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CHINA AUTOMOTIVE SYSTEMS INC - Quarter Report: 2015 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

Or

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to _________

 

Commission file number: 000-33123

 

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   33-0885775
     
(State or other jurisdiction of incorporation or   (I.R.S. employer identification number)
organization)    

 

No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District

Jing Zhou City, Hubei Province, the People’s Republic of China

(Address of principal executive offices)

 

  (86) 716- 832- 9196  
     
  Issuer’s telephone number  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes          x          No          ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes          x           No          ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
         
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 May 14, 2015, the Company had 32,121,019 shares of common stock issued and outstanding.

 

 
 

 

CHINA AUTOMOTIVE SYSTEMS, INC.

 

INDEX

 

        Page
         
    Part IFinancial Information    
         
Item 1.   Unaudited Financial Statements.   4
    Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2015 and 2014   4
    Condensed Unaudited Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014   5
    Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014   6
    Notes to Condensed Unaudited Consolidated Financial Statements   8
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.   23
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.   33
Item 4.   Controls and Procedures.   33
         
    Part II — Other Information    
         
Item 1.   Legal Proceedings.   33
Item 1A.   Risk Factors.   33
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.   33
Item 3.   Defaults Upon Senior Securities.   33
Item 4.   Mine Safety Disclosures.   34
Item 5.   Other Information.   34
Item 6.   Exhibits.   34
         
Signatures       35

 

2
 

 

Cautionary Statement

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

 

3
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS.

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

(In thousands of USD, except share and per share amounts)

 

   Three Months Ended
March 31,
 
   2015   2014 
Net product sales, including $8,299 and $11,810 to related parties for the three months ended March 31, 2015 and 2014  $123,443   $114,306 
Cost of products sold, including $7,008 and $7,191 purchased from related parties for the three months ended March 31, 2015 and 2014   101,772    92,969 
Gross profit   21,671    21,337 
Gain on other sales   1,657    909 
Less: Operating expenses          
Selling expenses   3,624    3,042 
General and administrative expenses   4,448    3,545 
Research and development expenses   5,893    5,888 
Total operating expenses   13,965    12,475 
Income from operations   9,363    9,771 
Other income, net   94    239 
Interest expense   (474)   (278)
Financial income, net   753    491 
Income before income tax expenses and equity in earnings of affiliated companies   9,736    10,223 
Less: Income taxes   1,410    1,975 
Equity in earnings of affiliated companies   66    63 
Net income   8,392    8,311 
Net income (loss) attributable to non-controlling interests   (118)   1,537 
Net income attributable to parent company’s common shareholders  $8,510   $6,774 
Comprehensive income:          
Net income  $8,392   $8,311 
Other comprehensive income:          
Foreign currency translation loss, net of tax   (1,275)   (2,397)
Comprehensive income   7,117    5,914 
Comprehensive income (loss) attributable to non-controlling interests   (201)   1,136 
Comprehensive income attributable to parent company  $7,318   $4,778 
           
Net income attributable to parent company’s common shareholders per share          
           
Basic –  $0.26   $0.24 
           
Diluted-  $0.26   $0.24 
Weighted average number of common shares outstanding          
Basic   32,121,019    28,043,019 
Diluted   32,134,732    28,063,501 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

4
 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(In thousands of USD unless otherwise indicated)

 

   March 31,
2015
   December 31,
2014
 
ASSETS          
Current assets:          
Cash and cash equivalents  $65,909   $68,505 
Pledged cash deposits   30,663    33,633 
Short-term investments   39,084    41,017 
Accounts and notes receivable, net - unrelated parties   295,215    282,348 
Accounts and notes receivable, net - related parties   25,678    22,760 
Advance payments and others - unrelated parties   3,561    2,124 
Advance payments and others - related parties   623    741 
Inventories   68,747    64,419 
Current deferred tax assets   6,739    7,078 
Total current assets   536,219    522,625 
Non-current assets:          
Property, plant and equipment, net   84,099    82,466 
Intangible assets, net   3,262    3,419 
Other receivables, net - unrelated parties   1,858    1,619 
Other receivables, net - related parties   8    76 
Advance payment for property, plant and equipment - unrelated parties   3,229    6,755 
Advance payment for property, plant and equipment - related parties   2,554    2,085 
Long-term investments   4,624    4,575 
Goodwill   643    645 
Non-current deferred tax assets   5,293    4,896 
Total assets  $641,789   $629,161 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Bank and government loans  $41,187   $43,988 
Accounts and notes payable - unrelated parties   226,248    213,090 
Accounts and notes payable - related parties   4,751    4,857 
Customer deposits   1,279    1,885 
Accrued payroll and related costs   7,227    7,554 
Accrued expenses and other payables   34,471    35,429 
Accrued pension costs   5,322    5,586 
Taxes payable   11,801    11,557 
Amounts due to shareholders/directors   378    380 
Current deferred tax liabilities   156    189 
Total current liabilities   332,820    324,515 
Long-term liabilities:          
Advances payable   3,691    6,156 
Non-current deferred tax liabilities   310    321 
Total liabilities  $336,821   $330,992 
           
Commitments and Contingencies (See Note 29)          
           
Stockholders’ equity:          
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued–32,338,302 and 32,338,302 shares as of March 31, 2015 and December 31, 2014, respectively  $3   $3 
Additional paid-in capital   64,522    64,522 
Retained earnings-          
Appropriated   10,178    10,178 
Unappropriated   187,945    179,435 
Accumulated other comprehensive income   34,927    36,119 
Treasury stock – 217,283 and 217,283 shares as of March 31, 2015 and December 31, 2014, respectively   (1,000)   (1,000)
Total parent company stockholders' equity   296,575    289,257 
Non-controlling interests   8,393    8,912 
Total stockholders' equity   304,968    298,169 
Total liabilities and stockholders' equity  $641,789   $629,161 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

5
 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)

 

   Three Months Ended March 31, 
   2015   2014 
Cash flows from operating activities:          
Net income  $8,392   $8,311 
Adjustments to reconcile net income from operations to net cash provided by operating activities:          
Depreciation and amortization   3,965    3,713 
Increase (decrease) in allowance for doubtful accounts   (2)   2 
Inventory write downs   756    1,080 
Deferred income taxes   (145)   248 
Equity in earnings of affiliated companies   (66)   (63)
Gain on disposal of fixed assets   (10)   (35)
Changes in operating assets and liabilities:          
(Increase) decrease in:          
Pledged deposits   2,843    1,223 
Accounts and notes receivable   (16,932)   (22,366)
Advance payments and others   (1,330)   (839)
Inventories   (5,328)   (5,992)
Increase (decrease) in:          
Accounts and notes payable   13,876    4,594 
Customer deposits   (602)   181 
Accrued payroll and related costs   (300)   (312)
Accrued expenses and other payables   (236)   (56)
Accrued pension costs   (242)   202 
Taxes payable   287    1,738 
Net cash provided by (used in) operating activities   4,926    (8,371)
Cash flows from investing activities:          
(Increase) in other receivables   (184)   (46)
Cash received from property, plant and equipment sales   559    152 
Payments to acquire property, plant and equipment   (5,723)   (3,501)
Payments to acquire intangible assets   (7)   (3)
Purchase of short-term investments   (5,889)   (13,002)
Proceeds from maturities of short-term investments   7,667    12,259 
Dividends from investment under cost method   -    11 
Net cash used in investing activities   (3,577)   (4,130)
Cash flows from financing activities:          
Proceeds from government and bank loan   2,249    5,146 
Repayments of government and bank loan   (4,884)   (3,251)
Dividends paid to the non-controlling interest holders   (814)   - 
Dividends paid to the holders of the Company’s common stock   (252)   - 
Increase  in amounts due to shareholders/directors   -    52 
Net cash provided by (used in) financing activities   (3,701)   1,947 
Effects of exchange rates on cash and cash equivalents   (244)   (470)
Net decrease in cash and cash equivalents   (2,596)   (11,024)
Cash and cash equivalents at beginning of period   68,505    53,979 
Cash and cash equivalents at end of period  $65,909   $42,955 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

6
 

 

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:

 

   Three Months Ended
March 31,
 
   2015   2014 
Cash paid for interest  $294   $256 
Cash paid for income taxes   336    1,204 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

   Three Months Ended
March 31,
 
   2015   2014 
Advance payments for acquiring property, plant and equipment  $2,203   $5,337 
Dividends payable to non-controlling interest holders   318    34 
Government subsidies recorded as a reduction of property, plant and equipment cost   1,628    - 
Accounts payable for acquiring property, plant and equipment   842    - 

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

7
 

 

China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months Ended March 31, 2015 and 2014

 

1. Organization and business

 

China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the joint ventures described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.

