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 September
30, 2014
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 |
¨ |
|
|
|
|
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 November 12, 2014, 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 confirm 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, 2013, as filed with the Securities and Exchange Commission, and Item 1A. “Risk
Factors” of Part II in the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 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 September
30, | |
| |
2014 | | |
2013 | |
Net product sales, including $11,890 and $9,166 to related parties for the three months ended September 30, 2014 and 2013 | |
$ | 101,735 | | |
$ | 90,919 | |
Cost of products sold, including $6,069 and $10,500 purchased from related parties for the three months ended September 30, 2014 and 2013 | |
| 81,152 | | |
| 74,394 | |
Gross profit | |
| 20,583 | | |
| 16,525 | |
Gain on other sales | |
| 1,132 | | |
| 5,030 | |
Less: Operating expenses | |
| | | |
| | |
Selling expenses | |
| 3,734 | | |
| 2,647 | |
General and administrative expenses | |
| 3,734 | | |
| 2,821 | |
Research and development expenses | |
| 5,441 | | |
| 5,117 | |
Total operating expenses | |
| 12,909 | | |
| 10,585 | |
Income from operations | |
| 8,806 | | |
| 10,970 | |
Other income, net | |
| 113 | | |
| 499 | |
Financial income, net | |
| 412 | | |
| 689 | |
Income before income tax expenses and equity in earnings of affiliated companies | |
| 9,331 | | |
| 12,158 | |
Less: Income taxes | |
| 1,387 | | |
| 1,854 | |
Equity in earnings of affiliated companies | |
| 82 | | |
| 125 | |
Net income | |
| 8,026 | | |
| 10,429 | |
Net income attributable to non-controlling interests | |
| 1,293 | | |
| 1,805 | |
Net income attributable to parent company’s common shareholders | |
$ | 6,733 | | |
$ | 8,624 | |
Comprehensive income: | |
| | | |
| | |
Net income | |
$ | 8,026 | | |
$ | 10,429 | |
Other comprehensive income: | |
| | | |
| | |
Foreign currency translation gain, net of tax | |
| 9 | | |
| 1,218 | |
Comprehensive income | |
| 8,035 | | |
| 11,647 | |
Comprehensive income attributable to non-controlling interests | |
| 1,293 | | |
| 2,010 | |
Comprehensive income attributable to parent company | |
$ | 6,742 | | |
$ | 9,637 | |
| |
| | | |
| | |
Net income attributable to parent company’s common shareholders per share | |
| | | |
| | |
| |
| | | |
| | |
Basic – | |
$ | 0.24 | | |
$ | 0.31 | |
| |
| | | |
| | |
Diluted- | |
$ | 0.24 | | |
$ | 0.31 | |
Weighted average number of common shares outstanding | |
| | | |
| | |
Basic | |
| 28,043,019 | | |
| 28,043,019 | |
Diluted | |
| 28,063,661 | | |
| 28,062,297 | |
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)
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
Net product sales, including $38,627 and $26,344 to related parties for the nine months ended September 30, 2014 and 2013 | |
$ | 331,517 | | |
$ | 285,971 | |
Cost of products sold, including $20,721 and $23,171 purchased from related parties for the nine months ended September 30, 2014 and 2013 | |
| 268,013 | | |
| 231,696 | |
Gross profit | |
| 63,504 | | |
| 54,275 | |
Gain on other sales | |
| 10,267 | | |
| 6,762 | |
Less: Operating expenses | |
| | | |
| | |
Selling expenses | |
| 11,104 | | |
| 9,611 | |
General and administrative expenses | |
| 11,056 | | |
| 10,164 | |
Research and development expenses | |
| 16,509 | | |
| 13,134 | |
Total operating expenses | |
| 38,669 | | |
| 32,909 | |
Income from operations | |
| 35,102 | | |
| 28,128 | |
Other income, net | |
| 491 | | |
| 573 | |
Financial income, net | |
| 598 | | |
| 380 | |
Income before income tax expenses and equity in earnings of affiliated companies | |
| 36,191 | | |
| 29,081 | |
Less: Income taxes | |
| 6,488 | | |
| 5,172 | |
Equity in earnings of affiliated companies | |
| 220 | | |
| 251 | |
Net income | |
| 29,923 | | |
| 24,160 | |
Net income attributable to non-controlling interests | |
| 5,409 | | |
| 4,616 | |
Net income attributable to parent company’s common shareholders | |
$ | 24,514 | | |
$ | 19,544 | |
Comprehensive income: | |
| | | |
| | |
Net income | |
$ | 29,923 | | |
$ | 24,160 | |
Other comprehensive income (loss): | |
| | | |
| | |
Foreign currency translation gain (loss), net of tax | |
| (2,413 | ) | |
| 5,265 | |
Comprehensive income | |
| 27,510 | | |
| 29,425 | |
Comprehensive income attributable to non-controlling interests | |
| 5,006 | | |
| 5,507 | |
Comprehensive income attributable to parent company | |
$ | 22,504 | | |
$ | 23,918 | |
| |
| | | |
| | |
Net income attributable to parent company’s common shareholders per share | |
| | | |
| | |
| |
| | | |
| | |
Basic – | |
$ | 0.87 | | |
$ | 0.70 | |
| |
| | | |
| | |
Diluted- | |
$ | 0.87 | | |
$ | 0.70 | |
Weighted average number of common shares outstanding | |
| | | |
| | |
Basic | |
| 28,043,019 | | |
| 28,043,019 | |
Diluted | |
| 28,063,846 | | |
| 28,054,008 | |
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)
| |
September 30, 2014 | | |
December 31, 2013 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 41,569 | | |
$ | 53,979 | |
Pledged cash deposits | |
| 31,703 | | |
| 33,963 | |
Short-term investments | |
| 43,266 | | |
| 35,510 | |
Accounts and notes receivable, net - unrelated parties | |
| 281,620 | | |
| 267,639 | |
Accounts and notes receivable, net - related parties | |
| 22,253 | | |
| 17,194 | |
Advance payments and others - unrelated parties | |
| 2,073 | | |
| 3,156 | |
Advance payments and others - related parties | |
| 1,715 | | |
| 866 | |
Inventories | |
| 72,691 | | |
| 51,392 | |
Assets held for sale | |
| - | | |
| 925 | |
Current deferred tax assets | |
| 6,419 | | |
| 5,783 | |
Total current assets | |
| 503,309 | | |
| 470,407 | |
Non-current assets: | |
| | | |
| | |
Property, plant and equipment, net | |
| 81,710 | | |
| 80,018 | |
Intangible assets, net | |
| 1,572 | | |
| 686 | |
Other receivables, net - unrelated parties | |
| 1,892 | | |
| 252 | |
Other receivables, net - related parties | |
| 48 | | |
| 108 | |
Advance payment for property, plant and equipment - unrelated parties | |
| 3,912 | | |
| 3,488 | |
Advance payment for property, plant and equipment - related parties | |
| 2,391 | | |
| 2,097 | |
Long-term investments | |
| 3,660 | | |
| 4,023 | |
Goodwill | |
| 642 | | |
| - | |
Non-current deferred tax assets | |
| 4,760 | | |
| 4,528 | |
Total assets | |
$ | 603,896 | | |
$ | 565,607 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Bank and government loans | |
$ | 45,565 | | |
$ | 37,381 | |
Accounts and notes payable - unrelated parties | |
| 203,397 | | |
| 198,419 | |
Accounts and notes payable - related parties | |
| 3,837 | | |
| 4,634 | |
Customer deposits | |
| 2,979 | | |
| 1,677 | |
Accrued payroll and related costs | |
| 6,568 | | |
| 7,052 | |
Accrued expenses and other payables | |
| 73,340 | | |
| 29,062 | |
Accrued pension costs | |
| 6,044 | | |
| 4,626 | |
Taxes payable | |
| 8,537 | | |
| 7,792 | |
Amounts due to shareholders/directors | |
| 376 | | |
| 312 | |
Current deferred tax liabilities | |
| 220 | | |
| 117 | |
Total current liabilities | |
| 350,863 | | |
| 291,072 | |
Long-term liabilities: | |
| | | |
| | |
Advances payable | |
| 2,875 | | |
| 2,764 | |
Non-current deferred tax liabilities | |
| 329 | | |
| - | |
Total liabilities | |
$ | 354,067 | | |
$ | 293,836 | |
| |
| | | |
| | |
Commitments and Contingencies (See Note 29) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued–28,260,302 and 28,260,302 shares as of September 30, 2014 and December 31, 2013, respectively | |
$ | 3 | | |
$ | 3 | |
Additional paid-in capital | |
| 27,209 | | |
| 39,565 | |
Retained earnings- | |
| | | |
| | |
Appropriated | |
| 10,178 | | |
| 10,048 | |
Unappropriated | |
| 170,407 | | |
| 146,023 | |
Accumulated other comprehensive income | |
| 34,794 | | |
| 32,061 | |
Treasury stock – 217,283 and 217,283 shares as of September 30, 2014 and December 31, 2013, respectively | |
| (1,000 | ) | |
| (1,000 | ) |
Total parent company stockholders' equity | |
| 241,591 | | |
| 226,700 | |
Non-controlling interests | |
| 8,238 | | |
| 45,071 | |
Total stockholders' equity | |
| 249,829 | | |
| 271,771 | |
Total liabilities and stockholders' equity | |
$ | 603,896 | | |
$ | 565,607 | |
The accompanying notes are an integral part of these condensed
unaudited consolidated financial statements.
China Automotive Systems, Inc.
and Subsidiaries
Condensed Unaudited Consolidated Statements
of Cash Flows
(In thousands of USD unless otherwise
indicated)
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 29,923 | | |
$ | 24,160 | |
Adjustments to reconcile net income from operations to net cash provided by operating activities: | |
| | | |
| | |
Stock-based compensation | |
| 193 | | |
| 194 | |
Depreciation and amortization | |
| 11,592 | | |
| 10,964 | |
Increase (decrease) in allowance for doubtful accounts | |
| 177 | | |
| (139 | ) |
Inventory write downs | |
| 2,531 | | |
| 480 | |
Deferred income taxes | |
| (907 | ) | |
| (1,611 | ) |
Equity in earnings of affiliated companies | |
| (182 | ) | |
| (251 | ) |
Amortization of debt issue cost | |
| - | | |
| 58 | |
Gain on fixed assets disposals | |
| (7,500 | ) | |
| (4,288 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Pledged deposits | |
| 1,953 | | |
| 1,413 | |
Accounts and notes receivable | |
| (19,173 | ) | |
| (36,803 | ) |
Advance payments and others | |
| 328 | | |
| 465 | |
Inventories | |
| (17,449 | ) | |
| (9,076 | ) |
Increase (decrease) in: | |
| | | |
| | |
Accounts and notes payable | |
| 2,363 | | |
| 6,199 | |
Customer deposits | |
| 1,313 | | |
| 1,016 | |
Accrued payroll and related costs | |
| (423 | ) | |
| 514 | |
Accrued expenses and other payables | |
| 597 | | |
| 3,459 | |
Accrued pension costs | |
| 1,460 | | |
| 653 | |
Taxes payable | |
| 1,257 | | |
| 3,256 | |
Advances payable | |
| 8 | | |
| (32 | ) |
Net cash provided by operating activities | |
| 8,061 | | |
| 631 | |
Cash flows from investing activities: | |
| | | |
| | |
Increase (decrease) in other receivables | |
| (347 | ) | |
| 158 | |
Cash received from property, plant and equipment sales | |
| 6,994 | | |
| 6,282 | |
Payments to acquire property, plant and equipment | |
| (11,317 | ) | |
| (9,065 | ) |
Payments to acquire intangible assets | |
| (252 | ) | |
| (109 | ) |
Purchase of short-term investments | |
| (46,192 | ) | |
| (32,197 | ) |
Proceeds from maturities of short-term investments | |
| 38,115 | | |
| - | |
Acquisition of Fujian Qiaolong, net of cash acquired | |
| (2,976 | ) | |
| - | |
Dividends from investment under cost method | |
| - | | |
| 66 | |
Net cash used in investing activities | |
| (15,975 | ) | |
| (34, 865) | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from government and bank loan | |
| 15,836 | | |
| 15,588 | |
Repayments of bank loan | |
| (9,590 | ) | |
| (14,758 | ) |
Dividends paid to the non-controlling interests | |
| (6,048 | ) | |
| (1,381 | ) |
Dividends paid to the holders of the Company’s common stock | |
| (4,291 | ) | |
| - | |
Increase (decrease) in amounts due to shareholders/directors | |
| 69 | | |
| (40 | ) |
Net cash used in financing activities | |
| (4,024 | ) | |
| (591 | ) |
Effects of exchange rate on cash and cash equivalents | |
| (472 | ) | |
| 1,878 | |
Net decrease in cash and cash equivalents | |
| (12,410 | ) | |
| (32,947 | ) |
Cash and cash equivalents at beginning of period | |
| 53,979 | | |
| 87,649 | |
Cash and cash equivalents at end of period | |
$ | 41,569 | | |
$ | 54,702 | |
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:
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
Cash paid for interest | |
$ | 893 | | |
$ | 972 | |
Cash paid for income taxes | |
| 3,459 | | |
| 4,217 | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
Advance payments for acquiring property, plant and equipment | |
$ | 6,303 | | |
$ | 2,777 | |
Non-controlling interests arising as a result of acquisition of Fujian Qiaolong | |
| 2,793 | | |
| - | |
Payables for the acquisition of non-controlling interests in Henglong and Jiulong | |
| 37,314 | | |
| - | |
Account receivable for the sale of land use rights | |
| 1,890 | | |
| - | |
Dividends payable to the Company’s shareholders | |
| 757 | | |
| - | |
Dividends payable to non-controlling interests | |
| 4,063 | | |
| 86 | |
Dividends receivable from joint venture company | |
| 508 | | |
| - | |
SUPPLEMENTAL DISCLOSURE OF ACQUISITION
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
Purchase consideration settled in cash for Fujian Qiaolong | |
$ | (3,007 | ) | |
$ | - | |
Less: cash acquired | |
| 31 | | |
| - | |
Investing cash outflow for acquisitions | |
$ | (2,976 | ) | |
$ | - | |
The accompanying notes are an integral part of these condensed
unaudited consolidated financial statements.
