December 31, 2018, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
| 24. | 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 inter- segmentinter-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,September 30, 2019, the Company had 14 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 eight 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), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
As of September 30, 2018, 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-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).
The Company’s product sector information for the three months and nine months ended March 31,September 30, 2019 and 2018, is as follows (figures are in thousands of USD):
| Net Product Sales | Net Income (Loss) | Net Product Sales | Net Income (Loss) | |||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
| March 31, | March 31, | September 30, | September 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Henglong | $ | 40,964 | $ | 68,896 | $ | (2,121 | ) | $ | (312 | ) | $ | 38,971 | $ | 51,477 | $ | 1,300 | $ | (828 | ) | |||||||||||||
| Jiulong | 22,122 | 27,445 | 1,168 | 455 | 17,211 | 19,678 | (726 | ) | 529 | |||||||||||||||||||||||
| Shenyang | 4,895 | 6,348 | (299 | ) | (618 | ) | 4,267 | 5,952 | 160 | 132 | ||||||||||||||||||||||
| Wuhu | 6,998 | 4,636 | (175 | ) | (397 | ) | 3,047 | 6,970 | (190 | ) | (394 | ) | ||||||||||||||||||||
| Hubei Henglong | 28,175 | 33,393 | 1,372 | 3,089 | 33,664 | 30,264 | 2,425 | 855 | ||||||||||||||||||||||||
| Henglong KYB | 19,954 | - | (396 | ) | - | 15,971 | - | (426 | ) | - | ||||||||||||||||||||||
| Other Entities | 17,296 | 17,898 | 1,455 | 794 | 14,120 | 17,634 | 907 | 1,726 | ||||||||||||||||||||||||
| Total Segments | 140,404 | 158,616 | 1,004 | 3,011 | 127,251 | 131,975 | 3,450 | 2,020 | ||||||||||||||||||||||||
| Corporate | - | - | (301 | ) | 564 | - | - | 14 | (1,970 | ) | ||||||||||||||||||||||
| Eliminations | (31,211 | ) | (24,598 | ) | 521 | 457 | (26,709 | ) | (19,891 | ) | 613 | 328 | ||||||||||||||||||||
| Total | $ | 109,193 | $ | 134,018 | $ | 1,224 | $ | 4,032 | $ | 100,542 | $ | 112,084 | $ | 4,077 | $ | 378 | ||||||||||||||||
| Net Product Sales | Net Income (Loss) | |||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Henglong | $ | 116,510 | $ | 180,674 | $ | 1,379 | $ | (2,670 | ) | |||||||
| Jiulong | 65,971 | 78,085 | 1,637 | 1,940 | ||||||||||||
| Shenyang | 14,573 | 21,166 | 566 | 48 | ||||||||||||
| Wuhu | 14,283 | 17,171 | (577 | ) | (1,274 | ) | ||||||||||
| Hubei Henglong | 89,423 | 92,375 | 6,209 | 7,217 | ||||||||||||
| Henglong KYB | 54,803 | - | (2,280 | ) | - | |||||||||||
| Other Entities | 46,769 | 56,684 | 3,768 | 4,008 | ||||||||||||
| Total Segments | 402,332 | 446,155 | 10,702 | 9,269 | ||||||||||||
| Corporate | - | - | (1,450 | ) | (2,988 | ) | ||||||||||
| Eliminations | (86,849 | ) | (74,271 | ) | (1,718 | ) | (875 | ) | ||||||||
| Total | $ | 315,483 | $ | 371,884 | $ | 7,534 | $ | 5,406 | ||||||||
| 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. |
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
|
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
Results of Operations -
Three Months Ended March 31,September 30, 2019 and 2018
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% | Three Months Ended September 30, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | Change% | |||||||||||||||||||||||||||||
| Net product sales | $ | 109,193 | $ | 134,018 | $ | (24,825 | ) | -18.5 | % | $ | 100,542 | $ | 112,084 | $ | (11,542 | ) | -10.3 | % | ||||||||||||||
| Cost of products sold | 95,148 | 112,379 | (17,231 | ) | -15.3 | 83,225 | 96,718 | (13,493 | ) | -14.0 | ||||||||||||||||||||||
| Net gain on other sales | 1,269 | 1,513 | (244 | ) | -16.1 | |||||||||||||||||||||||||||