 

Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company. Great Genesis is mainly engaged in the manufacture and sale of automotive systems and components through its controlled subsidiaries and the joint ventures, as described below.

 

Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and is mainly engaged in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.

 

The Company owns the following aggregate net interests in the entities established in the People's Republic of China, the “PRC,” and Brazil as of March 31, 2015 and December 31, 2014.

 

   Percentage Interest 
Name of Entity  March 31,
2015
   December 31,
2014
 
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1   100.00%   100.00%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2   100.00%   100.00%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3   70.00%   70.00%
Universal Sensor Application Inc., “USAI” 4   83.34%   83.34%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 5   85.00%   85.00%
Wuhu HengLong Automotive Steering System Co., Ltd., “Wuhu” 6   77.33%   77.33%
Hubei Henglong Automotive System Group Co., Ltd, “Hubei Henglong” 7   100.00%   100.00%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 8   100.00%   100.00%
Beijing Henglong Automotive System Co., Ltd., “Beijing Henglong” 9   50.00%   50.00%
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 10   70.00%   70.00%
CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong” 11   80.00%   80.00%
Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong” 12   51.00%   51.00%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 13   85.00%   85.00%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”14   100.00%   - 

 

1.Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.

 

2.Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.

 

3.Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.

 

4.USAI was established in 2005 and mainly engages in the production and sales of sensor modules.

 

5.Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.

 

6.Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.

 

7.On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.

 

8.In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of new products. The registered capital of the Testing Center was RMB30.0 million, equivalent to approximately $4.4 million.

 

9.Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric power steering systems and parts. According to the joint venture agreement, the Company does not have voting control of Beijing Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such investment is accounted for by the equity accounting method.

 

8
 

 

10.On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.

 

11.On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil.

 

12.In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles.

 

13.In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China. The registered capital of Wuhan Chuguanjie is RMB30.0 million, equivalent to approximately $4.9 million. Jielong has completed the capital injection of RMB30.0 million, equivalent to approximately $4.9 million.

 

14.In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics. The registered capital of Shanghai Henglong was RMB3.0 million, equivalent to approximately $0.5 million. Hubei Henglong has completed the capital injection of RMB3.0 million, equivalent to approximately $0.5 million.

 

On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish a venture capital fund, the “Venture Fund”, which mainly focuses on investments in emerging automobiles and parts industries. Total share capital of the Venture Fund is RMB280.0 million (equivalent to approximately $45.5 million). The initial term of the fund is eight years. Hubei Henglong has committed to make investments into the Venture Fund of 17.9% or RMB50.0 million (equivalent to approximately $8.1 million), which will be paid in three installments. 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). On April 24, 2015, Hubei Henlong made its second capital contribution of RMB10.0 million (equivalent to approximately $1.6 million) (See Note 29).

 

2. Basis of presentation and significant accounting policies

 

  (a) Basis of Presentation

 

Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Article 10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.

 

The condensed consolidated balance sheet as of December 31, 2014 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented herein not misleading. For further information, please refer to the financial statements and the notes thereto included in the Company’s 2014 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

 

9
 

 

The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2015.

 

Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

  (b) Recent Accounting Pronouncements

  

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 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. On April 1, 2015, the FASB voted to propose a one-year deferral of the effective date of ASU 2014-09. If finalized, the Company could elect to adopt the provisions of ASU 2014-09 for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Under this proposal, early adoption for annual periods beginning after December 15, 2016, including interim periods within that reporting period, would also be permissible. Management is currently assessing the impact the adoption of ASU 2014-09 and the effect of the standard on the Company’s ongoing financial reporting. 

 

  (c) Significant Accounting Policies

 

There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2014.

 

3.Acquisition  

 

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.

 

10
 

 

4. Pledged cash deposits

 

Pledged cash deposits are used as guarantees for the Company’s notes payable and their use is restricted. The Company regularly pays some of its suppliers by bank notes. The Company has to make a cash deposit, generally equivalent to 30% - 100% of the face value of the relevant bank note in order to obtain the bank note.

 

5. Short-term investments

 

Short-term investments comprise time deposits with maturity terms of more than three months but due within one year. The carrying values of time deposits approximate fair value because of their short maturities. The interest earned is recognized in the condensed unaudited statements of operations and comprehensive income over the contractual term of the deposit.

 

As of March 31, 2015, the Company had pledged short-term investments of RMB33.0 million (equivalent to approximately $5.4 million) to secure loans under the credit facility issued by HSBC Bank (China) Company Limited Hong Kong branch (“HSBC HK”) and the use of the pledged short-term investments is restricted (See Note 14).

 

6. Accounts and notes receivable, net

 

The Company’s accounts and notes receivable as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Accounts receivable - unrelated parties (1)   $159,297   $137,165 
Notes receivable - unrelated parties (2) (3)    137,319    146,597 
Total accounts and notes receivable- unrelated parties   296,616    283,762 
Less: allowance for doubtful accounts - unrelated parties   (1,401)   (1,414)
Accounts and notes receivable, net - unrelated parties   295,215    282,348 
Accounts and notes receivable, net - related parties   25,678    22,760 
Accounts and notes receivable, net  $320,893   $305,108 

 

(1)As of March 31, 2015 and December 31, 2014, the Company has pledged $31.9 million and $34.3 million, respectively, of accounts receivable as security for its comprehensive credit facilities with banks in China.

 

(2)Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.

 

(3)As of March 31, 2015, Henglong collateralized its notes receivable in an amount of RMB207.6 million (equivalent to approximately $33.8 million) as security in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose of obtaining the Henglong Standby Letter of Credit (as defined in Note 14) which is used as security for the non-revolving credit facility in the amount of $30.0 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau”. As of December 31, 2014, Henglong collateralized its notes receivable in an amount of RMB201.8 million (equivalent to approximately $33.0 million) in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose of obtaining the Henglong Standby Letter of Credit (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.”

 

7. Payment to customer

 

During the three months ended March 31, 2015, the Company made a $2.4 million payment to a customer for new product testing services provided by the customer. As the Company cannot reasonably demonstrate that such payment amount represents the fair value of the services provided by its customer, the payment was recorded as a reduction of net sales in accordance with U.S. GAAP.

 

8. Inventories

 

The Company’s inventories as of March 31, 2015 and December 31, 2014 consisted of the following (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Raw materials  $16,234   $15,842 
Work in process   13,993    11,849 
Finished goods   38,520    36,728 
Total  $68,747   $64,419 

 

11
 

 

Provision for inventories amounted to $0.8 million and $1.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

9. Other receivables, net

 

The Company’s other receivables as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Other receivables - unrelated parties (1)  $964   $707 
Other receivables - employee housing loans (2)   960    990 
Less: allowance for doubtful accounts- unrelated parties   (66)   (78)
Other receivables, net - unrelated parties  $1,858   $1,619 

 

   March 31,
2015
   December 31,
2014
 
Other receivables - related parties (1)  $672   $725 
Less: allowance for doubtful accounts- related parties   (664)   (649)
Other receivables, net - related parties  $8   $76 

 

(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 five years.

  

10. Long-term investments

 

As of March 31, 2015 and December 31, 2014, the Company’s balance of long-term investment was $4.6 million and $4.6 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.