China Automotive Systems, Inc.
and Subsidiaries
Notes to Condensed Unaudited Consolidated
Financial Statements
Three Months and Nine Months Ended September
30, 2014 and 2013
| 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 September
30, 2014 and December 31, 2013.
| |
Percentage Interest | |
Name of Entity | |
September 30, 2014 | | |
December 31, 2013 | |
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1 | |
| 100.00 | % | |
| 81.00 | % |
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2 | |
| 100.00 | % | |
| 80.00 | % |
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 | |
| 80.00 | % | |
| 80.00 | % |
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 | % | |
| - | |
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 13 | |
| 85.00 | % | |
| - | |
| 1. | Jiulong was established in 1993 and mainly engages in the production of integral power
steering gear for heavy-duty vehicles. On August 11, 2014, the Company entered into a Stock Exchange Agreement (the
“Exchange Agreement”) with a third party, Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd.
(“Jiulong Machinery Electricity”), under which
the Company issued 818,000 of its common shares in a private placement for the
acquisition of the 19% equity interest in Jiulong held by Jiulong Machinery Electricity. On September 26, 2014, the Company
obtained the 19% equity interest in Jiulong and completed its share registration with the local government administrative
bureau. Therefore, the Company owned 100% of the equity interests in Jiulong as of September 30, 2014. While the
Company retains its controlling interest of Jiulong, the Company’s
acquisition of the
non-controlling interest
was accounted for as an equity transaction in the
quarter ended September 30,
2014. On October 13, 2014, the Company completed its issuance of 818,000 common shares at market price of $9.15 per share in
a private placement to nominee
holders of
Jiulong Machinery
Electricity (See Notes 19 and 32). |
| 2. | Henglong was established in 1997 and is mainly engaged in the production of rack and pinion
power steering gears for cars and light duty vehicles. On August 11, 2014, the Company entered into the Exchange Agreement
with a third party, Jiulong Machinery Electricity, under which the Company issued 3,260,000 of its common shares in a
private placement
for the
acquisition of the 20% equity interest in Henglong held
by Jiulong Machinery Electricity. On September 26, 2014, the
Company obtained the 20% equity interest in Henglong and completed its share registration with the local government
administrative bureau. Therefore, the Company owned 100% equity interests in Henglong as of September 30, 2014. While
the Company retains its controlling interest of Henglong, the Company’s acquisition of the non-controlling interest
was accounted for
as an
equity transaction
in the
quarter ended
September 30, 2014. On
October 13, 2014, the Company completed its
issuance of 3,260,000 common shares at market price
of $9.15 per share in a private placement to nominee holders
of Jiulong Machinery Electricity (See Notes 19 and 32). |
| 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 electric power
steering, “EPS.” |
| 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. | On January 24, 2010, Genesis entered into a joint venture contract with Beijing Hainachuan Auto
Parts Co., Ltd. to establish Beijing Henglong as a joint venture company to design, develop and manufacture both hydraulic and
electric power steering systems and parts. On September 16, 2010, with Beijing Hainachuan’s agreement, Genesis transferred
its interest in the joint venture to Hubei Henglong, and left the other terms of the joint venture contract unchanged. 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 through the equity 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. The consideration was
approximately $3.0 million. |
| 13. | In May 2014, 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. At the date of release of this quarterly report, Jielong has not completed the capital
injection. |
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. As Hubei Henglong is a limited partner of the Venture Fund and has no significant influence
on the operation and decision-making of the Venture Fund, 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) (See
Note 32).
| 2. | Basis of presentation and significant accounting policies |
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, 2013.
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, 2013 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 2013 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission.
The results of operations for the three
months and nine months ended September 30, 2014 are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2014.
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 April 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 “Presentation of Financial Statements
(Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity”. The new guidance changes the criteria for reporting discontinued operations while enhancing disclosures in
this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued
operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally,
ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information
about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the
pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations
reporting. ASU 2014-08 is effective for the Company in the first quarter of fiscal 2015. Early adoption is permitted, but only
for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available
for issuance. The Company is currently evaluating the impact of adopting this update on its financial statements.
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, 2016, including interim periods within that reporting period. Early adoption
is not permitted. 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 our
ongoing financial reporting.
In June 2014, the FASB issued Accounting
Standards Update No. 2014-12 (“ASU 2014-12”), “Compensation—Stock Compensation (Topic 718) - Accounting
for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service
Period.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates
to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not
be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which
it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the
period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved
before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively
over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service
period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately
vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award
if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period
in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments
in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. Entities
may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or
(b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period
presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the
cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements
should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition
is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating
the impact of adopting this Update on its financial statements.
In August 2014, the FASB issued Accounting
Standards Update No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”,
which will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related
footnote disclosures in certain circumstances. Currently, there is no guidance in GAAP about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related
footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments should reduce diversity
in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue
as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically,
the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting
period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4)
require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5)
require an express statement and other disclosures when substantial doubt is not alleviated and (6) require an assessment for a
period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this
update are effective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. The Company is currently evaluating the impact of adopting this update on its financial statements.
| (c) | Significant Accounting Policies |
Business Combinations – A business
combination is recorded using the purchase method of accounting, and the cost of an acquisition is measured as the aggregate of
the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the
contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the
acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured
separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess
of (i) the total of consideration of acquisition, fair value of the non-controlling interests and acquisition date fair value of
any previously held equity interest in the subsidiary acquired over (ii) the fair value of the identifiable net assets of the subsidiary
acquired is recorded as goodwill. If the consideration of acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognized directly in the consolidated statements of operations and comprehensive income.
Goodwill - Goodwill represents the excess
of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company’s
acquisition of interests in its subsidiary. We test goodwill for impairment at the reporting unit level on an annual basis as of
December 31, and between annual tests when an event occurs or circumstances change that could indicate that the asset might be
impaired. The Company adopted the FASB revised guidance on “Testing of Goodwill for Impairment.” Under this guidance,
the Company has the option to choose whether it will apply the qualitative assessment first and then the quantitative assessment,
if necessary, or to apply the quantitative assessment directly. For a reporting unit applying a qualitative assessment first, the
Company starts the goodwill impairment test by assessing qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not
the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise,
no further testing is required. The quantitative impairment test uses a two-step process. In the first step, the fair value of
a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net
assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value
of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test
is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value
of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to
the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds
its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. The Company estimates
total fair value of the reporting unit using discounted cash flow analysis, and makes assumptions regarding future revenue, gross
margins, working capital levels, investments in new products, capital spending, tax, cash flows, and the terminal value of the
reporting unit.
There have been no other updates to the significant accounting
policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2013.
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.
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 September 30, 2014, 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 September 30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Accounts receivable - unrelated parties (1) | |
$ | 131,134 | | |
$ | 140,920 | |
Notes receivable - unrelated parties (2) (3) | |
| 151,926 | | |
| 128,068 | |
Total accounts and notes receivable- unrelated parties | |
| 283,060 | | |
| 268,988 | |
Less: allowance for doubtful accounts - unrelated parties | |
| (1,440 | ) | |
| (1,349 | ) |
Accounts and notes receivable, net - unrelated parties | |
| 281,620 | | |
| 267,639 | |
Accounts and notes receivable, net - related parties | |
| 22,253 | | |
| 17,194 | |
Accounts and notes receivable, net | |
$ | 303,873 | | |
$ | 284,833 | |
| (1) | As of September 30, 2014 and December 31, 2013, the Company has pledged $11.0 million and $19.1
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 September 30, 2014, Henglong collateralized its notes receivable in an amount of RMB229.2
million (equivalent to approximately $37.3 million) as security for the credit facilities with banks in China and the Chinese government,
including RMB197.8 million (equivalent to approximately $32.2 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 (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 RMB31.4 million (equivalent to approximately $5.1 million) in favor
of the Chinese government as security for the low-interest government loan (See Note 14). As of December 31, 2013, Henglong collateralized
its notes receivable in an amount of RMB196.3 million (equivalent to approximately $32.2 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
(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.” |
The Company’s inventories as of September
30, 2014 and December 31, 2013 consisted of the following (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Raw materials | |
$ | 18,137 | | |
$ | 12,185 | |
Work in process | |
| 13,462 | | |
| 8,079 | |
Finished goods | |
| 41,092 | | |
| 31,128 | |
Total | |
$ | 72,691 | | |
$ | 51,392 | |
Provision for inventories amounted to $2.5
million and $0.5 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company’s other receivables as
of September 30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Other receivables - unrelated parties (1) | |
$ | 653 | | |
$ | 314 | |
Less: allowance for doubtful accounts- unrelated parties | |
| (108 | ) | |
| (62 | ) |
Subtotal | |
| 545 | | |
| 252 | |
Other receivables - employee housing loans (2) | |
| 839 | | |
| - | |
DiviDividend receivables - affiliated company (3) | |
| 508 | | |
| - | |
Other receivables, net - unrelated parties | |
$ | 1,892 | | |
$ | 252 | |
| |
September 30, 2014 | | |
December 31, 2013 | |
Other receivables - related parties (1) | |
$ | 711 | | |
$ | 729 | |
Less: allowance for doubtful accounts- related parties | |
| (663 | ) | |
| (621 | ) |
Other receivables, net - related parties | |
$ | 48 | | |
$ | 108 | |
| (1) | Other receivables consist of amounts advanced to both related and unrelated parties, primarily
as unsecured demand loans, with no stated interest rate or due date. 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 6.4%. The term of the loans is
generally for five years. The Company accounts for employee loans to be repaid within 12 months from the ending date of reporting
period in Advance payments and others - unrelated parties and loans to be repaid in more than 12 months in Other receivables -
unrelated parties. As of September 30, 2014, total loans to employees under this program were $1.1 million, consisting of $0.8
million included in Other receivables - unrelated parties and $0.3 million included in Advance payments and others - unrelated
parties in the accompanying condensed unaudited consolidated balance sheets. |
| (3) | Beijing Henglong declared a dividend with a total amount of approximately $1 million, of which
$0.5 million was payable to the Company. |
According to the agreement signed between
the Company and Jingzhou Land Reserve Center (“JLRC”), a local PRC government bureau, the Company has agreed to transfer
the land use rights over 136,392 square meters of a piece of land in total located at Jingzhou city, Hubei Province, the PRC, to
JLRC for total consideration of approximately $13.0 million. The collection of the consideration was subject to JLRC’s completion
of its sale of such land use rights to be tendered in the open market.
In the third quarter of 2013, the Company
recognized and received consideration of $4.6 million upon the completion of the sale of the first portion of the land use rights
by JLRC. As of December 31, 2013, the balance of assets held for sale represented the remaining land use rights to be sold within
the 12 months following such date.
In April 2014, JLRC successfully sold the
remaining land use rights through an open tender. The consideration for the remaining land use rights was approximately $8.4 million,
of which $6.5 million has been received by the Company as of September 30, 2014 and the remaining $1.9 million was recorded in
accounts and notes receivable in the accompanying condensed unaudited consolidated balance sheets. Accordingly, the Company recorded
$7.5 million for the sale of the rest of the land use rights as gain on other sales in the accompanying condensed unaudited consolidated
statements of operations and comprehensive income.
As of September 30, 2014 and December 31,
2013, the Company’s balance of long-term investment was $3.7 million and $4.0 million, respectively. For the long-term investments
in which the Company has no voting control, such investments were accounted for using the equity method or cost method.