| Gain on other sales | 1,102 | 482 | 620 | 128.6 | ||||||||||||||||||||||||||||
| Selling expenses | 3,085 | 5,827 | (2,742 | ) | -47.1 | 3,563 | 3,353 | 210 | 6.3 | |||||||||||||||||||||||
| General and administrative expenses | 4,590 | 4,424 | 166 | 3.8 | 4,429 | 3,708 | 721 | 19.4 | ||||||||||||||||||||||||
| Research and development expenses | 6,602 | 8,307 | (1,705 | ) | -20.5 | 6,112 | 6,957 | (845 | ) | -12.1 | ||||||||||||||||||||||
| Operating income | 1,037 | 4,594 | (3,557 | ) | -77.4 | |||||||||||||||||||||||||||
| Other income, net | 1,407 | 621 | 786 | 126.6 | ||||||||||||||||||||||||||||
| Other income/(expense), net | 171 | (461 | ) | 632 | -137.1 | |||||||||||||||||||||||||||
| Interest expense | (568 | ) | (415 | ) | (153 | ) | 36.9 | (787 | ) | (431 | ) | (356 | ) | 82.6 | ||||||||||||||||||
| 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 | 948 | 326 | 622 | 190.8 | |||||||||||||||||||||||
| Net income | 1,224 | 4,032 | (2,808 | ) | -69.6 | 4,077 | 378 | 3,699 | 978.6 | |||||||||||||||||||||||
| Net loss attributable to non-controlling interest | (243 | ) | (280 | ) | 37 | -13.2 | ||||||||||||||||||||||||||
| Net (loss)/income attributable to non-controlling interests | (172 | ) | 1 | (173 | ) | -17,300.0 | ||||||||||||||||||||||||||
| Net income attributable to parent company’s common shareholders | 1,467 | 4,312 | (2,845 | ) | -66.0 | % | 4,249 | 377 | 3,872 | 1,027.1 | % | |||||||||||||||||||||
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 | Cost of Products Sold | |||||||||||||||||||||||||||||||
| (in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||
| Henglong | $ | 38,971 | $ | 51,477 | $ | (12,506 | ) | -24.3 | % | $ | 35,328 | $ | 48,591 | $ | (13,263 | ) | -27.3 | % | ||||||||||||||
| Jiulong | 17,211 | 19,678 | (2,467 | ) | -12.5 | 16,560 | 17,774 | (1,214 | ) | -6.8 | ||||||||||||||||||||||
| Shenyang | 4,267 | 5,952 | (1,685 | ) | -28.3 | 3,480 | 5,037 | (1,557 | ) | -30.9 | ||||||||||||||||||||||
| Wuhu | 3,047 | 6,970 | (3,923 | ) | -56.3 | 2,859 | 6,753 | (3,894 | ) | -57.7 | ||||||||||||||||||||||
| Hubei Henglong | 33,664 | 30,264 | 3,400 | 11.2 | 26,900 | 24,040 | 2,860 | 11.9 | ||||||||||||||||||||||||
| Henglong KYB | 15,971 | - | 15,971 | - | 13,831 | - | 13,831 | - | ||||||||||||||||||||||||
| Other Entities | 14,120 | 17,634 | (3,514 | ) | -19.9 | 10,628 | 14,588 | (3,960 | ) | -27.1 | ||||||||||||||||||||||
| Total Segments | 127,251 | 131,975 | (4,724 | ) | -3.6 | 109,586 | 116,783 | (7,197 | ) | -6.2 | ||||||||||||||||||||||
| Elimination | (26,709 | ) | (19,891 | ) | (6,818 | ) | 34.3 | (26,361 | ) | (20,065 | ) | (6,296 | ) | 31.4 | ||||||||||||||||||
| Total | $ | 100,542 | $ | 112,084 | $ | (11,542 | ) | -10.3 | % | $ | 83,225 | $ | 96,718 | $ | (13,493 | ) | -14.0 | % | ||||||||||||||
Net Product Sales
Net product sales were $109.2$100.5 million for the three months ended March 31,September 30, 2019, compared to $134.0$112.1 million for the same period in 2018, representing a decrease of $24.8$11.6 million, or 18.5%10.3%.
Net sales of traditional steering products and parts were $87.0$82.0 million for the three months ended March 31,September 30, 2019, compared to $109.0$91.1 million for the same period in 2018, representing a decrease of $22.0$9.1 million, or 20.2%10.0%. Net sales of electric power steering (“EPS”) were $22.2$18.5 million for the three months ended March 31,September 30, 2019 and $25.0$21.0 million for the same period in 2018, representing a decrease of $2.8$2.5 million, or 11.2%11.9%. As a percentage of net sales, sales of EPS were 20.3%18.4% for the three months ended March 31,September 30, 2019, compared towith 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$5.5 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$2.6 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$3.5 million.
