UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT |
For the quarterly period ended September 30, 2017March 31, 2021
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. | |
organization) |
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District
Jing Zhou City, Hubei Province, the People’s Republic of China
(Address of principal executive offices)
(86) 716- 412- | ||
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.0001 par value | CAAS | The Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No �� ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | Smaller reporting company Emerging growth company | x ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of November 9, 2017,May 12, 2021, the Company had 31,644,00430,851,776 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
2
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020, as filed with the Securities and Exchange Commission.
PART I — FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS. |
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Net product sales ($7,563 and $9,950 sold to related parties for the three months ended September 30, 2017 and 2016) | $ | 118,365 | $ | 94,626 | ||||
Cost of products sold ($6,549 and $5,869 purchased from related parties for the three months ended September 30, 2017 and 2016) | 95,878 | 74,641 | ||||||
Gross profit | 22,487 | 19,985 | ||||||
Gain on other sales | 553 | 22 | ||||||
Less: Operating expenses | ||||||||
Selling expenses | 4,537 | 3,840 | ||||||
General and administrative expenses | 4,390 | 3,741 | ||||||
Research and development expenses | 9,194 | 6,723 | ||||||
Total operating expenses | 18,121 | 14,304 | ||||||
Income from operations | 4,919 | 5,703 | ||||||
Other income | 100 | 420 | ||||||
Interest expense | (318 | ) | (201 | ) | ||||
Financial income, net | 1,027 | 800 | ||||||
Income before income tax expenses and equity in earnings of affiliated companies | 5,728 | 6,722 | ||||||
Less: Income taxes | 991 | 1,167 | ||||||
Equity in earnings of affiliated companies | 491 | 304 | ||||||
Net income | 5,228 | 5,859 | ||||||
Net income attributable to non-controlling interests | 169 | 177 | ||||||
Net income attributable to parent company’s common shareholders | $ | 5,059 | $ | 5,682 | ||||
Comprehensive income: | ||||||||
Net income | $ | 5,228 | $ | 5,859 | ||||
Other comprehensive income: | ||||||||
Foreign currency translation gain/(loss), net of tax | 6,705 | (2,139 | ) | |||||
Comprehensive income | 11,933 | 3,720 | ||||||
Comprehensive income attributable to non-controlling interests | 386 | 119 | ||||||
Comprehensive income attributable to parent company | $ | 11,547 | $ | 3,601 | ||||
Net income attributable to parent company’s common shareholders per share | ||||||||
Basic – | $ | 0.16 | $ | 0.18 | ||||
Diluted- | $ | 0.16 | $ | 0.18 | ||||
Weighted average number of common shares outstanding | ||||||||
Basic | 31,644,004 | 31,911,360 | ||||||
Diluted | 31,644,271 | 31,911,722 |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Net product sales ($16,575 and $7,494 sold to related parties for the three months ended March 31, 2021 and 2020) | $ | 130,341 | $ | 73,555 | ||||
Cost of products sold ($8,214 and $3,134 purchased from related parties for the three months ended March 31, 2021 and 2020) | 110,593 | 62,403 | ||||||
Gross profit | 19,748 | 11,152 | ||||||
Gain on other sales | 1,316 | 600 | ||||||
Less: Operating expenses | ||||||||
Selling expenses | 5,609 | 2,118 | ||||||
General and administrative expenses | 4,615 | 3,429 | ||||||
Research and development expenses | 6,680 | 5,193 | ||||||
Total operating expenses | 16,904 | 10,740 | ||||||
Income from operations | 4,160 | 1,012 | ||||||
Other income, net | 1,723 | 117 | ||||||
Interest expense | (343 | ) | (365 | ) | ||||
Financial expense, net | (239 | ) | (531 | ) | ||||
Income before income tax expenses and equity in loss of affiliated companies | 5,301 | 233 | ||||||
Less: Income taxes expense | (641 | ) | (514 | ) | ||||
Less: Equity in loss of affiliated companies | (1,429 | ) | (347 | ) | ||||
Net income/(loss) | 3,231 | (628 | ) | |||||
Less: Net income/(loss) attributable to non-controlling interests | 18 | (600 | ) | |||||
Accretion to redemption value of redeemable non-controlling interests | (7 | ) | - | |||||
Net income/(loss) attributable to parent company’s common shareholders | $ | 3,206 | $ | (28 | ) | |||
Comprehensive income: | ||||||||
Net income/(loss) | $ | 3,231 | $ | (628 | ) | |||
Other comprehensive income: | ||||||||
Foreign currency translation loss, net of tax | (2,271 | ) | (4,961 | ) | ||||
Comprehensive income/(loss) | 960 | (5,589 | ) | |||||
Comprehensive loss attributable to non-controlling interests | (118 | ) | (1,053 | ) | ||||
Comprehensive income/(loss) attributable to parent company | $ | 1,078 | $ | (4,536 | ) | |||
Net income/(loss) attributable to parent company’s common shareholders per share - | ||||||||
Basic | $ | 0.10 | $ | - | ||||
Diluted | $ | 0.10 | $ | - | ||||
Weighted average number of common shares outstanding - | ||||||||
Basic | 30,851,776 | 31,174,045 | ||||||
Diluted | 30,857,736 | 31,174,045 | ||||||
Share-based compensation included in operating expense above is as follows: | ||||||||
General and administrative expenses | 88 | - |
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, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 90,374 | $ | 97,248 | ||||
Pledged cash | 31,663 | 30,813 | ||||||
Accounts and notes receivable, net - unrelated parties | 217,372 | 216,519 | ||||||
Accounts and notes receivable - related parties | 19,273 | 17,621 | ||||||
Inventories | 89,638 | 88,325 | ||||||
Other current assets | 30,963 | 25,132 | ||||||
Total current assets | 479,283 | 475,658 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 138,542 | 141,004 | ||||||
Land use rights, net | 10,626 | 10,774 | ||||||
Long-term investments | �� | 45,518 | 49,766 | |||||
Other non-current assets | 27,794 | 30,358 | ||||||
Total assets | $ | 701,763 | $ | 707,560 | ||||
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term loans | $ | 46,193 | $ | 44,238 | ||||
Accounts and notes payable - unrelated parties | 212,925 | 212,522 | ||||||
Accounts and notes payable - related parties | 10,984 | 12,730 | ||||||
Accrued expenses and other payables | 51,458 | 55,607 | ||||||
Other current liabilities | 27,216 | 29,387 | ||||||
Total current liabilities | 348,776 | 354,484 | ||||||
Long-term liabilities: | ||||||||
