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 June
30, 2015
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- 832- 9196 |
|
|
|
|
|
Issuer’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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
x No
¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
¨ |
|
Accelerated filer |
¨ |
|
|
|
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Non-accelerated filer (Do not check if a smaller
reporting company) |
¨ |
|
Smaller reporting company |
x |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨ No
x
As of August 13, 2015, the Company had 32,121,019 shares of
common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Cautionary Statement
This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted
to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,”
“can,” “continues,” “could,” “estimates,” “expects,” “intends,”
“may,” “plans,” “potential,” “predicts,” “should” or “will”
or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties,
including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and
Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot
guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking
statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed,
and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q
is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified
in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.
PART I — FINANCIAL
INFORMATION
|
Item 1. |
FINANCIAL STATEMENTS. |
China Automotive Systems, Inc.
and Subsidiaries
Condensed Unaudited
Consolidated Statements of Operations and Comprehensive Income
(In thousands of
USD, except share and per share amounts)
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
Net product sales, including $11,640 and $14,928 to related parties for the three months ended June 30, 2015 and 2014 | |
$ | 109,167 | | |
$ | 115,476 | |
Cost of products sold, including $5,630 and $7,461 purchased from related parties for the three months ended June 30, 2015 and 2014 | |
| 87,374 | | |
| 93,893 | |
Gross profit | |
| 21,793 | | |
| 21,583 | |
Gain on other sales | |
| 713 | | |
| 8,226 | |
Less: Operating expenses | |
| | | |
| | |
Selling expenses | |
| 4,046 | | |
| 4,327 | |
General and administrative expenses | |
| 3,787 | | |
| 3,776 | |
Research and development expenses | |
| 6,413 | | |
| 5,180 | |
Total operating expenses | |
| 14,246 | | |
| 13,283 | |
Income from operations | |
| 8,260 | | |
| 16,526 | |
Other income, net | |
| 271 | | |
| 139 | |
Interest expense | |
| (65 | ) | |
| (546 | ) |
Financial income, net | |
| 709 | | |
| 518 | |
Income before income tax expenses and equity in earnings of affiliated companies | |
| 9,175 | | |
| 16,637 | |
Less: Income taxes | |
| 1,645 | | |
| 3,126 | |
Equity in earnings of affiliated companies | |
| 98 | | |
| 75 | |
Net income | |
| 7,628 | | |
| 13,586 | |
Net income (loss) attributable to non-controlling interests | |
| (31 | ) | |
| 2,580 | |
Net income attributable to parent company’s common shareholders | |
$ | 7,659 | | |
$ | 11,006 | |
Comprehensive income: | |
| | | |
| | |
Net income | |
$ | 7,628 | | |
$ | 13,586 | |
Other comprehensive income: | |
| | | |
| | |
Foreign currency translation gain (loss), net of tax | |
| 1,436 | | |
| (25 | ) |
Comprehensive income | |
| 9,064 | | |
| 13,561 | |
Comprehensive income attributable to non-controlling interests | |
| 34 | | |
| 2,576 | |
Comprehensive income attributable to parent company | |
$ | 9,030 | | |
$ | 10,985 | |
| |
| | | |
| | |
Net income attributable to parent company’s common shareholders per share | |
| | | |
| | |
| |
| | | |
| | |
Basic – | |
$ | 0.24 | | |
$ | 0.39 | |
| |
| | | |
| | |
Diluted- | |
$ | 0.24 | | |
$ | 0.39 | |
Weighted average number of common shares outstanding | |
| | | |
| | |
Basic | |
| 32,121,019 | | |
| 28,043,019 | |
Diluted | |
| 32,138,438 | | |
| 28,064,376 | |
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 Operations and Comprehensive Income
(In thousands of
USD, except share and per share amounts)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Net product sales, including $19,939 and $26,738 to related parties for the six months ended June 30, 2015 and 2014 | |
$ | 232,610 | | |
$ | 229,782 | |
Cost of products sold, including $12,638 and $14,652 purchased from related parties for the six months ended June 30, 2015 and 2014 | |
| 189,146 | | |
| 186,861 | |
Gross profit | |
| 43,464 | | |
| 42,921 | |
Gain on other sales | |
| 2,371 | | |
| 9,135 | |
Less: Operating expenses | |
| | | |
| | |
Selling expenses | |
| 7,670 | | |
| 7,369 | |
General and administrative expenses | |
| 8,235 | | |
| 7,322 | |
Research and development expenses | |
| 12,306 | | |
| 11,068 | |
Total operating expenses | |
| 28,211 | | |
| 25,759 | |
Income from operations | |
| 17,624 | | |
| 26,297 | |
Other income, net | |
| 365 | | |
| 378 | |
Interest expense | |
| (540 | ) | |
| (824 | ) |
Financial income, net | |
| 1,463 | | |
| 1,010 | |
Income before income tax expenses and equity in earnings of affiliated companies | |
| 18,912 | | |
| 26,861 | |
Less: Income taxes | |
| 3,055 | | |
| 5,101 | |
Equity in earnings of affiliated companies | |
| 164 | | |
| 137 | |
Net income | |
| 16,021 | | |
| 21,897 | |
Net income (loss) attributable to non-controlling interests | |
| (150 | ) | |
| 4,116 | |
Net income attributable to parent company’s common shareholders | |
$ | 16,171 | | |
$ | 17,781 | |
Comprehensive income: | |
| | | |
| | |
Net income | |
$ | 16,021 | | |
$ | 21,897 | |
Other comprehensive income: | |
| | | |
| | |
Foreign currency translation gain (loss), net of tax | |
| 161 | | |
| (2,422 | ) |
Comprehensive income | |
| 16,182 | | |
| 19,475 | |
Comprehensive income (loss) attributable to non-controlling interests | |
| (167 | ) | |
| 3,712 | |
Comprehensive income attributable to parent company | |
$ | 16,349 | | |
$ | 15,763 | |
| |
| | | |
| | |
Net income attributable to parent company’s common shareholders per share | |
| | | |
| | |
| |
| | | |
| | |
Basic – | |
$ | 0.50 | | |
$ | 0.63 | |
| |
| | | |
| | |
Diluted- | |
$ | 0.50 | | |
$ | 0.63 | |
Weighted average number of common shares outstanding | |
| | | |
| | |
Basic | |
| 32,121,019 | | |
| 28,043,019 | |
Diluted | |
| 32,136,585 | | |
| 28,063,939 | |
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)
| |
June 30, 2015 | | |
December 31, 2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 70,889 | | |
$ | 68,505 | |
Pledged cash deposits | |
| 32,810 | | |
| 33,633 | |
Short-term investments | |
| 37,760 | | |
| 41,017 | |
Accounts and notes receivable, net - unrelated parties | |
| 276,648 | | |
| 282,348 | |
Accounts and notes receivable, net - related parties | |
| 27,003 | | |
| 22,760 | |
Advance payments and others - unrelated parties | |
| 2,538 | | |
| 2,124 | |
Advance payments and others - related parties | |
| 784 | | |
| 741 | |
Inventories | |
| 67,794 | | |
| 64,419 | |
Current deferred tax assets | |
| 7,334 | | |
| 7,078 | |
Total current assets | |
| 523,560 | | |
| 522,625 | |
Non-current assets: | |
| | | |
| | |
Property, plant and equipment, net | |
| 83,027 | | |
| 82,466 | |
Intangible assets, net | |
| 3,124 | | |
| 3,419 | |
Other receivables, net - unrelated parties | |
| 1,825 | | |
| 1,619 | |
Other receivables, net - related parties | |
| 19 | | |
| 76 | |
Advance payment for property, plant and equipment - unrelated parties | |
| 8,481 | | |
| 6,755 | |
Advance payment for property, plant and equipment - related parties | |
| 2,693 | | |
| 2,085 | |
Long-term investments | |
| 6,380 | | |
| 4,575 | |
Goodwill | |
| 646 | | |
| 645 | |
Non-current deferred tax assets | |
| 5,458 | | |
| 4,896 | |
Total assets | |
$ | 635,213 | | |
$ | 629,161 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Bank and government loans | |
$ | 45,387 | | |
$ | 43,988 | |
Accounts and notes payable - unrelated parties | |
| 209,777 | | |
| 213,090 | |
Accounts and notes payable - related parties | |
| 5,198 | | |
| 4,857 | |
Customer deposits | |
| 1,224 | | |
| 1,885 | |
Accrued payroll and related costs | |
| 5,963 | | |
| 7,554 | |
Accrued expenses and other payables | |
| 35,296 | | |
| 35,429 | |
Accrued pension costs | |
| 5,450 | | |
| 5,586 | |
Taxes payable | |
| 8,331 | | |
| 11,557 | |
Amounts due to shareholders/directors | |
| 380 | | |
| 380 | |
Current deferred tax liabilities | |
| 165 | | |
| 189 | |
Total current liabilities | |
| 317,171 | | |
| 324,515 | |
Long-term liabilities: | |
| | | |
| | |
Advances payable | |
| 3,708 | | |
| 6,156 | |
Non-current deferred tax liabilities | |
| 302 | | |
| 321 | |
Total liabilities | |
$ | 321,181 | | |
$ | 330,992 | |
| |
| | | |
| | |
Commitments and Contingencies (See Note 29) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of June 30, 2015 and December 31, 2014, respectively | |
$ | 3 | | |
$ | 3 | |
Additional paid-in capital | |
| 64,522 | | |
| 64,522 | |
Retained earnings- | |
| | | |
| | |
Appropriated | |
| 10,349 | | |
| 10,178 | |
Unappropriated | |
| 195,434 | | |
| 179,435 | |
Accumulated other comprehensive income | |
| 36,297 | | |
| 36,119 | |
Treasury stock – 217,283 and 217,283 shares as of June 30, 2015 and December 31, 2014, respectively | |
| (1,000 | ) | |
| (1,000 | ) |
Total parent company stockholders' equity | |
| 305,605 | | |
| 289,257 | |
Non-controlling interests | |
| 8,427 | | |
| 8,912 | |
Total stockholders' equity | |
| 314,032 | | |
| 298,169 | |
Total liabilities and stockholders' equity | |
$ | 635,213 | | |
$ | 629,161 | |
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)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 16,021 | | |
$ | 21,897 | |
Adjustments to reconcile net income from operations to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 7,897 | | |
| 7,751 | |
Increase (decrease) in allowance for doubtful accounts | |
| (32 | ) | |
| 121 | |
Inventory write downs | |
| 1,307 | | |
| 1,922 | |
Deferred income taxes | |
| (849 | ) | |
| (413 | ) |
Equity in earnings of affiliated companies | |
| (164 | ) | |
| (128 | ) |
Gain on disposal of fixed assets | |
| 1 | | |
| (7,506 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Pledged deposits | |
| 840 | | |
| 6,695 | |
Accounts and notes receivable | |
| 1,843 | | |
| (25,139 | ) |
Advance payments and others | |
| (449 | ) | |
| 1,038 | |
Inventories | |
| (4,604 | ) | |
| (7,461 | ) |
Increase (decrease) in: | |
| | | |
| | |
Accounts and notes payable | |
| (2,951 | ) | |
| 7,948 | |
Customer deposits | |
| (661 | ) | |
| 57 | |
Accrued payroll and related costs | |
| (1,595 | ) | |
| (790 | ) |
Accrued expenses and other payables | |
| 1,268 | | |
| 191 | |
Accrued pension costs | |
| (140 | ) | |
| 502 | |
Taxes payable | |
| (3,237 | ) | |
| 1,007 | |
Net cash provided by operating activities | |
| 14,495 | | |
| 7,692 | |
Cash flows from investing activities: | |
| | | |
| | |
(Increase) decrease in other receivables | |
| (153 | ) | |
| 636 | |
Cash received from property, plant and equipment sales | |
| 570 | | |
| 6,777 | |
Payments to acquire property, plant and equipment | |
| (13,705 | ) | |
| (8,194 | ) |
Payments to acquire intangible assets | |
| (825 | ) | |
| (5 | ) |
Purchase of short-term investments | |
| (11,388 | ) | |
| (15,882 | ) |
Proceeds from maturities of short-term investments | |
| 14,672 | | |
| 12,597 | |
Acquisition of Fujian Qiaolong, net of cash acquired | |
| - | | |
| (2,976 | ) |
Investment under cost method | |
| (1,636 | ) | |
| - | |
Net cash used in investing activities | |
| (12,465 | ) | |
| (7,047 | ) |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from government and bank loan | |
| 6,420 | | |
| 6,774 | |
Repayments of government and bank loan | |
| (5,048 | ) | |
| (3,251 | ) |
Dividends paid to the non-controlling interest holders | |
| (814 | ) | |
| (1,985 | ) |
Dividends paid to the holders of the Company’s common stock | |
| (252 | ) | |
| - | |
Increase in amounts due to shareholders/directors | |
| - | | |
| 69 | |
Net cash provided by financing activities | |
| 306 | | |
| 1,607 | |
Effects of exchange rates on cash and cash equivalents | |
| 48 | | |
| (474 | ) |
Net increase in cash and cash equivalents | |
| 2,384 | | |
| 1,778 | |
Cash and cash equivalents at beginning of period | |
| 68,505 | | |
| 53,979 | |
Cash and cash equivalents at end of period | |
$ | 70,889 | | |
$ | 55,757 | |
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 (continued)
(In thousands of
USD unless otherwise indicated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Cash paid for interest | |
$ | 561 | | |
$ | 603 | |
Cash paid for income taxes | |
| 5,487 | | |
| 3,109 | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Advance payments for acquiring property, plant and equipment | |
$ | 6,732 | | |
$ | 5,155 | |
Dividends payable to non-controlling interest holders | |
| 318 | | |
| 8,127 | |
Dividends payable to the Company’s shareholders | |
| - | | |
| 5,048 | |
Non-controlling interests arising as a result of acquisition of Fujian Qiaolong | |
| - | | |
| 2,793 | |
Accounts receivable for selling property, plant and equipment | |
| - | | |
| 1,890 | |
Accounts payable for acquiring property, plant and equipment | |
| 238 | | |
| - | |
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 Six Months Ended June
30, 2015 and 2014
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. Great Genesis is mainly engaged in the manufacture and sale of automotive systems
and components through its controlled subsidiaries and the joint ventures, as described below.