Further analysis by segment (before elimination) is as follows:
Cost of Products Sold
For the three months ended September 30, 2019, the cost of products sold was $83.2 million, compared to $96.7 million for the same period of 2018, representing a decrease of $13.5 million, or 14.0%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in sales volumes led to a cost of sales decrease of $8.1 million; ii) the decrease in unit cost led to a cost of sales decrease of $2.3 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $3.1 million. Further analysis is as follows:
| • | Cost of products sold for Jiulong was $16.6 million for the three months ended September 30, 2019, compared to $17.8 million for the same period of 2018, representing a decrease of $1.2 million, or 6.7%. 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, an increase in unit cost resulting in a cost of sales increase of $0.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.4 million. |
| • | Cost of products sold for Shenyang was $3.5 million for the three months ended September 30, 2019, compared to $5.0 million for the same period of 2018, representing a decrease of $1.5 million, or 30.0%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.3 million and a decrease in unit cost resulting in a cost of sales decrease of $0.2 million. |
| • | Cost of products sold for Wuhu was $2.9 million for the three months ended September 30, 2019, compared to $6.8 million for the same period of 2018, representing a decrease of $3.9 million, or 57.4%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $3.0 million, a decrease in unit cost resulting in a cost of sales decrease of $0.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.1 million. |
Gross margin was 17.2% for the three months ended September 30, 2019, compared to 13.7% for the same period of 2018, representing an increase of 3.5%, mainly due to the changes in the product mix for the three months ended September 30, 2019.
29
Selling Expenses
Selling expenses were $3.6 million for the three months ended September 30, 2019, substantially consistent with $3.4 million for the same period of 2018.
General and Administrative Expenses
General and administrative expenses were $4.4 million for the three months ended September 30, 2019, as compared to $3.7 million for the same period of 2018, representing an increase of $0.7 million, or 18.9%, which was primarily due to increased professional service fees.
Research and Development Expenses
Research and development expenses were $6.1 million for the three months ended September 30, 2019, as compared to $7.0 million for the three months ended September 30, 2018, representing a decrease of $0.9 million, or 12.9%, which was mainly due to cost control on research and development expenditures.
Other Income/(Expense), Net
Other income, net was $0.2 million for the three months ended September 30, 2019, compared to other expense, net of $0.5 million for the three months ended September 30, 2018, representing an increase of $0.7 million in other income, which was primarily due to a donation of $0.7 million made by the Company to a charity in July 2018.
Interest Expense
Interest expense was $0.8 million for the three months ended September 30, 2019, compared to $0.4 million for the three months ended September 30, 2018, which was primarily due to higher interest rates.
Income Taxes
Income tax expense was $0.9 million for the three months ended September 30, 2019, compared to $0.3 million for the three months ended September 30, 2018. The income before income tax increased to $5.3 million for the three months ended September 30, 2019 from $1.8 million for the same period in 2018 and the effective tax rate decreased to 18.1% from 18.6% for the same period in 2018, which was due to a lower valuation allowance provided for the deferred tax assets of Genesis.
Net (Loss)/Income Attributable to Non-controlling Interests
Net loss attributable to non-controlling interests amounted to $0.2 million for the three months ended September 30, 2019, compared to nil for the three months ended September 30, 2018.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $4.2 million for the three months ended September 30, 2019, compared to $0.4 million for the three months ended September 30, 2018, representing an increase of $3.8 million.