Other long-term payable | 35 | 1,126 | ||||||
Long-term tax payable | 23,884 | 23,884 | ||||||
Other non-current liabilities | 8,105 | 8,151 | ||||||
Total liabilities | $ | 380,800 | $ | 387,645 | ||||
Commitments and Contingencies (See Note 23) | ||||||||
Mezzanine equity: | ||||||||
Redeemable non-controlling interests | 530 | 523 | ||||||
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, 2021 and December 31, 2020, respectively | $ | 3 | $ | 3 | ||||
Additional paid-in capital | 64,361 | 64,273 | ||||||
Retained earnings- | ||||||||
Appropriated | 11,303 | 11,303 | ||||||
Unappropriated | 218,697 | 215,491 | ||||||
Accumulated other comprehensive income | 15,285 | 17,413 | ||||||
Treasury stock - 1,486,526 and 1,486,526 shares as of March 31, 2021 and December 31, 2020, respectively | (5,261 | ) | (5,261 | ) | ||||
Total parent company stockholders' equity | 304,388 | 303,222 | ||||||
Non-controlling interests | 16,045 | 16,170 | ||||||
Total stockholders' equity | 320,433 | 319,392 | ||||||
Total liabilities, mezzanine equity and stockholders' equity | $ | 701,763 | $ | 707,560 |
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, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income/(loss) | $ | 3,231 | $ | (628 | ) | |||
Adjustments to reconcile net income/(loss) from operations to net cash (used in)/provided by operating activities: | ||||||||
Share-based compensation | 88 | - | ||||||
Depreciation and amortization | 6,544 | 5,101 | ||||||
Reversal of credit losses | (177 | ) | (1 | ) | ||||
Deferred income taxes | (254 | ) | (34 | ) | ||||
Equity in loss of affiliated companies | 1,429 | 347 | ||||||
Government subsidy reclassified from government loans | - | 287 | ||||||
Loss on fixed assets disposals | 9 | 52 | ||||||
(Increase)/decrease in: | ||||||||
Accounts and notes receivable | (3,972 | ) | 33,444 | |||||
Inventories | (1,934 | ) | 10,430 | |||||
Other current assets | (1,371 | ) | (3,455 | ) | ||||
Increase/(decrease) in: | ||||||||
Accounts and notes payable | 1,595 | (18,032 | ) | |||||
Accrued expenses and other payables | (4,135 | ) | 2,557 | |||||
Other current liabilities | (1,811 | ) | (824 | ) | ||||
Net cash (used in)/provided by operating activities | (758 | ) | 29,244 | |||||
Cash flows from investing activities: | ||||||||
Increase in demand loans and employee housing loans included in other non-current assets | (33 | ) | (212 | ) | ||||
Repayment of loan from a related party | 154 | - | ||||||
Cash received from property, plant and equipment sales | 51 | 242 | ||||||
Payments to acquire property, plant and equipment (including $137 and $242 paid to related parties for the three months ended March 31, 2021 and 2020, respectively) | (3,267 | ) | (1,984 | ) | ||||
Payments to acquire intangible assets | (112 | ) | - | |||||
Investment under the equity method | - | (2,579 | ) | |||||
Purchase of short-term investments | (14,661 | ) | - | |||||
Proceeds from maturities of short-term investments | 9,873 | 5,781 | ||||||
Cash received from long-term investment | 2,237 | 448 | ||||||
Net cash (used in)/provided by investing activities | (5,758 | ) | 1,696 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from bank loans | 12,569 | 14,368 | ||||||
Repayments of bank loans | (10,086 | ) | (16,247 | ) | ||||
Repayments of the borrowing for sale and leaseback transaction | (1,107 | ) | (1,028 | ) | ||||
Net cash provided by/(used in) financing activities | 1,376 | (2,907 | ) | |||||
Effects of exchange rate on cash, cash equivalents and pledged cash | (884 | ) | (1,851 | ) | ||||
Net (decrease)/increase in cash, cash equivalents and pledged cash | (6,024 | ) | 26,182 | |||||
Cash, cash equivalents and pledged cash at beginning of the period | 128,061 | 106,403 | ||||||
Cash, cash equivalents and pledged cash at end of the period | $ | 122,037 | $ | 132,585 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Net product sales ($25,684 and $28,589 sold to related parties for the nine months ended September 30, 2017 and 2016) | $ | 355,333 | $ | 312,497 | ||||
Cost of products sold ($20,195 and $18,912 purchased from related parties for the nine months ended September 30, 2017 and 2016) | 287,156 | 253,352 | ||||||
Gross profit | 68,177 | 59,145 | ||||||
Gain on other sales | 5,896 | 2,008 | ||||||
Less: Operating expenses | ||||||||
Selling expenses | 13,160 | 12,273 | ||||||
General and administrative expenses | 14,027 | 11,998 | ||||||
Research and development expenses | 23,666 | 18,849 | ||||||
Total operating expenses | 50,853 | 43,120 | ||||||
Income from operations | 23,220 | 18,033 | ||||||
Other (expense)/income, net | (2 | ) | 995 | |||||
Interest expense | (1,193 | ) | (524 | ) | ||||
Financial income, net | 1,909 | 1,270 | ||||||
Income before income tax expenses and equity in earnings of affiliated companies | 23,934 | 19,774 | ||||||
Less: Income taxes | 4,367 | 3,416 | ||||||
Equity in earnings of affiliated companies | 480 | 561 | ||||||
Net income | 20,047 | 16,919 | ||||||
Net income attributable to non-controlling interests | 353 | 164 | ||||||
Net income attributable to parent company’s common shareholders | $ | 19,694 | $ | 16,755 | ||||
Comprehensive income: | ||||||||
Net income | $ | 20,047 | $ | 16,919 | ||||
Other comprehensive income: | ||||||||
Foreign currency translation gain/(loss), net of tax | 14,148 | (8,435 | ) | |||||
Comprehensive income | 34,195 | 8,484 | ||||||
Comprehensive gain/(loss) attributable to non-controlling interests | 819 | (143 | ) | |||||
Comprehensive income attributable to parent company | $ | 33,376 | $ | 8,627 | ||||
Net income attributable to parent company’s common shareholders per share | ||||||||
Basic – | $ | 0.62 | $ | 0.52 | ||||
Diluted- | $ | 0.62 | $ | 0.52 | ||||
Weighted average number of common shares outstanding | ||||||||
Basic | 31,644,004 | 32,038,933 | ||||||
Diluted | 31,647,833 | 32,040,514 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 55,382 | $ | 31,092 | ||||
Pledged cash | 31,075 | 30,799 | ||||||
Short-term investments | 23,829 | 30,475 | ||||||
Accounts and notes receivable, net - unrelated parties | 269,943 | 285,731 | ||||||
Accounts and notes receivable, net - related parties | 17,607 | 20,984 | ||||||
Advance payments and others - unrelated parties | 12,235 | 10,203 | ||||||
Advance payments and others - related parties | 31,397 | 624 | ||||||
Inventories | 73,030 | 68,050 | ||||||
Current deferred tax assets | 7,476 | 7,946 | ||||||