 

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 $0.1 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

11. Property, plant and equipment, net

 

The Company’s property, plant and equipment as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Land use rights and buildings  $53,969   $48,956 
Machinery and equipment   119,261    119,597 
Electronic equipment   7,725    7,706 
Motor vehicles   5,100    4,609 
Construction in progress   5,207    5,463 
Total amount of property, plant and equipment (1)   191,262    186,331 
Less: Accumulated depreciation (2)   (107,163)   (103,865)
Total amount of property, plant and equipment, net (3)  $84,099   $82,466 

 

  (1) Through the acquisition of Fujian Qiaolong in the second quarter of 2014, the Company acquired $3.7 million of property, plant and equipment, consisting of $3.4 million of land use rights and buildings, $0.2 million of machinery and equipment, and $0.1 million of motor vehicles, which are depreciated over a weighted average life of 43.0 years, 3.5 years, and 3.1 years, respectively.

 

  (2) Depreciation charges were $3.8 million and $3.7 million for the three months ended March 31, 2015 and 2014, respectively.

 

  (3) As of March 31, 2015 and December 31, 2014, the Company had pledged property, plant and equipment with net book value of $45.5 million and $45.5 million, respectively, for its comprehensive credit facilities with banks in China.

 

12
 

 

12. Intangible assets

 

The Company’s intangible assets as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Costs:          
Patent technology  $4,869   $4,887 
Management software license   936    932 
Total intangible assets (1)     5,805    5,819 
Less: Amortization (2)     (2,543)   (2,400)
Total intangible assets, net  $3,262   $3,419 

 

  (1) Through the acquisition of Fujian Qiaolong in the second quarter of 2014, the Company acquired $0.9 million of intangible assets, consisting of $0.9 million of patent technology and $nil of management software licenses, which are amortized over a weighted average life of 4.7 years and 1.1 years, respectively.

 

  (2) Amortization expenses were $0.2 million and $0.05 million for the three months ended March 31, 2015 and 2014, respectively.

 

13. Deferred income tax assets

 

In accordance with the provisions of ASC Topic 740, “Income Taxes”, the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.

 

The components of estimated deferred income tax assets as of March 31, 2015 and December 31, 2014 are as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
           
Losses carry forward (U.S.) (1)  $7,018   $7,014 
Losses carry forward (PRC) (1)   2,385    2,000 
Product warranties and other reserves   4,735    4,531 
Property, plant and equipment   4,738    4,684 
Share-based compensation   266    266 
Bonus accrual   331    372 
Other accruals   885    1,319 
Others   1,546    1,496 
Total deferred tax assets   21,904    21,682 
Less: taxable temporary difference related to revenue recognition   (758)   (472)
Total deferred tax assets, net   21,146    21,210 
Less: Valuation allowance   (9,114)   (9,236)
Total deferred tax assets, net of valuation allowance (2)  $12,032   $11,974 

 

  (1) The net operating losses carry forward for the U.S. entity for income tax purposes are available to reduce future years' taxable income. These losses will expire, if not utilized, in 20 years. Net operating losses carry forward for non-U.S. entities can be carried forward for 5 years to offset taxable income. However, as of March 31, 2015, the valuation allowance was $9.1 million, including $7.3 million allowance for the Company’s deferred tax assets in the United States and $1.8 million allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the United States, management believes that the deferred tax assets in the United States are not likely to be realized in the future. For the non-U.S. deferred tax assets, pursuant to certain tax laws and regulations in China, the management believes such amount will not be used to offset future taxable income.

 

  (2) Approximately $5.3 million and $4.9 million of net deferred income tax asset as of March 31, 2015 and December 31, 2014, respectively, are included in non-current deferred tax assets in the accompanying condensed unaudited consolidated balance sheets. The remaining $6.7 million and $7.1 million of net deferred income tax assets as of March 31, 2015 and December 31, 2014, respectively, are included in current deferred tax assets.

 

13
 

 

14. Bank and government loans

 

Loans consist of the following as of March 31, 2015 and December 31, 2014 (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Short-term bank loan (1)  $6,187   $4,085 
Short-term bank loan (2) (3)   35,000    35,000 
Short-term government loan (4)   -    4,903 
Bank and government loans  $41,187   $43,988 

 

(1)These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note 11). As of March 31, 2015 and December 31, 2014, the weighted average interest rate was 7.0% and 6.5% per annum, respectively. Interest is paid on the twentieth day of each month or quarter, as applicable, and the principal repayment is at maturity.

 

(2)On May 18, 2012, the Company entered into a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving credit facility in the amount of $30.0 million, the “Credit Facility”. The Credit Facility would have expired on November 3, 2012 unless the Company drew down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown was the earlier of (i) 18 months from the drawdown or (ii) 1 month before the expiry of the standby letter of credit obtained by Henglong from ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. The interest is calculated daily based on a 360-day year and it is fixed one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount not less than $31.6 million if the Credit Facility is fully drawn.

 

On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB207.6 million (equivalent to approximately $33.8 million). The Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013.

 

On May 7, 2013, ICBC Macau agreed to extend the maturity date of the Credit Facility to May 13, 2014. The interest rate of the Credit Facility under the extended term 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 March 31, 2015, the interest rate of the Credit Facility was 2.82% per annum.

 

(3)On July 16, 2014, Great Genesis entered into a credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million, the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015, and has an annual interest rate of 1.7%. Interest is paid on the twentieth day of each month and the principal repayment is at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with the Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC Credit Facility is fully drawn.

 

On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB33.0 million (equivalent to approximately $5.4 million).

 

(4)On March 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 matured and was repaid in full on March 14, 2015.

 

14
 

 

15. Accounts and notes payable

 

The Company’s accounts and notes payable as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Accounts payable - unrelated parties  $150,578   $132,389 
Notes payable - unrelated parties (1)   75,670    80,701 
Total accounts and notes payable - unrelated parties   226,248    213,090 
Total accounts and notes payable - related parties   4,751    4,857 
Total accounts and notes payable  $230,999   $217,947 

 

(1)Notes payable represent accounts payable in the form of bills of exchange whose acceptances are guaranteed and settlements are handled by banks. The Company has pledged cash deposits, notes receivable and certain property, plant and equipment to secure notes payable granted by banks.

 

16. Accrued expenses and other payables

 

The Company’s accrued expenses and other payables as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Accrued expenses  $5,482   $6,988 
Accrued interest   118    121 
Other payables   2,130    1,735 
Dividends payable to common shareholders (1)   505    757 
Dividends payable to non-controlling interests  (2)   318    817 
Warranty reserves (3)   25,918    25,011 
Total  $34,471   $35,429 

 

(1)On May 27, 2014, the Company announced the payment of a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014. As of March 31, 2015, dividends payable of $0.5 million remained unpaid.

 

(2)In accordance with the resolution of the board of directors of Shenyang, in March 2015, Shenyang declared a dividend amounting to $1.1 million to its shareholders, of which $0.3 million was payable to the holder of the non-controlling interests. As of March 31, 2015, the dividends have not yet been paid to the holder of the non-controlling interests.

 

(3)The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances.

 

For the three months ended March 31, 2015 and 2014, and for the year ended December 31, 2014, the warranties activities were as follows (figures are in thousands of USD):

 

   Three Months Ended
March 31,
   Year Ended
December 31,
 
   2015   2014   2014 
Balance at beginning of the period  $25,011   $22,104   $22,104 
Additions during the period   2,095    2,730    12,341 
Settlement within period, by cash or actual material   (1,094)   (1,511)   (9,354)
Foreign currency translation gain   (94)   (198)   (80)
Balance at end of the period  $25,918   $23,125   $25,011 

 

17. Taxes payable

 

The Company’s taxes payable as of March 31, 2015 and December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   March 31,
2015
   December 31,
2014
 
Value-added tax payable  $5,436   $6,393 
Income tax payable   5,738    4,537 
Other tax payable   627    627 
Total  $11,801   $11,557 

 

15
 

 

18. Advances payable

 

As of March 31, 2015 and December 31, 2014, advances payable by the Company were $3.7 million and $6.2 million, respectively.

 

The amounts are special subsidies made by the Chinese government to the Company to offset the cost and charges related to the improvement of production capacities and improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are recorded as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances payable when received and will be recorded as a deduction of related expenses and cost of acquired assets when the conditions are met.

 

The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.