Henglong USA Corporation, “HLUSA,”
incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and is mainly engaged 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 entities established in the People's Republic of China, the “PRC,” and Brazil as of June 30, 2015
and December 31, 2014.
| |
Percentage Interest | |
Name of Entity | |
June 30, 2015 | | |
December 31, 2014 | |
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 | % |
Beijing Henglong Automotive System Co., Ltd., “Beijing Henglong” 9 | |
| 50.00 | % | |
| 50.00 | % |
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 10 | |
| 70.00 | % | |
| 70.00 | % |
CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong” 11 | |
| 80.00 | % | |
| 80.00 | % |
Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong” 12 | |
| 51.00 | % | |
| 51.00 | % |
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 13 | |
| 85.00 | % | |
| 85.00 | % |
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 14 | |
| 100.00 | % | |
| - | |
|
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 the Testing Center, which mainly engages in the research and development of new products. The registered capital of the Testing Center was RMB30.0 million, equivalent to approximately $4.4 million. |
|
9. |
Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric power steering systems and parts. According to the joint venture agreement, the Company does not have voting control of Beijing Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such investment is accounted for by the equity accounting method. |
|
|
|
|
10. |
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. |
|
11. |
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. |
|
12. |
In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolong 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. |
|
13. |
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. The registered capital of Wuhan Chuguanjie is RMB30.0 million, equivalent to approximately $4.9 million. Jielong has completed the capital injection of RMB30.0 million, equivalent to approximately $4.9 million. |
|
14. |
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. The registered capital of Shanghai Henglong was RMB3.0 million, equivalent to approximately $0.5 million. Hubei Henglong has completed the capital injection of RMB3.0 million, equivalent to approximately $0.5 million. |
On
September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish a venture capital fund,
the “Venture Fund”, which mainly focuses on investments in emerging automobiles and parts industries. Total
share capital of the Venture Fund is RMB280.0 million, equivalent to approximately $45.5 million. The initial term of the
fund is eight years. Hubei Henglong has committed to make investments into the Venture Fund of 17.9% or RMB50.0 million,
equivalent to approximately $8.1 million, which will be paid in three installments. Hubei Henglong is a limited partner of
the Venture Fund. It has no seat on the investment committee of the Venture Fund and does not have any other rights that give
it significant influence on the operation and decision-making of the Venture Fund. Furthermore, such investment has no
readily determinable fair value. Therefore, this investment will be accounted for using the cost method. On October 20,
2014, Hubei Henglong made its first capital contribution of RMB5.0 million, equivalent to approximately $0.8 million. On
April 24, 2015, Hubei Henglong made its second capital contribution of RMB10.0 million, equivalent to approximately $1.6
million (See Note 29).
2. |
Basis of presentation and significant accounting policies |
|
(a) |
Basis of Presentation |
Basis of Presentation – The accompanying
condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of
subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation.
The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Article
10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles
for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements
and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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, 2014 is derived from the Company’s audited financial statements at that date but does not include all
of the information and footnotes required by U.S. GAAP for complete financial statements.
Certain information and footnote disclosures
normally included in financial statements that have been prepared in accordance with U.S. GAAP have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the
disclosures contained in these financial statements are adequate to make the information presented herein not misleading. For further
information, please refer to the financial statements and the notes thereto included in the Company’s 2014 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission.
The results of operations for the three
months and six months ended June 30, 2015 are not necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2015.
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.
|
(b) |
Recent Accounting Pronouncements |
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606)”. ASU
2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current U.S. GAAP and replace
it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue
based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption
is permitted for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Entities
can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. Management
is currently assessing the impact the adoption of ASU 2014-09 and the effect of the standard on the Company’s ongoing financial
reporting.
In April 2015, the FASB issued ASU No.
2015-3, "Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires
debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For the Company,
the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. The new guidance will be applied on a retrospective basis and early adoption is permitted. The Company
is in the process of evaluating the impact of adopting this guidance.
|
(c) |
Significant Accounting Policies |
There have been no updates to the significant
accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2014.
In the second quarter of 2014, the Company
acquired a 51.0% ownership interest in Fujian Qiaolong, a special purpose vehicle manufacturer and dealer with automobile repacking
qualification, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescue vehicle 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. The acquisition expands the Company’s
scope of business and improves the Company’s product mix. The results of Fujian Qiaolong have been included since the date
of acquisition and are reflected in the Company’s Condensed Unaudited Consolidated Statements of Operations and Comprehensive
Income. The total purchase price was approximately $3.0 million. The goodwill resulting from the acquisition is not deductible
for tax purposes.
The following table summarizes the allocation of consideration
and the respective fair values of the assets acquired and liabilities assumed in the Fujian Qiaolong acquisition as of the date
of purchase (figures are in thousands of USD):
Total purchase price: | |
| | |
Cash consideration paid to acquire ownership interest | |
$ | 3,007 | |
| |
| | |
Assets | |
| | |
Cash and cash equivalents | |
$ | 31 | |
Current assets, net of cash acquired | |
| 8,428 | |
Deferred tax asset | |
| 69 | |
Property and equipment | |
| 3,694 | |
Intangible assets | |
| 864 | |
Goodwill | |
| 642 | |
Total assets consolidated into the Company | |
$ | 13,728 | |
Liabilities | |
| | |
Current liabilities, excluding current deferred tax liabilities | |
| (7,352 | ) |
Deferred tax liabilities | |
| (448 | ) |
Other liabilities | |
| (128 | ) |
Total liabilities consolidated into the Company | |
| (7,928 | ) |
Non-controlling interests at fair value | |
| (2,793 | ) |
Total equity consolidated into the Company | |
$ | (3,007 | ) |
Pro forma results of operations for the
acquisition of Fujian Qiaolong have not been presented because it is not material to the consolidated results of operations.
For the acquisition of Fujian Qiaolong,
intangible assets which have been assessed and recognized, such as patents and developed technology, have a weighted-average useful
life of 4.7 years.
Pledged cash deposits are used as guarantees
for the Company’s notes payable and their use is restricted. The Company regularly pays some of its suppliers by bank notes.
The Company has to make a cash deposit, generally equivalent to 30% - 100% of the face value of the relevant bank note in order
to obtain the bank note.
5. |
Short-term investments |
Short-term investments comprise time deposits
with maturity terms of more than three months but due within one year. The carrying values of time deposits approximate fair value
because of their short maturities. The interest earned is recognized in the condensed unaudited statements of operations and comprehensive
income over the contractual term of the deposit.
As of June 30, 2015, the Company had pledged
short-term investments of RMB33.0 million, equivalent to approximately $5.4 million, to secure loans under the credit facility
issued by HSBC Bank (China) Company Limited Hong Kong branch, “HSBC HK”, and the use of the pledged short-term investments
is restricted (See Note 14).
6. |
Accounts and notes receivable, net |
The Company’s accounts and notes
receivable as of June 30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Accounts receivable - unrelated parties (1) | |
$ | 144,630 | | |
$ | 137,165 | |
Notes receivable - unrelated parties (2) (3) | |
| 133,395 | | |
| 146,597 | |
Total accounts and notes receivable- unrelated parties | |
| 278,025 | | |
| 283,762 | |
Less: allowance for doubtful accounts - unrelated parties | |
| (1,377 | ) | |
| (1,414 | ) |
Accounts and notes receivable, net - unrelated parties | |
| 276,648 | | |
| 282,348 | |
Accounts and notes receivable, net - related parties | |
| 27,003 | | |
| 22,760 | |
Accounts and notes receivable, net | |
$ | 303,651 | | |
$ | 305,108 | |
|
(1) |
As of June 30, 2015 and December 31, 2014, the Company has pledged $42.6 million and $34.3 million, respectively, of accounts receivable as security for its comprehensive credit facilities with banks in China. |
|
(2) |
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks. |
|
(3) |
As of June 30, 2015, Henglong collateralized
its notes receivable in an amount of RMB236.8 million, equivalent to approximately $38.7 million, including RMB211.5 million, equivalent
to approximately $34.6 million, as security in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,”
for the purpose of obtaining the Henglong Standby Letter of Credit (as defined in Note 14) which is used as security for the non-revolving
credit facility in the amount of $30.0 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC
Macau”, and RMB25.3 million, equivalent to approximately $4.1 million, as security in favor of the Chinese government for
the low-interest government loan (See Note 14).
As of December 31, 2014, Henglong collateralized
its notes receivable in an amount of RMB232.5 million (equivalent to approximately $38.0 million) as security for the credit facilities
with banks in China and the Chinese government, including RMB201.8 million (equivalent to approximately $33.0 million) in favor
of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose of obtaining the Henglong
Standby Letter of Credit which is used as security for the non-revolving credit facility in the amount of $30.0 million provided
by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau,” and RMB30.7 million (equivalent to approximately
$5.0 million) in favor of the Chinese government as security for the low-interest government loan. |
During the three months ended March 31,
2015, the Company made a $2.4 million payment to a customer for new product testing services provided by the customer. As the Company
cannot reasonably demonstrate that such payment amount represents the fair value of the services provided by its customer, the
payment was recorded as a reduction of net sales in accordance with U.S. GAAP.
The Company’s inventories as of June
30, 2015 and December 31, 2014 consisted of the following (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Raw materials | |
$ | 16,286 | | |
$ | 15,842 | |
Work in process | |
| 12,732 | | |
| 11,849 | |
Finished goods | |
| 38,776 | | |
| 36,728 | |
Total | |
$ | 67,794 | | |
$ | 64,419 | |
Provision for inventories amounted to $1.3
million and $1.9 million for the six months ended June 30, 2015 and 2014, respectively.
9. |
Other receivables, net |
The Company’s other receivables as
of June 30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Other receivables - unrelated parties (1) | |
$ | 837 | | |
$ | 707 | |
Other receivables - employee housing loans (2) | |
| 1,055 | | |
| 990 | |
Less: allowance for doubtful accounts- unrelated parties | |
| (67 | ) | |
| (78 | ) |
Other receivables, net - unrelated parties | |
$ | 1,825 | | |
$ | 1,619 | |
| |
June 30, 2015 | | |
December 31, 2014 | |
Other receivables - related parties (1) | |
$ | 686 | | |
$ | 725 | |
Less: allowance for doubtful accounts- related parties | |
| (667 | ) | |
| (649 | ) |
Other receivables, net - related parties | |
$ | 19 | | |
$ | 76 | |
|
(1) |
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans. These receivables originate as part of the Company's normal operating activities and are periodically settled in cash. |
|
(2) |
On May 28, 2014, the board of directors of the Company approved a loan program under which the Company will lend an aggregate of up to RMB50.0 million, equivalent to approximately $8.1 million, to the employees of the Company to assist them in purchasing houses. Employees are required to pay interest at an annual rate of 5.4%. The term of the loans is generally five years. |
10. |
Long-term investments |
As of June 30, 2015 and December 31, 2014,
the Company’s balance of long-term investment was $6.4 million and $4.6 million, respectively. For the long-term investments
in which the Company has significant influence but no controlling power, such investments were accounted for using the equity method;
for long-term investments in which the Company has no significant influence and such investments have no readily determinable fair
values, such investments were accounted for using the cost method.
The Company’s share of net assets and net income is reported
as “long-term investment” on the condensed unaudited consolidated balance sheets and “equity in earnings of affiliated
companies” on the condensed unaudited consolidated statements of operations and comprehensive income. The Company’s
condensed unaudited consolidated financial statements reflect the equity earnings of non-consolidated affiliates of $0.16 million
and $0.13 million for the six months ended June 30, 2015 and 2014, respectively.