Total current assets | 521,974 | 485,904 | ||||||
Non-current assets: | ||||||||
Long-term time deposits | 6,027 | 865 | ||||||
Property, plant and equipment, net | 115,302 | 101,478 | ||||||
Intangible assets, net | 512 | 617 | ||||||
Other receivables, net - unrelated parties | 2,234 | 2,252 | ||||||
Advance payment for property, plant and equipment - unrelated parties | 14,222 | 14,506 | ||||||
Advance payment for property, plant and equipment - related parties | 4,813 | 5,005 | ||||||
Long-term investments | 25,341 | 16,431 | ||||||
Non-current deferred tax assets | 4,295 | 4,641 | ||||||
Total assets | $ | 694,720 | $ | 631,699 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Bank and government loans | $ | 73,594 | $ | 40,820 | ||||
Accounts and notes payable - unrelated parties | 224,758 | 216,993 | ||||||
Accounts and notes payable - related parties | 5,749 | 6,803 | ||||||
Customer deposits | 869 | 700 | ||||||
Accrued payroll and related costs | 7,460 | 6,971 | ||||||
Accrued expenses and other payables | 32,883 | 35,882 | ||||||
Accrued pension costs | 4,750 | 4,130 | ||||||
Taxes payable | 3,800 | 11,674 | ||||||
Amounts due to shareholders/directors | 335 | 312 | ||||||
Advances payable (current portion) | 399 | 382 | ||||||
Current deferred tax liabilities | 190 | 193 | ||||||
Total current liabilities | 354,787 | 324,860 | ||||||
Long-term liabilities: | ||||||||
Long-term bank loan | - | 608 | ||||||
Advances payable | 354 | 339 | ||||||
Total liabilities | $ | 355,141 | $ | 325,807 | ||||
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 September 30, 2017 and December 31, 2016, respectively | $ | 3 | $ | 3 | ||||
Additional paid-in capital | 64,406 | 64,764 | ||||||
Retained earnings- | ||||||||
Appropriated | 10,673 | 10,549 | ||||||
Unappropriated | 248,533 | 228,963 | ||||||
Accumulated other comprehensive income/(loss) | 12,722 | (892 | ) | |||||
Treasury stock – 694,298 and 694,298 shares as of September 30, 2017 and December 31, 2016, respectively | (2,907 | ) | (2,907 | ) | ||||
Total parent company stockholders' equity | 333,430 | 300,480 | ||||||
Non-controlling interests | 6,149 | 5,412 | ||||||
Total stockholders' equity | 339,579 | 305,892 | ||||||
Total liabilities and stockholders' equity | $ | 694,720 | $ | 631,699 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 20,047 | $ | 16,919 | ||||
Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
Share-based compensation | 100 | - | ||||||
Depreciation and amortization | 10,933 | 10,732 | ||||||
Increase in/(reversal of) provision for doubtful accounts | 1,034 | (126 | ) | |||||
Inventory write downs | 4,436 | 2,353 | ||||||
Deferred income taxes | 1,354 | (142 | ) | |||||
Equity in earnings of affiliated companies | (480 | ) | (561 | ) | ||||
Gain on disposal of Fujian Qiaolong | - | (698 | ) | |||||
Gain on fixed assets disposals | (2,204 | ) | (6 | ) | ||||
Changes in operating assets and liabilities | ||||||||
(Increase) decrease in: | ||||||||
Pledged cash | 1,226 | 9,711 | ||||||
Accounts and notes receivable | 32,807 | (18,471 | ) | |||||
Advance payments and others | (1,527 | ) | (2,798 | ) | ||||
Inventories | (6,441 | ) | (18,244 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts and notes payable | (3,023 | ) | 14,990 | |||||
Customer deposits | 158 | (613 | ) | |||||
Accrued payroll and related costs | 182 | 544 | ||||||
Accrued expenses and other payables | (6,216 | ) | 1,309 | |||||
Accrued pension costs | 443 | (160 | ) | |||||
Taxes payable | (9,806 | ) | (1,582 | ) | ||||
Advance payable | - | (75 | ) | |||||
Net cash provided by operating activities | 43,023 | 13,082 | ||||||
Cash flows from investing activities: | ||||||||
Decrease in other receivables | 159 | 2,382 | ||||||
Proceeds from disposition of a subsidiary, net of cash disposed of $1,063 | - | 1,953 | ||||||
Cash received from property, plant and equipment sales | 2,351 | 511 | ||||||
Payments to acquire property, plant and equipment(including $7,656 and $5,662 paid to related parties for the nine months ended September 30, 2017 and 2016, respectively) | (19,187 | ) | (27,161 | ) | ||||
Payments to acquire intangible assets | - | (60 | ) | |||||
Purchase of short-term investments | (25,017 | ) | (28,181 | ) | ||||
Purchase of long-term time deposit | (5,836 | ) | - | |||||
Proceeds from maturities of short-term investments | 33,749 | 13,236 | ||||||
Investment under equity method | (7,629 | ) | (8,682 | ) | ||||
Loan to a related party | (29,044 | ) | - | |||||
Net cash used in investing activities | (50,454 | ) | (46,002 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from bank and government loans | 69,635 | 12,151 | ||||||
Repayments of bank and government loans | (39,271 | ) | (7,145 | ) | ||||
Dividends paid to the non-controlling interest holders | - | (464 | ) | |||||
Repurchases of common stock | - | (991 | ) | |||||
Net cash provided by financing activities | 30,364 | 3,551 | ||||||
Effects of exchange rate on cash and cash equivalents | 1,357 | (1,245 | ) | |||||
Net increase/decrease in cash and cash equivalents | 24,290 | (30,614 | ) | |||||
Cash and cash equivalents at beginning of period | 31,092 | 69,676 | ||||||
Cash and cash equivalents at end of period | $ | 55,382 | $ | 39,062 |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows (continued)
(In thousands of USD unless otherwise indicated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash paid for interest | $ | 573 | $ | 219 | ||||
Cash paid for income taxes | 4,343 | 1,396 |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Property, plant and equipment recorded during the period which previously were advance payments | $ | 12,331 | $ | 12,771 | ||||
Accounts payable for acquiring property, plant and equipment | 890 | 844 | ||||||
Dividends payable to non-controlling interests | 621 | - |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
China automotive Systems, Inc. and Subsidiaries
Notes to Condensed Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2021 and Nine Months Ended September 30, 2017 and 20162020
1. | Organization and business |
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the joint ventures described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate net interests in the following Sino-foreign joint ventures, wholly-owned subsidiaries and joint ventures organized in the People's Republic of China, the “PRC,” and Brazil as of September 30, 2017March 31, 2021 and December 31, 2016.2020.