Results of Operations - Nine Months Ended September 30, 2019 and 2018
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Change | Change% | |||||||||||||
| Net product sales | $ | 315,483 | $ | 371,884 | $ | (56,401 | ) | -15.2 | % | |||||||
| Cost of products sold | 268,936 | 317,858 | (48,922 | ) | -15.4 | |||||||||||
| Gain on other sales | 4,856 | 2,972 | 1,884 | 63.4 | ||||||||||||
| Selling expenses | 10,507 | 14,067 | (3,560 | ) | -25.3 | |||||||||||
| General and administrative expenses | 13,453 | 12,574 | 879 | 7.0 | ||||||||||||
| Research and development expenses | 19,351 | 23,349 | (3,998 | ) | -17.1 | |||||||||||
| Other income, net | 1,131 | 760 | 371 | 48.8 | ||||||||||||
| Interest expense | (2,086 | ) | (1,647 | ) | (439 | ) | 26.7 | |||||||||
| Income taxes | 1,820 | 1,116 | 704 | 63.1 | ||||||||||||
| Net income | 7,534 | 5,406 | 2,128 | 39.4 | ||||||||||||
| Net loss attributable to non-controlling interests | (692 | ) | (130 | ) | (562 | ) | 432.3 | |||||||||
| Net income attributable to parent company’s common shareholders | 8,226 | 5,536 | 2,690 | 48.6 | % | |||||||||||
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 | $ | 116,510 | $ | 180,674 | $ | (64,164 | ) | -35.5 | % | $ | 112,381 | $ | 166,688 | $ | (54,307 | ) | -32.6 | % | ||||||||||||||
| Jiulong | 65,971 | 78,085 | (12,114 | ) | -15.5 | 58,736 | 69,842 | (11,106 | ) | -15.9 | ||||||||||||||||||||||
| Shenyang | 14,573 | 21,166 | (6,593 | ) | -31.1 | 12,234 | 19,110 | (6,876 | ) | -36.0 | ||||||||||||||||||||||
| Wuhu | 14,283 | 17,171 | (2,888 | ) | -16.8 | 13,700 | 16,467 | (2,767 | ) | -16.8 | ||||||||||||||||||||||
| Hubei Henglong | 89,423 | 92,375 | (2,952 | ) | -3.2 | 70,632 | 72,684 | (2,052 | ) | -2.8 | ||||||||||||||||||||||
| Henglong KYB | 54,803 | - | 54,803 | - | 50,637 | - | 50,637 | - | ||||||||||||||||||||||||
| Other Entities | 46,769 | 56,684 | (9,915 | ) | -17.5 | 37,842 | 47,273 | (9,431 | ) | -20.0 | ||||||||||||||||||||||
| Total Segments | 402,332 | 446,155 | (43,823 | ) | -9.8 | 356,162 | 392,064 | (35,902 | ) | -9.2 | ||||||||||||||||||||||
| Elimination | (86,849 | ) | (74,271 | ) | (12,578 | ) | 16.9 | (87,226 | ) | (74,206 | ) | (13,020 | ) | 17.5 | ||||||||||||||||||
| Total | $ | 315,483 | $ | 371,884 | $ | (56,401 | ) | -15.2 | % | $ | 268,936 | $ | 317,858 | $ | (48,922 | ) | -15.4 | % | ||||||||||||||
Net Product Sales
Net product sales were $315.5 million for the nine months ended September 30, 2019, compared to $371.9 million for the same period in 2018, representing a decrease of $56.4 million, or 15.2%.
Net sales of traditional steering products and parts were $252.1 million for the nine months ended September 30, 2019, compared to $298.9 million for the same period in 2018, representing a decrease of $46.8 million, or 15.7%. Net sales of electric power steering (“EPS”) were $63.4 million for the nine months ended September 30, 2019 and $73.0 million for the same period in 2018, representing a decrease of $9.6 million, or 13.2%. As a percentage of net sales, sales of EPS were 20.1% for the nine months ended September 30, 2019, consistent with 19.6% 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 $38.1 million due to the soft demand in the China domestic brand automobile market; ii) the increase in average selling price of steering gears led to a sales increase of $3.5 million; and iii) the depreciation of the RMB against the U.S. dollar in this period compared to the same period last year, resulting in a sales decrease of $21.8 million.
Further analysis by segment (before elimination) is as follows:
Cost of Products Sold
For the threenine months ended March 31,September 30, 2019, the cost of products sold was $95.1$268.9 million, compared to $112.4$317.9 million for the same period of 2018, representing a decrease of $17.3$49.0 million, or 15.4%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in sales volumes withled to a cost of sales decrease of $5.3$35.5 million; ii) the decreaseincrease in unit cost withled to a cost of sales decreaseincrease of $4.4$5.8 million; and iii) the depreciation of the RMB against the U.S. dollar withresulted in a cost of sales decrease of $7.6$19.3 million. Further analysis is as follows:
| • | Cost of products sold for Jiulong was |
| • | Cost of products sold for Shenyang was $12.2 million for the nine months ended September 30, 2019, compared to $19.1 million for the same period of 2018, representing a decrease of $6.9 million, or 36.1%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $2.8 million, a decrease in unit cost resulting in a cost of sales decrease of $3.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.9 million. |
| • | Cost of products sold for Wuhu was $13.7 million for the nine months ended September 30, 2019, compared to $16.5 million for the same period of 2018, representing a decrease of $2.8 million, or 17.0%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.8 million, a decrease in unit cost resulting in a cost of sales decrease of $0.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.5 million. |
Gross margin was 12.9%14.8% for the threenine months ended March 31,September 30, 2019, compared to 16.1%substantially consistent with 14.5% for the same period of 2018, representing a decrease of 3.2%, mainly due to the decrease in selling price and the changes in the product mix for the three months ended March 31, 2019.2018.