11. |
Property, plant and equipment, net |
The Company’s property, plant and equipment as of June
30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Land use rights and buildings | |
$ | 54,218 | | |
$ | 48,956 | |
Machinery and equipment | |
| 121,207 | | |
| 119,597 | |
Electronic equipment | |
| 7,997 | | |
| 7,706 | |
Motor vehicles | |
| 5,102 | | |
| 4,609 | |
Construction in progress | |
| 5,891 | | |
| 5,463 | |
Total amount of property, plant and equipment (1) | |
| 194,415 | | |
| 186,331 | |
Less: Accumulated depreciation (2) | |
| (111,388 | ) | |
| (103,865 | ) |
Total amount of property, plant and equipment, net (3) | |
$ | 83,027 | | |
$ | 82,466 | |
|
(1) |
Through the acquisition of Fujian Qiaolong in the second quarter of 2014, the Company acquired $3.7 million of property, plant and equipment, consisting of $3.4 million of land use rights and buildings, $0.2 million of machinery and equipment, and $0.1 million of motor vehicles, which are depreciated over a weighted average life of 43.0 years, 3.5 years, and 3.1 years, respectively. |
|
(2) |
Depreciation charges were $3.8 million and $3.9 million for the three months ended June 30, 2015 and 2014, respectively, and $7.6 million and $7.6 million for the six months ended June 30, 2015 and 2014, respectively. |
| (3) | As of June 30, 2015 and December 31, 2014, the Company
had pledged property, plant and equipment with net book value of $44.1 million and $45.5 million, respectively, for its comprehensive
credit facilities with banks in China. |
| (4) | During the six months ended June 30, 2015, $1,628
of government subsidies were recorded as a reduction of the cost of property, plant and equipment. |
The Company’s intangible assets as
of June 30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Costs: | |
| | | |
| | |
Patent technology | |
$ | 4,891 | | |
$ | 4,887 | |
Management software license | |
| 940 | | |
| 932 | |
Total intangible assets (1) | |
| 5,831 | | |
| 5,819 | |
Less: Amortization (2) | |
| (2,707 | ) | |
| (2,400 | ) |
Total intangible assets, net | |
$ | 3,124 | | |
$ | 3,419 | |
|
(1) |
Through the acquisition of Fujian Qiaolong in the second quarter of 2014, the Company acquired $0.9 million of intangible assets, consisting of $0.9 million of patent technology and $nil of management software licenses, which are amortized over a weighted average life of 4.7 years and 1.1 years, respectively. |
|
(2) |
Amortization expenses were $0.30 million and $0.12 million for the three months ended June 30, 2015 and 2014, respectively, and $0.5 million and $0.17 million for the six months ended June 30, 2015 and 2014, respectively. |
13. |
Deferred income tax assets |
In accordance with the provisions of ASC
Topic 740, “Income Taxes”, the Company assesses, on a quarterly basis, its ability to realize its deferred tax
assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a
valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company
considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities;
the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing
and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting
further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry
period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of estimated deferred income tax assets as of
June 30, 2015 and December 31, 2014 are as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Losses carry forward (U.S.) (1) | |
$ | 6,984 | | |
$ | 7,014 | |
Losses carry forward (PRC) (1) | |
| 2,767 | | |
| 2,000 | |
Product warranties and other reserves | |
| 4,717 | | |
| 4,531 | |
Property, plant and equipment | |
| 4,836 | | |
| 4,684 | |
Share-based compensation | |
| 266 | | |
| 266 | |
Bonus accrual | |
| 418 | | |
| 372 | |
Other accruals | |
| 1,043 | | |
| 1,319 | |
Others | |
| 1,544 | | |
| 1,496 | |
Total deferred tax assets | |
| 22,575 | | |
| 21,682 | |
Less: taxable temporary difference related to revenue recognition | |
| (388 | ) | |
| (472 | ) |
Total deferred tax assets, net | |
| 22,187 | | |
| 21,210 | |
Less: Valuation allowance | |
| (9,395 | ) | |
| (9,236 | ) |
Total deferred tax assets, net of valuation allowance (2) | |
$ | 12,792 | | |
$ | 11,974 | |
|
(1) |
The net operating losses carry forward for the U.S. entity for income tax purposes are available to reduce future years' taxable income. These losses will expire, if not utilized, in 20 years. Net operating losses carry forward for non-U.S. entities can be carried forward for 5 years to offset taxable income. However, as of June 30, 2015, the valuation allowance was $9.4 million, including $7.3 million allowance for the Company’s deferred tax assets in the United States and $2.1 million allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the United States, management believes that the deferred tax assets in the United States are not likely to be realized in the future. For the non-U.S. deferred tax assets, pursuant to certain tax laws and regulations in China, the management believes such amount will not be used to offset future taxable income. |
|
(2) |
Approximately $5.5 million and $4.9 million of net deferred income tax asset as of June 30, 2015 and December 31, 2014, respectively, are included in non-current deferred tax assets in the accompanying condensed unaudited consolidated balance sheets. The remaining $7.3 million and $7.1 million of net deferred income tax assets as of June 30, 2015 and December 31, 2014, respectively, are included in current deferred tax assets. |
14. |
Bank and government loans |
Loans consist of the following as of June 30, 2015 and December
31, 2014 (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Short-term bank loan (1) | |
$ | 6,298 | | |
$ | 4,085 | |
Short-term bank loan (2) (3) | |
| 35,000 | | |
| 35,000 | |
Short-term government loan (4) | |
| 4,089 | | |
| 4,903 | |
Bank and government loans | |
$ | 45,387 | | |
$ | 43,988 | |
|
(1) |
These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note 11). As of June 30, 2015 and December 31, 2014, the weighted average interest rate was 7.03% and 6.5% per annum, respectively. Interest is paid on the twentieth day of each month or quarter, as applicable, and the principal repayment is at maturity. |
|
(2) |
On May 18, 2012, the Company entered into
a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving credit facility in the
amount of $30.0 million, the “Credit Facility”. The Credit Facility would have expired on November 3, 2012 unless the
Company drew down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown was the
earlier of (i) 18 months from the drawdown or (ii) 1 month before the expiry of the standby letter of credit obtained by Henglong
from ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate
of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the availability of funds and
fluctuation at ICBC Macau’s discretion. The interest is calculated daily based on a 360-day year and it is fixed one day
before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security
for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total
amount not less than $31.6 million if the Credit Facility is fully drawn.
On May 22, 2012, the Company drew down
the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of
$31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s
notes receivable of RMB207.6 million, equivalent to approximately $33.8 million. The Company also paid an arrangement fee of $0.1
million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013.
On May 7, 2013, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 13, 2014. The interest rate of the Credit Facility under the extended term was
revised as the three-month LIBOR plus 2.0% per annum. Except for the above, all other terms and conditions as stipulated in the
Credit Agreement remained unchanged.
On May 13, 2014, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 12, 2015. The interest rate of the Credit Facility under the extended term was
revised as the three-month LIBOR plus 2.55% per annum. Except for the above, all other terms and conditions as stipulated in the
Credit Agreement remained unchanged.
On May 8, 2015, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 13, 2016. The interest rate of the Credit Facility under the extended term is revised
as the three-month LIBOR plus 1.40% per annum. Except for the above, all other terms and conditions as stipulated in the Credit
Agreement remain unchanged. As of June 30, 2015, the interest rate of the Credit Facility was 1.67% per annum. |
|
(3) |
On July 16, 2014, Great Genesis
entered into a credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million,
the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015, and has an annual interest rate
of 1.7%. Interest is paid on the twentieth day of each month and the principal repayment is at maturity. As security for the HSBC
Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with the Standby Letter of Credit
for a total amount of not less than $5.4 million if the HSBC Credit Facility is fully drawn.
|
| | On July 22, 2014, Great Genesis drew down a loan amounting
to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4 million in favor
of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and is
collateralized by short-term investments of Hubei Henglong of RMB33.0 million, equivalent to approximately $5.4 million. |
|
(4) |
On March 31, 2015, the Company received a Chinese government loan of RMB25.0 million, equivalent to approximately $4.1 million, with an interest rate of 2.5% per annum. The government loan will mature on April 20, 2016. Henglong pledged RMB25.3 million, equivalent to approximately $4.1 million, of notes receivable as security for such Chinese government loan (See Note 6). |
15. |
Accounts and notes payable |
The Company’s accounts and notes
payable as of June 30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Accounts payable - unrelated parties | |
$ | 137,211 | | |
$ | 132,389 | |
Notes payable - unrelated parties (1) | |
| 72,566 | | |
| 80,701 | |
Total accounts and notes payable - unrelated parties | |
| 209,777 | | |
| 213,090 | |
Total accounts and notes payable - related parties | |
| 5,198 | | |
| 4,857 | |
Total accounts and notes payable | |
$ | 214,975 | | |
$ | 217,947 | |
|
(1) |
Notes payable represent accounts payable in the form of bills of exchange whose acceptances are guaranteed and settlements are handled by banks. The Company has pledged cash deposits, notes receivable and certain property, plant and equipment to secure notes payable granted by banks. |
16. |
Accrued expenses and other payables |
The Company’s accrued expenses and
other payables as of June 30, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Accrued expenses | |
$ | 7,060 | | |
$ | 6,988 | |
Accrued interest | |
| 75 | | |
| 121 | |
Other payables | |
| 1,332 | | |
| 1,735 | |
Dividends payable to common shareholders (1) | |
| 505 | | |
| 757 | |
Dividends payable to non-controlling interests (2) | |
| 320 | | |
| 817 | |
Warranty reserves (3) | |
| 26,004 | | |
| 25,011 | |
Total | |
$ | 35,296 | | |
$ | 35,429 | |
|
(1) |
On May 27, 2014, the Company announced the payment of a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014. As of June 30, 2015, dividends payable of $0.5 million remained unpaid. |
|
(2) |
In accordance with the resolution of the board of directors of Shenyang, in March 2015, Shenyang declared a dividend amounting to $1.1 million to its shareholders, of which $0.3 million was payable to the holder of the non-controlling interests. As of June 30, 2015, the dividends have not yet been paid to the holder of the non-controlling interests. |
|
(3) |
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 six months ended June 30, 2015
and 2014, and for the year ended December 31, 2014, the warranties activities were as follows (figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended
December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 25,011 | | |
$ | 22,104 | | |
$ | 22,104 | |
Additions during the period | |
| 4,419 | | |
| 5,055 | | |
| 12,341 | |
Settlement within period, by cash or actual material | |
| (3,448 | ) | |
| (2,972 | ) | |
| (9,354 | ) |
Foreign currency translation gain (loss) | |
| 22 | | |
| (201 | ) | |
| (80 | ) |
Balance at end of the period | |
$ | 26,004 | | |
$ | 23,986 | | |
$ | 25,011 | |
The Company’s taxes payable as of June 30, 2015 and December
31, 2014 are summarized as follows (figures are in thousands of USD):
| |
June 30, 2015 | | |
December 31, 2014 | |
Value-added tax payable | |
$ | 4,813 | | |
$ | 6,393 | |
Income tax payable | |
| 3,002 | | |
| 4,537 | |
Other tax payable | |
| 516 | | |
| 627 | |
Total | |
$ | 8,331 | | |
$ | 11,557 | |
As of June 30, 2015 and December 31, 2014,
advances payable by the Company were $3.7 million and $6.2 million, respectively.
The amounts are special subsidies made
by the Chinese government to the Company to offset the cost and charges related to the improvement of production capacities and
improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are recorded
as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances
payable when received and will be recorded as a deduction of related expenses and cost of acquired assets when the conditions are
met.
The balances are unsecured, interest-free
and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.
19. |
Additional paid-in capital |
The Company’s positions in respect of the amounts of additional
paid-in capital for the six months ended June 30, 2015 and 2014, and the year ended December 31, 2014 are summarized as follows
(figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended
December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 64,522 | | |
$ | 39,565 | | |
$ | 39,565 | |
Return of common shareholders’ investment cost (1) | |
| - | | |
| (5,047 | ) | |
| (5,047 | ) |
Acquisition of the non-controlling interests in Henglong and Jiulong (2) | |
| - | | |
| - | | |
| (7,502 | ) |
Issuance of common stock in exchange for the non-controlling interests in Henglong and Jiulong (2) | |
| - | | |
| - | | |
| 37,313 | |
Share-based compensation (3) | |
| - | | |
| - | | |
| 193 | |
Balance at end of the period | |
$ | 64,522 | | |
$ | 34,518 | | |
$ | 64,522 | |
|
(1) |
On May 27, 2014, the Company announced a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014. As China Automotive Systems, the parent company, had an accumulated deficit position as of the date of the dividend declaration, the dividends distributed to the Company’s common shareholders described above are treated as a return of common shareholders’ investment cost. |
|
(2) |
On August 11, 2014, the Company entered into the Exchange Agreement with Jiulong Machinery Electricity, under which the Company issued 3,260,000 and 818,000 of its common shares in consideration for the acquisition of the 20% and 19% equity interests in Henglong and Jiulong, respectively, held by Jiulong Machinery Electricity. On September 26, 2014, the Company obtained the 20% and 19% equity interests in Henglong and Jiulong, respectively, and completed its share registrations with the local government administrative bureau. The Company owned 100% of the equity interests in both Henglong and Jiulong as of September 30, 2014. The Company’s acquisitions of the non-controlling interests were accounted for as equity transactions in the year ended December 31, 2014. The total carrying value for the non-controlling interests in both Henglong and Jiulong was $34.5 million, including the accumulated other comprehensive income of $4.7 million related to the noncontrolling interests acquired and other non-controlling interests of $29.8 million. Therefore, the total carrying value of $34.5 million for the non-controlling interests acquired was reclassified from non-controlling interests to the controlling interest’s equity as of September 30, 2014. On October 13, 2014, the Company completed its issuance of 4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity. The fair market value of the Company’s common stock issued was $37.3 million or $9.15 per share, which was determined on the issuance date of the common shares. The difference between the fair market value of $37.3 million for the Company’s common shares issued and the carrying value of $34.5 million for the non-controlling interest acquired of $2.8 million was recorded as a reduction of additional paid-in capital. Additional paid-in capital of the Company was also decreased by $4.7 million and the accumulated other comprehensive income attributable to Henglong and Jiulong was increased by a corresponding amount. |
|
(3) |
On September 16, 2014 and August 13, 2013, the Company granted 22,500 and 22,500 stock options, respectively, to the Company’s independent directors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ on the date of grant. The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company’s dividends. |
Assumptions used to estimate the fair
value of stock options on the grant dates are as follows:
Issuance Date | |
Expected volatility | | |
Risk-free rate | | |
Expected term (years) | | |
Dividend yield | |
| |
| | |
| | |
| | |
| |
September 16, 2014 | |
| 120.6 | % | |
| 1.78 | % | |
| 5 | | |
| 0.00 | % |
| |
| | | |
| | | |
| | | |
| | |
August 13, 2013 | |
| 131.5 | % | |
| 1.49 | % | |
| 5 | | |
| 0.00 | % |
The above stock options were vested and
exercisable immediately. Their fair value on the grant dates of September 16, 2014 and August 13, 2013 using the Black-Scholes
option pricing model was $0.2 million and $0.2 million, respectively. For the year ended December 31, 2014, the Company
recognized stock-based compensation expenses of $0.2 million.