 

19. Additional paid-in capital

 

The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 2015 and 2014, and the year ended December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

 

   Three Months Ended March 31,   Year Ended 
December 31,
 
   2015   2014   2014 
Balance at beginning of the period  $64,522   $39,565   $39,565 
Return of  common shareholders’ investment cost  (1)    -    -    (5,047)
Acquisition of the non-controlling interests in Henglong and Jiulong (2)    -    -    (7,502)
Issuance of common stock in exchange for the non-controlling interests in Henglong and Jiulong (2)   -    -    37,313 
Share-based compensation (3)    -    -    193 
Balance at end of the period  $64,522   $39,565   $64,522 

 

(1)On May 27, 2014, the Company announced a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014. As China Automotive Systems, the parent company, had an accumulated deficit position as of the date of the dividend declaration, the dividends distributed to the Company’s common shareholders described above are treated as a return of common shareholders’ investment cost.

 

(2)On August 11, 2014, the Company entered into the Exchange Agreement with Jiulong Machinery Electricity, under which the Company issued 3,260,000 and 818,000 of its common shares in consideration for the acquisition of the 20% and 19% equity interests in Henglong and Jiulong, respectively, held by Jiulong Machinery Electricity. On September 26, 2014, the Company obtained the 20% and 19% equity interests in Henglong and Jiulong, respectively, and completed its share registrations with the local government administrative bureau. The Company owned 100% of the equity interests in both Henglong and Jiulong as of September 30, 2014. The Company’s acquisitions of the non-controlling interests were accounted for as equity transactions in the year ended December 31, 2014. The total carrying value for the non-controlling interests in both Henglong and Jiulong was $34.5 million, including the accumulated other comprehensive income of $4.7 million related to the noncontrolling interests acquired and other non-controlling interests of $29.8 million. Therefore, the total carrying value of $34.5 million for the non-controlling interests acquired was reclassified from non-controlling interests to the controlling interest’s equity as of September 30, 2014. On October 13, 2014, the Company completed its issuance of 4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity. The fair market value of the Company’s common stock issued was $37.3 million or $9.15 per share, which was determined on the issuance date of the common shares. The difference between the fair market value of $37.3 million for the Company’s common shares issued and the carrying value of $34.5 million for the non-controlling interest acquired of $2.8 million was recorded as a reduction of additional paid-in capital. Additional paid-in capital of the Company was also decreased by $4.7 million and the accumulated other comprehensive income attributable to Henglong and Jiulong was increased by a corresponding amount.

 

(3)On September 16, 2014 and August 13, 2013, the Company granted 22,500 and 22,500 stock options, respectively, to the Company’s independent directors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ on the date of grant. The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company’s dividends.

 

16
 

 

Assumptions used to estimate the fair value of stock options on the grant dates are as follows:

 

Issuance Date   Expected volatility    Risk-free rate    Expected term (years)    Dividend yield 
                     
September 16, 2014   120.6%   1.78%   5    0.00%
                     
August 13, 2013   131.5%   1.49%   5    0.00%

 

The above stock options were vested and exercisable immediately. Their fair value on the grant dates of September 16, 2014 and August 13, 2013 using the Black-Scholes option pricing model was $0.2 million and $0.2 million, respectively. For the year ended December 31, 2014, the Company recognized stock-based compensation expenses of $0.2 million.

 

20. Retained earnings

 

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.

 

During the three months ended March 31, 2015 and 2014, none of the parent company or the subsidiaries declared any dividend or appropriated any statutory reserves.

 

Unappropriated 

 

The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2015 and 2014, and the year ended December 31, 2014 are summarized as follows (figures are in thousands of USD): 

 

   Three Months Ended
March 31,
   Year Ended
December 31,
 
   2015   2014   2014 
Balance at beginning of the period  $179,435   $146,023   $146,023 
Net income attributable to parent company   8,510    6,774    33,542 
Appropriation of retained earnings   -    -    (130)
Balance at end of the period  $187,945   $152,797   $179,435 

 

21. Accumulated other comprehensive income

 

The Company’s activities in respect of the amounts of the accumulated other comprehensive income for the three months ended March 31, 2015 and 2014, and the year ended December 31, 2014 are summarized as follows (figures are in thousands of USD):

 

   Three Months Ended
March 31,
   Year Ended
December 31,
 
   2015   2014   2014 
Balance at beginning of the period  $36,119   $32,061   $32,061 
Other comprehensive income related to the non-controlling interests acquired by the Company (See Note 19)   -    -    4,743 
Foreign currency translation adjustment attributable to parent company   (1,192)   (1,996)   (685)
Balance at end of the period  $34,927   $30,065   $36,119 

 

22. Non-controlling interests

 

The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2015 and 2014, and the year ended December 31, 2014 are summarized as follows (figures are in thousands of USD):  

 

17
 

 

   Three Months Ended
March 31,
   Year Ended
December 31,
 
   2015   2014   2014 
Balance at beginning of the period  $8,912   $45,071   $45,071 
Fair value of the non-controlling interests arising from the acquisition of Fujian Qiaolong (1)     -         2,793 
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   (118)   1,537    6,052 
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 16)   (318)   -    (10,077)
Foreign currency translation adjustment attributable to non-controlling interests   (83)   (401)   (372)
Balance at end of the period  $8,393   $46,207   $8,912 

 

(1)In the second quarter of 2014, the Company acquired a 51.0% equity interest in Fujian Qiaolong (See Note 3). The fair value of the non-controlling interest of Fujian Qiaolong is $2.8 million.

 

23. 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. During the three months ended March 31, 2015, gain on other sales was $1.7 million, while it was $0.9 million in the three months ended March 31, 2014.

 

24. Financial income, net

 

During the three months ended March 31, 2015 and 2014, the Company recorded financial income, net which is summarized as follows (figures are in thousands of USD):

 

   Three Months Ended
March 31,
 
   2015   2014 
Interest income  $(672)  $(757)
Foreign exchange loss (income), net   (165)   196 
Gain of cash discount, net   (30)   (60)
Bank fees   114    130 
Total financial income, net  $(753)  $(491)

  

25. Income tax rate

 

The Company’s subsidiaries registered in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.

 

Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

 

Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%, if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is regarded as a non-resident enterprise, it is required to pay an additional 5% withholding tax for any dividends payable to it from the PRC subsidiaries.

 

18
 

 

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 March 31, 2015, the Company has recognized deferred tax liabilities of $0.15 million for the remaining undistributed profits to Genesis of $3.0 million. The Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries permanently. As of March 31, 2015 and December 31, 2014, the Company still has undistributed earnings of approximately $197.2 million and $188.3 million, respectively, from investment in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earnings been distributed to Genesis and not permanently reinvested, the tax provision as of March 31, 2015 and December 31, 2014 of approximately $9.9 million and $9.4 million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis and not further distributed to the parent company incorporated in the United States going forward.

 

In 2014, Jiulong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% from 2014 to 2016.

 

In 2014, Henglong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% from 2014 to 2016.

 

In 2009, Shenyang was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continued to be taxed at the 15% tax rate in 2012, 2013 and 2014. The Company estimates the applied tax rate in 2015 to be 15% as it will probably pass the re-assessment in 2015 and continue to qualify as “High & New Technology Enterprise”.

 

In 2012, Wuhu was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2013 and 2014. The Company estimates the applied tax rate in 2015 to be 15% as it will probably pass the re-assessment in 2015 and continue to qualify as “High & New Technology Enterprise”.

 

In 2013, Jielong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% for 2013, 2014 and 2015.

 

In November 2011, Hubei Henglong was awarded the title of “High & New Technology Enterprise”. Based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2013. The Company has passed the re-assessment in 2014 and continues to qualify as a “High & New Technology Enterprise”. Accordingly, it continues to be taxed at the 15% tax rate in 2014, 2015 and 2016.

 

According to the New CIT, USAI and Testing Center are subject to income tax at a rate of 25% in 2014 and 2015.

 

Chongqing Henglong was established in 2012. According to the New CIT, Chongqing Henglong is subject to income tax at a uniform rate of 25%. No provision for Chongqing Henglong is made as it had no assessable income for the three months ended March 31, 2015 and 2014.

 

Based on Brazilian income tax laws, Brazil Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate of 10% for the part of taxable income over $0.12 million (equivalent to approximately BRL 0.24 million). The Company had no assessable income in Brazil for the three months ended March 31, 2015 and 2014.