Selling Expenses
Selling expenses were $3.1$10.5 million for the threenine months ended March 31,September 30, 2019, as compared to $5.8$14.1 million for the same period of 2018, representing a decrease of $2.7$3.6 million, or 46.6%25.5%, which was mainly due to decreased logistics fees as a result of decreased sales transactions and lower priced logistics suppliers.
General and Administrative Expenses
General and administrative expenses were $4.6$13.5 million for the threenine months ended March 31,September 30, 2019, as compared to $4.4$12.6 million for the same period of 2018, representing an increase of $0.2$0.9 million, or 4.5%7.1%, which was mainly due to the increased payroll expenses.increase in legal fees.
Research and Development Expenses
Research and development expenses were $6.6$19.4 million for the threenine months ended March 31,September 30, 2019, as compared to $8.3$23.3 million for the threenine months ended March 31,September 30, 2018, representing a decrease of $1.7$3.9 million, or 20.5%16.7%, which was mainly due to cost control on research and development expenditures.
Other Income, Net
Other income, net was $1.4$1.1 million for the threenine months ended March 31,September 30, 2019, compared to other income, net of $0.6$0.8 million for the threenine months ended March 31,September 30, 2018, representing an increase of $0.8$0.3 million, primarily due toas a result of an increase in the unspecific purposegovernment subsidies being recognized in the first quarter of 2019.
Interest Expense
Interest expense was $0.6$2.1 million for the threenine months ended March 31,September 30, 2019, compared to interest expense of $0.4$1.6 million for the threenine months ended March 31,September 30, 2018, representing an increaseprimarily as a result of $0.2 million, primarily due to the new bank loans borrowed in 2019 and higher interest rates.increased loans.
Income Taxes
Income tax expense was $0.2$1.8 million for the threenine months ended March 31,September 30, 2019, consistent with $0.6compared to $1.1 million of income tax expense for the threenine months ended March 31,September 30, 2018. The income before income tax decreasedincreased to $1.2$9.6 million for the threenine months ended March 31,September 30, 2019 from $4.0$7.1 million for the same period in 2018 and the effective tax rate increased to 16.4%19.0% from 14.6%15.8% for the same period in 2018.2018, which was due to the valuation allowance provided for the deferred tax assets of Henglong KYB.
Net Loss Attributable to Non-controlling Interests
Net loss attributable to non-controlling interests amounted to $0.2$0.7 million for the threenine months ended March 31,September 30, 2019, compared to $0.3$0.1 million for the threenine months ended March 31,September 30, 2018.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $1.5$8.2 million for the threenine months ended March 31,September 30, 2019, compared to $4.3$5.5 million for the threenine months ended March 31,September 30, 2018, representing a decreasean increase of $2.8$2.7 million, which was mainly due to a decrease in net income of $2.8 million.or 49.1%.
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,September 30, 2019, the Company had cash and cash equivalents and short-term investments of $84.1$93.7 million, compared to $103.9 million as of December 31, 2018, representing a decrease of $19.8$10.2 million, or 19.1%9.8%.
The Company had working capital (total current assets less total current liabilities) of $151.0$149.4 million as of March 31,September 30, 2019, compared to $154.1 million as of December 31, 2018, representing a decrease of $3.1$4.7 million, or 2.0%3.0%.