Appropriated
Pursuant to the relevant PRC laws and regulations,
the profits distribution of the Company’s PRC subsidiaries, which are based on their PRC statutory financial statements,
rather than the financial statement that was prepared in accordance with U.S. GAAP, 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 venture partners. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang,
Jielong, Wuhu, Hubei Henglong and Chongqing are $10.0 million, $4.2 million (equivalent to RMB35.0 million), $8.1 million (equivalent
to RMB67.5 million), $6.0 million, $3.8 million (equivalent to RMB30.0 million), $39 million and $9.5 million (equivalent to RMB60.0
million), respectively, and the registered capital of USAI is $2.6 million.
The Company’s activities in respect of the amounts of
appropriated retained earnings for the six months ended June 30, 2015 and 2014, and the year ended December 31, 2014 are summarized
as follows (figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 10,178 | | |
$ | 10,048 | | |
$ | 10,048 | |
Appropriation of retained earnings | |
| 171 | | |
| 130 | | |
| 130 | |
Balance at end of the period | |
$ | 10,349 | | |
$ | 10,178 | | |
$ | 10,178 | |
Unappropriated
The Company’s activities in respect
of the amounts of the unappropriated retained earnings for the six months ended June 30, 2015 and 2014, and the year ended December
31, 2014 are summarized as follows (figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 179,435 | | |
$ | 146,023 | | |
$ | 146,023 | |
Net income attributable to parent company | |
| 16,170 | | |
| 17,781 | | |
| 33,542 | |
Appropriation of retained earnings | |
| (171 | ) | |
| (130 | ) | |
| (130 | ) |
Balance at end of the period | |
$ | 195,434 | | |
$ | 163,674 | | |
$ | 179,435 | |
21. |
Accumulated other comprehensive income |
The Company’s activities in respect
of the amounts of the accumulated other comprehensive income for the six months ended June 30, 2015 and 2014, and the year ended
December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 36,119 | | |
$ | 32,061 | | |
$ | 32,061 | |
Other comprehensive income related to the non-controlling interests acquired by the Company (See Note 19) | |
| - | | |
| - | | |
| 4,743 | |
Foreign currency translation adjustment attributable to parent company | |
| 178 | | |
| (2,017 | ) | |
| (685 | ) |
Balance at end of the period | |
$ | 36,297 | | |
$ | 30,044 | | |
$ | 36,119 | |
22. |
Non-controlling interests |
The Company’s activities in respect
of the amounts of the non-controlling interests’ equity for the six months ended June 30, 2015 and 2014, and the year ended
December 31, 2014 are summarized as follows (figures are in thousands of USD):
| |
Six Months Ended June 30, | | |
Year Ended December 31, | |
| |
2015 | | |
2014 | | |
2014 | |
Balance at beginning of the period | |
$ | 8,912 | | |
$ | 45,071 | | |
$ | 45,071 | |
Fair value of the non-controlling interests arising from the acquisition of Fujian Qiaolong (1) | |
| - | | |
| 2,793 | | |
| 2,793 | |
Acquisition of the non-controlling interests in Henglong and Jiulong (See Note 19) | |
| - | | |
| - | | |
| (29,812 | ) |
Other comprehensive income related to the non-controlling interests acquired by the Company (See Note 19) | |
| - | | |
| - | | |
| (4,743 | ) |
Income attributable to non-controlling interests | |
| (150 | ) | |
| 4,116 | | |
| 6,052 | |
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 16) | |
| (318 | ) | |
| (10,077 | ) | |
| (10,077 | ) |
Foreign currency translation adjustment attributable to non-controlling interests | |
| (17 | ) | |
| (405 | ) | |
| (372 | ) |
Balance at end of the period | |
$ | 8,427 | | |
$ | 41,498 | | |
$ | 8,912 | |
|
(1) |
In the second quarter of 2014, the Company acquired a 51.0% equity interest in Fujian Qiaolong (See Note 3). The fair value of the non-controlling interest of Fujian Qiaolong is $2.8 million. |
Gain on other sales mainly consisted of net amount retained
from sales of materials, property, plant and equipment, land use rights, and scraps. For the six months ended June 30, 2015, gain
on other sales amounted to $2.4 million as compared to $9.1 million for the six months ended June 30, 2014, representing a decrease
of $6.7 million. In the second quarter of 2014, the Company sold the remaining land use rights and recognized a gain of $7.5 million,
which represented the difference between the selling price of $8.4 million and the net book value of the land use rights of
$0.9 million. There was no such gain in the same period in 2015.
24. |
Financial income, net |
During the six months
ended June 30, 2015 and 2014, the Company recorded financial income, net which is summarized as follows (figures are in thousands
of USD):
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Interest income | |
$ | (1,386 | ) | |
$ | (1,253 | ) |
Foreign exchange gain, net | |
| (377 | ) | |
| (1 | ) |
Gain of cash discount, net | |
| (28 | ) | |
| (62 | ) |
Bank fees | |
| 328 | | |
| 306 | |
Total financial income, net | |
$ | (1,463 | ) | |
$ | (1,010 | ) |
The Company’s subsidiaries registered
in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income
as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested
enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential
terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the
government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law
and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January
1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign
investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable
have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned
subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong
Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China
to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%, if the foreign investor
owns directly at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is regarded as a non-resident
enterprise, it is required to pay an additional 5% withholding tax for any dividends payable to it from the PRC subsidiaries.
According to PRC tax regulation, the Company
should withhold income taxes for the profit distributed from the PRC subsidiaries to Genesis, the subsidiaries’ holding company
incorporated in Hong Kong. For the profit that the PRC subsidiaries intended to distribute to Genesis, the Company accrues the
withholding income tax as deferred tax liabilities. As of June 30, 2015, the Company has recognized deferred tax liabilities of
$0.16 million for the remaining undistributed profits to Genesis of $3.2 million. The Company intended to re-invest the remaining
undistributed profits generated from the PRC subsidiaries in those subsidiaries permanently. As of June 30, 2015 and December 31,
2014, the Company still has undistributed earnings of approximately $204.7 million and $188.3 million, respectively, from investment
in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earnings been distributed to Genesis
and not permanently reinvested, the tax provision as of June 30, 2015 and December 31, 2014 of approximately $10.2 million and
$9.4 million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis and not further
distributed to the parent company incorporated in the United States going forward.
In 2014, Jiulong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% from 2014 to 2016.
In 2014, Henglong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% from 2014 to 2016.
In 2009, Shenyang was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment of the government based on PRC income
tax laws. Accordingly, it continued to be taxed at the 15% tax rate in 2012, 2013 and 2014. The Company estimates the applied tax
rate in 2015 to be 15% as it will probably pass the re-assessment in 2015 and continue to qualify as “High &
New Technology Enterprise”.
In 2012, Wuhu was awarded the title of
“High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax
at a rate of 15% for 2013 and 2014. The Company estimates the applied tax rate in 2015 to be 15% as it will probably pass the re-assessment
in 2015 and continue to qualify as “High & New Technology Enterprise”.
In 2013, Jielong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% for 2013, 2014 and 2015.
In November 2011, Hubei Henglong was awarded
the title of “High & New Technology Enterprise”. Based on the PRC income tax law, it was subject to enterprise
income tax at a rate of 15% for 2013. The Company has passed the re-assessment in 2014 and continues to qualify as a “High
& New Technology Enterprise”. Accordingly, it continues to be taxed at the 15% tax rate in 2014, 2015 and 2016.
According to the New CIT, USAI and Testing
Center are subject to income tax at a rate of 25% in 2014 and 2015.
Chongqing Henglong was established in 2012.
According to the New CIT, Chongqing Henglong is subject to income tax at a uniform rate of 25%. No provision for Chongqing Henglong
is made as it had no assessable income for the three months and six months ended June 30, 2015 and 2014.
Based on Brazilian income tax laws, Brazil
Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate
of 10% for the part of taxable income over $0.12 million (equivalent to approximately BRL 0.24 million). The Company had no assessable
income in Brazil for the three months and six months ended June 30, 2015 and 2014.
Fujian Qiaolong was acquired in the second
quarter of 2014. In November 2011, Fujian Qiaolong was awarded the title of “High & New Technology Enterprise”
and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2011, 2012 and 2013. In 2014,
the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it will continue to be taxed
at the 15% tax rate in 2014, 2015 and 2016. No provision for Fujian Qiaolong is made as it had no assessable income for the three
months and six months ended June 30, 2015.
The profits tax rate of Hong Kong is 16.5%.
No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong for
the three months and six months ended June 30, 2015 and 2014.
The enterprise income tax rate of the United
States is 35%. No provision for U.S. tax is made for the Company as the Company had no assessable income in the United States for
the three months and six months ended June 30, 2015 and 2014.
The Company’s effective tax rate
was 17.9% and 16.2% for the three months and six months ended June 30, 2015, respectively, compared with 18.8% and 19.0% for the
three months and six months ended June 30, 2014, respectively.
Basic income per share is calculated by
dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is
calculated 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 calculation of basic and diluted income
per share attributable to the parent company for the three months ended June 30, 2015 and 2014, was (figures are in thousands of
USD, except share and per share amounts):
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
Numerator: | |
| | | |
| | |
Net income attributable to the parent company’s common shareholders – Basic and Diluted | |
$ | 7,659 | | |
$ | 11,006 | |
Denominator: | |
| | | |
| | |
Weighted average shares outstanding | |
| 32,121,019 | | |
| 28,043,019 | |
Dilutive effects of stock options | |
| 17,419 | | |
| 21,357 | |
Denominator for dilutive income per share – Diluted | |
| 32,138,438 | | |
| 28,064,376 | |
| |
| | | |
| | |
Net income per share attributable to parent company’s common shareholders – Basic | |
$ | 0.24 | | |
$ | 0.39 | |
Net income per share attributable to parent company’s common shareholders – Diluted | |
$ | 0.24 | | |
$ | 0.39 | |
As of June 30, 2015 and 2014, the exercise
prices for 60,000 shares and 60,000 shares, respectively, of outstanding stock options were above the weighted average market price
of the Company’s common stock during the three months ended June 30, 2015 and 2014, respectively, and these stock options
were excluded from the calculation of the diluted income per share for the corresponding periods presented.
The calculation of basic and diluted income
per share attributable to the parent company for the six months ended June 30, 2015 and 2014, were (figures are in thousands of
USD , except share and per share amounts):
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
Numerator: | |
| | | |
| | |
Net income attributable to the parent company’s common shareholders – Basic and Diluted | |
$ | 16,171 | | |
$ | 17,781 | |
Denominator: | |
| | | |
| | |
Weighted average shares outstanding | |
| 32,121,019 | | |
| 28,043,019 | |
Dilutive effects of stock options | |
| 15,566 | | |
| 20,920 | |
Denominator for dilutive income per share – Diluted | |
| 32,136,585 | | |
| 28,063,939 | |
| |
| | | |
| | |
Net income per share attributable to parent company’s common shareholders – Basic | |
$ | 0.50 | | |
$ | 0.63 | |
Net income per share attributable to parent company’s common shareholders – Diluted | |
$ | 0.50 | | |
$ | 0.63 | |
As of June 30, 2015 and 2014, the exercise
prices for 60,000 shares and 60,000 shares, respectively, of outstanding stock options were above the weighted average market price
of the Company’s common stock during the six months ended June 30, 2015 and 2014, respectively, and these stock options were
excluded from the calculation of the diluted income per share for the corresponding periods presented.
27. |
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. However, pursuant to applicable regulations,
foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance
with the PRC law. In calculating accumulated profits, foreign investment enterprises in China are required to allocate at least
10% of their annual net income each year, if any, to fund certain reserve funds, including mandated employee benefits funds, unless
these reserves have reached 50% of the registered capital of the enterprises.
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
including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Fenglong and Jiangling Yude, which are related parties of the Company.
The Company’s customers are mostly located in the PRC.
During the six months ended June 30, 2015,
the Company’s ten largest customers accounted for 70.4% of its consolidated net product sales, with one customer individually
accounting for more than 10% of consolidated net sales, i.e., 12.8%. As of June 30, 2015, approximately 5.8% of accounts receivable
were from trade transactions with the aforementioned one customer, and there was one individual customer with a receivables balance
of more than 10% of total accounts receivable, i.e. 11.4%.
During the six months ended June 30, 2014,
the Company’s ten largest customers accounted for 68.7% of its consolidated net product sales, with one customer individually
accounting for more than 10% of consolidated net sales, i.e., 11.6%. As of June 30, 2014, approximately 4.9% of accounts receivable
were from trade transactions with the aforementioned one customer, and there was one individual customer with a receivables balance
of more than 10% of total accounts receivable, i.e. 12.3%.