On January 24, 2010, the Company invested
$3.1 million to establish a fifty-fifty joint venture company, Beijing Henglong, with an unrelated party. The Company accounts
for its operating results with the equity method of accounting. Beijing Henglong declared a dividend with total amount of $1 million,
of which $0.5 million was payable to the Company. As a result, the Company recorded dividend receivables of $0.5 million, which
was applied as a reduction of the carrying value of the long-term investment.
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 $0.2 million and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively.
| 11. | Property, plant and equipment, net |
The Company’s property, plant and equipment as of September
30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Land use rights and buildings | |
$ | 47,141 | | |
$ | 43,849 | |
Machinery and equipment | |
| 116,592 | | |
| 110,322 | |
Electronic equipment | |
| 7,590 | | |
| 7,414 | |
Motor vehicles | |
| 4,043 | | |
| 3,195 | |
Construction in progress | |
| 5,976 | | |
| 5,133 | |
Total amount of property, plant and equipment (1) | |
| 181,342 | | |
| 169,913 | |
Less: Accumulated depreciation (2) | |
| (99,632 | ) | |
| (89,895 | ) |
Total amount of property, plant and equipment, net (3) | |
$ | 81,710 | | |
$ | 80,018 | |
| (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 $3.7 million and $3.7 million for the three months ended September 30, 2014 and 2013, respectively,
and $11.4 million and $10.8 million for the nine months ended September 30, 2014 and 2013, respectively. |
| (3) | As of September 30, 2014 and December 31, 2013, the Company had pledged property, plant and equipment with net book value of
$46.8 million and $51.4 million, respectively, for its comprehensive credit facilities with banks in China. |
The Company’s intangible assets as
of September 30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30,
2014 | | |
December 31,
2013 | |
Costs: | |
| | | |
| | |
Patent technology | |
$ | 3,073 | | |
$ | 2,067 | |
Management software license | |
| 784 | | |
| 699 | |
Total intangible assets (1) | |
| 3,857 | | |
| 2,766 | |
Less: Amortization (2) | |
| (2,285 | ) | |
| (2,080 | ) |
Total intangible assets, net | |
$ | 1,572 | | |
$ | 686 | |
| (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 $0.1 million and $0.04 million for the three months ended September
30, 2014 and 2013, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2014 and 2013, 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
September 30, 2014 and December 31, 2013 are as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Losses carry forward (U.S.) (1) | |
$ | 7,047 | | |
$ | 6,825 | |
Losses carry forward (PRC) (1) | |
| 2,126 | | |
| 1,838 | |
Product warranties and other reserves | |
| 4,421 | | |
| 4,207 | |
Property, plant and equipment | |
| 4,558 | | |
| 4,346 | |
Share-based compensation | |
| 266 | | |
| 296 | |
Bonus accrual | |
| 359 | | |
| 557 | |
Other accruals | |
| 992 | | |
| 850 | |
Others | |
| 1,036 | | |
| 1,103 | |
Total deferred tax assets | |
| 20,805 | | |
| 20,022 | |
Less: taxable temporary difference related to revenue recognition | |
| (389 | ) | |
| (793 | ) |
Total deferred tax assets, net | |
| 20,416 | | |
| 19,229 | |
Less: Valuation allowance | |
| (9,237 | ) | |
| (8,918 | ) |
Total deferred tax assets, net of valuation allowance (2) | |
$ | 11,179 | | |
$ | 10,311 | |
| (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 September 30, 2014 and December 31, 2013, the valuation allowance
was $9.2 million and $8.9 million, respectively, including $7.3 million and $7.3 million, respectively, allowance for the Company’s
deferred tax assets in the United States and $1.9 million and $1.7 million, respectively, 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 $4.8 million and $4.5 million of net deferred income tax asset as of September 30, 2014 and December 31, 2013,
respectively, are included in non-current deferred tax assets in the accompanying condensed unaudited consolidated balance sheets.
The remaining $6.4 million and $5.8 million of net deferred income tax assets as of September 30, 2014 and December 31, 2013, respectively,
are included in current deferred tax assets. |
| 14. | Bank and government loans, net |
Loans consist of the following as of September 30, 2014 and
December 31, 2013 (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Short-term bank loan (1) (2) | |
$ | 5,689 | | |
$ | 7,381 | |
Short-term bank loan (3) (4) | |
| 35,000 | | |
| 30,000 | |
Short-term government loan (5) | |
| 4,876 | | |
| - | |
Subtotal | |
| 45,565 | | |
| 37,381 | |
Debt issue cost | |
| - | | |
| (57 | ) |
Amortization | |
| - | | |
| 57 | |
Bank and government loans, net | |
$ | 45,565 | | |
$ | 37,381 | |
| (1) | These loans are secured by property, plant and equipment of the Company and are repayable within
one year (See Note 11). As of September 30, 2014 and December 31, 2013, the weighted average interest rate was 6.65% and 6.22%
per annum, respectively. Interest is paid on the twentieth day of each month and the principal repayment is at maturity. |
| (2) | On July 18, 2013, Jiulong entered into a one-year loan agreement with China Construction Bank Jingzhou
branch in the amount of $1.6 million. The agreement contains certain financial and non-financial covenants, including but not limited
to restrictions on the utilization of the funds and the maintenance of an asset-liability ratio not exceeding 60%. The loan was
repaid on July 17, 2014. |
| (3) | 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 RMB197.8 million (equivalent to approximately $32.2 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 is 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 remain 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 is 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 remain unchanged. As of September 30, 2014, the interest rate of the Credit Facility was 2.80% per annum
(See Note 6).
| (4) | 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).
| (5) | On March 28, 2014, the Company received a Chinese government loan of RMB30.0 million (equivalent
to approximately $4.9 million), with an interest rate of 3% per annum, The government loan, will mature on March 15, 2015. Henglong
has pledged RMB31.4 million (equivalent to approximately $5.1 million) of notes receivable as security for such government loan
(See Note 6). |
| 15. | Accounts and notes payable |
The Company’s accounts and notes
payable as of September 30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Accounts payable - unrelated parties | |
$ | 129,420 | | |
$ | 120,202 | |
Notes payable - unrelated parties (1) | |
| 73,977 | | |
| 78,217 | |
Total accounts and notes payable - unrelated parties | |
| 203,397 | | |
| 198,419 | |
Total accounts and notes payable - related parties | |
| 3,837 | | |
| 4,634 | |
Total accounts and notes payable | |
$ | 207,234 | | |
$ | 203,053 | |
| (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 September 30, 2014 and December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Accrued expenses | |
$ | 5,180 | | |
$ | 4,980 | |
Accrued interest | |
| 125 | | |
| 85 | |
Other payables | |
| 1,480 | | |
| 1,858 | |
Dividends payable to common shareholders (1) | |
| 757 | | |
| - | |
Dividends payable to non-controlling interests (2) | |
| 4,063 | | |
| 35 | |
Amount payable for acquisition of non-controlling interests (See Note 19) | |
| 37,314 | | |
| - | |
Warranty reserves (3) | |
| 24,421 | | |
| 22,104 | |
Total | |
$ | 73,340 | | |
$ | 29,062 | |
| (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 September 30, 2014, dividends
payable of $0.8 million remained unpaid. |
| (2) | In accordance with the resolution of the board of directors of Henglong, in June 2014, Henglong
declared a dividend amounting to $40.6 million to its shareholders, of which $8.1 million was payable to the holder of the non-controlling
interests. As of September 30, 2014, dividends payable of $4.1 million 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 nine months ended September 30,
2014 and 2013, and for the year ended December 31, 2013, the warranties activities were as follows (figures are in thousands of
USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 22,104 | | |
$ | 18,081 | | |
$ | 18,081 | |
Additions during the period | |
| 8,333 | | |
| 8,554 | | |
| 12,707 | |
Settlement within period, by cash or actual material | |
| (5,816 | ) | |
| (6,199 | ) | |
| (9,244 | ) |
Foreign currency translation gain (loss) | |
| (200 | ) | |
| 404 | | |
| 560 | |
Balance at end of the period | |
$ | 24,421 | | |
$ | 20,840 | | |
$ | 22,104 | |
The Company’s taxes payable as of September 30, 2014 and
December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
September 30, 2014 | | |
December 31, 2013 | |
Value-added tax payable | |
$ | 2,658 | | |
$ | 5,494 | |
Income tax payable | |
| 5,697 | | |
| 1,841 | |
Other tax payable | |
| 182 | | |
| 457 | |
Total | |
$ | 8,537 | | |
$ | 7,792 | |
As of September 30, 2014 and December 31,
2013, advances payable by the Company were $2.9 million and $2.8 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 nine months ended September 30, 2014 and 2013, and the year ended December 31, 2013 are summarized as follows
(figures are in thousands of USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 39,565 | | |
$ | 39,371 | | |
$ | 39,371 | |
Return of common shareholders’ investment cost (1) | |
| (5,047 | ) | |
| - | | |
| - | |
Acquisition of the non-controlling interests in Henglong and Jiulong (2) | |
| (7,502 | ) | |
| - | | |
| - | |
Share-based compensation (3) | |
| 193 | | |
| 194 | | |
| 194 | |
Balance at end of the period | |
$ | 27,209 | | |
$ | 39,565 | | |
$ | 39,565 | |
| (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 quarter ended September 30, 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. 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. 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. |
On October 13, 2014, the Company completed its issuance
of 4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity (See Note 32).
| (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. During the nine months ended September
30, 2014 and 2013, the Company recognized stock-based compensation expenses of $ 0.2 million and $ 0.2 million,
respectively.
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
the appropriated retained earnings for the nine months ended September 30, 2014 and 2013, and the year ended December 31, 2013
are summarized as follows (figures are in thousands of USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 10,048 | | |
$ | 9,953 | | |
$ | 9,953 | |
Appropriation of retained earnings | |
| 130 | | |
| 95 | | |
| 95 | |
Balance at end of the period | |
$ | 10,178 | | |
$ | 10,048 | | |
$ | 10,048 | |
Unappropriated
The Company’s activities in respect
of the amounts of the unappropriated retained earnings for the nine months ended September 30, 2014 and 2013, and the year ended
December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 146,023 | | |
$ | 119,329 | | |
$ | 119,329 | |
Net income attributable to parent company | |
| 24,514 | | |
| 19,544 | | |
| 26,789 | |
Appropriation of retained earnings | |
| (130 | ) | |
| (95 | ) | |
| (95 | ) |
Balance at end of the period | |
$ | 170,407 | | |
$ | 138,778 | | |
$ | 146,023 | |
| 21. | Accumulated other comprehensive income |
The Company’s activities in respect of the amounts of
the accumulated other comprehensive income for the nine months ended September 30, 2014 and 2013, and the year ended December 31,
2013 are summarized as follows (figures are in thousands of USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 32,061 | | |
$ | 25,898 | | |
$ | 25,898 | |
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 | |
| (2,010 | ) | |
| 4,374 | | |
| 6,163 | |
Balance at end of the period | |
$ | 34,794 | | |
$ | 30,272 | | |
$ | 32,061 | |
| 22. | Non-controlling interests |
The Company’s activities in respect
of the amounts of the non-controlling interests’ equity for the nine months ended September 30, 2014 and 2013, and the year
ended December 31, 2013 are summarized as follows (figures are in thousands of USD):
| |
Nine Months Ended September 30, | | |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2013 | |
Balance at beginning of the period | |
$ | 45,071 | | |
$ | 38,846 | | |
$ | 38,846 | |
Fair value of the non-controlling interests arising from the acquisition of Fujian Qiaolong (1) | |
| 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 | |
| 5,409 | | |
| 4,616 | | |
| 6,276 | |
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 16) | |
| (10,077 | ) | |
| (1,299 | ) | |
| (1,299 | ) |
Foreign currency translation adjustment attributable to non-controlling interests | |
| (403 | ) | |
| 892 | | |
| 1,248 | |
Balance at end of the period | |
$ | 8,238 | | |
$ | 43,055 | | |
$ | 45,071 | |
| (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. In the second quarter
of 2014, the Company sold the remaining land use rights (See Note 9) 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.
In the third quarter of 2013, the Company sold part of its land use rights and recognized a gain of $ 4.1 million, which
represented the difference between the selling price of $ 4.6 million and the net book value of the land use rights of
$ 0.5 million.