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 $65.9$56.0 million (See Note 7) and bankers’ acceptances of $72.3$60.6 million (See Note 8) as of March 31,September 30, 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 $12.0$12.3 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 $12.0$12.3 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 $8.4$8.5 million, which is 70.0%69.1%, the mortgage rate, of $12.0$12.3 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 Arrangements
As of March 31,September 30, 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) | 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 | Shanghai Pudong Development Bank(1) | July-2020 | $ | 18,380 | $ | 2,224 | $ | 20,784 | |||||||||||||||
| 2. Comprehensive credit facilities | Shanghai Pudong Development Bank(1) | Jan-2019 | 16,968 | 16,968 | 17,374 | China CITIC Bank | June-2022 | 3,096 | 2,538 | 6,236 | |||||||||||||||||||||
| China CITIC Bank(1) | Oct-2019 | 72,106 | 32,422 | 20,142 | |||||||||||||||||||||||||||
| 3. Comprehensive credit facilities | China CITIC Bank | Jul-2019 | 3,416 | 2,672 | 5,492 | Bank of China(1) | Sep-2020 | 16,401 | 12,159 | - | |||||||||||||||||||||
| 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 | Hubei Bank | Nov-2019 | 25,449 | 13,974 | 53,353 | |||||||||||||||||||||
| 5. Comprehensive credit facilities | Bank of Chongqing | Sep-2021 | 743 | 554 | 2,320 | Hankou Bank(1) | Nov-2019 | 14,138 | 6,329 | - | |||||||||||||||||||||
| 6. Comprehensive credit facilities | Bank of China(1) | Sep-2019 | 19,455 | 9,749 | - | China Everbright Bank | Dec-2019 | 4,242 | 4,228 | 7,240 | |||||||||||||||||||||
| 7. Comprehensive credit facilities | Hankou Bank(1) | Nov-2019 | 14,850 | 1,297 | - | China Merchants Bank(1) | Mar-2020 | 21,208 | 15,233 | - | |||||||||||||||||||||
| 8. Comprehensive credit facilities | China Merchants Bank(1) | Mar-2020 | 22,277 | 7,802 | - | Agricultural Bank of China | Mar-2020 | 990 | 424 | 3,928 | |||||||||||||||||||||
| 9. Comprehensive credit facilities | Agriculture Bank of China | Mar-2020 | 1,040 | 149 | 4,126 | Bank of Chongqing | Sep-2021 | 707 | 527 | 2,208 | |||||||||||||||||||||
| Total | $ | 185,677 | $ | 101,294 | $ | 107,709 | $ | 176,717 | $ | 90,058 | $ | 113,891 | |||||||||||||||||||
| (1) | The comprehensive credit facility with Shanghai Pudong Development Bank is required to be guaranteed by Jielong and Hubei Henglong in addition to the above pledged assets. |
| (2) | “Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire. The amount used includes bank loans of |
| (3) | In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of |
| (4) | “Amount available” is used for the drawdown of bank loans and issuance of bank notes. For the drawdown of bank loans, this amount represents the amount that the Company can borrow immediately; for issuance of bank notes, the Company needs to pledge additional collateral in order to utilize these bank facilities. |
| (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 bank loan terms range from 78 months to 3612 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Equipment with an assessed value of approximately $56.0 million as security for its revolving comprehensive credit facility with Hubei Bank.
2. Land1.Land use rights and buildings with an assessed value of approximately $17.4$20.8 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
3. Land2.Land use rights and buildings with an assessed value of approximately $14.8$20.1 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.
4. Land3.Land use rights and buildings with an assessed value of approximately $5.5$6.2 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.
5. Land4.Equipment with an assessed value of approximately $53.4 million as security for its revolving comprehensive credit facility with Hubei Bank.
5.Land use rights and buildings with an assessed value of approximately $7.6$7.2 million as security for its comprehensive credit facility with China Everbright Bank.
6. Land6.Land use rights and buildings with an assessed value of approximately $2.3 million as security for its comprehensive credit facility with Bank of Chongqing.
7. Land use rights and buildings with an assessed value of approximately $4.1$3.9 million as security for its comprehensive credit facility with Agricultural Bank of China.
7.Land use rights and buildings with an assessed value of approximately $2.2 million as security for its comprehensive credit facility with Bank of Chongqing.
Short-term and Long-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,September 30, 2019 (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 | |||||||||||||
| Wuhu Municipal Science and Technology Bureau | Working Capital | Nov 13, 2017 | 36 | 4.75 | % | Pay quarterly | Nov 12, 2020 | 297 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 10, 2018 | 12 | 3.93 | % | Pay in arrear | Aug 9, 2019 | 1,713 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 10, 2018 | 12 | 3.84 | % | Pay in arrear | Aug 9, 2019 | 4,002 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 21, 2018 | 12 | 3.63 | % | Pay in arrear | Aug 20, 2019 | 3,438 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 21, 2018 | 12 | 3.98 | % | Pay in arrear | Aug 20, 2019 | 7,138 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 22, 2018 | 12 | 3.98 | % | Pay in arrear | Aug 20, 2019 | 3,855 | ||||||||||||