 

Fujian Qiaolong was acquired in the second quarter of 2014. In November 2011, Fujian Qiaolong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2011, 2012 and 2013. In 2014, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it will continue to be taxed at the 15% tax rate in 2014, 2015 and 2016. No provision for Fujian Qiaolong is made as it had no assessable income for the three months ended March 31, 2015.

 

The profits tax rate of Hong Kong is 16.5%. No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong for the three months ended March 31, 2015 and 2014.

 

The enterprise income tax rate of the United States is 35%. HLUSA made a provision for assessable income for the three months ended March 31, 2015. No provision for U.S. tax was made for HLUSA for the three months ended March 31, 2014 as HLUSA had no assessable income in the United States for the three months ended March 31, 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 ended March 31, 2015 and 2014.

 

The Company’s effective tax rate was 14.5% for the three months ended March 31, 2015, compared with 19.3% for the three months ended March 31, 2014.

 

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26. Income per share

 

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 March 31, 2015 and 2014, were (figures are in thousands of USD , except share and per share amounts ):

 

   Three Months Ended 
   March 31, 
   2015   2014 
Numerator:          
Net income attributable to the parent company’s common shareholders – Basic and Diluted  $8,510   $6,774 
Denominator:          
Weighted average shares outstanding   32,121,019    28,043,019 
Dilutive effects of stock options   13,713    20,482 
Denominator for dilutive income per share – Diluted   32,134,732    28,063,501 
           
Net income per share attributable to parent company’s common shareholders – Basic  $0.26   $0.24 
Net income per share attributable to parent company’s common shareholders – Diluted  $0.26   $0.24 

 

As of March 31, 2015 and 2014, the exercise prices for 60,000 shares and 60,000 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended March 31, 2015 and 2014, respectively, and these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

 

27. Significant concentrations

 

A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account," which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange for settlement of such "current account" transactions without pre-approval. However, pursuant to applicable regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with the PRC law. In calculating accumulated profits, foreign investment enterprises in China are required to allocate at least 10% of their annual net income each year, if any, to fund certain reserve funds, including mandated employee benefits funds, unless these reserves have reached 50% of the registered capital of the enterprises.

 

Transactions other than those that fall under the "current account" and that involve conversion of RMB into foreign currency are classified as "capital account" transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions require prior approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as USD, and transmit the foreign currency outside of China.

 

This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the PRC, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s PRC subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.

 

The Company grants credit to its customers including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Fenglong and Jiangling Yude, which are related parties of the Company. The Company’s customers are mostly located in the PRC.

 

During the three months ended March 31, 2015, the Company’s ten largest customers accounted for 67.3% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 11.5%. As of March 31, 2015, approximately 3.0% of accounts receivable were from trade transactions with the aforementioned one customer, and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

 

During the three months ended March 31, 2014, the Company’s ten largest customers accounted for 65.9% of its consolidated net product sales, with two customers individually accounting for more than 10 % of consolidated net sales, i.e., 11.6% and 10.3%. As of March 31, 2014, approximately 11.7% of accounts receivable were from trade transactions with the aforementioned two customers, and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

 

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28. Related party transactions and balances

 

Related party transactions are as follows (figures are in thousands of USD):

 

Related sales

 

   Three Months Ended 
   March 31, 
   2015   2014 
Merchandise sold to related parties  $8,299   $11,810 
Rental income obtained from related parties   33    - 
Materials sold to related parties   429    - 
Total  $8,761   $11,810 

 

Related purchases

 

   Three Months Ended 
   March 31, 
   2015   2014 
Materials purchased from related parties  $7,008   $7,191 
Technology purchased from related parties   -    92 
Equipment purchased from related parties   2,244    917 
Others purchased from related parties   218    - 
Total  $9,470   $8,200 

 

Related receivables

 

   March 31,
2015
   December 31,
2014
 
Accounts and notes receivable from related parties  $25,678   $22,760 
Other receivables from related parties   8    76 
Total  $25,686   $22,836 

 

Related advances 

   March 31,
2015
   December 31,
2014
 
Advance equipment payment to related parties  $2,554   $2,085 
Advance payments and others to related parties   623    741 
Total  $3,177   $2,826 

 

Related payables

 

   March 31,
2015
   December 31,
2014
 
Accounts payable  $4,751   $4,857 

 

These transactions were consummated under similar terms as those with the Company's third party customers and suppliers.

 

Related parties pledged certain land use rights and buildings as security for the Company’s credit facilities provided by banks.

  

As of May 14, 2015, Hanlin Chen, the Company’s Chairman, owns 55.6% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.

 

29. Commitments and contingencies

 

Legal proceedings

 

The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

 

21
 

 

Other commitments and contingencies

 

In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of March 31, 2015 (figures are in thousands of USD):

 

   Payment obligations by period 
   2015 (1)   2016   2017   2018   Thereafter   Total 
Obligations for investment contracts (2)   1,628   $3,256   $2,442   $-   $-   $7,326 
Obligations for purchasing and service agreements   13,247    460    -    -    -    13,707 
Total  14,875   3,716   2,442   $-   $-   21,033 

 

  (1) Remaining 9 months in 2015.

 

  (2) Capital Commitment to the Venture Fund  
     
    As disclosed in Note 1, on September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which Hubei Henglong has committed to make investments of 17.9% or RMB50.0 million (equivalent to approximately $8.1 million) into the Venture Fund in three installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5 million (equivalent to approximately $0.8 million). On April 24, 2015, Hubei Henglong made its second capital contribution of RMB10.0 million (equivalent to approximately $1.6 million). The remaining capital commitment of RMB35.0 million (equivalent to approximately $5.7 million) will be paid upon capital calls received from the Venture Fund.

 

30. Off-balance sheet arrangements

 

As of March 31, 2015 and December 31, 2014, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

31. Segment reporting

 

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 March 31, 2015, the Company had 13 product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other eight sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), commercial vehicle repacking and sales (Fujian Qiaolong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), and design and sales of automobile electronics (Shanghai Henglong). Since the revenues, net income and net assets of these eight sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these eight sectors into “Other Sectors.”

 

As of March 31, 2014, the Company had 10 product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other five sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong) and trade (Brazil Henglong). Since the revenues, net income and net assets of these five sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these five sectors into “Other Sectors.”

 

The Company’s product sector information for the three months and three months ended March 31, 2015 and 2014, is as follows (figures are in thousands of USD):

 

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   Net Product Sales   Net Income (Loss) 
   Three Months Ended   Three Months Ended 
   March 31,   March 31, 
   2015   2014   2015   2014 
Henglong  $83,802   $71,420   $7,551   $5,734 
Jiulong   17,781    21,635    (478)   1,183 
Shenyang   7,962    11,897    308    257 
Wuhu   6,157    6,546    (161)   (44)
Hubei Henglong   14,893    13,599    1,591    1,296 
Other Sectors   8,926    8,951    311    589 
Total Segments   139,521    134,048    9,122    9,015 
Corporate   -    -    (767)   (836)
Eliminations   (16,078)   (19,742)   37    132 
Total  $123,443   $114,306   $8,392   $8,311 

 

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

 

23
 

 

  · Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations.

 

The table below presents information about the nature and rationale for the Company’s critical accounting estimates:

 

Balance Sheet
Caption
  Critical
Estimate
Item
  Nature of Estimates
Required
  Assumptions/Approaches
Used
  Key Factors
Accrued
liabilities and
other long-term
liabilities

  Warranty
obligations

  Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.   The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.     ·OEM sourcing
·OEM policy decisions regarding warranty claims
 
                 
Property, plant and equipment, intangible assets and other long-term assets   Valuation of long- lived assets and investments

   The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.    The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.     ·Future production estimates
·Customer preferences and decisions 

 

 

Inventory
 
  Write-down of inventory
 
  The Company is required from time to time to review the cashability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories.   The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.   ·Future production estimates 
·Customer preferences and decisions
                 
Deferred income taxes
 
  Recoverability of deferred tax assets
 
  The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.   The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations.     ·Tax law changes
·Variances in future projected profitability, including by taxing entity
 
                 
Tax payable and deferred tax assets/liabilities
 
  Uncertain tax positions
 
  The Company is required to determine and assess all material positions, including all significant uncertain positions in all tax years that are still subject to assessment or challenge under relevant tax statutes.     The Company applies a more likely than not threshold and a two-step approach for tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.   ·An allocation or a shift of income between jurisdictions
·The characterization of income or a decision to exclude reporting taxable income in a tax return
·A decision to classify a transaction, entity, or other position in a tax return as tax exempt

 

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In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above, including provision of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this Report.