During the three months and nine months
ended September 30, 2014 and 2013, the Company recorded financial income, net which is summarized as follows (figures are in thousands
of USD):
| |
Three Months Ended September 30, | |
| |
2014 | | |
2013 | |
Interest expense | |
$ | (728 | ) | |
$ | (284 | ) |
Interest income | |
| 1,404 | | |
| 1,143 | |
Foreign exchange loss, net | |
| (63 | ) | |
| (24 | ) |
Gain of cash discount, net | |
| 3 | | |
| 3 | |
Bank fees | |
| (204 | ) | |
| (149 | ) |
Total financial income, net | |
$ | 412 | | |
$ | 689 | |
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
Interest expense | |
$ | (1,552 | ) | |
$ | (1,289 | ) |
Interest income | |
| 2,657 | | |
| 2,298 | |
Foreign exchange loss, net | |
| (62 | ) | |
| (71 | ) |
Gain (loss) of cash discount, net | |
| 65 | | |
| (9 | ) |
Bank fees | |
| (510 | ) | |
| (549 | ) |
Total financial income, net | |
$ | 598 | | |
$ | 380 | |
The Company’s subsidiaries registered
in the PRC are subject to state 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 and therefore 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 September 30, 2014, the Company has recognized deferred tax liabilities of $0.17 million for the remaining undistributed profits
to Genesis of $3.5 million. The Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries
in those subsidiaries permanently. As of September 30, 2014 and December 31, 2013, the Company still has undistributed earnings
of approximately $178.5 million and $158.5 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
September 30, 2014 and December 31, 2013 of approximately $8.9 million and $7.9 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.
During 2008, Jiulong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company passed the re-assessment of the government based on PRC income
tax laws. Accordingly, the Company continued to be taxed at the 15% tax rate in 2011, 2012 and 2013. The Company estimated the
applied tax rate in 2014 to be 15% as it will probably pass the re-assessment in 2014 and continue to qualify as “High &
New Technology Enterprise”.
During 2008, Henglong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% for 2008, 2009 and 2010. In 2011, 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 2011, 2012 and 2013. The Company estimated the applied tax
rate in 2014 to be 15% as it will probably pass the re-assessment in 2014 and continue to qualify as “High & New Technology
Enterprise”.
During 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 will continue to be taxed at the 15% tax rate in 2012, 2013 and 2014.
During 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.
According to the New CIT, Hubei Henglong
has been subject to tax at a rate of 12.5% from 2010 to 2012. In November 2011, Hubei Henglong was awarded the title of “High
& New Technology Enterprise”, based on the PRC income tax law. Accordingly, it will be subject to enterprise income tax
at a rate of 15% for 2013. The Company estimated the applied tax rate in 2014 to be 15% as it will probably pass the re-assessment
in 2014 and continue to qualify as “High & New Technology Enterprise”.
According to the New CIT, USAI and Testing
Center were exempted from income tax in 2009, and each has been subject to income tax at a rate of 12.5% in 2010 and 2011, and
25% in 2012, 2013 and 2014.
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 nine months ended September 30, 2014 and 2013.
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 BRL 0.24 million). The Company had no assessable income
in Brazil for the three months and nine months ended September 30, 2014 and 2013.
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 nine months ended September 30, 2014.
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 nine months ended September 30, 2014 and 2013.
The enterprise income tax rate of the United
States is 35%. No provision for U.S. tax is made for HLUSA as HLUSA had no assessable income in the United States for the three
months and nine months ended September 30, 2013. HLUSA made a provision for assessable income for the three months and nine months
ended September 30, 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 nine months ended September 30, 2014 and 2013.
The effective tax rate was 14.9% and 17.9% for the three months
and nine months ended September 30, 2014, compared with 15.3% and 17.8% for the three months and nine months ended September 30,
2013.
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 September 30, 2014 and 2013, were (figures are in thousands
of USD , except share and per share amounts ):
| |
Three Months Ended September 30, | |
| |
2014 | | |
2013 | |
Numerator: | |
| | | |
| | |
Net income attributable to the parent company’s common shareholders – Basic and Diluted | |
$ | 6,733 | | |
$ | 8,624 | |
Denominator: | |
| | | |
| | |
Weighted average shares outstanding | |
| 28,043,019 | | |
| 28,043,019 | |
Dilutive effects of stock options | |
| 20,642 | | |
| 19,278 | |
Denominator for dilutive income per share – Diluted | |
| 28,063,661 | | |
| 28,062,297 | |
| |
| | | |
| | |
Net income per share attributable to parent company’s common shareholders – Basic | |
$ | 0.24 | | |
$ | 0.31 | |
Net income per share attributable to parent company’s common shareholders – Diluted | |
$ | 0.24 | | |
$ | 0.31 | |
As of September 30, 2014 and 2013, 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 September 30, 2014 and 2013, respectively, and these
stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
The calculations of basic and diluted income
per share attributable to the parent company for the nine months ended September 30, 2014 and 2013, were (figures are in thousands
of USD , except share and per share amounts ):
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
Numerator: | |
| | | |
| | |
Net income attributable to the parent company’s common shareholders – Basic and Diluted | |
$ | 24,514 | | |
$ | 19,544 | |
Denominator: | |
| | | |
| | |
Weighted average shares outstanding | |
| 28,043,019 | | |
| 28,043,019 | |
Dilutive effects of stock options | |
| 20,827 | | |
| 10,989 | |
Denominator for dilutive income per share – Diluted | |
| 28,063,846 | | |
| 28,054,008 | |
| |
| | | |
| | |
Net income per share attributable to parent company’s common shareholders – Basic | |
$ | 0.87 | | |
$ | 0.70 | |
Net income per share attributable to parent company’s common shareholders – Diluted | |
$ | 0.87 | | |
$ | 0.70 | |
As of September 30, 2014 and 2013, the
exercise prices for 60,000 shares and 50,000 shares, respectively, of outstanding stock options were above the weighted average
market price of the Company’s common stock during the nine months ended September 30, 2014 and 2013, 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 nine months ended September
30, 2014, the Company’s ten largest customers accounted for 68.0% of its consolidated net product sales, with one customer
individually accounting for more than 10% of consolidated net sales, i.e., 12.1%. As of September 30, 2014, approximately 6.2%
of accounts receivable were from trade transactions with the aforementioned one customer, and there was one other individual customer
with a receivables balance of more than 10% of total accounts receivable, i.e. 12.9%.
During the nine months ended September
30, 2013, the Company’s ten largest customers accounted for 73.2% of its consolidated net sales, with the largest customer
individually accounting for more than 10% of consolidated net sales, i.e., 11.8%. As of September 30, 2013, approximately 3.2%
of accounts receivable were from trade transactions with the aforementioned one customer, and there were no individual customers
with a receivables balance of more than 10% of total accounts receivable.
| 28. | Related party transactions and balances |
Related
party transactions are as follows (figures are in thousands of USD):
Related sales
| |
Three Months Ended September 30, | |
| |
2014 | | |
2013 | |
Merchandise sold to related parties | |
$ | 11,890 | | |
$ | 9,166 | |
Rental income obtained from related parties | |
| 199 | | |
| - | |
Materials sold to related parties | |
| 657 | | |
| - | |
Total | |
$ | 12,746 | | |
$ | 9,166 | |
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
Merchandise sold to related parties | |
$ | 38,627 | | |
$ | 26,344 | |
Rental income obtained from related parties | |
| 199 | | |
| - | |
Materials sold to related parties | |
| 657 | | |
| - | |
Total | |
$ | 39,483 | | |
$ | 26,344 | |
Related purchases
| |
Three Months Ended September 30, | |
| |
2014 | | |
2013 | |
Materials purchased from related parties | |
$ | 6,069 | | |
$ | 10,500 | |
Technology purchased from related parties | |
| 114 | | |
| 58 | |
Equipment purchased from related parties | |
| 1,274 | | |
| 777 | |
Total | |
$ | 7,457 | | |
$ | 11,335 | |
| |
Nine Months Ended September
30, | |
| |
2014 | | |
2013 | |
Materials purchased from related parties | |
$ | 20,721 | | |
$ | 23,171 | |
Technology purchased from related parties | |
| 278 | | |
| 575 | |
Equipment purchased from related parties | |
| 2,528 | | |
| 2,160 | |
Total | |
$ | 23,527 | | |
$ | 25,906 | |
Related receivables
| |
September 30, 2014 | | |
December 31, 2013 | |
Accounts receivable | |
$ | 22,253 | | |
$ | 17,194 | |
Other receivables | |
| 48 | | |
| 108 | |
Total | |
$ | 22,301 | | |
$ | 17,302 | |
Related advances
| |
September 30, 2014 | | |
December 31, 2013 | |
Advance equipment payment to related parties | |
$ | 2,391 | | |
$ | 2,097 | |
Advance payments and others to related parties | |
| 1,715 | | |
| 866 | |
Total | |
$ | 4,106 | | |
$ | 2,963 | |
Related payables
| |
September 30, 2014 | | |
December 31, 2013 | |
Accounts payable | |
$ | 3,837 | | |
$ | 4,634 | |
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.
Loans to Related
Parties
For the nine months ended September 30,
2013, certain of the Company’s subsidiaries provided short-term loans to related parties of the Company in the aggregate
principal amount of $20.6 million (RMB126.6 million). The contractual period of each loan was three months or less from the date
of the extension of the loan, including a loan of $14.1 million (RMB 87.0 million) with an annual interest rate of 5.6%. The loans
to related parties were entered into for the purpose of assisting the borrowing entities in addressing certain cash flow needs.
All of these loans qualified for net reporting in accordance with ASC 230 “Statement of Cash Flows”. As of September
30, 2013, all of these loans had been repaid to the Company.
For the three months and nine months ended September 30, 2014,
there were no loan activities with related parties.
| |
Three Months Ended September 30, | |
| |
2014 | | |
2013 | |
Loans to related parties | |
$ | - | | |
$ | 19,922 | |
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
Loans to related parties | |
$ | - | | |
$ | 20,608 | |
As stated in the Company’s 2013 annual
financial statements (See Note 28), the short-term loans entered into with related parties prior to September 30, 2013 were identified
as related party transactions subsequent to December 31, 2013. These loans were not disclosed in the Company’s Form 10-Q
for each of the three-month periods ended March 31, 2013 and September 30, 2013. The Company has evaluated the significance of
this disclosure omission in the Form 10-Qs for previous periods and, in the opinion of management, the effect is not material to
the Company’s condensed unaudited financial statements for any period previously reported.
As of November 12, 2014, 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
Securities Action - Southern District
of New York. On October 25, 2011, a purported securities class action was filed in the United States District Court for the Southern
District of New York on behalf of all purchasers of the Company’s securities between March 25, 2010 and March 17, 2011. On
February 24, 2012, the plaintiffs filed an amended complaint, changing the purported class period to between May 12, 2009 and March
17, 2011. The amended complaint alleged that the Company, certain of its present officers and directors, and the Company’s
former independent accounting firm violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the rules promulgated
thereunder, and sought unspecified damages. The Company filed a motion to dismiss the amended complaint, which the court denied
on August 8, 2012. On September 4, 2012, the Company filed an answer to the amended complaint. On January 15, 2013, plaintiffs
filed a motion to certify the purported class, which the court denied on May 31, 2013. On July 17, 2013, plaintiffs filed a petition
for permission to appeal the order denying class certification, and, on August 1, 2013, the Company filed an answer in opposition
to the petition. On October 23, 2013, the Court of Appeals for the Second Circuit denied plaintiffs’ petition for permission
to appeal. On December 6, 2013, plaintiffs filed a motion for preliminary approval of a settlement with the Company’s former
independent accounting firm and certification of a proposed settlement class, which the district court denied on January 15, 2014.
On March 28, 2014, the Company and plaintiffs entered into a settlement agreement. As part of the settlement, on April 29, 2014,
the Company and plaintiffs filed a stipulation dismissing all claims by plaintiffs against the Company and its current and former
officers and directors, with no admission of any wrongdoing or liability. On April 29, 2014, the court entered an order granting
the dismissal. The settlement had no material effect on the condensed unaudited consolidated financial statements for the three
months and nine months ended September 30, 2014.
Other than the above, 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 September
30, 2014 (figures are in thousands of USD):
| |
Payment obligations by period | |
| |
2014 (1) | | |
2015 | | |
2016 | | |
2017 | | |
Thereafter | | |
Total | |
Interest on short-term bank loan | |
$ | 383 | | |
$ | 606 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 989 | |
Obligations for investment contracts (2) | |
| 813 | | |
| 1,625 | | |
| 3,251 | | |
| 2,438 | | |
| - | | |
| 8,127 | |
Obligations for purchasing and service agreements | |
| 3,715 | | |
| 4,538 | | |
| 96 | | |
| - | | |
| - | | |
| 8,349 | |
Total | |
$ | 4,911 | | |
$ | 6,769 | | |
$ | 3,347 | | |
$ | 2,438 | | |
$ | - | | |
$ | 17,465 | |
| (1) | Remaining 3 months in 2014. |
| (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 RMB 50.0 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 RMB 5 million (equivalent to approximately $0.8 million)
(See Note 32). The remaining capital commitment of RMB 45 million (equivalent to approximately $7.3 million) will be paid upon
capital calls received from the Venture Fund.
30. |
Off-balance sheet arrangements |
As of September 30, 2014 and December 31, 2013, 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 September 30, 2014, the Company had
12 product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production
and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other
seven sectors were engaged in the production and sale of sensor modular (USAI), EPS (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), and manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the
revenues, net income and net assets of these seven sectors collectively are less than 10% of consolidated revenues, net income
and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these seven
sectors into “Other Sectors.”