Percentage Interest | ||||||||
Name of Entity | September 30, 2017 | December 31, 2016 | ||||||
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”1 | 100.00 | % | 100.00 | % | ||||
JingzhouHenglong 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 | % | ||||
JingzhouHenglong Automotive Technology (Testing) Center, “Testing Center”8 | 100.00 | % | 100.00 | % | ||||
Beijing HainachunHenglong Automotive Steering System Co., Ltd., “Beijing Henglong”9 | 50.00 | % | 50.00 | % | ||||
Chongqing HenglongHongyan Automotive System Co., Ltd., “Chongqing Henglong”10 | 70.00 | % | 70.00 | % | ||||
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”11 | 95.84 | % | 80.00 | % | ||||
Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”12 | 0.00 | % | 0.00 | % | ||||
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 | % | 100.00 | % |
Percentage Interest | ||||||||
Name of Entity | March 31, 2021 | December 31, 2020 | ||||||
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 | % | ||||
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4 | 85.00 | % | 85.00 | % | ||||
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5 | 77.33 | % | 77.33 | % | ||||
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6 | 100.00 | % | 100.00 | % | ||||
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7 | 100.00 | % | 100.00 | % | ||||
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8 | 70.00 | % | 70.00 | % | ||||
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9 | 95.84 | % | 95.84 | % | ||||
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10 | 85.00 | % | 85.00 | % | ||||
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11 | 100.00 | % | 100.00 | % | ||||
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan” 12 | 60.00 | % | 60.00 | % | ||||
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 13 | 66.60 | % | 66.60 | % | ||||
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 14 | 51.00 | % | 51.00 | % | ||||
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 15 | 62.00 | % | 62.00 | % | ||||
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 16 | 100.00 | % | 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. |
Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns. |
5. | Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems. |
6. | On March 7, 2007, Genesis established Hubei Henglong, formerly known as |
In December 2009, Henglong, a subsidiary of Genesis, formed |
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. |
9. | On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. |
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. |
11. | 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. |
12. | In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology. |
13. | In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”, which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment. |
14. | In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”, which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment. |
15. | In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment. |
16. | In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition, 52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun Hualong mainly engages in design and R&D of automotive parts. |
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, 2016.2020.
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, 20162020 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 2016 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
The results of operations for the three months and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017.2021.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian reais,real, “BRL,” its functional currency. In accordance with ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, “FASB Accounting Standards Codification”, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b) | Recent Accounting Pronouncements |
In January 2017,No accounting standards newly issued during the FASB issued ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 is designed to provide guidance on how to recognize gain and losses on sales, including partial sales, of nonfinancial assets to noncustomers. ASU 2017-05 is effective beginning January 1, 2018. Early adoption is permitted but the standard is required to be adopted concurrently with ASU 2014-09. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
In May 2017, the FASB issued guidance within ASU 2017-09: Scope of Modification Accounting. The amendments in ASU 2017-09 to Topic 718, Compensation - Stock Compensation, provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments should be applied prospectively to an award modified on or after the adoption date. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after Decemberthree months ended March 31, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have2021, had a material impact on the Company's consolidatedCompany’s financial statements.statements or disclosures.
(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, 2016.
Short-term investments comprise time deposits with terms of three months or more which are due within one year and wealth management financial products with maturities within one year. The carrying values of time deposits approximate fair value because of their short maturities. The interest earned is recognized in the consolidated statements of income over the contractual term of the deposits. The wealth management financial products are measured at fair value and classified as Level 2 within the fair value measurement hierarchy. The fair values weremeasured by using directly or indirectly observable inputs in the marketplace. Changes in the fair value are reflected in other income in the consolidated statements of operations and comprehensive income.
The Company’s short-term investments as of September 30, 2017 and December 31, 2016 are summarized as follows
(figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Time deposits | $ | 5,100 | $ | 30,217 | ||||
Wealth management financial products measured at fair value | 18,729 | 258 | ||||||
Total | $ | 23,829 | $ | 30,475 |
As of September 30, 2017, the Company had pledged short-term investments of RMB 13.9 million, equivalent to approximately $2.1 million, to secure standby letters of credit under Bank of China and China CITIC Bank (Note 13). The use of the pledged short-term investments is restricted.
Accounts and notes receivable, net |
The Company’s accounts and notes receivable, net as of September 30, 2017March 31, 2021 and December 31, 20162020 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable - unrelated parties | $ | 150,696 | $ | 154,403 | ||||
Notes receivable - unrelated parties(1) (2) | 120,438 | 132,409 | ||||||
Total accounts and notes receivable- unrelated parties | 271,134 | 286,812 | ||||||
Less: allowance for doubtful accounts - unrelated parties | (1,191 | ) | (1,081 | ) | ||||
Accounts and notes receivable, net - unrelated parties | 269,943 | 285,731 | ||||||
Accounts and notes receivable, net - related parties | 17,607 | 20,984 | ||||||
Accounts and notes receivable, net | $ | 287,550 | $ | 306,715 |
March 31, 2021 | December 31, 2020 | |||||||
Accounts receivable - unrelated parties | $ | 140,944 | $ | 141,018 | ||||
Notes receivable - unrelated parties | 86,040 | 85,354 | ||||||
Total accounts and notes receivable - unrelated parties | 226,984 | 226,372 | ||||||
Less: allowance for doubtful accounts - unrelated parties | (9,612 | ) | (9,853 | ) | ||||
Accounts and notes receivable, net - unrelated parties | 217,372 | 216,519 | ||||||
Accounts and notes receivable - related parties | 19,274 | 17,622 | ||||||
Less: allowance for doubtful accounts - related parties | (1 | ) | (1 | ) | ||||
Accounts and notes receivable, net - related parties | 19,273 | 17,621 | ||||||
Accounts and notes receivable, net | $ | 236,645 | $ | 234,140 |
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks. |
As of | |||
Allowance for doubtful accounts receivable reversed in the consolidated statements of operations amounted to $0.2 million and | |||
During the three months ended March 31, 2021, the Company’s five largest customers accounted for 43.3% of During the three months ended March 31, 2020, the Company’s five largest customers accounted for 53.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., |
As of December 31, 2016, the Company collateralized its notes receivable in an amount of RMB 249.9 million, equivalent to approximately $36.0 million, as security for the credit facilities with banks in China and the Chinese government, including RMB 224.6 million, equivalent to approximately $32.4 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 13), which is used as security for the non-revolving credit facility in the amount of $30.0 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau”, and RMB 25.2 million, equivalent to approximately $3.6 million, as security in favor of the Chinese government for the low-interest government loan (See Note 13).