 

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 March 31, 2015, and under “Other Sectors” in the Company’s segment reporting. Please refer to Note 3 to the condensed unaudited consolidated financial statements in this Report.

 

Results of Operations—Three Months Ended March 31, 2015 and 2014

 

   Net Product Sales   Cost of Products Sold 
   (in thousands of USD,
except percentages)
   (in thousands of USD,
except percentages)
 
   2015   2014   Change   2015   2014   Change 
Henglong  $83,802   $71,420    12,382    17.3%  $70,328   $59,023   $11,305    19.2%
Jiulong   17,781    21,635    (3,854)   -17.8    16,062    18,273    (2,211)   -12.1 
Shenyang   7,962    11,897    (3,935)   -33.1    6,732    10,884    (4,152)   -38.1 
Wuhu   6,157    6,546    (389)   -5.9    5,745    6,046    (301)   -5.0 
Hubei Henglong   14,893    13,599    1,294    9.5    11,729    11,053    676    6.1 
Other Sectors   8,926    8,951    (25)   -0.3    7,292    7,564    (272)   -3.6 
Total Segments   139,521    134,048    5,473    4.1    117,888    112,843    5,045    4.5 
Elimination   (16,078)   (19,742)   3,664    -18.6    (16,116)   (19,874)   3,758    -18.9 
Total  123,443   114,306   9,137    8.0%  101,772   92,969   8,803    9.5%

 

Net Product Sales

 

Net product sales were $123.4 million for the three months ended March 31, 2015, compared to $114.3 million for the same period in 2014, representing an increase of $9.1 million, or 8.0%. The increase was mainly due to the continuing growth of automotive market demand in China and North America. During the three months ended March 31, 2015, the Company made a $2.4 million payment to a customer for new product testing services provided by the customer. As the Company cannot reasonably demonstrate that such payment amount represents the fair value of the services provided by its customer, the payment was recorded as a reduction of net sales in accordance with U.S. GAAP.

 

For the three months ended March 31, 2015, 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, such as sales of EPS for mid-size cars, and improvement in the quality of some of the old products, such as improvement of the quality of power steering gear for MPVs and SUVs, which resulted in the expansion of the Company’s market share in China, especially among the joint-venture brands’ auto customers.

 

From January 1, 2015, the National IV emission standard for commercial vehicles has been implemented in China. To meet the upgraded standard, certain OEMs transformed and renovated their existing products which, together with China’s economic slowdown, led to a significant decrease in the production and sales volume of China’s commercial vehicles. Accordingly, the Company’s sales of steering gears for commercial vehicles decreased.

 

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In summary, the Company had an increase in sales volume leading to a sales increase of $7.3 million, an increase in selling price of steering gears leading to a sales increase of $1.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar, which led to a sales increase of $0.2 million.

 

Further analysis by segment (before elimination) is as follows:

 

  Net product sales for Henglong were $83.8 million for the three months ended March 31, 2015, compared with $71.4 million for the three months ended March 31, 2014, representing an increase of $12.4 million, or 17.3%, which was mainly due to an increase in sales volume for passenger vehicles in the China market and the higher selling price of middle-level electric power steering compared with low-level electric power steering. An increase in sales volume led to a sales increase of $11.3 million, an increase in selling price led to a sales increase of $1.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million.

 

 

Net product sales for Jiulong were $17.8 million for the three months ended March 31, 2015, compared with $21.6 million for the three months ended March 31, 2014, representing a decrease of $3.9 million, or 17.8%, mainly due to China’s economic slowdown and the adoption of the National IV emission standard for commercial vehicles, as Jiulong’s main products and sales are steering gears for commercial vehicles. A decrease in sales volume led to a sales decrease of $3.1 million, a decrease in selling price led to a sales decrease of $0.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.1 million.

 

 

Net product sales for Shenyang were $8.0 million for the three months ended March 31, 2015, compared to $11.9 million for the same period in 2014, representing a decrease of $3.9 million, or 33.1%. The products of Shenyang are mainly sold to Shenyang Brilliance Jinbei Automobile Co., LTD, “Jinbei”. Jinbei transformed and renovated its production line to meet the new upgrade standard, which led to a significant decrease in production and sales volumes of Jinbei, and sales volumes of Shenyang decreased accordingly. A decrease in sales volumes led to a sales decrease of $4.5 million, and an increase in selling price led to a sales increase of $0.6 million.

 

  Net product sales for Wuhu were $6.2 million for the three months ended March 31, 2015, compared to $6.5 million for the same period in 2014, representing a decrease of $0.4 million, or 5.9%. A decrease in sales volumes led to a sales decrease of $0.7 million, and an increase in selling price led to a sales increase of $0.3 million.

 

  Net product sales for Hubei Henglong were $14.9 million for the three months ended March 31, 2015, compared to $13.6 million for the same period in 2014, representing an increase of $1.3 million, or 9.5%. 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 $0.8 million, and an increase in selling price led to a sales increase of $0.5 million.

 

  Net product sales for Other Sectors were $8.9 million for the three months ended March 31, 2015, consistent with $9.0 million for the same period in 2014.

 

Cost of Products Sold

 

For the three months ended March 31, 2015, the cost of products sold was $101.8 million, compared to $93.0 million for the same period of 2014, representing an increase of $8.8 million, or 9.5%. 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 $7.1 million, an increase in unit cost which led to a cost of products sold increase of $1.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products sold increase of $0.2 million. Further analysis is as follows:

 

  Cost of products sold for Henglong was $70.3 million for the three months ended March 31, 2015, compared to $59.0 million for the same period of 2014, representing an increase of $11.3 million, or 19.2%. 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 $10.0 million, an increase in unit cost led to a cost of products sold increase of $1.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of products sold increase of $0.1 million.

 

   • Cost of products sold for Jiulong was $16.1 million for the three months ended March 31, 2015, compared to $18.3 million for the same period of 2014, representing a decrease of $2.2 million, or 12.1%. A decrease in sales volumes led to a cost of products sold decrease of $2.5 million, and an increase in unit cost led to a cost of products sold increase of $0.3 million.

 

  Cost of products sold for Shenyang was $6.7 million for the three months ended March 31, 2015, compared to $10.9 million for the same period of 2014, representing a decrease of $4.2 million, or 38.1%. The decrease in cost of products sold was mainly due to a decrease in sales volumes, which led to a cost of products sold decrease of $4.3 million, and an increase in unit cost which led to a cost of products sold increase of $0.1 million.

 

26
 

 

  Cost of products sold for Wuhu was $5.7 million for the three months ended March 31, 2015, compared to $6.0 million for the same period of 2014, representing a decrease of $0.3 million, or 5.0%. The decrease in cost of products sold was mainly due to a decrease in sales volumes which led to a cost of products sold decrease of $0.6 million, and an increase in unit cost which led to a cost of products sold increase of $0.3 million.

 

  Cost of products sold for Hubei Henglong was $11.7 million for the three months ended March 31, 2015, compared to $11.1 million for the same period of 2014, representing an increase of $0.7 million, or 6.1%. The increase in cost of products sold was mainly due to an increase in sales volumes which led to a cost of products sold increase of $0.8 million, and a decrease in unit cost which led to a cost of products sold decrease of $0.1 million.

 

  Cost of products sold for Other Sectors was $7.3 million for the three months ended March 31, 2015, substantially consistent with $7.6 million for the same period of 2014.

 

Gross margin was 17.6% for the three months ended March 31, 2015, compared to 18.7% in the same period of 2014, representing a decrease of 1.1%, mainly due to an increase in the unit cost of products sold due to the Company improving the quality of its traditional products in 2015.