As of September 30, 2013, 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), EPS (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.”
As discussed in Acquisition (See Note 3)
above, the Company acquired a 51.0% equity interest in Fujian Qiaolong in the second quarter of 2014. The results of Fujian Qiaolong
have been included since the date of acquisition and are reflected in Other Sectors in the Company’s segment reporting.
The Company’s product sector information
for the three months and nine months ended September 30, 2014 and 2013, is as follows (figures are in thousands of USD):
| |
Net Product Sales | | |
Net Income (Loss) | |
| |
Three Months Ended September
30, | | |
Three Months Ended September
30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Henglong | |
$ | 60,902 | | |
$ | 55,846 | | |
$ | 5,127 | | |
$ | 8,368 | |
Jiulong | |
| 15,964 | | |
| 16,692 | | |
| 168 | | |
| 279 | |
Shenyang | |
| 8,988 | | |
| 9,095 | | |
| 998 | | |
| 603 | |
Wuhu | |
| 5,941 | | |
| 4,948 | | |
| (88 | ) | |
| (145 | ) |
Hubei Henglong | |
| 14,425 | | |
| 11,783 | | |
| 1,110 | | |
| 6,092 | (1) |
Other Sectors | |
| 9,887 | | |
| 7,558 | | |
| 252 | | |
| 522 | |
Total Segments | |
| 116,107 | | |
| 105,922 | | |
| 7,567 | | |
| 15,719 | |
Corporate | |
| - | | |
| - | | |
| 231 | | |
| 309 | |
Eliminations | |
| (14,372 | ) | |
| (15003 | ) | |
| 228 | | |
| (5,599 | ) |
Total | |
$ | 101,735 | | |
$ | 90,919 | | |
$ | 8,026 | | |
$ | 10,429 | |
(1) |
$ 5.2 million included in the balance of $ 6.1 million was income from investment in Henglong in 2013, which has been eliminated at the consolidation level. |
| |
Net Product Sales | | |
Net Income (Loss) | |
| |
Nine Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Henglong | |
$ | 203,987 | | |
$ | 177,836 | | |
$ | 22,660 | | |
$ | 19,751 | |
Jiulong | |
| 57,753 | | |
| 56,735 | | |
| 1,750 | | |
| 1,516 | |
Shenyang | |
| 32,928 | | |
| 28,164 | | |
| 1,760 | | |
| 1,119 | |
Wuhu | |
| 18,345 | | |
| 17,113 | | |
| (167 | ) | |
| (312 | ) |
Hubei Henglong | |
| 41,708 | | |
| 34,610 | | |
| 44,512 | (1) | |
| 7,550 | (1) |
Other Sectors | |
| 30,210 | | |
| 24,866 | | |
| 1,246 | | |
| 1,416 | |
Total Segments | |
| 384,931 | | |
| 339,324 | | |
| 71,761 | | |
| 31,040 | |
Corporate | |
| - | | |
| - | | |
| (1,792 | ) | |
| (2,203 | ) |
Eliminations | |
| (53,414 | ) | |
| (53,353 | ) | |
| (40,046 | ) | |
| (4,677 | ) |
Total | |
$ | 331,517 | | |
$ | 285,971 | | |
$ | 29,923 | | |
$ | 24,160 | |
|
(1) |
$ 40.3 million and $ 5.2 million included in the respective balances of $ 44.5 million and $ 7.6 million were income from investment in Henglong in 2014 and 2013, respectively, which have been eliminated at the consolidation level. |
32. Subsequent event
On October 13, 2014, the Company completed
its issuance of 4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity (See Note 19).
On October 20, 2014, Hubei Henglong made
its first capital contribution of RMB5.0 million (equivalent to approximately $0.8 million) to the Venture Fund according to the
agreement Hubei Henglong signed with seven other parties (See Note 1).
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. VMs (Vehicle 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. |
|
· VM sourcing
· VM policy decisions regarding warranty claims
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, intangible assets and other long-term assets |
|
Valuation of long- lived assets and investments
|
|
The Company is required from time-to-time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines. |
|
The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. |
|
· Future production estimates
· Customer preferences and decisions |
Accounts and notes receivables
|
|
Provision for doubtful accounts and notes receivable
|
|
Estimating the provision for doubtful accounts and notes receivable requires the Company to analyze and monitor each customer’s credit standing and financial condition regularly. The Company grants credit to its customers, generally on an open account basis. It will impact the Company’s expense disclosure and results of operations if such estimate is improper. |
|
The Company grants credit to its customers for three to four months based on each customer’s current credit standing and financial data. The Company assesses the allowance on an individual customer basis, under normal circumstances. The Company records provision for bad debts based on specific identification methods. |
|
· Customers’ credit standing and financial condition |
|
|
|
|
|
|
|
|
|
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. These include
the allowance for reserves for excess and obsolete inventory, impairment of goodwill and business combinations. Although not significant
in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s condensed
unaudited 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 September 30, 2014, 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 September 30, 2014 and 2013
| |
Net Product
Sales | | |
Cost of Products
Sold | |
| |
(in thousands
of USD, except percentages) | | |
(in thousands
of USD, except percentages) | |
| |
2014 | | |
2013 | | |
Change | | |
2014 | | |
2013 | | |
Change | |
Henglong | |
$ | 60,902 | | |
$ | 55,846 | | |
| 5,056 | | |
| 9.1 | % | |
$ | 49,218 | | |
$ | 45,726 | | |
$ | 3,492 | | |
| 7.6 | % |
Jiulong | |
| 15,964 | | |
| 16,692 | | |
| -728 | | |
| -4.4 | | |
| 13,953 | | |
| 14,760 | | |
| -807 | | |
| -5.5 | |
Shenyang | |
| 8,988 | | |
| 9,095 | | |
| -107 | | |
| -1.2 | | |
| 7,124 | | |
| 7,789 | | |
| -665 | | |
| -8.5 | |
Wuhu | |
| 5,941 | | |
| 4,948 | | |
| 993 | | |
| 20.1 | | |
| 5,388 | | |
| 4,725 | | |
| 663 | | |
| 14.0 | |
Hubei Henglong | |
| 14,425 | | |
| 11,783 | | |
| 2,642 | | |
| 22.4 | | |
| 11,989 | | |
| 9,812 | | |
| 2,177 | | |
| 22.2 | |
Other Sectors | |
| 9,887 | | |
| 7,558 | | |
| 2,329 | | |
| 30.8 | | |
| 8,080 | | |
| 6,192 | | |
| 1,888 | | |
| 30.5 | |
Total Segments | |
| 116,107 | | |
| 105,922 | | |
| 10,185 | | |
| 9.6 | | |
| 95,752 | | |
| 89,004 | | |
| 6,748 | | |
| 7.6 | |
Elimination | |
| (14,372 | ) | |
| (15,003 | ) | |
| 631 | | |
| -4.2 | | |
| (14,600 | ) | |
| (14,610 | ) | |
| 10 | | |
| -0.1 | |
Total | |
$ | 101,735 | | |
$ | 90,919 | | |
$ | 10,816 | | |
| 11.9 | % | |
$ | 81,152 | | |
$ | 74,394 | | |
$ | 6,758 | | |
| 9.1 | % |
Net Product Sales
Net product sales were $101.7 million for
the three months ended September 30, 2014, compared to $90.9 million for the same period in 2013, representing an increase of $10.8
million, or 11.9%. The increase was mainly due to the continuing growth of automotive market demand in China and North America.
For the three months ended September 30,
2014, there was an increase in sales of passenger vehicle power steering gears compared with the same period last year, mainly
due to the introduction of certain new products to the market and improvement in the quality of some of the old products, which
resulted in the expansion of the Company’s market share in China, especially among the joint-venture brands’ auto customers.
In order to maintain
the share of sales in the commercial vehicle market, most automobile component manufacturers have reduced the price of their products,
which led to continuing price decreases of steering gears for commercial vehicles, the Company’s main products. As result
of a decrease in the price of steering gears for commercial vehicles, the Company’s main products, during the three months
ended September 30, 2014, the increase in sales of steering gears for commercial vehicles was partly offset by the price decrease.
In summary, the Company had an increase
in sales volume leading to a sales increase of $10.3 million and an increase in the selling price of steering gears leading to a sales increase of $0.6 million.
Further analysis by segment (before elimination) is as follows:
|
• |
Net product sales for Henglong were $60.9 million for the three months ended September 30, 2014, compared to $55.8 million for the same period in 2013, representing an increase of $5.1 million, or 9.1%, 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 the low-level electric power steering the same period of last year. An increase in sales volume led to a sales increase of $3.9 million, and an increase in selling price led to a sales increase of $1.2 million. |
|
• |
Net product sales for Jiulong were $16.0 million for the three months ended September 30, 2014, compared to $16.7 million for the same period in 2013, representing a decrease of $0.7 million, or 4.4%, which was mainly due to the Company achieving higher sales volume in the commercial vehicles steering gears market, offset partially by a decrease in average selling price. An increase in sales volume led to a sales increase of $0.2 million, and a decrease in average selling price caused by product mix change led to a sales decrease of $0.9 million. |
|
• |
Net product sales for Shenyang were $9.0 million for the three months ended September 30, 2014, compared to $9.1 million for the same period in 2013, representing a decrease of $0.1 million, or 1.2%, which was mainly due to a decrease in selling price. An increase in sales volumes led to a sales increase of $0.6 million, and a decrease in selling price led to a sales decrease of $0.7 million. |
|
• |
Net product sales for Wuhu were $5.9 million for the three months ended September 30, 2014, compared to $4.9 million for the same period in 2013, representing an increase of $1.0 million, or 20.1%. An increase in sales volumes led to a sales increase of $1.3 million, and a decrease in selling price led to a sales decrease of $0.3 million. |
|
• |
Net product sales for Hubei Henglong were $14.4 million for the three months ended September 30, 2014, compared to $11.8 million for the same period in 2013, representing an increase of $2.6 million, or 22.4%. Hubei Henglong’s products were all sold to the United States. The net product sales increase was mainly due to the growth of automotive market demand in North America. An increase in sales volumes led to a sales increase of $1.9 million, and an increase in selling price led to a sales increase of $0.7 million. |
|
• |
Net product sales for Other Sectors were $9.9 million for the three months ended September 30, 2014, compared to $7.6 million for the same period in 2013, representing an increase of $2.3 million, or 30.8%, primarily due to the Company’s improved quality of machine columns, which led to an increase in sales of Other Sectors of $1.3 million, and the sales of Fujian Qiaolong (acquired in the second quarter of 2014) having been consolidated in Other Sectors, which led to an increase in sales of Other Sectors of $1.2 million. |
Cost of Products Sold
For the three months ended September 30,
2014, the cost of products sold was $81.2 million, compared to $74.4 million for the same period of 2013, representing an increase
of $6.8 million, or 9.1%. The increase in the cost of products sold was mainly due to the net effect of a net increase in sales
volumes which led to a cost of products sold increase of $7.7 million, and a decrease in unit cost which led to a cost of products
sold decrease of $0.9 million. Further analysis is as follows:
|
• |
Cost of products sold for Henglong was $49.2 million for the three months ended September 30, 2014, compared to $45.7 million for the same period of 2013, representing an increase of $3.5 million, or 7.6%. This increase was mainly due to an increase in sales volumes and the higher unit cost of middle-level EPS this year compared with low-level EPS in the same period last year. An increase in sales volumes led to a cost of products sold increase of $3.4 million, and an increase in unit cost led to a cost of products sold increase of $0.1 million. |
|
|
Cost of products sold for Jiulong was $14.0 million for the three months ended September 30, 2014, compared to $14.8 million for the same period of 2013, representing a decrease of $0.8 million, or 5.5%. The decrease in cost of products sold was mainly due to a decrease in unit cost which led to a cost of products sold decrease of $0.9 million. |
|
• |
Cost of products sold for Shenyang was $7.1 million for the three months ended September 30, 2014, compared to $7.8 million for the same period of 2013, representing a decrease of $0.7 million, or 8.5%. The decrease in cost of products sold was mainly due to a decrease in unit cost which led to a cost of products sold decrease of $1.0 million, offset by an increase in sales volumes which led to a cost of products sold increase of $0.4 million. |
|
• |
Cost of products sold for Wuhu was $5.4 million for the three months ended September 30, 2014, compared to $4.7 million for the same period of 2013, representing an increase of $0.7 million, or 14.0%. 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, offset by a decrease in unit cost which led to a cost of products sold decrease of $0.5 million. |
|
• |
Cost of products sold for Hubei Henglong was $12.0 million for the three months ended September 30, 2014, compared to $9.8 million for the same period of 2013, representing an increase of $2.2 million, or 22.2%. 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 $1.4 million, and an increase in unit cost which led to a cost of products sold increase of $0.8 million. |
|
• |
Cost of products sold for Other Sectors was $8.1 million for the three months ended September 30, 2014, compared to $6.2 million for the same period of 2013, representing an increase of $1.9 million, or 30.5%. The increase in cost of products sold was mainly due to the Company’s improved quality of manual columns, an increase in sales volume and cost of production, which led to a cost of products sold for Other Sectors increase of $1.1 million, and the sales of Fujian Qiaolong (acquired in the second quarter of 2014) having been consolidated in Other Sectors, which led to a cost of products sold for Other Sectors increase of $0.9 million. |
Gross margin was 20.2% for the three months
ended September 30, 2014, compared to 18.2% in the same period of 2013, representing an increase of 2.0%, mainly due to a decrease
in the unit cost of the Company’s traditional products and an increase in sales of high quality EPS.