The Company’s advance payments and othersinventories as of September 30, 2017March 31, 2021 and December 31, 20162020 consisted of the following (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Advance payments and others - unrelated parties | $ | 13,307 | $ | 10,203 | ||||
Less: allowance for doubtful accounts – unrelated parties(2) | (1,072 | ) | - | |||||
Advance payments and others, net – unrelated parties | 12,235 | 10,203 | ||||||
Advance payments and others - related parties(1) | 31,397 | 624 | ||||||
Total advance payments and others | $ | 43,632 | $ | 10,827 |
March 31, 2021 | December 31, 2020 | |||||||
Raw materials | $ | 27,274 | $ | 24,367 | ||||
Work in process | 10,508 | 10,098 | ||||||
Finished goods | 51,856 | 53,860 | ||||||
Total | $ | 89,638 | $ | 88,325 |
The Company recorded $1.0 million and $0.8 million of inventory write-down to cost of product sold for the three months ended March 31, 2021 and 2020, respectively.
The Company’s inventories as of September 30, 2017long-term investments at March 31, 2021 and December 31, 2016 consisted of the following (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Raw materials | $ | 16,637 | $ | 15,007 | ||||
Work in process | 17,379 | 10,852 | ||||||
Finished goods | 39,014 | 42,191 | ||||||
Total | $ | 73,030 | $ | 68,050 |
Provision for inventories amounted to $4.4 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively.
The Company’s other receivables as of September 30, 2017 and December 31, 20162020, are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31,2016 | |||||||
Other receivables - unrelated parties(1) | $ | 1,009 | $ | 738 | ||||
Other receivables - employee housing loans(2) | 1,291 | 1,577 | ||||||
Less: allowance for doubtful accounts - unrelated parties | (66 | ) | (63 | ) | ||||
Other receivables, net - unrelated parties | $ | 2,234 | $ | 2,252 |
September 30, 2017 | December 31, 2016 | |||||||
Other receivables - related parties(1) | $ | 576 | $ | 559 | ||||
Less: allowance for doubtful accounts - related parties | (576 | ) | (559 | ) | ||||
Other receivables, net - related parties | $ | - | $ | - |
March 31, 2021 | December 31, 2020 | |||||||
Chongqing Venture Fund(1) | $ | 18,286 | $ | 20,230 | ||||
Hubei Venture Fund | 14,171 | 14,473 | ||||||
Suzhou Venture Fund | 7,328 | 7,740 | ||||||
Beijing Henglong (1) | 3,749 | 5,241 | ||||||
Henglong Tianyu | 1,022 | 1,070 | ||||||
Chongqing Jinghua | 565 | 599 | ||||||
Jiangsu Intelligent | 397 | 413 | ||||||
Total | $ | 45,518 | $ | 49,766 |
(1) |
Long-term time deposits are time deposits with maturities of longer than one year. Time deposits with original maturities of longer than one year but due within the next 12 months are included in short-term investments. As of September 30, 2017 and December 31, 2016, short-term investments include $1.0 million and $4.8 million, respectively, of time deposits with original maturities of longer than one year but due within the next 12 months.
As of September 30, 2017 and December 31, 2016, the Company had pledged long-term time deposits of nil and RMB 6.0 million (equivalent to approximately $0.9 million), respectively, to secure loans under the credit facility issued by ICBC Brazil. The use of the pledged long-term time deposits is restricted (See Note 13).
On January 24, 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns 50% of the equity in Beijing Henglong and can exercise significant influence over Beijing Henglong’s operating and financial policies. The Company accounted for Beijing Henglong’s operational results using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $4.2 million and $3.8 million, respectively, of net equity in Beijing Henglong.
On September 22, 2014, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Suzhou Venture Fund”, which mainly focuses on investments in emerging automobiles and parts industries. Hubei Henglong has committed to make investments of RMB 50.0 million, equivalent to approximately $7.5 million, in the Suzhou Venture Fund in three installments. As of September 30, 2017, Hubei Henglong has completed a capital contribution of RMB 50.0 million, equivalent to approximately $7.5 million, representing 12.5% of the Suzhou Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Suzhou Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $8.1 million and $5.3 million, respectively, of net equity in the Suzhou Venture Fund.
In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million, equivalent to approximately $18.1 million, in the Chongqing Venture Fund in three installments. As of September 30, 2017, Hubei Henglong has completed a capital contribution of RMB 84.0 million, equivalent to approximately $12.7 million, representing 35.0% of the Chongqing Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Chongqing Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $12.5 million and $6.8 million, respectively, of net equity in the Chongqing Venture Fund.
In October 2016, Hubei Henglong invested RMB 3.0 million, equivalent to approximately $0.5 million, to establish a joint venture company, Chongqing Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”, with five other parties. The Company owns 30% of the equity in Chongqing Jinghua, and can exercise significant influence over Chongqing Jinghua’s operating and financial policies. The Company accounts for Chongqing Jinghua’s operational results with the equity method. As of September 30, 2017 and December 31, 2016, the Company had $0.5 million and $0.4 million, respectively, of net equity in Chongqing Jinghua.