 

Gain on Other Sales

 

Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights and scraps. For the three months ended March 31, 2015, gain on other sales amounted to $1.7 million, while it amounted to $0.9 million for the same period of 2014, representing an increase of $0.8 million. The increase was mainly due to an increase in sales of materials and scraps.

 

Selling Expenses

 

Selling expenses were $3.6 million for the three months ended March 31, 2015, compared to $3.0 million for the same period of 2014, representing an increase of $0.6 million, or 20.0%, mainly due to an increase in sales volumes which led to an increase in salaries and wages cost of $0.4 million, and an increase in travel expenses of $0.2 million.

 

General and Administrative Expenses

 

General and administrative expenses were $4.4 million for the three months ended March 31, 2015, compared to $3.5 million for the same period of 2014, representing an increase of $0.9 million, or 25.7%, which was mainly due to an increase in salaries and wages cost of $0.3 million, a decrease in consulting fees of $0.3 million, and an increase in office facilities improvement expenses of $0.6 million.

 

Research and Development Expenses

 

Research and development expenses (“R&D expenses”) amounted to $5.9 million in the first quarter of 2015, compared to $5.9 million in the first quarter of 2014.

 

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 $9.4 million for the three months ended March 31, 2015, compared to $9.8 million for the three months ended March 31, 2014, representing a decrease of $0.4 million, or 4.1%, including an increase of $0.4 million in gross profit, an increase of $0.8 million in gain on other sales and an increase of $1.6 million in operating expenses.

 

Other Income, Net

 

Other income, net was $0.1 million for the three months ended March 31, 2015, compared to $0.2 million for the three months ended March 31, 2014, a decrease of $0.1 million, primarily resulting from decreased government subsidies.

 

Interest expense

 

Interest expense was $0.5 million for the three months ended March 31, 2015, compared to $0.3 million for the three months ended March 31, 2014, representing an increase of $0.2 million, primarily resulting from an increase in loans during the three months ended March 31, 2015.

 

27
 

 

Financial Income, Net

 

Financial income, net, was $0.8 million for the three months ended March 31, 2015, compared to $0.5 million for the three months ended March 31, 2014, representing an increase of $0.3 million, which was mainly due to an increase in income of foreign currency exchange 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 $9.7 million for the three months ended March 31, 2015, compared to $10.2 million for the three months ended March 31, 2014, representing a decrease of $0.5 million, which was mainly due to a decrease in operating income of $0.4 million, a decrease in other income of $0.1 million, and an increase in financial income, net of $0.1 million.

 

Income Taxes

 

Income tax expense was $1.4 million for the three months ended March 31, 2015, compared to $2.0 million of income tax expense for the three months ended March 31, 2014, representing a decrease of $0.6 million, which was mainly due to decreases in income before income tax and the effective tax rate. The income before income tax decreased to $9.7 million for the three months ended March 31, 2015 from $10.2 million for the same period in 2014 and the effective tax rate decreased to 14.5% from 19.3% as a result of a decrease in income before tax of high effective tax rate subsidiaries and an increase in income before tax of low effective tax rate subsidiaries.

 

Net Income

 

Net income was $8.4 million for the three months ended March 31, 2015, compared to net income of $8.3 million for the three months ended March 31, 2014, representing an increase of $0.1 million, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies of $0.5 million, offset by a decrease in income tax expenses of $0.6 million.

 

Net Income (Loss) Attributable to Non-controlling Interests

 

Net loss attributable to non-controlling interests amounted to $0.1 million, while net income attributable to non-controlling interests amounted to $1.5 million for the three months ended March 31, 2014.

 

The Company owns equity interests in twelve non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong, which is accounted for under the equity method, all the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s financial statements as of March 31, 2015 and 2014. The decrease in net income attributable to non-controlling interests was mainly due to the Company’s acquisition of the non-controlling interests of Henglong and Jiulong in September 2014.

 

Net Income Attributable to Parent Company’s Common Shareholders

 

Net income attributable to parent company’s common shareholders was $8.5 million for the three months ended March 31, 2015, compared to net income attributable to parent company’s common shareholders of $6.8 million for the three months ended March 31, 2014, representing an increase of $1.7 million, which was mainly due to the Company’s acquisition of the non-controlling interests of Henglong and Jiulong in September 2014, which led to a decrease in net income attributable to non-controlling interests.

 

Liquidity and Capital Resources

 

Capital Resources and Use of Cash

 

The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of March 31, 2015, the Company had cash and cash equivalents and short-term investments (excluding pledged deposit) of $99.6 million, compared to $109.5 million as of December 31, 2014, representing a decrease of $4.5 million, or 4.1%.

 

The Company had working capital of $203.3 million as of March 31, 2015, compared to $198.1 million as of December 31, 2014, representing an increase of $5.2 million, or 2.6%.

 

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 March 31, 2015, the cash expected to be generated from the operations and funds available from bank borrowings as detailed in subsequent paragraphs will be sufficient to meet its working capital and capital expenditure requirements, including the repayment of bank loans, for at least twelve months commencing from March 31, 2015.

 

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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 loans of $41.2 million and bankers’ acceptances of $75.7 million (See Note 14) as of March 31, 2015.

 

The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Owing to depreciation, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances will be lowered by approximately $10.5 million over the next 12 months. If the Company wishes to obtain the same amount of bank loans and banker's acceptances, it will have to provide additional mortgages of $14.0 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $10.5 million, which is 74.94%, 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 March 31, 2015, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):

 

   Bank  Due
Date
  Amount
Available 
(4)
   Amount
Used
   Assessed 
Mortgage
Value
 (6)
 
1.  Comprehensive credit facilities  Bank of China (5)  Mar 2015  $22,956   $8,462   $34,190 
                      
2.  Comprehensive credit facilities  Jingzhou Commercial Bank  July 2015   29,305    13,386    59,152 
                      
3.  Comprehensive credit facilities  Fujian Haixia Bank  Mar 2016   2,768    2,117    3,898 
                      
4.  Comprehensive credit facilities  Shanghai Pudong Development Bank(1) (5)  Mar 2015   25,398    22,610    13,199 
                      
5.  Comprehensive credit facilities  China CITIC Bank(1)  Jun 2015   19,537    15,776    10,001 
   China CITIC Bank  July 2016   4,884    2,442    6,021 
                      
6.  Comprehensive credit facilities  China Everbright Bank  Sep 2015   4,884    4,877    8,336 
                      
7.  Comprehensive credit facilities  China Huaxia Bank(1)  Jan 2016   26,049    -    - 
                      
8.  Comprehensive credit facilities  ICBC Macau(5)  May 2015   30,000    30,000    33,793 
                      
9. Comprehensive credit facilities  HSBC (China) Company Limited  July 2015   5,000    5,000    5,373 
                      
Total        $170,781    $ 104,670 (2)   $ 173,963 (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 $41.2 million and notes payable of $63.5 million as of March 31, 2015. The remainder of $12.2 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 March 31, 2015, the pledged assets included $65.7 million of accounts and notes receivable, $5.4 million of time deposits, and other pledged assets with an assessed value of $100.6 million.

 

  (4) The amount available is used for the drawdown of bank loans and issuance of bank notes. For the drawdown of bank loans, this amount represents the amount that the Company can borrow immediately; for issuance of bank notes, the Company needs to pledge additional collateral in order to utilize these bank facilities.

 

  (5) As at the date of this report, the comprehensive credit facilities with Bank of China, ICBC Macau, and Shanghai Pudong Development Bank have expired. The Company is negotiating the renewal of the credit facilities with the banks and expects to obtain the renewal in late June 2015.  As the Company has obtained sufficient comprehensive lines of credit from other banks, the Company does not anticipate any significant adverse impact on its financial position if the Company fails to renew these credit facilities.

 

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  (6) The pledged cash deposits, which are disclosed in Note 4 to the consolidated financial statements in this quarterly report, were not included in the assessed mortgage value.

 

The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.