28. |
Related party transactions and balances |
Related party transactions are as follows
(figures are in thousands of USD):
Related sales
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
Merchandise sold to related parties | |
$ | 11,640 | | |
$ | 14,928 | |
Rental income obtained from related parties | |
| 23 | | |
| - | |
Materials and others sold to related parties | |
| 563 | | |
| - | |
Total | |
$ | 12,226 | | |
$ | 14,928 | |
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Merchandise sold to related parties | |
$ | 19,939 | | |
$ | 26,738 | |
Rental income obtained from related parties | |
| 56 | | |
| - | |
Materials and others sold to related parties | |
| 992 | | |
| - | |
Total | |
$ | 20,987 | | |
$ | 26,738 | |
Related purchases
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
Materials purchased from related parties | |
$ | 5,630 | | |
$ | 7,461 | |
Technology purchased from related parties | |
| 147 | | |
| 72 | |
Equipment purchased from related parties | |
| 826 | | |
| 336 | |
Others purchased from related parties | |
| 136 | | |
| - | |
Total | |
$ | 6,739 | | |
$ | 7,869 | |
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Materials purchased from related parties | |
$ | 12,638 | | |
$ | 14,652 | |
Technology purchased from related parties | |
| 147 | | |
| 164 | |
Equipment purchased from related parties | |
| 3,070 | | |
| 1,254 | |
Others purchased from related parties | |
| 354 | | |
| - | |
Total | |
$ | 16,209 | | |
$ | 16,070 | |
Related receivables
| |
June 30,
2015 | | |
December 31, 2014 | |
Accounts and notes receivable from related parties | |
$ | 27,003 | | |
$ | 22,760 | |
Other receivables from related parties | |
| 19 | | |
| 76 | |
Total | |
$ | 27,022 | | |
$ | 22,836 | |
Related advances
| |
June 30,
2015 | | |
December 31, 2014 | |
Advance equipment payment to related parties | |
$ | 2,693 | | |
$ | 2,085 | |
Advance payments and others to related parties | |
| 784 | | |
| 741 | |
Total | |
$ | 3,477 | | |
$ | 2,826 | |
Related payables
| |
June 30,
2015 | | |
December 31, 2014 | |
Accounts payable | |
$ | 5,198 | | |
$ | 4,857 | |
These transactions were consummated under
similar terms as those with the Company's third party customers and suppliers.
Related parties pledged certain land use
rights and buildings as security for the Company’s credit facilities provided by banks.
As of August 13, 2015, Hanlin Chen, the
Company’s Chairman, owns 55.6% 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.
29. |
Commitments and contingencies |
Legal proceedings
The Company is not a party to any pending
or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition, 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 June 30,
2015 (figures are in thousands of USD):
| |
Payment obligations by period | |
| |
2015 (1) | | |
2016 | | |
2017 | | |
2018 | | |
Thereafter | | |
Total | |
Obligations for investment contracts (2) | |
| - | | |
$ | 3,256 | | |
$ | 2,442 | | |
$ | - | | |
$ | - | | |
$ | 5,698 | |
Obligations for purchasing and service agreements | |
| 22,292 | | |
| 849 | | |
| 5 | | |
| - | | |
| - | | |
| 23,146 | |
Total | |
$ | 22,292 | | |
$ | 4,105 | | |
$ | 2,447 | | |
$ | - | | |
$ | - | | |
$ | 28,844 | |
|
(1) |
Remaining 6 months in 2015. |
|
(2) |
Capital Commitment to the Venture Fund |
|
|
|
|
|
As disclosed in Note 1, on September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which Hubei Henglong has committed to make investments of 17.9% or RMB50.0 million, equivalent to approximately $8.1 million, into the Venture Fund in three installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5.0 million, equivalent to approximately $0.8 million. On April 24, 2015, Hubei Henglong made its second capital contribution of RMB10.0 million, equivalent to approximately $1.6 million. The remaining capital commitment of RMB35.0 million, equivalent to approximately $5.7 million, will be paid upon capital calls received from the Venture Fund. |
30. |
Off-balance sheet arrangements |
As of June 30, 2015 and December 31, 2014, the Company did not
have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
The accounting policies of the product
sectors are the same as those described in the summary of significant accounting policies 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
segment sales and transfers as if the sales or transfers were to third parties, at current market prices.
As of June 30, 2015, the Company had 13
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
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),
commercial vehicle repacking and sales (Fujian Qiaolong), manufacture and sales of automobile electronic systems and parts (Wuhan
Chuguanjie), and design and sales of automobile electronics (Shanghai Henglong). Since the revenues, net income and net assets
of these eight sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the
condensed unaudited consolidated financial statements, the Company incorporated these eight sectors into “Other Sectors.”
As of June 30, 2014, the Company had 10
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
five 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) and trade (Brazil Henglong).
Since the revenues, net income and net assets of these five sectors collectively are less than 10% of consolidated revenues, net
income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these
five sectors into “Other Sectors.”
The Company’s product sector information
for the three months and six months ended June 30, 2015 and 2014, is as follows (figures are in thousands of USD):
| |
Net Product Sales | | |
Net Income (Loss) | |
| |
Three Months Ended | | |
Three Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Henglong | |
$ | 68,327 | | |
$ | 71,665 | | |
$ | 5,298 | | |
$ | 11,799 | |
Jiulong | |
| 19,287 | | |
| 20,155 | | |
| 328 | | |
| 399 | |
Shenyang | |
| 8,578 | | |
| 12,043 | | |
| 515 | | |
| 506 | |
Wuhu | |
| 6,014 | | |
| 5,857 | | |
| 93 | | |
| (35 | ) |
Hubei Henglong | |
| 15,753 | | |
| 13,684 | | |
| 2,289 | | |
| 1,799 | |
Other Sectors | |
| 9,851 | | |
| 11,372 | | |
| 67 | | |
| 406 | |
Total Segments | |
| 127,810 | | |
| 134,776 | | |
| 8,590 | | |
| 14,874 | |
Corporate | |
| - | | |
| - | | |
| (1,021 | ) | |
| (1,188 | ) |
Eliminations | |
| (18,643 | ) | |
| (19,300 | ) | |
| 60 | | |
| (100 | ) |
Total | |
$ | 109,167 | | |
$ | 115,476 | | |
$ | 7,629 | | |
$ | 13,586 | |
| |
Net Product Sales | | |
Net Income (Loss) | |
| |
Six Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Henglong | |
$ | 152,130 | | |
$ | 143,085 | | |
$ | 12,848 | | |
$ | 17,533 | |
Jiulong | |
| 37,068 | | |
| 41,789 | | |
| (150 | ) | |
| 1,582 | |
Shenyang | |
| 16,540 | | |
| 23,940 | | |
| 824 | | |
| 762 | |
Wuhu | |
| 12,171 | | |
| 12,404 | | |
| (68 | ) | |
| (79 | ) |
Hubei Henglong | |
| 30,645 | | |
| 27,283 | | |
| 3,880 | | |
| 3,095 | |
Other Sectors | |
| 18,777 | | |
| 20,323 | | |
| 378 | | |
| 995 | |
Total Segments | |
| 267,331 | | |
| 268,824 | | |
| 17,712 | | |
| 23,888 | |
Corporate | |
| | | |
| - | | |
| (1,788 | ) | |
| (2,023 | ) |
Eliminations | |
| (34,721 | ) | |
| (39,042 | ) | |
| 97 | | |
| 32 | |
Total | |
$ | 232,610 | | |
$ | 229,782 | | |
$ | 16,021 | | |
$ | 21,897 | |
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 SAIC Group, BAIC Group, FAW Group, Dongfeng Auto Group and Changan Automobile 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. 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.
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 |
|
|
|
|
|
|
|
|
|
Inventory
|
|
Write-down of inventory
|
|
The Company is required from time to time to review the cashability 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
|
|
|
|
|
|
|
|
|
|
Tax payable and deferred tax assets/liabilities
|
|
Uncertain tax positions
|
|
The Company is required to determine and assess all material positions, including all significant uncertain positions in all tax years that are still subject to assessment or challenge under relevant tax statutes. |
|
The Company applies a more likely than not threshold and a two-step approach for tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. |
|
·An allocation or a shift of income between jurisdictions
·The characterization of income or a decision to exclude
reporting taxable income in a tax return
·A decision to classify a transaction, entity, or other
position in a tax return as tax exempt |
In addition, there are other items within
the Company’s financial statements that require estimation, but are not as critical as those discussed above, including provision
of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items
could have a significant effect on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial
statements under Item 1 of Part I of this Report.
Results of Operations
In the second quarter of 2014, the Company
acquired a 51.0% equity interest in Fujian Qiaolong. Pursuant to ASC Topic 805, the results of Fujian Qiaolong have been included
since the date of acquisition and are reflected in the condensed unaudited consolidated statements of operations and
comprehensive income for the three months ended June 30, 2015, and under “Other Sectors” in the Company’s segment
reporting. Please refer to Note 3 to the condensed unaudited consolidated financial statements in this Report.
Results of Operations—Three
Months Ended June 30, 2015 and 2014
| |
Net Product Sales | | |
Cost of Products Sold | |
| |
(in thousands of USD, except percentages) | | |
(in thousands of USD, except percentages) | |
| |
2015 | | |
2014 | | |
Change | | |
2015 | | |
2014 | | |
Change | |
Henglong | |
$ | 68,327 | | |
$ | 71,665 | | |
| (3,338 | ) | |
| -4.7 | % | |
$ | 56,239 | | |
$ | 59,982 | | |
$ | (3,743 | ) | |
| -6.2 | % |
Jiulong | |
| 19,287 | | |
| 20,155 | | |
| (868 | ) | |
| -4.3 | | |
| 17,159 | | |
| 17,166 | | |
| (7 | ) | |
| 0.0 | |
Shenyang | |
| 8,578 | | |
| 12,043 | | |
| (3,465 | ) | |
| -28.8 | | |
| 7,260 | | |
| 10,600 | | |
| (3,340 | ) | |
| -31.5 | |
Wuhu | |
| 6,014 | | |
| 5,857 | | |
| 157 | | |
| 2.7 | | |
| 5,567 | | |
| 5,284 | | |
| 283 | | |
| 5.4 | |
Hubei Henglong | |
| 15,753 | | |
| 13,684 | | |
| 2,069 | | |
| 15.1 | | |
| 11,547 | | |
| 10,609 | | |
| 938 | | |
| 8.8 | |
Other Sectors | |
| 9,851 | | |
| 11,372 | | |
| (1,521 | ) | |
| -13.4 | | |
| 8,304 | | |
| 9,452 | | |
| (1,148 | ) | |
| -12.1 | |
Total Segments | |
| 127,810 | | |
| 134,776 | | |
| (6,966 | ) | |
| -5.2 | | |
| 106,076 | | |
| 113,093 | | |
| (7,017 | ) | |
| -6.2 | |
Elimination | |
| (18,643 | ) | |
| (19,300 | ) | |
| 657 | | |
| -3.4 | | |
| -18,702 | | |
| (19,200 | ) | |
| 498 | | |
| -2.6 | |
Total | |
$ | 109,167 | | |
$ | 115,476 | | |
$ | (6,309 | ) | |
| -5.5 | % | |
$ | 87,374 | | |
$ | 93,893 | | |
$ | (6,519 | ) | |
| -6.9 | % |
Net Product Sales
Net product sales were $109.2 million for
the three months ended June 30, 2015, compared to $115.5 million for the same period in 2014, representing a decrease of $6.3 million,
or 5.5%. The decrease was mainly due to a decrease in sales of hydraulic power steering gears for passenger vehicles, partially
offset by the continuing increase in sales of electronic power steering gears (EPS).
Compared with the same period of 2014,
during the three months ended June 30, 2015, sales of hydraulic power steering gears decreased by $11.5 million, while sales of
EPS only increased by $5.7 million.
From January 1, 2015, the National IV emission
standard for commercial vehicles has been implemented in China. To meet the upgraded standard, certain OEMs transformed and renovated
their existing products which, together with China’s economic slowdown, led to a significant decrease in the production and
sales volume of China’s commercial vehicles. Accordingly, the Company’s sales of steering gears for commercial vehicles
decreased.
The steering gears that the Company sold
to North America significantly increased as a result of the continuing growth of automotive market demand in North America.
In summary, the Company had a decrease
in sales volume leading to a sales decrease of $9.7 million, an increase in selling price of steering gears leading to a sales
increase of $2.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar, which led to a sales
increase of $0.9 million.