The Company’s consolidated financial statements reflect the net income of non-consolidated affiliates of $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Property, plant and equipment, net |
The Company’s property, plant and equipment, net as of September 30, 2017March 31, 2021 and December 31, 20162020 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
Land use rights and buildings | $ | 55,067 | $ | 47,448 | ||||||||||||
Costs: | ||||||||||||||||
Buildings | $ | 61,432 | $ | 61,035 | ||||||||||||
Machinery and equipment | 150,928 | 134,361 | 233,711 | 233,273 | ||||||||||||
Electronic equipment | 5,636 | 4,979 | 6,512 | 6,491 | ||||||||||||
Motor vehicles | 4,954 | 4,395 | 5,018 | 5,064 | ||||||||||||
Construction in progress | 28,832 | 24,890 | 22,520 | 20,813 | ||||||||||||
Total amount of property, plant and equipment | 245,417 | 216,073 | 329,193 | 326,676 | ||||||||||||
Less: Accumulated depreciation(1) | (130,115 | ) | (114,595 | ) | (190,651 | ) | (185,672 | ) | ||||||||
Total amount of property, plant and equipment, net(2)(3) | $ | 115,302 | $ | 101,478 | $ | 138,542 | $ | 141,004 |
(1) | |
(2) | As of |
(3) | Interest costs capitalized for the three months ended |
7. | Loans |
Loans consist of the following as of March 31, 2021 and December 31, 2020 (figures are in thousands of USD):
March 31, 2021 | December 31, 2020 | |||||||
Short-term bank loans (1) | $ | 38,584 | $ | 36,575 | ||||
Current portion of long-term government loan (2) | 7,609 | 7,663 | ||||||
Subtotal | 46,193 | 44,238 | ||||||
Long-term government loans (2) | 7,609 | 7,663 | ||||||
Less: Current portion of long-term government loans (2) | (7,609 | ) | (7,663 | ) | ||||
Subtotal | - | - | ||||||
Total bank and government loans | $ | 46,193 | $ | 44,238 |
(1) | The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $173.1 million and $172.7 million, respectively, as of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, the Company has drawn down loans with an aggregate amount of $38.6 million and $36.6 million, respectively. The weighted average interest rate was 3.8% and 3.7% for the three months ended March 31, 2021 and December 31, 2020, respectively. |
(2) | On August 7 and September 3, 2019, the Company borrowed from the local government loans of RMB 20.0 million and RMB 30.0 million, equivalent to approximately $3.0 million and $4.6 million, respectively. These loans are due for repayment on June 30, 2021 and have an interest rate of 3.80% per annum. As of March 31, 2021 and December 31, 2020, Henglong pledged RMB 53.5 million and RMB 53.5 million, equivalent to approximately $8.1 million and $8.2 million, respectively, of notes receivable as collateral for the local government loans (See Note 3). |
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of March 31, 2021.
The Company’s intangible assetsaccounts and notes payable as of September 30, 2017March 31, 2021 and December 31, 20162020 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Costs: | ||||||||
Patent technology | $ | 2,076 | $ | 1,986 | ||||
Management software license | 1,218 | 1,165 | ||||||
Total intangible assets | 3,294 | 3,151 | ||||||
Less: Amortization(1) | (2,782 | ) | (2,534 | ) | ||||
Total intangible assets, net | $ | 512 | $ | 617 |
In accordance with the provisions ofASC Topic 740, “Income Taxes”, the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of estimated deferred income tax assets as of September 30, 2017 and December 31, 2016 are as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Losses carry forward (U.S.)(1) | $ | 6,389 | $ | 6,216 | ||||
Losses carry forward (Non-U.S.)(1) | 2,307 | 2,887 | ||||||
Product warranties and other reserves | 4,290 | 4,766 | ||||||
Property, plant and equipment | 4,422 | 4,204 | ||||||
Share-based compensation | 220 | 247 | ||||||
Bonus accrual | 230 | 231 | ||||||
Other accruals | 1,439 | 1,551 | ||||||
Deductible temporary difference related to revenue recognition | 153 | 191 | ||||||
Others | 1,365 | 1,206 | ||||||
Total deferred tax assets, net | 20,815 | 21,499 | ||||||
Less: Valuation allowance | (9,044 | ) | (8,912 | ) | ||||
Total deferred tax assets, net of valuation allowance(2) | $ | 11,771 | $ | 12,587 |
Loans consist of the following as of September 30, 2017 and December 31, 2016 (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Short-term bank loan(1) | $ | 9,794 | $ | 2,162 | ||||
Short-term bank loan(2) (3) (4) (5) | 30,484 | 35,054 | ||||||
Short-term bank loans(6) | 28,796 | - | ||||||
Short-term government loan(7) | 4,520 | 3,604 | ||||||
Bank and government loans | $ | 73,594 | $ | 40,820 |
On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 207.1 million, equivalent to approximately $32.6 million. The Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013 and was extended to May 12, 2017. The interest rate of the Credit Facility under the extended term is three-month LIBOR plus 0.7% per annum. Except for the above, all other terms and conditions as stipulated in the Credit Agreement remained unchanged. As of December 31, 2016, the interest rate of the Credit Facility was 1.7% per annum.
On April 20, 2017, 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 $20.0 million, the “Credit Facility”. The Credit Facility will expire on May 12, 2018 unless the Company draws down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown is the earlier of (i) 12 months from the date of drawdown or (ii) one 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 1.30% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. 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 of not less than $23.9 million if the Credit Facility is fully drawn.
On May 5, 2017, the Company drew down the full amount of $20.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $23.4 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 158.9 million, equivalent to approximately $23.9 million. The Company also paid an arrangement fee of $0.04 million to ICBC Jingzhou. The maturity date of the Credit Facility is May 12, 2018.
On April 28, 2017, Great Genesis drew down the full amount of $9.9 million under the Taishin Bank Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $10.0 million in favor of Taishin Bank. Henglong’s Standby Letter of Credit issued by China CITIC Bank Wuchang branch is collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.4 million, equivalent to approximately $12.0 million.
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 long-term time deposits of Hubei Henglong of RMB 33.0 million, equivalent to approximately $4.8 million.
On July 7, 2016, HSBC HK agreed to extend the maturity date of the HSBC Credit Facility to July 1, 2017. Hubei Henglong provided a Standby Letter of Credit in an amount of $5.1 million in favor of HSBC HK. The Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and was collateralized by short-term time deposits of Hubei Henglong of RMB 36.0 million, equivalent to approximately $5.2 million. The interest rate of the HSBC Credit Facility under the extended term was revised as three-month LIBOR plus 0.8% per annum, i.e. 1.95% per annum. Except for the above, all other terms and conditions as stipulated in the Credit Agreement remained unchanged. The Company repaid this bank loan on July 14, 2017.
On May 6, 2016, Brazil Henglong drew down a loan amounting to $0.1 million provided by HSBC Brazil. The loan matured on October 9, 2017 and has an annual interest rate of 8.2%.Hubei Henglong provided a Standby Letter of Credit for an amount of $0.1 million in favor of HSBC Brazil. Hubei Henglong’s Standby Letter of Credit was issued by China CITIC Bank Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB 0.5 million, equivalent to approximately $0.1 million. The Company repaid this bank loan on October 9, 2017.
On August 26, 2016, Brazil Henglong entered into a credit facility agreement with Bank of China (Brazil) to obtain a credit facility in the amount of $0.6 million, the “Bank of China Credit Facility”. The Bank of China Credit Facility will expire on January 15, 2018. As security for the Bank of China Credit Facility, the Company’s subsidiary Hubei Henglong is required to provide Bank of China (Brazil) with a Standby Letter of Credit for a total amount of $0.9 million if the Bank of China Credit Facility is fully drawn.