| China CITIC Bank | 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 | $ | 66,185 | ||||||||||||||||||
| Borrowing | Annual | Date of | Amount | |||||||||||||||||
| Bank | Borrowing | Term | Interest | Interest | Payable on | |||||||||||||||
| Government | Purpose | Date | (Months) | Rate | Payment | Due Date | Due Date | |||||||||||||
| Wuhu Municipal Science and Technology Bureau | Working Capital | Nov 13, 2017 | 36 | 4.75 | % | Pay quarterly | Nov 12, 2020 | 283 | ||||||||||||
| Hubei Bank(1) | Working Capital | Oct 19, 2018 | 12 | 5.22 | % | Pay monthly | Oct 19, 2019 | 2,828 | ||||||||||||
| Bank of Chongqing(1) | Working Capital | Oct 29, 2018 | 12 | 5.66 | % | Pay monthly | Oct 28, 2019 | 196 | ||||||||||||
| Bank of China | Working Capital | Nov 23, 2018 | 12 | 4.57 | % | Pay monthly | Nov 22, 2019 | 2,828 | ||||||||||||
| Bank of China | Working Capital | Dec 19, 2018 | 12 | 4.57 | % | Pay monthly | Dec 18, 2019 | 2,828 | ||||||||||||
| Bank of Chongqing | Working Capital | Dec 28, 2018 | 12 | 5.66 | % | Pay monthly | Dec 24, 2019 | 92 | ||||||||||||
| Bank of Chongqing | Working Capital | Jan 30, 2019 | 12 | 5.66 | % | Pay monthly | Jan 29, 2020 | 78 | ||||||||||||
| Bank of Chongqing | Working Capital | Mar 5, 2019 | 12 | 5.66 | % | Pay monthly | Mar 3, 2020 | 161 | ||||||||||||
| China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 9, 2020 | 1,024 | ||||||||||||
| China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 11, 2020 | 1,994 | ||||||||||||
| China CITIC Bank | Working Capital | Mar 15, 2019 | 12 | 3.63 | % | Pay in arrear | Mar 13, 2020 | 3,955 | ||||||||||||
| China Merchants Bank | Working Capital | Mar 18, 2019 | 12 | 5.00 | % | Pay monthly | Mar 18, 2020 | 6,433 | ||||||||||||
| China CITIC Bank | Working Capital | Mar 26, 2019 | 12 | 3.52 | % | Pay in arrear | Mar 24, 2020 | 1,106 | ||||||||||||
| Agricultural Bank of China | Working Capital | Mar 27, 2019 | 12 | 4.35 | % | Pay monthly | Mar 26, 2020 | 141 | ||||||||||||
| Agricultural Bank of China | Working Capital | May 10, 2019 | 10 | 4.40 | % | Pay monthly | Mar 25, 2020 | 283 | ||||||||||||
| Bank of China | Working Capital | May 27, 2019 | 12 | 4.35 | % | Pay monthly | May 26, 2020 | 6,504 | ||||||||||||
| China CITIC Bank | Working Capital | Jun 26, 2019 | 12 | 3.49 | % | Pay in arrear | Jun 19, 2020 | 888 | ||||||||||||
| Hankou Bank | Working Capital | Jun 28, 2019 | 12 | 4.80 | % | Pay monthly | Jun 28, 2020 | 5,655 | ||||||||||||
| China CITIC Bank | Working Capital | Jul 1, 2019 | 12 | 3.49 | % | Pay in arrear | Jun 24, 2020 | 465 | ||||||||||||
| China CITIC Bank | Working Capital | Jul 8, 2019 | 12 | 3.47 | % | Pay in arrear | Jul 3, 2020 | 1,293 | ||||||||||||
| China CITIC Bank | Working Capital | Jul 9, 2019 | 12 | 3.47 | % | Pay in arrear | Jul 7, 2020 | 4,316 | ||||||||||||
| China CITIC Bank | Working Capital | Jul 9, 2019 | 12 | 3.47 | % | Pay in arrear | Jul 7, 2020 | 1,762 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 6, 2019 | 12 | 5.22 | % | Pay monthly | Aug 6, 2020 | 1,979 | ||||||||||||
| Financial Bureau of Jingzhou Development Zone | Working Capital | Aug 7, 2019 | 23 | 3.80 | % | Pay annually | Jun 30, 2021 | 2,828 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 12, 2019 | 8 | 4.80 | % | Pay monthly | Apr 12, 2020 | 4,242 | ||||||||||||
| China CITIC Bank | Working Capital | Aug 23, 2019 | 8 | 4.80 | % | Pay monthly | Apr 23, 2020 | 1,414 | ||||||||||||
| Financial Bureau of Jingzhou Development Zone | Working Capital | Sep 3, 2019 | 22 | 3.80 | % | Pay annually | Jun 30, 2021 | 4,242 | ||||||||||||
| China CITIC Bank | Working Capital | Sep 11, 2019 | 12 | 3.15 | % | Pay in arrear | Sep 9, 2020 | 2,534 | ||||||||||||
| China CITIC Bank | Working Capital | Sep 20, 2019 | 12 | 3.04 | % | Pay in arrear | Sep 11, 2020 | 1,042 | ||||||||||||
| $ | 63,394 | |||||||||||||||||||
| (1) | The company repaid these bank loans in October 2019. |
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 $6.8$6.4 million with China Merchants Bank, the bank loanloans of $0.1 million and $0.3 million with AgricultureAgricultural Bank of China, the bank loan of $3.0$2.8 million with Hubei Bank, the bank loanloans of $2.2$4.2 million and $1.4 million with China CITIC Bank, the bank loan of $5.7 million with Hankou Bank, the government loans of $2.8 million and $4.2 million with Financial Bureau of Jingzhou Development Zone 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 100% of the specified loan rate listed in the table above or early repayment will be triggered. The Company has to pay interest at the interest rate described in the table on the 20th of each month or 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% of the specified loan rate for bank loans with Bank of China, and penalty interest at 50% of the specified loan rate for bank loans with other banks.