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
September 30, 2014, gain on other sales amounted to $1.1 million, while it amounted to $5.0 million for the same period of 2013,
representing a decrease of $3.9 million. The decrease was mainly due to a gain on sales of land use rights in the same period of
last year. During the three months ended September 30, 2013, the Company sold the remaining land use rights (See Note 9) and recognized
a gain of $4.1 million, which represented the difference between the selling price of $4.6 million and the net book value of the
land use rights of $0.5 million. There was no such gain in the three months ended September 30, 2014.
Selling Expenses
Selling expenses were $3.7 million for
the three months ended September 30, 2014, compared to $2.6 million for the same period of 2013, representing an increase of $1.1
million, or 42.3%, mainly due to an increase in sales volumes which led to an increase in salaries and wages cost of $0.2 million,
an increase in transportation expenses of $0.6 million, and an increase in travel expenses of $0.2 million.
General and Administrative Expenses
General and administrative expenses were
$3.7 million for the three months ended September 30, 2014, compared to $2.8 million for the same period of 2013, representing
an increase of $0.9 million, or 32.1%, which was mainly due to an increase in salaries and wages cost of $0.2 million, an increase
in consulting fees of $0.5 million, and an increase in office facilities improvement expenses of $0.2 million.
Research and Development Expenses
Research and development expenses were
$5.4 million for the three months ended September 30, 2014, compared to $5.1 million for the three months ended September 30, 2013,
representing an increase of $0.3 million, or 5.9%. 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 increased by $0.2 million and external technical support fees
increased by $0.1 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 $8.8 million
for the three months ended September 30, 2014, compared to $11.0 million for the three months ended September 30, 2013, representing
a decrease of $2.2 million, or 20.0%, including an increase of $4.1 million in gross profit, a decrease of $3.9 million in gain
on other sales and an increase of $2.3 million in operating expenses.
Other Income, Net
Other income, net was $0.1 million for
the three months ended September 30, 2014, compared to $0.5 million for the three months ended September 30, 2013, a decrease of
$0.4 million, primarily resulting from decreased government subsidies.
Financial Income, Net
Financial income, net, was $0.4 million
for the three months ended September 30, 2014, compared to $0.7 million for the three months ended September 30, 2013, representing
a decrease of $0.3 million, which was mainly due to an increase in loans during the three months ended September 30, 2014, which
led to an increase in interest expenses and handling expenses of $0.5 million, and partly offset by an increase in interest income
of time deposits of $0.3 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 $9.3 million for the three months ended September 30, 2014, compared to $12.2 million for
the three months ended September 30, 2013, representing a decrease of $2.9 million, which was mainly due to a decrease in operating
income of $2.2 million, an increase in other income of $0.4 million, and a decrease in financial income, net of $0.3 million.
Income Taxes
Income tax expense was $1.4 million for
the three months ended September 30, 2014, compared to $1.9 million of income tax expense for the three months ended September
30, 2013, representing a decrease of $0.5 million, which was mainly due to a decrease in income before income tax. The income before
income tax decreased to $9.3 million for the three months ended September 30, 2014 from $12.2 million for the same period in 2013
and the effective tax rate was consistent with the same period of last year (See Note 25).
Net Income
Net income was $8.0 million for the three
months ended September 30, 2014, compared to net income of $10.4 million for the three months ended September 30, 2013, representing
a decrease of $2.4 million, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated
companies of $2.9 million, offset by a decrease in income tax expenses of $0.5 million.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling
interests amounted to $1.3 million and $1.8 million for the three months ended September 30, 2014 and 2013, respectively.
The Company owns equity interests in eleven
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 September 30, 2014 and 2013. For the three months ended September 30, 2014 and
2013, the Company recorded $1.3 million and $1.8 million, respectively, for the non-controlling interests’ share in the earnings
of the consolidated non-wholly owned subsidiaries.
Net Income Attributable to Parent Company’s Common
Shareholders
Net income attributable to parent company’s
common shareholders was $6.7 million for the three months ended September 30, 2014, compared to net income attributable to parent
company’s common shareholders of $8.6 million for the three months ended September 30, 2013, representing a decrease of $1.9
million.
Results of Operations—Nine Months
Ended September 30, 2014 and 2013
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 nine months ended September 30, 2014, 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) | |
| |
2014 | | |
2013 | | |
Change | | |
2014 | | |
2013 | | |
Change | |
Henglong | |
$ | 203,987 | | |
$ | 177,836 | | |
| 26,151 | | |
| 14.7 | % | |
$ | 168,223 | | |
$ | 145,763 | | |
$ | 22,460 | | |
| 15.4 | % |
Jiulong | |
| 57,753 | | |
| 56,735 | | |
| 1,018 | | |
| 1.8 | | |
| 49,392 | | |
| 49,519 | | |
| (127 | ) | |
| -0.3 | |
Shenyang | |
| 32,928 | | |
| 28,164 | | |
| 4,764 | | |
| 16.9 | | |
| 28,608 | | |
| 24,888 | | |
| 3,720 | | |
| 14.9 | |
Wuhu | |
| 18,345 | | |
| 17,113 | | |
| 1,232 | | |
| 7.2 | | |
| 16,718 | | |
| 16,007 | | |
| 711 | | |
| 4.4 | |
Hubei Henglong | |
| 41,708 | | |
| 34,610 | | |
| 7,098 | | |
| 20.5 | | |
| 33,650 | | |
| 28,559 | | |
| 5,091 | | |
| 17.8 | |
Other Sectors | |
| 30,210 | | |
| 24,866 | | |
| 5,344 | | |
| 21.5 | | |
| 25,096 | | |
| 20,841 | | |
| 4,255 | | |
| 20.4 | |
Total Segments | |
| 384,931 | | |
| 339,324 | | |
| 45,607 | | |
| 13.4 | | |
| 321,687 | | |
| 285,577 | | |
| 36,110 | | |
| 12.6 | |
Elimination | |
| (53,414 | ) | |
| (53,353 | ) | |
| (61 | ) | |
| 0.1 | | |
| (53,674 | ) | |
| (53,881 | ) | |
| 207 | | |
| -0.4 | |
Total | |
$ | 331,517 | | |
$ | 285,971 | | |
$ | 45,546 | | |
| 15.9 | % | |
$ | 268,013 | | |
$ | 231,696 | | |
$ | 36,317 | | |
| 15.7 | % |
Net Product Sales
Net product sales were $331.5 million for
the nine months ended September 30, 2014, compared to $$286.0 million for the same period in 2013, representing an increase of
$45.5 million, or 15.9%. The increase was mainly due to the continuing growth of automotive market demand in China and North America.
For the nine months ended September 30,
2014, there was an increase in sales of passenger vehicle power steering gears compared with the same period last year, mainly
due to the introduction of certain new products to the market and improvement in the quality of some of the old products, which
resulted in the expansion of the Company’s market share in China, especially among the joint-venture brands’ auto customers.
In summary, the Company had an increase
in sales volume leading to a sales increase of $45.7 million, a decrease in selling price leading to a sales decrease of $2.8 million,
and the effect of foreign currency translation of the RMB against the U.S. dollar resulted in a sales increase of $2.6 million.
Further analysis by segment (before elimination) is as follows:
|
• |
Net product sales for Henglong were $204.0 million for the nine months ended September 30, 2014, compared to $177.8 million for the same period in 2013, representing an increase of $26.2 million, or 14.7%, 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 the low-level electric power steering the same period of last year. An increase in sales volume led to a sales increase of $19.2 million, an increase in selling price led to a sales increase of $5.5 million and the effect of foreign currency translation of the RMB against the U.S. dollar resulted in a sales increase of $1.4 million. |
|
• |
Net product sales for Jiulong were $57.7 million for the nine months ended September 30, 2014, compared to $56.7 million for the same period in 2013, representing an increase of $1.0 million, or 1.8%, which was mainly due to the Company achieving higher sales volume in the commercial vehicles steering gears market. An increase in sales volume led to a sales increase of $8.7 million, a decrease in average selling price caused by product mix change led to a sales decrease of $8.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulted in a sales increase of $0.4 million. |
|
• |
Net product sales for Shenyang were $32.9 million for the nine months ended September 30, 2014, compared to $28.1 million for the same period in 2013, representing an increase of $4.8 million, or 16.9%, which was mainly due to an increase in sales volume for passenger vehicles in the China market. An increase in sales volumes led to a sales increase of $6.8 million, a decrease in selling price led to a sales decrease of $2.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulted in a sales increase of $0.2 million. |
|
• |
Net product sales for Wuhu were $18.3 million for the nine months ended September 30, 2014, compared to $17.1 million for the same period in 2013, representing an increase of $1.2 million, or 7.2%. An increase in sales volumes led to a sales increase of $2.0 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 resulted in a sales increase of $0.1 million. |
|
• |
Net product sales for Hubei Henglong were $41.7 million for the nine months ended September 30, 2014, compared to $34.6 million for the same period in 2013, representing an increase of $7.1 million, or 20.5%. Hubei Henglong’s products were all sold to the United States. The net product sales increase was mainly due to the growth of automotive market demand in North America. An increase in sales volumes led to a sales increase of $5.5 million, an increase in selling price led to a sales increase of $1.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulted in a sales increase of $0.3 million. |
|
• |
Net product sales for Other Sectors were $30.2 million for the nine months ended September 30, 2014, compared to $24.9 million for the same period in 2013, representing an increase of $5.3 million, or 21.5%, primarily due to the Company’s new products and improved quality of manual columns, which led to an increase in sales of Other Sectors of $2.0 million, an increase in sales of commercial vehicles in the China market which led to an increase in sales of Chongqing of $0.9 million, and sales of Fujian Qiaolong (acquired in the second quarter of 2014) having been consolidated in Other Sectors, which led to an increase in sales of Other Sectors of $2.4 million. |
Cost of Products Sold
For the nine months ended September 30,
2014, the cost of products sold was $268.0 million, compared to $231.7 million for the same period of 2013, representing an increase
of $36.3 million, or 15.7%. The increase in the cost of products sold was mainly due to the net effect of a net increase in sales
volumes which led to a cost of products sold increase of $38.2 million, a decrease in unit cost which led to a cost of products
sold decrease of $4.1 million, and the appreciation of the RMB against the U.S. dollar which led to a cost of products sold increase
of $2.2 million. The decrease in the unit cost of sales was primarily due to a decrease in the cost of raw materials, including
steel, enhanced production efficiency and strengthened cost control, which was partially offset by the higher unit cost of middle-level
EPS compared with low-level EPS in the same period last year. Further analysis is as follows:
|
• |
Cost of products sold for Henglong was $168.2 million for the nine months ended September 30, 2014, compared to $145.7 million for the same period of 2013, representing an increase of $22.5 million, or 15.4%. This increase was mainly due to an increase in sales volumes and the higher unit cost of middle-level EPS this year compared with low-level EPS in the same period last year. An increase in sales volumes led to a cost of products sold increase of $15.4 million, an increase in unit cost led to a cost of products sold increase of $5.9 million, and the appreciation of the RMB against the U.S. dollar led to a cost of products sold increase of $1.2 million. |
|
• |
Cost of products sold for Jiulong was $49.4 million for the nine months ended September 30, 2014, compared to $49.5 million for the same period of 2013, representing a decrease of $0.1 million, or 0.3%. The decrease in cost of products sold was mainly due to an increase in sales volumes which led to a cost of products sold increase of $7.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which resulted in a cost of products sold increase of $0.4 million, which was offset by a decrease in unit cost which led to a cost of products sold decrease of $7.9 million. |
|
• |
Cost of products sold for Shenyang was $28.6 million for the nine months ended September 30, 2014, compared to $24.9 million for the same period of 2013, representing an increase of $3.7 million, or 14.9%. 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 $6.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which resulted in a cost of products sold increase of $0.2 million, offset by a decrease in unit cost which led to a cost of products sold decrease of $2.5 million. |
|
• |
Cost of products sold for Wuhu was $16.7 million for the nine months ended September 30, 2014, compared to $16.0 million for the same period of 2013, representing an increase of $0.7 million, or 4.4%, mainly due to an increase in sales volumes which led to a cost of products sold increase of $1.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which resulted in a cost of products sold increase of $0.1 million, offset by a decrease in unit cost which led to a cost of products sold decrease of $1.3 million . |
|
• |
Cost of products sold for Hubei Henglong was $33.7 million for the nine months ended September 30, 2014, compared to $28.6 million for the same period of 2013, representing an increase of $5.1 million, or 17.8%, mainly due to an increase in sales volumes which led to a cost of products sold increase of $4.4 million, the effect of foreign currency translation of the RMB against the U.S. dollar which resulted in a cost of products sold increase of $0.2 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 Other
Sectors was $25.1 million for the nine months ended September 30, 2014, compared to $20.8 million for the same period of 2013,
representing an increase of $4.3 million, or 20.4%. The increase in cost of products sold was mainly due to an increase in sales
volumes, which led to a cost of products sold for Other Sectors increase of $2.9 million, the effect of foreign currency translation
of the RMB against the U.S. dollar, which resulted in a cost of products sold for Other Sectors increase of $0.2 million, and
an increase in unit cost, which led to a cost of products sold for Other Sectors increase of $1.2 million. |
Gross margin was 19.2% for the nine months
ended September 30, 2014, compared to 19.0% for the same period of 2013, representing 0.2%, mainly due to an increase in sales
of high quality EPS, which increased the gross margin level of the Company.