On August 26, 2016, Brazil Henglong drew down a loan amounting to $0.6 million provided by Bank of China (Brazil). The loan will mature on January 15, 2018 and has an annual interest rate of 4.0%. Interest is paid semiannually and the principal repayment is at maturity. Hubei Henglong provided a Standby Letter of Credit for an amount of $0.9 million in favor of Bank of China (Brazil). Hubei Henglong’s Standby Letter of Credit was issued by Bank of China Jingzhou branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 6.0 million, equivalent to approximately $0.9 million.
On September 26, 2016, Hubei Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 100.0 million (equivalent to $15.1 million as of September 30, 2017), the “Hubei Henglong CITIC Credit Facility”. The Hubei Henglong CITIC Credit Facility expired on September 26, 2017. Henglong provided a guarantee for the Hubei Henglong CITIC Credit Facility. On March 3, 2017, Hubei Henglong drew down loans amounting to RMB 28.7 million, RMB 28.7 million and 38.2 million (equivalent to $4.3 million, $4.3 million and $5.8 million), respectively. The loans will mature on February 2, 8 and 9, 2018, respectively. The annual interest rate of the loans is 5.0%. The principal and interest will be paid at maturity.
On April 21, 2017, the Company received an interest-free Chinese government loan of RMB 10.0 million, equivalent to approximately $1.5 million, which will mature on December 8, 2017. Jiulong pledged RMB 10.0 million, equivalent to approximately $1.5 million, of notes receivable as security for the Chinese government loan (See Note 4).
The Company’s accounts and notes payable as of September 30, 2017 and December 31, 2016 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Accounts payable - unrelated parties | $ | 142,594 | $ | 138,053 | ||||
Notes payable - unrelated parties(1) | 82,164 | 78,940 | ||||||
Accounts and notes payable- unrelated parties | 224,758 | 216,993 | ||||||
Accounts payable - related parties | 5,749 | 6,803 | ||||||
Balance at end of period | $ | 230,507 | $ | 223,796 |
March 31, 2021 | December 31, 2020 | |||||||
Accounts payable - unrelated parties | $ | 129,099 | $ | 132,349 | ||||
Notes payable - unrelated parties (1) | 83,826 | 80,173 | ||||||
Accounts and notes payable - unrelated parties | 212,925 | 212,522 | ||||||
Accounts and notes payable - related parties | 10,984 | 12,730 | ||||||
Total | $ | 223,909 | $ | 225,252 |
(1) | Notes payable represent |
Accrued expenses and other payables |
The Company’s accrued expenses and other payables as of September 30, 2017March 31, 2021 and December 31, 20162020 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
Warranty reserves (1) | $ | 35,985 | $ | 36,215 | ||||||||||||
Accrued expenses | $ | 7,975 | $ | 8,605 | 7,870 | 8,627 | ||||||||||
Current portion of other long-term payable (See Note 10) | 4,177 | 4,131 | ||||||||||||||
Payables for overseas transportation and custom clearance | 1,956 | 3,278 | ||||||||||||||
Dividends payable to holders of non-controlling interests | 457 | 460 | ||||||||||||||
Accrued interest | 953 | 88 | 588 | 646 | ||||||||||||
Dividends payable to holders of non-controlling interests(3) | 621 | - | ||||||||||||||
Other payables | 2,483 | 964 | 425 | 2,250 | ||||||||||||
Warranty reserves(1) (2) | 20,851 | 26,225 | ||||||||||||||
Total | $ | 32,883 | $ | 35,882 | ||||||||||||
Balance at end of year | $ | 51,458 | $ | 55,607 |
(1) | The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances. |
For the three months ended September 30, 2017March 31, 2021 and 2016,2020, the warranties activities were as follows (figures are in thousands of USD):
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Balance at beginning of the period | $ | 23,898 | $ | 21,238 | $ | 36,215 | $ | 32,907 | ||||||||
Additions during the period | 4,426 | 1,693 | 3,681 | 3,428 | ||||||||||||
Settlement within period, by cash or actual materials | (6,814 | ) | (2,378 | ) | ||||||||||||
Foreign currency translation (gain)/loss | (659 | ) | 160 | |||||||||||||
Settlement within the period | (3,645 | ) | (3,174 | ) | ||||||||||||
Foreign currency translation gain | (266 | ) | (520 | ) | ||||||||||||
Balance at end of the period | $ | 20,851 | $ | 20,713 | $ | 35,985 | $ | 32,641 |
For the nine months ended September 30, 2017 and 2016, and for the year ended December 31, 2016, the warranties activities were as follows (figures are in thousands of USD):
12
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||
2017 | 2016 | 2016 | ||||||||||
Balance at beginning of the period | $ | 26,225 | $ | 23,059 | $ | 23,059 | ||||||
Additions during the period | 11,182 | 5,433 | 16,522 | |||||||||
Settlement within period, by cash or actual materials | (15,423 | ) | (8,434 | ) | (11,781 | ) | ||||||
Foreign currency translation loss | (1,133 | ) | 655 | (1,575 | ) | |||||||
Balance at end of the period | $ | 20,851 | $ | 20,713 | $ | 26,225 |
The Company’s taxes payable as of September 30, 2017 and December 31, 2016 are summarized as follows (figures are in thousands of USD):
September 30, 2017 | December 31, 2016 | |||||||
Value-added tax payable | $ | 2,374 | $ | 7,662 | ||||
Income tax payable | 1,019 | 3,390 | ||||||
Other tax payable | 407 | 622 | ||||||
Total | $ | 3,800 | $ | 11,674 |
On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was RMB 91.3 million (equivalent to $13.9 million as of March 31, 2021) and the sales price was RMB 100.0 million (equivalent to $15.2 million as of March 31, 2021). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four (4) years with a quarterly lease payment of approximately $1.0 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of March 31, 2021, $4.2 million was recognized as other payable (See Note 9) and $0.04 million was recognized as other long-term payable to the buyer-lessor according to the contract term.
11. | Redeemable non-controlling interests |
In September 30, 20172020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the Company and December 31, 2016, advances payablethe other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company were $0.8 million and $0.7 million, respectively.are therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the issuance date.
The amounts are special subsidies made byFor the Chinese governmentthree months ended March 31, 2021, the Company recognized accretion of $0.007 million to the Company to offset the costs and charges related to the improvement of production capacities and improvementredemption value of the quality of products. Forshares over the government subsidiesperiod starting from the issuance date with no further conditionsa corresponding reduction to be met, the amounts are recorded as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances payable when received and will be recorded as a deduction of related expenses and cost when the conditions are met.
The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.retained earnings.