The Company has complied with such financial covenants as of March 31,September 30, 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,September 30, 2019 (figures are in thousands of USD):
| Purpose | Term (Months) | Due Date | Amount Payable on Due Date | Term (Months) | Due Date | Amount Payable on Due Date | ||||||||||||
| Working Capital(1) | 6 | Apr. 2019 | $ | 14,783 | 6 | Oct. 2019 | 11,002 | |||||||||||
| Working Capital | 6 | May 2019 | 11,945 | 6 | Nov. 2019 | 10,047 | ||||||||||||
| Working Capital | 6 | Jun. 2019 | 14,662 | 6 | Dec. 2019 | 7,544 | ||||||||||||
| Working Capital | 6 | Jul. 2019 | 11,859 | 6 | Jan. 2020 | 14,167 | ||||||||||||
| Working Capital | 6 | Aug. 2019 | 10,856 | 6 | Feb. 2020 | 11,943 | ||||||||||||
| Working Capital | 6 | Sep. 2019 | 8,152 | 6 | Mar. 2020 | 5,851 | ||||||||||||
| Total (See Note 8) | $ | 72,257 | $ | 60,554 | ||||||||||||||
| (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,September 30, 2019, and believes it will continue to comply with them.
Cash Flows
| (a) | Operating Activities |
Net cash used inprovided by operating activities for the threenine months ended March 31,September 30, 2019 was $18.2$4.1 million, compared with net cash used inprovided by operating activities of $7.5$9.0 million for the same period of 2018, representing an increasea decrease in net cash outflowinflow of $10.7$4.9 million, which was mainly due to the net effect of (1) the decrease in net income excluding non-cash items by $4.0$2.7 million and (2) the increasedecrease in cash outflowsinflows from movements of operating assets and liabilities by $6.7$2.2 million.
| (b) | Investing Activities |
Net cash used in investing activities duringfor the threenine months ended March 31,September 30, 2019 was $10.0$16.3 million, as compared to net cash provided byused in investing activities of $30.6$2.3 million for the same period of 2018, representing an increase of cash outflows by $40.7$14.0 million, which was mainly due to the net effect of (1) a decrease in cash inflows due to the repayment of the loan to a related party by $20.4 million, (2) a decrease in payments for equity investments by $3.5 million, and (2)(3) a combination of other factors contributing an increase of cash inflows by $2.9 million, including an increase in government subsidies received; and cash payment to purchase short-term investments by $14.1 million.received from disposal of property, plant and equipment.
| (c) | Financing Activities |
Net cash provided by financing activities for the threenine months ended March 31,September 30, 2019 was $2.0$1.8 million, compared to net cash usedprovided of $11.4$23.7 million for the same period of 2018, representing an increasea decrease in cash inflows by $13.4$21.9 million, which was mainly due to the net effect of decreased(1) a decrease in proceeds from bank loanssale and leaseback transaction by $4.4$11.8 million, (2) a decrease in cash received from capital contribution by non-controlling interest holder by $12.2 million and (3) an increase in repayment of the borrowing for sale and leasebacknet cash inflows from loans by $1.1 million and the decrease in repayments of bank loan by $19.2$3.3 million.
Off-Balance Sheet Arrangements
As of March 31,September 30, 2019 and December 31, 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, 2018 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,September 30, 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,September 30, 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,September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
3439
| 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. The motion to dismiss was denied on July 17, 2019. The directors of the Company will continue to answer this 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 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 2018 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: | By: | /s/Qizhou Wu | |
| Qizhou Wu | |||
| President and Chief Executive Officer | |||
| Date: | By: | /s/Jie Li | |
| Jie Li | |||
| Chief Financial Officer | |||
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