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 nine months ended
September 30, 2014, gain on other sales amounted to $10.3 million, while it amounted to $6.8 million for the same period of 2013,
representing an increase of $3.5 million. The increase was mainly due to an increase in sales of land use rights. During the nine
months ended September 30, 2014, the Company sold the remaining land use rights (See Note 9) and recognized a gain of $7.5 million,
while the gain was $4.1 million for the same period of last year.
Selling Expenses
Selling expenses were $11.1 million for
the nine months ended September 30, 2014, compared to $9.6 million for the same period of 2013, representing an increase of $1.5
million, or 15.6%, mainly due to an increase in sales volumes which led to an increase in warehouse rental fees of $0.2 million,
an increase in transport charge of $0.8 million, an increase in travel expense of $0.3 million, and an increase in advertising
expenses of $0.2 million.
General and Administrative Expenses
General and administrative expenses were
$11.1 million for the nine months ended September 30, 2014, compared to $10.2 million for the same period of 2013, representing
an increase of $0.9 million, or 8.8%, mainly reflecting an increase in salaries and wages expenses of $1.5 million, an increase
in travel expense of $0.2 million, an increase in office facilities improvement expenses of $0.4 million, an increase in consulting
fees of $0.4 million, and a decrease in legal fees of $1.6 million.
Research and Development Expenses
Research and development expenses were
$16.5 million for the nine months ended September 30, 2014, compared to $13.1 million for the nine months ended September 30, 2013,
representing an increase of $3.4 million, or 26.0%. 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 increased by $1.6 million, external technical support
fees increased by $0.3 million, and the salaries and wages expenses of research and development related staff increased by $1.5
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 hiring senior technicians and giving bonuses to technical personnel
who make an outstanding contribution to product research and development.
Income from Operations
Income from operations was $35.1 million
for the nine months ended September 30, 2014, compared to $28.1 million for the nine months ended September 30, 2013, representing
an increase of $7.0 million, or 24.9%, including an increase of $9.2 million in gross profit and an increase of $3.5 million in
gain on other sales, which was offset by an increase of $5.7 million in operating expenses.
Other Income, Net
Other income, net was $0.5 million for
the nine months ended September 30, 2014, compared to $0.6 million for the nine months ended September 30, 2013, representing a
decrease of $0.1 million, primarily resulting from decreased government subsidies.
Financial Income, Net
Financial income, net, was $0.6 million
for the nine months ended September 30, 2014, compared to $0.4 million for the nine months ended September 30, 2013, representing
an increase of $0.2 million, which was mainly due to an increase in time deposits which led to an increase in interest income, partially
offset by interest charges on increased bank loans of $0.3 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 $36.2 million for the nine months ended September 30, 2014, compared to $29.1 million for
the nine months ended September 30, 2013, representing an increase of $7.1 million, which was mainly due to an increase in operating
income of $7.0 million, offset by a decrease in other income of $0.1 million, and an increase in financial expenses, net of $0.2
million.
Income Taxes
Income tax expense was $6.5 million for
the nine months ended September 30, 2014, compared to $5.2 million of income tax expense for the nine months ended September 30,
2013, representing an increase of $1.3 million, which was mainly due to an increase in income before income tax. The income before
income tax increased to $36.2 million for the nine months ended September 30, 2014 from $29.1 million for the same period in 2013
and the effective tax rate was consistent with the same period of last year (See Note 25).
Net Income
Net income was $29.9 million for the nine
months ended September 30, 2014, compared to net income of $24.1 million for the nine months ended September 30, 2013, representing
an increase of $5.8 million, which was mainly due to an increase in income before income tax expenses and equity in earnings of
affiliated companies of $7.1 million, offset by an increase in income tax expenses of $1.3 million.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling
interests amounted to $5.4 million and $4.6 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company owns equity interests in eleven
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 September 30, 2014 and 2013. For the nine months ended September 30, 2014 and
2013, the Company recorded $5.4 million and $4.6 million, respectively, for the non-controlling interests’ share in the earnings
of the consolidated non-wholly owned subsidiaries.
Net Income Attributable to Parent Company’s Common
Shareholders
Net income attributable to parent company’s
common shareholders was $24.5 million for the nine months ended September 30, 2014, compared to net income attributable to parent
company’s common shareholders of $19.5 million for the nine months ended September 30, 2013, representing an increase of
$5.0 million, reflecting an increase in net income.
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 September 30, 2014, the Company had cash
and cash equivalents and short-term investments (excluding pledged deposit) of $79.5 million, compared to $89.5 million as of December
31, 2013, representing a decrease of $4.7 million, or 5.3%.
The Company had working capital of $189.8
million as of September 30, 2014, compared to $179.3 million as of December 31, 2013, representing an increase of $10.1 million,
or 5.6%.
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 September 30, 2014, 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 September 30, 2014.
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 bank and government
loans of $45.6 million, including bank loans of $40.7 million and a government loan of $4.9 million (See Note 14); and bankers’
acceptances of $74.0 million (See Note 15) as of September 30, 2014.
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 $9.4 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 $9.4 million as of the maturity date of such line of credit agreements
(see the table under “Bank Arrangements” below for more information). The Company can still obtain a reduced line of
credit with a reduction of $9.4 million, which is 66.90% (the mortgage rate) of $14.0 million, if it cannot provide additional
mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
Bank Arrangements
As of September 30, 2014, 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 | |
Mar 2015 | |
$ | 22,918 | | |
$ | 15,481 | | |
$ | 11,027 | |
| |
| |
| |
| | | |
| | | |
| | |
2. Comprehensive credit facilities | |
Jingzhou Commercial Bank | |
July 2015 | |
| 29,256 | | |
| 12,897 | | |
| 59,053 | |
| |
| |
| |
| | | |
| | | |
| | |
3. Comprehensive credit facilities | |
China Construction Bank | |
Nov 2014 | |
| 11,377 | | |
| - | | |
| 30,759 | |
| |
| |
| |
| | | |
| | | |
| | |
4. Comprehensive credit facilities | |
Shanghai Pudong Development Bank(1) | |
Mar 2015 | |
| 25,356 | | |
| 8,289 | | |
| 13,177 | |
| |
| |
| |
| | | |
| | | |
| | |
5. Comprehensive credit facilities | |
China CITIC Bank(1) (5) | |
Nov 2014 | |
| 16,254 | | |
| 7445 | | |
| 15,996 | |
| |
China CITIC Bank | |
July 2016 | |
| 4,876 | | |
| 2,438 | | |
| | |
| |
| |
| |
| | | |
| | | |
| | |
6. Comprehensive credit facilities | |
China Everbright Bank | |
Sep 2015 | |
| 4,876 | | |
| 3,226 | | |
| 8,323 | |
| |
| |
| |
| | | |
| | | |
| | |
7. Comprehensive credit facilities | |
China Huaxia Bank(1) (5) | |
Sep 2014 | |
| 26,006 | | |
| 13,122 | | |
| - | |
| |
| |
| |
| | | |
| | | |
| | |
8. Comprehensive credit facilities | |
ICBC Macau | |
May 2015 | |
| 30,000 | | |
| 30,000 | | |
| 32,151 | |
| |
| |
| |
| | | |
| | | |
| | |
9. Comprehensive credit facilities | |
HSBC (China) Company Limited | |
July 2015 | |
| 5,000 | | |
| 5,000 | | |
| 5,364 | |
| |
| |
| |
| | | |
| | | |
| | |
Total | |
| |
| |
$ | 175,919 | | |
$ | 97,898 | (2) | |
$ | 175,850 | (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) |
The amount used includes bank loans of $39.1 million and notes payable of $58.8 million as of September 30, 2014. The remainder of $6.5 million of bank and government loan and $15.1 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 September 30, 2014, the pledged assets included $43.2 million of accounts and notes receivable, $5.4 million of time deposits, and other pledged assets with an assessed value of $127.3 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 facility with China CITIC Bank and China Huaxia Bank has expired. The Company is negotiating the renewal of the credit facilities with the bank and expects to obtain the renewal in late November 2014. 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 this credit facility. |
|
(6) |
The pledged cash deposits, which are disclosed in Note 4 to the consolidated financial statements in this 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 short-term
bank loans and borrowed new bank loans during 2014 at annual interest rates of 1.70% to 7.20%, and loan terms of five to twelve
months. Pursuant to the comprehensive credit line arrangement the Company pledged and guaranteed:
|
(1) |
Accounts receivable, land use rights and buildings with an assessed value of approximately $11.0 million as security for its comprehensive credit facility with the Bank of China; |
|
(2) |
Equipment with an assessed value of approximately $59.0 million as security for its revolving comprehensive credit facility with Jingzhou Commercial Bank; |
|
(3) |
Equipment, land use rights and buildings with an assessed value of approximately $30.8 million as security for its comprehensive credit facility with China Construction Bank; |
|
(4) |
Land use rights and buildings with an assessed value of approximately $13.2 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 $16.0 million as security for its comprehensive credit facility with China CITIC Bank; |
|
(6) |
Land use rights and buildings with an assessed value of approximately $8.3 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 RMB 197.8 million (equivalent to approximately $32.2 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 is calculated
based on three-month LIBOR plus 2.0% per annum, Except for the above, all other terms and conditions stipulated in the Credit Agreement
remain 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 is revised
as three-month LIBOR plus 2.55% per annum. Except for the above, all other terms and conditions stipulated in the Credit Agreement
remain unchanged. As of September 30, 2014, the interest rate of the Credit Facility was 2.80 % per annum (See Note 6). |
|
(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 RMB 33.0 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 | |
$ | 46,553 | | |
$ | 46,553 | | |
$ | - | | |
$ | - | | |
$ | - | |
Notes payable (1) | |
| 73,977 | | |
| 73,977 | | |
| - | | |
| - | | |
| - | |
Obligation for investment contract (2) | |
| 8,127 | | |
| 813 | | |
| 4,876 | | |
| 2,438 | | |
| - | |
Other contractual purchase commitments, including
service agreements | |
| 8,349 | | |
| 3,715 | | |
| 4,634 | | |
| - | | |
| - | |
Total | |
$ | 137,006 | | |
$ | 125,058 | | |
$ | 9,510 | | |
$ | 2,438 | | |
$ | - | |
| (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 RMB 50.0 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 RMB 5 million
(equivalent to approximately $0.8 million). The remaining capital commitment of RMB 45 million (equivalent to approximately $7.3
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 September 30, 2014 (figures
are in thousands of USD):
Bank / PRC 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, 2014 | |
| 12 | | |
| 2.80 | % | |
Pay quarterly | |
12 May 2015 | |
$ | 30,000 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Industrial and Commercial Bank of China(2) | |
Working Capital | |
26 May, 2014 | |
| 5 | | |
| 6.16 | % | |
Pay quarterly | |
25 Oct 2014 | |
| 732 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Chongqiong Commercial Bank | |
Working Capital | |
6 Jun, 2014 | |
| 12 | | |
| 6.00 | % | |
Pay quarterly | |
6 Jun 2015 | |
| 894 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
China CITIC Bank | |
Working Capital | |
8 Aug, 2014 | |
| 12 | | |
| 7.20 | % | |
Pay quarterly | |
7 Aug 2015 | |
| 2,438 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Shanghai Pudong Development Bank | |
Working Capital | |
16 Jul, 2014 | |
| 12 | | |
| 6.39 | % | |
Pay monthly | |
15 Jul 2015 | |
| 1,625 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
HSBC Bank (China) Company Limited | |
Working Capital | |
22 Jul, 2014 | |
| 12 | | |
| 1.70 | % | |
Pay monthly | |
1 Jul 2015 | |
| 5,000 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Financial Bureau of Jingzhou Development Zone | |
Working Capital | |
28 Mar, 2014 | |
| 12 | | |
| 3.00 | % | |
Pay upon maturity | |
15 Mar 2015 | |
| 4,876 | |
| |
| |
| |
| | | |
| | | |
| |
| |
| | |
Total | |
| |
| |
| | | |
| | | |
| |
| |
$ | 45,565 | |
|
(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 12, 2015. |
|
(2) |
The borrowings were repaid in full in October 2014. |
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 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. 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. For the government loan, 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 rate at 0.3% per day in addition to the penalty interest
of the loan rate that is published by the People’s Bank of China for the same period.