Further analysis by segment (before elimination)
is as follows:
|
• |
Net product sales for Henglong were $68.3 million for the three months ended June 30, 2015, compared with $71.7 million for the three months ended June 30, 2014, representing a decrease of $3.3 million, or 4.7%, which was mainly due to the decrease in sales of hydraulic power steering gears, partially offset by the increase in sales of EPS. A decrease in sales volume led to a sales decrease of $3.0 million, a decrease in selling price led to a sales decrease of $0.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.5 million. |
|
• |
Net product sales for Jiulong were $19.3 million for the three months ended June 30, 2015, compared with $20.2 million for the three months ended June 30, 2014, representing a decrease of $0.9 million, or 4.3%, mainly due to China’s economic slowdown and the adoption of the National IV emission standard for commercial vehicles, as Jiulong’s main products and sales are steering gears for commercial vehicles. A decrease in sales volume led to a sales decrease of $4.8 million, an increase in selling price led to a sales increase of $3.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
|
• |
Net product sales for Shenyang were $8.6 million for the three months ended June 30, 2015, compared to $12.1 million for the same period in 2014, representing a decrease of $3.5 million, or 28.8%. The products of Shenyang are mainly sold to Shenyang Brilliance Jinbei Automobile Co., LTD, “Jinbei”. Jinbei primarily uses EPS on its passenger vehicles, while Shenyang mainly engages in the production and sales of hydraulic power steering gears for passenger vehicles, so the sales volumes of Shenyang decreased accordingly. A decrease in sales volumes led to a sales decrease of $3.5 million. |
|
• |
Net product sales for Wuhu were $6.0 million for the three months ended June 30, 2015, compared to $5.8 million for the same period in 2014, representing an increase of $0.2 million, or 2.7%. The products of Wuhu are mainly sold to Chery Automobile Co., Ltd., “Chery”. Sales volumes of Chery have decreased significantly since 2012. Therefore, Wuhu’s ability to increase its sales is limited. An increase in sales volumes led to a sales increase of $0.1 million, and an increase in selling price led to a sales increase of $0.1 million. |
|
• |
Net product sales for Hubei Henglong were $15.8 million for the three months ended June 30, 2015, compared to $13.7 million for the same period in 2014, representing an increase of $2.1 million, or 15.1%. The net product sales increase was mainly due to the growth of automotive market demand in North America, where Hubei Henglong’s products are sold. An increase in sales volumes led to a sales increase of $1.4 million, an increase in selling price led to a sales increase of $0.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
|
• |
Net product sales for Other Sectors were $9.9 million for the three months ended June 30, 2015, compared to $11.4 million for the same period in 2014, representing a decrease of $1.5 million, mainly due to a decrease of $0.5 million for Fujian Qiaolong (which engages in repacking and sales of commercial vehicles) and a decrease of $1.0 million for Chongqing Henglong’s (which engages in production and sales of hydraulic power steering gears for commercial vehicles). |
Cost of Products Sold
For the three months ended June 30, 2015,
the cost of products sold was $87.4 million, compared to $93.9 million for the same period of 2014, representing a decrease of
$6.5 million, or 6.9%. The decrease in the cost of products sold was mainly due to the net effect of a net decrease in sales volumes
which led to a cost of products sold decrease of $7.3 million, an increase in unit cost which led to a cost of products sold increase
of $0.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products
sold increase of $0.7 million. Further analysis is as follows:
|
• |
Cost of products sold for Henglong was $56.2 million for the three months ended June 30, 2015, compared to $60.0 million for the same period of 2014, representing a decrease of $3.8 million, or 6.2%. A decrease in sales volumes led to a cost of products sold decrease of $1.2 million, a decrease in unit cost led to a cost of products sold decrease of $2.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of products sold increase of $0.3 million. |
|
• |
Cost of products sold for Jiulong was $17.2 million for the three months ended June 30, 2015, consistent with $17.2 million for the same period of 2014. A decrease in sales volumes led to a cost of products sold decrease of $4.3 million, and an increase in unit cost led to a cost of products sold increase of $4.3 million. |
|
• |
Cost of products sold for Shenyang was $7.3 million for the three months ended June 30, 2015, compared to $10.6 million for the same period of 2014, representing a decrease of $3.3 million, or 31.5%. The decrease in cost of products sold was mainly due to a decrease in sales volumes, which led to a cost of products sold decrease of $3.1 million, a decrease in unit cost which led to a cost of products sold decrease of $0.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
|
• |
Cost of products sold for Wuhu was $5.6 million for the three months ended June 30, 2015, compared to $5.3 million for the same period of 2014, representing an increase of $0.3 million, or 5.4%. The increase in cost of products sold was mainly due to an increase in sales volumes which led to a cost of products sold increase of $0.1 million, and an increase in unit cost which led to a cost of products sold increase of $0.2 million. |
|
• |
Cost of products sold for Hubei Henglong was $11.5 million for the three months ended June 30, 2015, compared to $10.6 million for the same period of 2014, representing an increase of $0.9 million, or 8.8%. The increase in cost of products sold was mainly due to an increase in sales volumes which led to a cost of products sold increase of $1.2 million, and a decrease in unit cost which led to a cost of products sold decrease of $0.3 million. |
|
• |
Cost of products sold for Other Sectors was $8.3 million for the three months ended June 30, 2015, compared to $9.5 million for the same period of 2014, representing a decrease of $1.2 million, mainly including a decrease in sales volumes which led to a cost of products sold decrease of $0.4 million, and a decrease in unit cost which led to a cost of products sold decrease of $0.8 million. |
Gross margin was 20.0% for the three months
ended June 30, 2015, compared to 18.7% in the same period of 2014, representing an increase of 1.3%, mainly due to the decrease
in the unit cost of the Company’s products in 2015.
Gain on Other Sales
Gain on other sales mainly consisted of
net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the three months ended
June 30, 2015, gain on other sales amounted to $0.7 million as compared to $8.2 million for the three months ended June 30, 2014,
representing a decrease of $7.5 million. In the second quarter of 2014, the Company sold the remaining land use rights and recognized
a gain of $7.5 million, which represented the difference between the selling price of $8.4 million and the net book value
of the land use rights of $0.9 million. There was no such gain in the same period in 2015.
Selling Expenses
Selling expenses were $4.0 million for
the three months ended June 30, 2015, compared to $4.3 million for the same period of 2014, representing a decrease of $0.3 million,
or 7.0%, mainly due to an increase in salaries and wages cost of $0.3 million, a decrease in transportation fees of $0.3 million,
a decrease in office expenses of $0.1 million, and a decrease in advertising expenses of $0.2 million.
General and Administrative Expenses
General and administrative expenses were
$3.8 million for the three months ended June 30, 2015, compared to $3.8 million for the same period of 2014, which was mainly due
to a decrease in salaries and wages cost of $0.1 million, a decrease in audit professional service fees of $0.2 million and an
increase in office facilities improvement expenses of $0.3 million.
Research and Development Expenses
Research and development expenses were
$6.4 million for the three months ended June 30, 2015, compared to $5.2 million for the three months ended June 30, 2014, representing
an increase of $1.2 million, or 23.1%. The Company’s research and development expenses were mainly used for the development
and trial production of EPS and other new products. Research and development expenditures have continued to be significant in the
past three years. In summary, expenses for mold improvement decreased by $0.2 million, external technical support fees increased
by $0.8 million, and the salaries and wages expenses of research and development related staff increased by $0.6 million.
The global automotive parts industry is
highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive
basis. In the past three years, the Company has continued to purchase advanced manufacturing equipment for newly developed products,
hiring senior technicians and actively seeking external technical support.
Income from Operations
Income from operations was $8.3 million
for the three months ended June 30, 2015, compared to $16.5 million for the three months ended June 30, 2014, representing a decrease
of $8.2 million, or 49.7%, including an increase of $0.2 million in gross profit, a decrease of $7.5 million in gain on other sales
and an increase of $ 0.9 million in operating expenses.
Other Income, Net
Other income, net was $0.3 million for
the three months ended June 30, 2015, compared to $0.1 million for the three months ended June 30, 2014, an increase of $0.2 million,
primarily resulting from increased government subsidies.
Interest expense
Interest expense was $0.1 million for the
three months ended June 30, 2015, compared to $0.5 million for the three months ended June 30, 2014, representing a decrease of
$0.4 million, primarily due to the annual interest rate of the USD loan which was 1.7% during the three months ended June 30, 2015,
while it was 2.8% in the same period of last year.
Financial Income, Net
Financial income, net, was $0.7 million
for the three months ended June 30, 2015, compared to $0.5 million for the three months ended June 30, 2014, representing an increase
of $0.2 million, which was mainly due to an increase in interest income of $0.2 million.
Income Before Income Tax Expenses and Equity In Earnings
Of Affiliated Companies
Income before income tax expenses and equity
in earnings of affiliated companies was $9.2 million for the three months ended June 30, 2015, compared to $16.6 million for the
three months ended June 30, 2014, representing a decrease of $7.4 million, which was mainly due to a decrease in operating income
of $8.2 million, an increase in other income of $0.1 million, and an increase in financial income, net of $0.2 million.
Income Taxes
Income tax expense was $1.6 million for
the three months ended June 30, 2015, compared to $3.1 million of income tax expense for the three months ended June 30, 2014,
representing a decrease of $1.6 million, which was mainly due to decreases in income before income tax and the effective tax rate.
The income before income tax decreased to $9.2 million for the three months ended June 30, 2015 from $16.6 million for the same
period in 2014 and the effective tax rate decreased to 17.9% from 18.8% as a result of a larger decrease in income before tax of
high effective tax rate subsidiaries and a smaller decrease in income before tax of low effective tax rate subsidiaries.
Net Income
Net income was $7.6 million for the three
months ended June 30, 2015, compared to net income of $13.5 million for the three months ended June 30, 2014, representing a decrease
of $5.9 million, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies
of $7.4 million, offset by a decrease in income tax expenses of $1.5 million.
Net Income (Loss) Attributable to Non-controlling
Interests
Net loss attributable to non-controlling
interests amounted to $0.1 million for the three months ended June 30, 2015, while net income attributable to non-controlling interests
amounted to $2.6 million for the three months ended June 30, 2014.
The Company owns equity interests in twelve non-wholly owned
subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong, which is
accounted for under the equity method, all the operating results of these non-wholly owned subsidiaries were consolidated in the
Company’s financial statements as of June 30, 2015 and 2014. The decrease in net income attributable to non-controlling interests
was mainly due to the Company’s acquisition of the non-controlling interests of Henglong and Jiulong in September 2014.
Net Income Attributable to Parent Company’s Common
Shareholders
Net income attributable to parent company’s
common shareholders was $7.7 million for the three months ended June 30, 2015, compared to net income attributable to parent company’s
common shareholders of $11.0 million for the three months ended June 30, 2014, representing a decrease of $3.3 million, which was
mainly due to a decrease in net income of $6.3 million and the Company’s acquisition of the non-controlling interests of
Henglong and Jiulong in September 2014, which led to a decrease in net income attributable to non-controlling interests of $2.6
million.
Results of Operations—Six Months
Ended June 30, 2015 and 2014
In the second quarter of 2014, the Company
acquired a 51.0% equity interest in Fujian Qiaolong. Pursuant to ASC Topic 805, the results of Fujian Qiaolong have been included
since the date of acquisition and are reflected in the condensed unaudited consolidated statements of operations and
comprehensive income for the six months ended June 30, 2015, and under “Other Sectors” in the Company’s segment
reporting. Please refer to Note 3 to the condensed unaudited consolidated financial statements in this Report.
| |
Net Product Sales | | |
Cost of Products Sold | |
| |
(in thousands of USD, except percentages) | | |
(in thousands of USD, except percentages) | |
| |
2015 | | |
2014 | | |
Change | | |
2015 | | |
2014 | | |
Change | |
Henglong | |
$ | 152,130 | | |
$ | 143,085 | | |
| 9,045 | | |
| 6.3 | % | |
$ | 126,567 | | |
$ | 119,004 | | |
$ | 7,563 | | |
| 6.4 | % |
Jiulong | |
| 37,068 | | |
| 41,789 | | |
| (4,721 | ) | |
| -11.3 | | |
| 33,222 | | |
| 35,439 | | |
| (2,217 | ) | |
| -6.3 | |
Shenyang | |
| 16,540 | | |
| 23,940 | | |
| (7,400 | ) | |
| -30.9 | | |
| 13,992 | | |
| 21,484 | | |
| (7,492 | ) | |
| -34.9 | |
Wuhu | |
| 12,171 | | |
| 12,404 | | |
| (233 | ) | |
| -1.9 | | |
| 11,311 | | |
| 11,330 | | |
| (19 | ) | |
| -0.2 | |
Hubei Henglong | |
| 30,645 | | |
| 27,283 | | |
| 3,362 | | |
| 12.3 | | |
| 23,276 | | |
| 21,662 | | |
| 1,614 | | |
| 7.5 | |
Other Sectors | |
| 18,777 | | |
| 20,323 | | |
| (1,546 | ) | |
| -7.6 | | |
| 15,596 | | |
| 17,016 | | |
| (1,420 | ) | |
| -8.3 | |
Total Segments | |
| 267,331 | | |
| 268,824 | | |
| (1,493 | ) | |
| -0.6 | | |
| 223,964 | | |
| 225,935 | | |
| (1,971 | ) | |
| -0.9 | |
Elimination | |
| (34,721 | ) | |
| (39,042 | ) | |
| 4,321 | | |
| -11.1 | | |
| (34,818 | ) | |
| (39,074 | ) | |
| 4,256 | | |
| -10.9 | |
Total | |
$ | 232,610 | | |
$ | 229,782 | | |
$ | 2,828 | | |
| 1.2 | % | |
$ | 189,146 | | |
$ | 186,861 | | |
$ | 2,285 | | |
| 1.2 | % |
Net Product Sales
Net product sales were $232.6 million for
the six months ended June 30, 2015, compared to $229.8 million for the same period in 2014, representing an increase of $2.8 million,
or 1.2%. The increase was mainly due to the continuing growth of sales to North America.
During the six months ended June 30, 2015,
the Company made a $2.4 million payment to a customer for new product testing services provided by the customer. As the Company
cannot reasonably demonstrate that such payment amount represents the fair value of the services provided by its customer, the
payment was recorded as a reduction of net sales in accordance with U.S. GAAP.
For the six months ended June 30, 2015,
there was an increase in sales of passenger vehicle power steering gears compared with the same period last year, mainly due to
the decrease in sales of hydraulic power steering gears, partially offset by the increase in sales of EPS. Compared with the same
period of 2014, during the six months ended June 30, 2015, sales of hydraulic power steering gears decreased by $17.7 million,
while sales of EPS increased by $18.5 million.
From January 1, 2015, the National IV emission
standard for commercial vehicles has been implemented in China. To meet the upgraded standard, certain OEMs transformed and renovated
their existing products which, together with China’s economic slowdown, led to a significant decrease in the production and
sales volume of China’s commercial vehicles. Accordingly, the Company’s sales of steering gears for commercial vehicles
decreased.
The steering gears that the Company sold
to North America significantly increased, as a result of the continuing growth of automotive market demand in North America.
In summary, the Company had a decrease
in sales volume leading to a sales decrease of $2.4 million, an increase in selling price of steering gears leading to a sales
increase of $4.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar, which led to a sales
increase of $1.1 million.