 

The Company renewed its existing short-term bank loans and borrowed new bank loans during 2014 at annual interest rates of 6.16% to 8.03%, and loan terms of eleven to twelve months. Pursuant to the comprehensive credit line arrangement the Company pledged and guaranteed:

 

  (1) Accounts receivable with an assessed value of approximately $31.9 million as security for its comprehensive credit facility with the Bank of China;

 

  (2) Equipment with an assessed value of approximately $59.2 million as security for its revolving comprehensive credit facility with Jingzhou Commercial Bank;

 

  (3) Land use rights and buildings with an assessed value of approximately $3.9 million as security for its comprehensive credit facility with Fujian Haixia Bank;

 

  (4) Land use rights and buildings with an assessed value of approximately $13.2 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 RMB207.6 million (equivalent to approximately $33.8 million). The Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013.
     
    On May 7, 2013, ICBC Macau agreed to extend the maturity date of the Credit Facility to May 13, 2014. The interest rate of the Credit Facility under the extended term 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 March 31, 2015, the interest rate of the Credit Facility was 2.82% per annum (See Note 14).

 

  (9) On July 16, 2014, Great Genesis entered into a credit facility agreement, with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million, the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015 and has an annual interest rate of 1.7%. Interest is paid on the twentieth day of each month and the principal repayment is at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with the Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC Credit Facility is fully drawn.
     
    On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB33.0 million (equivalent to approximately $5.4 million).

 

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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  $41,713   $41,713   $-   $-   $- 
Notes payable (1)   75,670    75,670    -    -    - 
Obligation for investment contract (2)   7,326    1,628    5,698    -    - 
Other contractual purchase commitments, including service agreements   13,707    13,247    460    -    - 
Total  $138,416   $132,258   $6,158   $-   $- 

 

  (1) Notes payable do not bear interest.

 

  (2) On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which Hubei Henglong has committed to make investments of 17.9% or RMB50.0 million (equivalent to approximately $8.1 million) into the Venture Fund in three installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5 million (equivalent to approximately $0.8 million). The remaining capital commitment of RMB45 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 March 31, 2015 (figures are in thousands of USD):

 

Bank Government  Purpose   Borrowing 
Date
  Borrowing 
Term 
(Months)
   Annual 
Interest 
Rate
   Date of 
Interest 
Payment
  Due Date  Amount 
Payable on 
Due Date
 
                              
ICBC Macau  (1)  (2)   Working Capital   13 May 2014   12    2.82%  Pay quarterly  12 May 2015  $30,000 
                              
Shanghai Pudong Development Bank   Working Capital   16 Dec 2014   12    6.16%  Pay quarterly  15 Dec 2015   651 
                              
Shanghai Pudong Development Bank   Working Capital   17 Dec 2014   11    6.16%  Pay quarterly  13 Nov 2015   651 
                              
Shanghai Pudong Development Bank   Working Capital   18 Dec 2014   11    6.16%  Pay quarterly  13 Nov 2015   326 
                              
China CITIC Bank   Working Capital   29 Dec 2014   12    6.72%  Pay quarterly  29 Dec 2015   2,442 
                              
HSBC Limited   Working Capital   22 Jul 2014   12    1.70%  Pay monthly  1 Jul 2015   5,000 
                              
Fujian Haixia Bank   Working Capital   20 Mar 2015   12    8.03%  Pay monthly  20 Mar 2016   2,117 
Total                          $41,187 

 

  (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 on May 12, 2015.

 

The Company must use the loans for the purpose described in the table. For the three bank loans, if the Company fails to do so, it will be charged a penalty interest at 60% to 100% of the specified loan rate listed in the table above. Except for the loan granted by ICBC Macau as disclosed in the section “Capital Source” above, the Company has to pay interest at the interest rate described in the table on the 20th of each month or quarter, as applicable. If the Company fails to do so, it will be charged compound interest at the specified rate in the above table. The Company has to repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged a penalty interest at 50% of the specified loan rate.

 

Management believes that the Company had complied with such financial covenants as of March 31, 2015, and will continue to comply with them.

 

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Notes Payable

 

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2015 (figures are in thousands of USD):

 

Purpose  Term (Month)   Due Date  Amount Payable on
Due Date
 
Working Capital (1)   3-6   Apr -15  $13,888 
Working Capital   3-6   May -15   12,842 
Working Capital   3-6   Jun -15   13,946 
Working Capital   3-6   Jul -15   14,694 
Working Capital   3-6   Aug -15   10,722 
Working Capital   3-6   Sep -15   9,578 
Total (See Note 15)          $75,670 

 

  (1) The notes payable were repaid in full in April 2015.

 

The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash in the designated account of the bank on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged a penalty interest at 50% of the loan rate that is published by the People’s Bank of China for the same period. The Company complied with such financial covenants as of March 31, 2015, and believes it will continue to comply with them.

 

Cash Flows

 

  (a) Operating activities

 

Net cash provided by operations during the three months ended March 31, 2015 was $4.9 million, compared to net cash used in operations of $8.4 million for the same period of 2014, representing an increase of $13.3 million.

 

During the three months ended March 31, 2015, the increase in net cash provided by operations was mainly due to the net effect of:

 

  (1) The decrease in net income (excluding non-cash items) by $0.4 million;

 

  (2) The change in balance of pledge deposits which led to an increase in net cash provided by operations of $1.6 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 $5.4 million, which was mainly due to the sales of the Company’s goods always being on credit terms ranging from 4 to 6 months. During the three months ended March 31, 2015, there was a smaller increase in sales revenue of the Company’s products compared with the same period last year while there was a significant decrease in the growth rate of the ending balance of accounts receivable compared with the same period last year as a result of the Company strengthening its collections;

 

(4)The change in balance of inventories led to a decrease in net cash provided by operations of $0.7 million, which was mainly due to an increase in inventory in anticipation of sales growth in the future. The Company has actively adjusted its production plan to decrease inventory;

 

  (5) The change in balance of accounts and notes payable which led to an increase in net cash provided by operations of $9.3 million, which was mainly due to the Company having paid less accounts and notes payable as a result of more accounts and notes payable being not yet due and not payable in the current period;

 

  (6) The change in taxes payable which led to a decrease in net cash provided by operations of $1.5 million, which was mainly due to the Company paying certain value-added tax that accrued in the prior year during the current period; and

 

  (7) The change of balance of customer deposits, which led to a decrease in net cash provided by operations of $0.8 million.

 

  (b) Investing activities

 

The Company used net cash of $3.6 million in investment activities during the three months ended March 31, 2015, compared to $4.1 million during the same period of 2014, representing a decrease of $0.5 million, which was mainly due to a net decrease in time deposits in the current period of $2.5 million, offset by an increase in purchase of equipment of $2.2 million (See Note 5).

 

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  (c) Financing activities

 

During the three months ended March 31, 2015, the Company used net cash in financing activities of $3.7 million, compared to net cash provided by financing activities of $1.9 million for the same period of 2014, representing a decrease of $5.6 million, which was mainly due to the net effect of (1) $4.9 million for repayments of government loans and (2) the payment of dividends to non-controlling interest holders having increased by $0.8 million and payment of dividends on common stock having increased by $0.3 million.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2015 and December 31, 2014, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 regarding this matter.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

A.Disclosure Controls and Procedures

 

The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2015, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2015.

 

The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

B.Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

 

ITEM 1A. RISK FACTORS.

 

There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2014 Annual Report on Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

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ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

INDEX TO EXHIBITS

 

Exhibit
Number
  Description
     
3.1(i)   Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123).
     
3.1(ii)   Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002).
     
10.1   Joint-venture Agreement, dated June 30, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
     
10.2   Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
     
31.1   Rule 13a-14(a) Certification*
     
31.2   Rule 13a-14(a) Certification*
     
32.1   Section 1350 Certification*
     
32.2   Section 1350 Certification*
     
101*   The following materials from the China Automotive Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, were filed on May 14, 2015 formatted in Extensible Business Reporting Language (XBRL):

 

  (i) Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income,

 

  (ii) Condensed Unaudited Consolidated Balance Sheets,

 

  (iii) Condensed Unaudited Consolidated Statements of Cash Flows, and

 

  (iv) related notes

 

  * filed herewith

 

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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: May 14, 2015   By: /s/ Qizhou Wu
      Qizhou Wu
      President and Chief Executive Officer
       
Date: May 14, 2015   By: /s/ Jie Li
      Jie Li
      Chief Financial Officer

 

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