Management believes that the Company had
complied with such financial covenants as of September 30, 2014, 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 September 30, 2014 (figures are in thousands of USD):
Purpose | |
Term (Month) | |
Due Date | |
Amount Payable on Due Date | |
Working Capital (1) | |
3-6 | |
Oct. -14 | |
$ | 11,919 | |
Working Capital | |
3-6 | |
Nov -14 | |
| 12,202 | |
Working Capital | |
3-6 | |
Dec -14 | |
| 10,213 | |
Working Capital | |
3-6 | |
Jan -15 | |
| 11,972 | |
Working Capital | |
3-6 | |
Feb -15 | |
| 13,315 | |
Working Capital | |
3-6 | |
Mar -15 | |
| 14,356 | |
Total (See Note 15) | |
| |
| |
$ | 73,977 | |
|
(1) |
The notes payable were repaid in full in October 2014. |
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 September 30, 2014, and believes it will continue to comply with
them.
Cash Flows
Net cash provided by operations during
the nine months ended September 30, 2014 was $8.1 million, compared to net cash provided by operations of $0.7 million for the
same period of 2013, representing an increase of $7.4 million.
During the nine months ended September
30, 2014, 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 $6.3 million; |
|
(2) |
The change in balance of pledge deposits which led to an increase in net cash provided by operations of $0.5 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 $17.6 million, which was mainly due to the sales of the Company’s goods always being on credit terms ranging from 4 to 6 months, the fact that, during the nine months ended September 30, 2014, there was a smaller increase in sales revenue of the Company’s products compared with the same period last year, and the Company’s collection strength, which led to a significant decrease in the growth rate of the ending balance of accounts receivable compared with the same period last year; |
|
(4) |
The change in balance of inventories led to a decrease in net cash provided by operations of $8.4 million, which was mainly due to an increase in inventory as a result of the increased growth rate of sales that were not completed, and the Company has actively adjusted its production plan to decrease inventory; |
|
(5) |
The change in balance of accounts and notes payable which led to a decrease in net cash provided by operations of $3.8 million, which was mainly due to the Company having paid more accounts and notes payable as a result of more accounts and notes payable being due and payable in the current period; |
|
(6) |
The change in accrued expenses and other payable which led to a decrease in net cash provided by operations of $2.9 million, which was mainly due to the Company paying certain legal expenses, audit fees and consulting fees that accrued in the prior year during the current period; and |
|
(7) |
The change of balance of tax payable, which led to a decrease in net cash provided by operations of $2.0 million. |
The Company used net cash of $16.0 million
in investment activities during the nine months ended September 30, 2014, compared to $34.9 million during the same period of 2013,
representing a decrease of $18.9 million, which was mainly due to an increase in purchase of equipment of $2.3 million, the acquisition
of Fujian Qiaolong cost of $3.0 million in cash, an increase in gain on sale of property, plant and equipment of $0.7 million,
and most time deposits having matured and carried forward to short-term deposits in the current period, which led to an increase
of $24.1 million (See Note 5).
During the nine months ended September
30, 2014, the Company used net cash in financing activities of $4.0 million, compared to $0.6 million for the same period of 2013,
representing an increase of $3.4 million, which was mainly due to the net effect of (1) the proceeds from and repayments of government
and bank loans having increased by $5.4 million and (2) the payment of dividends to non-controlling interest having increased by
$4.7 million and payment of dividends on common stock having increased by $4.3 million.
Off-Balance Sheet Arrangements
As of September 30, 2014 and December 31,
2013, 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, 2013 regarding this matter.
ITEM 4. |
CONTROLS AND PROCEDURES. |
Evaluation of 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 September 30, 2014, 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. Management evaluated the effectiveness of the
Company's disclosure controls and procedures as of September 30, 2014. Based on that evaluation, Messrs. Wu and Li concluded that
the Company’s disclosure controls and procedures were not effective as of September 30, 2014.
Background of Review
In the first quarter of 2014, the Company
identified certain loan transactions, the "Transactions", between certain of the Company’s subsidiaries, on the
one hand, and various other companies, on the other hand, that occurred during 2013. The Company has determined that the Transactions
constituted "related party transactions" and that the Company’s procedures were not followed so as to properly
identify the Transactions as related party transactions, submit them in advance to the Audit Committee of the Company’s Board
of Directors, the "Audit Committee", for its examination and approval and make timely disclosure of the Transactions
in the Company’s quarterly financial statements. Upon learning of the Transactions, the Audit Committee engaged independent
legal and accounting consultants and undertook a thorough review of these matters, the "Review", to determine the nature
and financial impact of the Transactions, as well as any deficiencies in the internal controls of the Company with respect to the
Transactions, and analyze certain additional related party transactions that were identified in the context of the Review. The
Company’s management cooperated fully with the Audit Committee and its advisers with respect to the Review. The Audit Committee
concluded that the failure to identify the Transactions as related party transactions, submit them in advance to the Audit Committee
for its examination and approval and timely disclose the Transactions evidenced a failure of the Company’s controls that
management should be directed to address. The Company’s Board of Directors agreed with the Audit Committee’s conclusions.
The Transactions, which are detailed in
Note 28 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013, were short-term loan transactions that were designed to use the Company’s idle cash resulting from the
seasonality of its business to generate returns and at the same time to assist the borrowing entities in addressing certain cash
flow needs. All of the loans were timely repaid, with interest, if any, at commercially stated rates. Nevertheless, because certain
of the borrowers were entities in which certain senior members of the Company’s management held a direct or indirect financial
interest, the Transactions were required to be treated as related party transactions for purposes of the Company’s internal
policies and procedures and financial reporting.
The Review determined that the errors resulted
from inconsistent interpretations and application of the Company’s written policies and procedures with respect to related
party transactions. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, these
deficiencies represented a material weakness in the Company’s internal control over financial reporting as of December 31,
2013, as more fully described below.
The Review concluded that the errors did
not result from any fraud or intentional misconduct and that the Transactions did not constitute loans that are prohibited by Section
402 of the Sarbanes-Oxley Act of 2002.
Description of Material Weakness
As disclosed in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013, in connection with the Review, management identified the following control
deficiencies as of December 31, 2013 that constituted a material weakness:
Although the Company has a policy requiring
that related party transactions be reported and disclosed by the Finance Department and promptly directed to the Audit Committee
for its review and approval, and the Company historically has applied that policy and approval process to various transactions,
Company personnel failed to adhere to the policy with respect to the Transactions. The Review revealed that this control failure
was a result of differing interpretations on the part of individual Company personnel regarding the scope and application of the
policy. Further, when certain of the Transactions later were reported to members of the Finance Department, those persons did not
promptly report the Transactions to the Audit Committee. The Transactions later were also identified by the Internal Audit Department
of the Company as deviations from the Company’s internal control procedures during the normal course of its internal audit
procedures. However, Internal Audit personnel did not report the Transactions to the Audit Committee until the Internal Audit Department
had completed its broader and regular internal audit procedures and, therefore, they did not timely inform the Audit Committee
about the Transactions.
Remediation Steps to Address Material
Weakness
In response to the material weakness identified
above, the Audit Committee directed that management consider certain corrective or remedial actions in respect of the relevant
internal controls at the Company. Management, under the supervision of the Chief Executive Officer and Chief Financial Officer,
adopted the recommendations of the Audit Committee and it has begun to implement the measures described below to address the material
weakness. This remediation effort is intended both to address the identified material weakness and to enhance the Company’s
overall financial control environment. Management believes that the remediation measures described below will remediate the identified
control deficiencies. However, management continues to evaluate and work to improve its internal control over financial reporting.
It may be determined that additional measures must be taken to address control deficiencies.
Pursuant to the Review and the resulting
conclusions by management, the Company is taking the following steps to remediate the identified material weakness: (1) the Company’s
policies and procedures with respect to related party transactions are being amended to clarify their scope, as well as certain
definitions and internal reporting and approval requirements; (2) a training program is being designed and implemented, which will
be mandatory for relevant Company personnel and which will focus on the scope and application of the Company’s controls concerning
related party transactions, including reporting and approval requirements; (3) policies and procedures will be amended to clarify
that any identified errors relating to the reporting and submission for approval of related party transactions should be immediately
brought to the attention of the Audit Committee by the Finance Department or the Internal Audit Department; and (4) as directed
by the Audit Committee, the Company’s Internal Audit Department will conduct and report to the Audit Committee with respect
to a series of special audits designed to assess the implementation of the subject policies and procedures, the Company’s
controls regarding related party transactions and relevant staff members’ awareness of the Company’s procedures and
controls regarding related party transactions. During the three months ended September 30, 2014, the Company continued to implement
the remediation measures described above.
The material weakness identified by management
is not fully remediated as of the date of the filing of this Quarterly Report on Form 10-Q though some remediation measures such
as the training, the relevant policies update and internal audit procedures have been taken. The Company has performed substantive
procedures in an effort to ensure that the information reflected in this report is supported and fairly presented as of the date
of this report. The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of
the above-referenced remediation measures and will monitor their implementation. In addition, under the direction of the Audit
Committee, management will continue to review and make necessary changes to the overall design of the system of internal controls
and the control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial
reporting.
Changes in Internal Control Over Financial
Reporting
Other than as described herein, there have
been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2014
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.
Securities Action - Southern District
of New York. On October 25, 2011, a purported securities class action was filed in the United States District Court for the Southern
District of New York on behalf of all purchasers of the Company’s securities between March 25, 2010 and March 17, 2011. On
February 24, 2012, the plaintiffs filed an amended complaint, changing the purported class period to between May 12, 2009 and March
17, 2011. The amended complaint alleged that the Company, certain of its present officers and directors, and the Company’s
former independent accounting firm violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the rules promulgated
thereunder, and sought unspecified damages. The Company filed a motion to dismiss the amended complaint, which the court denied
on August 8, 2012. On September 4, 2012, the Company filed an answer to the amended complaint. On January 15, 2013, plaintiffs
filed a motion to certify the purported class, which the court denied on May 31, 2013. On July 17, 2013, plaintiffs filed a petition
for permission to appeal the order denying class certification, and, on August 1, 2013, the Company filed an answer in opposition
to the petition. On October 23, 2013, the Court of Appeals for the Second Circuit denied plaintiffs’ petition for permission
to appeal. On December 6, 2013, plaintiffs filed a motion for preliminary approval of a settlement with the Company’s former
independent accounting firm and certification of a proposed settlement class, which the district court denied on January 15, 2014.
On March 28, 2014, the Company and plaintiffs entered into a settlement agreement. As part of the settlement, on April 29, 2014,
the Company and plaintiffs filed a stipulation dismissing all claims by plaintiffs against the Company and its current and former
officers and directors, with no admission of any wrongdoing or liability. On April 29, 2014, the court entered an order granting
the dismissal. The settlement had no material effect on the condensed unaudited consolidated financial statements for the three
months and nine months ended September 30, 2014.
Other than as set forth above, 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 than as set forth in Item 1A of Part
II in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, there have been no material
changes from the risk factors previously disclosed in Item 1A of the Company’s 2013 Annual Report on Form 10-K.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
See Note 19 to the Condensed Unaudited
Consolidated Financial Statements for a description of the Stock Exchange Agreement by which the Company has issued unregistered
shares as consideration for the acquisition of the minority interests in two subsidiaries of the Company. On October 13, 2014,
the Company completed its issuance of 4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity. The
shares were issued in a private placement transaction that was exempt from registration pursuant to Section 4(a)(2) of the Securities
Act of 1933, as amended.
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 the exhibit 10.8 to the Company’s Form 10Q 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. |
|
|
|
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 September 30, 2014, were filed on November 12, 2014 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: November 12, 2014 |
|
By: |
/s/ Qizhou Wu |
|
|
|
Qizhou Wu |
|
|
|
President and Chief Executive Officer |
|
|
|
|
Date: November 12, 2014 |
|
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: November 12, 2014 |
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: November 12, 2014 |
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 September 30, 2014, 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: November 12, 2014 |
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 September 30, 2014, 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: November 12, 2014 |
By: /s/ Jie Li |
|
Jie Li |
|
Chief Financial Officer |
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