Further analysis by segment (before elimination) is as follows:
|
• |
Net product sales for Henglong were $152.1 million for the six months ended June 30, 2015, compared with $143.1 million for the six months ended June 30, 2014, representing an increase of $9.0 million, or 6.3%, which was mainly due to an increase in sales volume for passenger vehicles in the China market and the higher selling price of middle-level electric power steering compared with low-level electric power steering. An increase in sales volume led to a sales increase of $8.3 million, an increase in selling price led to a sales increase of $0.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.5 million. |
|
• |
Net product sales for Jiulong were $37.1 million for the six months ended June 30, 2015, compared with $41.8 million for the six months ended June 30, 2014, representing a decrease of $4.7 million, or 11.3%, mainly due to China’s economic slowdown and the adoption of the National IV emission standard for commercial vehicles, as Jiulong’s main products and sales are steering gears for commercial vehicles. A decrease in sales volume led to a sales decrease of $7.8 million, an increase in selling price led to a sales increase of $2.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.2 million. |
|
• |
Net product sales for Shenyang were $16.5 million for the six months ended June 30, 2015, compared to $23.9 million for the same period in 2014, representing a decrease of $7.4 million, or 30.9%. The products of Shenyang are mainly sold to Shenyang Brilliance Jinbei Automobile Co., LTD, “Jinbei”. Jinbei primarily uses EPS on its passenger vehicles, while Shenyang mainly engages in the production and sales of hydraulic power steering gears for passenger vehicles, so sales volumes of Shenyang decreased accordingly. A decrease in sales volumes led to a sales decrease of $8.0 million, an increase in selling price led to a sales increase of $0.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.1 million. |
|
• |
Net product sales for Wuhu were $12.2 million for the six months ended June 30, 2015, compared to $12.4 million for the same period in 2014, representing a decrease of $0.2 million, or 1.9%. A decrease in sales volumes led to a sales decrease of $0.6 million, and an increase in selling price led to a sales increase of $0.4 million. |
|
• |
Net product sales for Hubei Henglong were $30.6 million for the six months ended June 30, 2015, compared to $27.3 million for the same period in 2014, representing an increase of $3.3 million, or 12.3%. The net product sales increase was mainly due to the growth of automotive market demand in North America, where Hubei Henglong’s products are sold. An increase in sales volumes led to a sales increase of $2.1 million, an increase in selling price led to a sales increase of $1.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
|
• |
Net product sales for Other Sectors
were $18.8 million for the six months ended June 30, 2015, compared to $20.3 million for the same period in 2014, representing
a decrease of $1.5 million, or 7.6%. A decrease in sales volumes led to a sales decrease of $0.7 million, a decrease in selling
price led to a sales decrease of $0.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar
led to a sales increase of $0.1 million. |
Cost of Products Sold
For the six months ended June 30, 2015,
the cost of products sold was $189.1 million, compared to $186.9 million for the same period of 2014, representing an increase
of $2.3 million, or 1.2%. The increase in the cost of products sold was mainly due to the net effect of a net decrease in sales
volumes which led to a cost of products sold decrease of $0.2 million, an increase in unit cost which led to a cost of products
sold increase of $1.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a
cost of products sold increase of $0.9 million. Further analysis is as follows:
|
• |
Cost of products sold for Henglong was $126.6 million for the six months ended June 30, 2015, compared to $119.0 million for the same period of 2014, representing an increase of $7.6 million, or 6.4%. An increase in sales volumes led to a cost of products sold increase of $8.8 million, a decrease in unit cost led to a cost of products sold decrease of $1.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of products sold increase of $0.5 million. |
|
• |
Cost of products sold for Jiulong was $33.2 million for the six months ended June 30, 2015, compared to $35.4 million for the same period of 2014, representing a decrease of $2.2 million, or 6.3%. A decrease in sales volumes led to a cost of products sold decrease of $6.8 million, an increase in unit cost led to a cost of products sold increase of $4.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
|
• |
Cost of products sold for Shenyang was $14.0 million for the six months ended June 30, 2015, compared to $21.5 million for the same period of 2014, representing a decrease of $7.5 million, or 34.9%. The decrease in cost of products sold was mainly due to a decrease in sales volumes, which led to a cost of products sold decrease of $7.3 million, and a decrease in unit cost which led to a cost of products sold decrease of $0.2 million. |
|
• |
Cost of products sold for Wuhu was $11.3 million for the six months ended June 30, 2015, consistent with $11.3 million for the same period of 2014. The decrease in cost of products sold was mainly due to a decrease in sales volumes which led to a cost of products sold decrease of $0.5 million, and an increase in unit cost which led to a cost of products sold increase of $0.5 million. |
|
• |
Cost of products sold for Hubei Henglong was $23.3 million for the six months ended June 30, 2015, compared to $21.7 million for the same period of 2014, representing an increase of $1.6 million, or 7.5%. The increase in cost of products sold was mainly due to an increase in sales volumes which led to a cost of products sold increase of $1.9 million, and a decrease in unit cost which led to a cost of products sold decrease of $0.3 million. |
|
• |
Cost of products sold for Other Sectors was $15.6 million for the six months ended June 30, 2015, compared to $17.0 million for the same period of 2014, representing a decrease of $1.4 million, or 8.3%. The decrease in cost of products sold was mainly due to a decrease in sales volumes which led to a cost of products sold decrease of $0.5 million, a decrease in unit cost which led to a cost of products sold decrease of $1.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products sold increase of $0.1 million. |
Gross margin was 18.7% for the six months
ended June 30, 2015, consistent with 18.7% in the same period of 2014.
Gain on Other Sales
Gain on other sales mainly consisted of
net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the six months ended
June 30, 2015, gain on other sales amounted to $2.4 million as compared to $9.1 million for the six months ended June 30, 2014,
representing a decrease of $6.7 million. The decrease was mainly due to the Company selling the remaining land use rights and recognizing
a gain of $7.5 million in the second quarter of 2014, which represented the difference between the selling price of $8.4 million
and the net book value of the land use rights of $0.9 million. There was no such gain in the same period in 2015.
Selling Expenses
Selling expenses were $7.7 million for
the six months ended June 30, 2015, compared to $7.4 million for the same period of 2014, representing an increase of $0.3 million,
or 4.1%, mainly due to an increase in sales volumes which led to an increase in salaries and wages cost of $0.6 million, an increase
in office expenses of $0.1 million, a decrease in transportation fees of $0.2 million, a decrease in advertising expenses of $0.1
million, and a decrease in other expenses of $0.1 million.
General and Administrative Expenses
General and administrative expenses were
$8.2 million for the six months ended June 30, 2015, compared to $7.3 million for the same period of 2014, representing an increase
of $0.9 million, or 12.3%, which was mainly due to an increase in salaries and wages cost of $0.3 million, a decrease in audit
professional service fees of $0.2 million and an increase in office facilities improvement expenses of $0.9 million.
Research and Development Expenses
Research and development expenses were
$12.3 million for the six months ended June 30, 2015, compared to $11.1 million for the six months ended June 30, 2014, representing
an increase of $1.2 million, or 10.8%. The Company’s research and development expenses were mainly used for the development
and trial production of EPS and other new products. Research and development expenditures have continued to be significant in the
past three years. In summary, expenses for mold improvement decreased by $0.4 million, external technical support fees increased
by $0.8 million, and the salaries and wages expenses of research and development related staff increased by $0.8 million.
Income from Operations
Income from operations was $17.6 million
for the six months ended June 30, 2015, compared to $26.3 million for the six months ended June 30, 2014, representing a decrease
of $8.7 million, or 33.1%, including an increase of $0.6 million in gross profit, a decrease of $6.8 million in gain on other sales
and an increase of $2.4 million in operating expenses.
Other Income, Net
Other income, net was $0.4 million for
the six months ended June 30, 2015, consistent with $0.4 million for the six months ended June 30, 2014.
Interest expense
Interest expense was $0.5 million for the
six months ended June 30, 2015, compared to $0.8 million for the six months ended June 30, 2014, representing a decrease of $0.3
million, primarily due to the annual interest rate of the USD loan being 1.7% during the three months ended June 30, 2015, while
it was 2.8% in the same period of last year.
Financial Income, Net
Financial income, net, was $1.5 million
for the six months ended June 30, 2015, compared to $1.0 million for the six months ended June 30, 2014, representing an increase
of $0.5 million, which was mainly due to an increase in income of foreign currency exchange of $0.4 million.
Income Before Income Tax Expenses and
Equity In Earnings Of Affiliated Companies
Income before income tax expenses and equity
in earnings of affiliated companies was $18.9 million for the six months ended June 30, 2015, compared to $26.9 million for the
six months ended June 30, 2014, representing a decrease of $8.0 million, which was mainly due to a decrease in operating income
of $8.7 million, a decrease in interest income of $0.3 million, and an increase in financial income, net of $0.5 million.
Income Taxes
Income tax expense was $3.1 million for
the six months ended June 30, 2015, compared to $5.1 million of income tax expense for the six months ended June 30, 2014, representing
a decrease of $2.0 million, which was mainly due to decreases in income before income tax and the effective tax rate. The income
before income tax decreased to $18.9 million for the six months ended June 30, 2015 from $26.9 million for the same period in 2014
and the effective tax rate decreased to 16.2% from 19.0% as a result of a decrease in income before tax of high effective tax rate
subsidiaries and an increase in income before tax of low effective tax rate subsidiaries.
Net Income
Net income was $16.0 million for the six
months ended June 30, 2015, compared to net income of $21.9 million for the six months ended June 30, 2014, representing a decrease
of $5.9 million, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies
of $8.0 million, offset by a decrease in income tax expenses of $2.0 million.
Net Income (Loss) Attributable to Non-controlling
Interests
Net loss attributable to non-controlling
interests amounted to $0.2 million, while net income attributable to non-controlling interests amounted to $4.1 million for the
six months ended June 30, 2014.
The Company owns equity interests in twelve
non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong,
which is accounted for under the equity method, all the operating results of these non-wholly owned subsidiaries were consolidated
in the Company’s financial statements as of June 30, 2015 and 2014. The decrease in net income attributable to non-controlling
interests was mainly due to the Company’s acquisition of the non-controlling interests of Henglong and Jiulong in September
2014.
Net Income Attributable to Parent Company’s
Common Shareholders
Net income attributable to parent company’s
common shareholders was $16.2 million for the six months ended June 30, 2015, compared to net income attributable to parent company’s
common shareholders of $17.8 million for the six months ended June 30, 2014, representing a decrease of $1.6 million, which was
mainly due to a decrease in net income of $5.9 million and the Company’s acquisition of the non-controlling interests of
Henglong and Jiulong in September 2014, which led to a decrease in net income attributable to non-controlling interests of $4.3
million.
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 June 30, 2015, the Company had cash and
cash equivalents and short-term investments, excluding pledged deposit, of $108.6 million, compared to $109.5 million as of December
31, 2014, representing a decrease of $0.9 million, or 0.8%.
The Company had working capital of $205.8
million as of June 30, 2015, compared to $198.1 million as of December 31, 2014, representing an increase of $7.7 million, or 3.9%.
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 as of June 30, 2015, 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 June 30, 2015.
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 $45.4
million (See Note 14) and bankers’ acceptances of $72.6 million (See Note 15) as of June 30, 2015.
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 lowered by
approximately $14.1 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 $14.1 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 $10.6 million, which is 75.07%, the mortgage rate, of $14.1 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 June 30, 2015, 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 | | |
Assessed Mortgage Value (6) | |
1. Comprehensive credit facilities | |
Bank of China (5) | |
Mar 2015 | |
$ | 23,063 | | |
$ | 8,518 | | |
$ | 34,350 | |
| |
| |
| |
| | | |
| | | |
| | |
2. Comprehensive credit facilities | |
Jingzhou Commercial Bank(5) | |
July 2015 | |
| 29,443 | | |
| 5,178 | | |
| 59,429 | |
| |
| |
| |
| | | |
| | | |
| | |
3. Comprehensive credit facilities | |
Fujian Haixia Bank | |
Mar 2016 | |
| 2,781 | | |
| 2,887 | | |
| 3,916 | |
| |
| |
| |
| | | |
| | | |
| | |
4. Comprehensive credit facilities | |
Shanghai Pudong Development Bank (1) (5) | |
Mar 2015 | |
| 25,517 | | |
| 23,066 | | |
| 13,261 | |
| |
| |
| |
| | | |
| | | |
| | |
5. Comprehensive credit facilities | |
China CITIC Bank (1) (5) | |
Jun 2015 | |
| 19,628 | | |
| 15,236 | | |
| 10,048 | |
| |
China CITIC Bank | |
July 2016 | |
| 4,907 | | |
| 2,454 | | |
| 6,049 | |
| |
| |
| |
| | | |
| | | |
| | |
6. Comprehensive credit facilities | |
China Everbright Bank | |
Sep 2015 | |
| 4,907 | | |
| 2,723 | | |
| 8,375 | |
| |
| |
| |
| | | |
| | | |
| | |
7. Comprehensive credit facilities | |
China Huaxia Bank (1) | |
Jan 2016 | |
| 26,171 | | |
| 6,411 | | |
| - | |
| |
| |
| |
| | | |
| | | |
| | |
8. Comprehensive credit facilities | |
ICBC Macau | |
May 2016 | |
| 30,000 | | |
| 30,000 | | |
| 34,599 | |
| |
| |
| |
| | | |
| | | |
| | |
9. Comprehensive credit facilities | |
HSBC (China) Company Limited(5) | |
July 2015 | |
| 5,000 | | |
| 5,000 | | |
| 5,398 | |
| |
| |
| |
| | | |
| | | |
| | |
Total | |
| |
| |
$ | 171,417 | | |
$ | 101,473 | (2) | |
$ | 175,425 | (3) |
|
(1) |
Each of Henglong’s comprehensive credit facility with China CITIC Bank, Henglong and Jielong's comprehensive credit facility with Shanghai Pudong Development Bank, and Henglong's comprehensive credit facility with China Hua Xia Bank, is required to be guaranteed by Jiulong, another subsidiary of the Company, 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 expires. The amount used includes
bank loans of $41.3 million and notes payable of $60.2 million as of June 30, 2015. The remainder of $4.1 million
of government loan and $12.4 million of notes payable was 100% secured by bank notes and time deposit without
utilization of credit lines. |
|
(3) |
In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of June 30, 2015, the pledged assets included $73.1 million of accounts and notes receivable, $5.4 million of time deposits, and other pledged assets with an assessed value of $101.1 million. |
|
(4) |
The 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) |
As at the date of this report, the comprehensive credit facilities with Bank of China, Jingzhou Commercial Bank, China CITIC Bank, Shanghai Pudong Development Bank and HSBC (China) Company Limited have expired. The Company is negotiating the renewal of the credit facilities with the banks and expects to obtain the renewal in late September 2015. As the Company has obtained sufficient comprehensive lines of credit from other banks, the Company does not anticipate any significant adverse impact on its financial position if the Company fails to renew these credit facilities. |
|
(6) |
The pledged cash deposits, which are disclosed in Note 4 to the consolidated financial statements in this quarterly report, 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 renewed its existing domestic
short-term bank loans and borrowed new bank loans during 2014 at annual interest rates of 6.16% to 8.03%, and loan terms of eleven
to twelve months. Pursuant to the comprehensive credit line arrangement the Company pledged and guaranteed:
|
(1) |
Accounts receivable with an assessed value of approximately $34.4 million as security for its comprehensive credit facility with the Bank of China; |
|
(2) |
Equipment with an assessed value of approximately $59.4 million as security for its revolving comprehensive credit facility with Jingzhou Commercial Bank; |
|
(3) |
Land use rights and buildings with an assessed value of approximately $3.9 million as security for its comprehensive credit facility with Fujian Haixia Bank; |
|
(4) |
Land use rights and buildings with an assessed value of approximately $13.3 million as security for its comprehensive credit facility with Shanghai Pudong Development Bank; |
|
(5) |
Land use rights and buildings with an assessed value of approximately $16.1 million as security for its comprehensive credit facility with China CITIC Bank; |
|
(6) |
Land use rights and buildings with an assessed value of approximately $8.4 million as security for its comprehensive credit facility with China Everbright Bank; |
|
(7) |
Henglong’s comprehensive credit facility with China Hua Xia Bank is guaranteed by Jiulong, another subsidiary of the Company; |
|
(8) |
On May 18, 2012, the Company entered into a Credit Agreement with ICBC Macau to obtain the Credit Facility. |
|
|
|
|
|
The interest rate of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. Interest is calculated daily on a 360-day basis and it is to be fixed one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown. |
|
|
|
|
|
As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount of not less than $31.6 million if the Credit Facility is fully drawn. |
|
|
|
|
|
On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB211.5 million, equivalent to approximately $34.6 million. The Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013 and extended to May 13, 2016 after being extended three times. |
|
|
|
|
(9) |
On July 16, 2014, Great Genesis entered into a credit facility agreement, with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million, the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015 and has an annual interest rate of 1.7%. Interest is paid on the twentieth day of each month and the principal repayment is at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with the Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC Credit Facility is fully drawn. |
|
|
|
|
|
On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB33.0 million, equivalent to approximately $5.4 million. |
Cash Requirements
The following table summarizes the Company’s
expected cash outflows resulting from financial contracts and commitments (in thousands of USD). The Company has not included information
on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year
to year, closely reflecting the Company’s levels of production, and are not long-term in nature (being less than three months
in length).
| |
| | |
Payment Due Dates | |
| |
Total | | |
Less than 1 year | | |
1-3 years | | |
3-5 years | | |
More than 5 Years | |
Short-term loan including interest payable | |
$ | 46,113 | | |
$ | 46,113 | | |
$ | - | | |
$ | - | | |
$ | - | |
Notes payable (1) | |
| 72,565 | | |
| 72,565 | | |
| - | | |
| - | | |
| - | |
Obligation for investment contract (2) | |
| 5,698 | | |
| - | | |
| 5,698 | | |
| - | | |
| - | |
Other contractual purchase commitments, including service agreements | |
| 23,146 | | |
| 22,292 | | |
| 854 | | |
| - | | |
| - | |
Total | |
$ | 147,522 | | |
$ | 140,970 | | |
$ | 6,552 | | |
$ | - | | |
$ | - | |
|
(1) |
Notes payable do not bear interest. |
|
(2) |
On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which Hubei Henglong has committed to make investments of 17.9% or RMB50.0 million, equivalent to approximately $8.1 million, into the Venture Fund in three installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5 million, equivalent to approximately $0.8 million. On April 24, 2015, Hubei Henglong made its second capital contribution of RMB10.0 million, equivalent to approximately $1.6 million. The remaining capital commitment of RMB35.0 million, equivalent to approximately $5.7 million, will be paid upon capital calls received from the Venture Fund. |
Short-term Loans
The following table summarizes the contract information of short-term
borrowings among the banks and the government of the PRC and the Company as of June 30, 2015 (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 | |
| |
| |
| |
| | |
| | |
| |
| |
| |
ICBC Macau (1)
| |
Working Capital | |
13 May 2015 | |
| 12 | | |
| 1.67 | % | |
Pay quarterly | |
13 May 2016 | |
$ | 30,000 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Shanghai Pudong Development Bank | |
Working Capital | |
16 Dec 2014 | |
| 12 | | |
| 6.16 | % | |
Pay quarterly | |
15 Dec 2015 | |
| 654 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Shanghai Pudong Development Bank | |
Working Capital | |
17 Dec 2014 | |
| 11 | | |
| 6.16 | % | |
Pay quarterly | |
13 Nov 2015 | |
| 654 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Shanghai Pudong Development Bank | |
Working Capital | |
18 Dec 2014 | |
| 11 | | |
| 6.16 | % | |
Pay quarterly | |
13 Nov 2015 | |
| 327 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
China CITIC Bank | |
Working Capital | |
29 Dec 2014 | |
| 12 | | |
| 6.72 | % | |
Pay quarterly | |
29 Dec 2015 | |
| 2,454 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
HSBC Limited (2) | |
Working Capital | |
22 Jul 2014 | |
| 12 | | |
| 1.70 | % | |
Pay monthly | |
1 Jul 2015 | |
| 5,000 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Financial Bureau of Jingzhou Development Zone | |
Working Capital | |
31 Mar 2015 | |
| 13 | | |
| 2.50 | % | |
Pay monthly | |
20 Apr 2016 | |
| 4,089 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Fujian Haixia Bank | |
Working Capital | |
28 Apr 2015 | |
| 12 | | |
| 8.03 | % | |
Pay monthly | |
28 Apr 2016 | |
| 49 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Fujian Haixia Bank | |
Working Capital | |
20 May 2015 | |
| 12 | | |
| 7.65 | % | |
Pay monthly | |
20 May 2016 | |
| 33 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Fujian Haixia Bank | |
Working Capital | |
20 Mar 2015 | |
| 12 | | |
| 8.03 | % | |
Pay monthly | |
20 Mar 2016 | |
| 2,127 | |
Total | |
| |
| |
| | | |
| | | |
| |
| |
$ | 45,387 | |
|
(1) |
The original borrowing date and maturity date of this loan was May 22, 2012 and May 22, 2013, respectively. The original maturity date was extended to May 13, 2016. |
|
(2) |
The original borrowing date and maturity date of this loan were July 22, 2014 and July 1, 2015, respectively. The original maturity date was extended to July 1, 2016. |
The Company must use the loans for the
purpose described in the table. For the three bank loans, if the Company fails to do so, it will be charged a penalty interest
at 60% to 100% of the specified loan rate listed in the table above. Except for the loan granted by ICBC Macau as disclosed in
the section “Capital Source” above, 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 50% of the specified loan rate.
Management believes that the Company had
complied with such financial covenants as of June 30, 2015, and 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 June 30, 2015 (figures are in thousands of USD):
Purpose | |
Term (Month) | |
Due Date | |
Amount Payable on Due Date | |
Working Capital (1) | |
3-6 | |
Jul -15 | |
$ | 15,580 | |
Working Capital | |
3-6 | |
Aug -15 | |
| 10,773 | |
Working Capital | |
3-6 | |
Sep -15 | |
| 9,803 | |
Working Capital | |
3-6 | |
Oct -15 | |
| 13,352 | |
Working Capital | |
3-6 | |
Nov -15 | |
| 12,014 | |
Working Capital | |
3-6 | |
Dec -15 | |
| 11,044 | |
Total (See Note 15) | |
| |
| |
$ | 72,566 | |
|
(1) |
The notes payable were repaid in full in July 2015. |
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 June 30, 2015, and believes it will continue to comply with them.
Cash Flows
Net cash provided by operations during the six months ended
June 30, 2015 was $14.5 million, compared to net cash provided by operations of $7.7 million for the same period of 2014, representing
an increase of $6.8 million.
During the six months ended June 30, 2015, the increase in net
cash provided by operations was mainly due to the net effect of:
|
(1) |
The increase in net income (excluding non-cash items) by $0.5 million; |
|
(2) |
The change in balance of pledge deposits which led to a decrease in net cash provided by operations of $5.9 million; |
|
(3) |
A decrease in the growth rate of balance of accounts and notes receivable which led to an increase in net cash provided by operations of $27.0 million, which was mainly due to the sales of the Company’s goods always being on credit terms ranging from 4 to 6 months. During the six months ended June 30, 2015, there was a smaller increase in sales revenue of the Company’s products compared with the same period last year while there was a significant decrease in the growth rate of the ending balance of accounts receivable compared with the same period last year as a result of the Company strengthening its collections; |
|
(4) |
The change in balance of inventories led to an increase in net cash provided by operations of $2.9 million. During the six months ended June 30, 2015, the Company actively adjusted its production plan to decrease inventory; |
|
(5) |
The change in balance of accounts and notes payable led to a decrease in net cash provided by operations of $10.9 million, which was mainly due to the Company having paid more accounts and notes payable as a result of these accounts and notes payable meeting the terms of payment as of June 30, 2015; |
|
(6) |
The change in taxes payable which led to a decrease in net cash provided by operations of $4.2 million, which was mainly due to the Company paying certain value-added tax and income tax that accrued in the prior year during the current period; and |
|
(7) |
The change of balance of customer deposits, which led to a decrease in net cash provided by operations of $0.7 million. |
The Company used net cash of
$12.5 million in investment activities during the six months ended June 30, 2015, compared to $7.0 million during the same
period of 2014, representing an increase of $5.5 million, which was mainly due to a net decrease in time deposits in the
current period of $6.5 million, the investment in the Venture Fund which used cash of $1.6 million and purchases of equipment
and patented technology which used cash of $6.3 million, offset by sales of property, plant and equipment which provided cash
of $6.2 million and the acquisition of Fujian Qiaolong which used cash of $3.0 million in the same period of last year, while there was no
such investment in the current period.
During the six months ended June 30, 2015,
the Company had net cash provided by financing activities of $0.3 million, compared to net cash provided by financing activities
of $1.6 million for the same period of 2014, representing a decrease of $1.3 million, which was mainly due to the net effect of
(1) a decrease of $0.4 million of bank/government loans received, (2) an increase of $1.8 million of repayments of bank/government
loans, (3) the payment of dividends to non-controlling interest holders having decreased by $1.2 million and (4) payment of dividends
on common stock having increased by $0.3 million.
Off-Balance Sheet Arrangements
As of June 30, 2015 and December 31, 2014,
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, 2014 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 June 30, 2015, 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 June 30, 2015.
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 June 30, 2015 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS. |
The Company is not a party to any pending
or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition, 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.
There have been no material changes from the risk factors previously
disclosed in Item 1A of the Company’s 2014 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.
INDEX TO EXHIBITS
Exhibit
Number |
|
Description |
|
|
|
3.1(i) |
|
Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123). |
|
|
|
3.1(ii) |
|
Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002). |
|
|
|
10.1 |
|
Joint-venture Agreement, dated June 30, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006). |
|
|
|
10.2 |
|
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014). |
|
|
|
31.1 |
|
Rule 13a-14(a) Certification* |
|
|
|
31.2 |
|
Rule 13a-14(a) Certification* |
32.1 |
|
Section 1350 Certification* |
|
|
|
32.2 |
|
Section 1350 Certification* |
|
|
|
101* |
|
The following materials from the China Automotive Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, were filed on August 13, 2015 formatted in Extensible Business Reporting Language (XBRL): |
|
(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 |
SIGNATURES
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: August 13, 2015 |
|
By: |
/ s/ Qizhou Wu |
|
|
|
Qizhou Wu |
|
|
|
President and Chief Executive Officer |
|
|
|
|
Date: August 13, 2015 |
|
By: |
/s/ Jie Li |
|
|
|
Jie Li |
|
|
|
Chief Financial Officer |
Exhibit 31.1
RULE 13a-14(a) CERTIFICATION FOR FORM
10-Q
I, Qizhou Wu, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of China Automotive Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 13, 2015 |
By: /s/ Qizhou Wu |
|
Qizhou Wu |
|
President and Chief Executive Officer |
Exhibit 31.2
RULE 13a-14(a) CERTIFICATION FOR FORM
10-Q
I, Jie Li, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of China Automotive Systems, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 13, 2015 |
By: /s/ Jie Li |
|
Jie Li |
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of China Automotive Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2015, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Qizhou Wu, the Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 13, 2015 |
By: /s/ Qizhou Wu |
|
Qizhou Wu |
|
President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of China Automotive Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2015, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Jie Li, the Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 13, 2015 |
By: /s/ Jie Li |
|
Jie Li |
|
Chief Financial Officer |
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