Additional paid-in capital |
The Company’s positions in respect of the amounts of additional paid-in capital for the ninethree months ended September 30, 2017March 31, 2021 and 2016, and the year ended December 31, 20162020, are summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2017 | 2016 | 2016 | 2021 | 2020 | ||||||||||||||||
Balance at beginning of the period | $ | 64,764 | $ | 64,627 | $ | 64,627 | $ | 64,273 | $ | 64,466 | ||||||||||
Acquisition of the non-controlling interest in Brazil Henglong(1) | (458 | ) | - | - | ||||||||||||||||
Share-based compensation(2) | 100 | - | 137 | |||||||||||||||||
Share-based compensation | 88 | - | ||||||||||||||||||
Acquisition of the non-controlling interest in USAI | - | (29 | ) | |||||||||||||||||
Balance at end of the period | $ | 64,406 | $ | 64,627 | $ | 64,764 | $ | 64,361 | $ | 64,437 |
13. |
The Company’s stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended to June 27, 2025 at the Annual Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under this plan is 2,200,000. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who served over three years or have given outstanding performance, of options to purchase shares of the Company’s common stock. The Company has issued 658,850 stock options under this plan, and there remain 1,541,150 stock options issuable in the future as of March 31, 2021.
AssumptionsUnder the aforementioned plan, the stock options granted will have an exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one day before the date of grant, and will expire two to five years after the grant date. The stock options granted during the three months ended March 31, 2021 were exercisable immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon exercise and are recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of March 31, 2021, the Company has sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.
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 dividends.
For the stock options granted during the three months ended March 31, 2021, assumptions used to estimate the fair value of the stock options on the grant dates aredate is as follows:
Issuance Date | Expected volatility | Risk-free rate | Expected term (years) | Dividend yield | ||||||||||||
December 2, 2016 | 134.8 | % | 1.84 | % | 5 | 0.00 | % | |||||||||
August 16, 2017 | 139.2 | % | 1.79 | % | 5 | 0.00 | % |
Issuance Date | Expected volatility | Risk-free rate | Expected term (years) | Dividend yield | ||||||||||||
February 3, 2021 | 76.91 | % | 0.46 | % | 5 | 0.00 | % |
The stock options granted during 2017 and 2016the three months ended March 31, 2021 were exercisable immediately. Theirimmediately and their fair valuesvalue on the grant datesdate using the Black-Scholes option pricing model were$0.1 million andwas $0.1 million, respectively.million. For the ninethree months ended September 30, 2017March 31, 2021 and the year ended December 31, 2016,2020, the Company recognized stock-based compensation expenses of $0.1 million and nil, respectively.
The activities of stock options are summarized as follows, including granted, exercised and forfeited.
Weighted-Average | ||||||||||||
Weighted-Average | Contractual | |||||||||||
Shares | Exercise Price | Term (years) | ||||||||||
Outstanding - January 1, 2020 | 30,000 | $ | 4.99 | 5 | ||||||||
Expired | (7,500 | ) | 5.58 | 5 | ||||||||
Outstanding - December 31, 2020 | 22,500 | $ | 4.79 | 5 | ||||||||
Granted | 22,500 | 6.26 | 5 | |||||||||
Outstanding - March 31, 2021 | 45,000 | $ | 5.52 | 5 |
The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at March 31, 2021:
Outstanding Stock | Weighted Average | Weighted Average | Number of Stock | |||||||||||||
Range of Exercise Prices | Options | Remaining Life | Exercise Price | Options Exercisable | ||||||||||||
$2.37 - $6.95 | 45,000 | 2.39 | $ | 5.52 | 45,000 |
As of March 31, 2021 and December 31, 2020, the total intrinsic value of the Company’s stock options that were exercisable was $0.2 million and $0.1 million, respectively.
For the three months ended March 31, 2021 and 2020, no Company’s stock options were exercised.
During the three months ended March 31, 2021, the weighted average fair value of the Company’s stock options granted was $3.92. No stock option was granted during the three months ended March 31, 2020.
Retained earnings |
Appropriated
Pursuant to the relevant PRC laws, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements, other than the financial statement that was prepared in accordance with generally accepted accounting principles in the United States of America, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.
of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended March 31, 2021 and 2020, no longer required. However,statutory reserve was appropriated by the reserve cannot be distributed to joint venture partners. Based on the business licenses of the PRC subsidiaries the registered capital of Henglong, Jiulong, Shenyang, USAI, Jielong, Wuhu, Hubei Henglong and Chongqing are $10.0 million, $4.2 million (equivalent to RMB 35.0 million), $8.1 million (equivalent to RMB 67.5 million), $2.6 million, $6.0 million, $3.8 million (equivalent to RMB 30.0 million), $39.0 million and $9.5 million (equivalent to RMB 60.0 million), respectively.in China.
The Company’s activities in respect of the amounts of appropriated retained earnings for the ninethree months ended September 30, 2017March 31, 2021 and 2016, and the year ended December 31, 20162020, are summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2017 | 2016 | 2016 | 2021 | 2020 | ||||||||||||||||
Balance at beginning of the period | $ | 10,549 | $ | 10,379 | $ | 10,379 | $ | 11,303 | $ | 11,265 | ||||||||||
Appropriation of retained earnings | 124 | 142 | 170 | |||||||||||||||||
Balance at end of the period | $ | 10,673 | $ | 10,521 | $ | 10,549 | $ | 11,303 | $ | 11,265 |
Unappropriated
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the ninethree months ended September 30, 2017March 31, 2021 and 2016, and the year ended December 31, 20162020, are summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||
2017 | 2016 | 2016 | ||||||||||
Balance at beginning of the period | $ | 228,963 | $ | 206,622 | $ | 206,622 | ||||||
Net income attributable to parent company | 19,694 | 16,755 | 22,511 | |||||||||
Appropriation of retained earnings | (124 | ) | (142 | ) | (170 | ) | ||||||
Balance at end of the period | $ | 248,533 | $ | 223,235 | $ | 228,963 |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance at beginning of the period | $ | 215,491 | $ | 221,298 | ||||
Cumulative effect of accounting change - credit loss | - | (789 | ) | |||||
Net income/(loss) attributable to parent company | 3,213 | (28 | ) | |||||
Accretion of redeemable non-controlling interests | (7 | ) | - | |||||
Balance at end of the period | $ | 218,697 | $ | 220,481 |
Accumulated other comprehensive income |
The Company’s activities in respect of the amounts of the accumulated other comprehensive income for the ninethree months ended September 30, 2017March 31, 2021 and 2016, and the year ended December 31, 20162020, are summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | Year Ended December 31, | Three Months Ended March 31, | ||||||||||||||||||
2017 | 2016 | 2016 | 2021 | 2020 | ||||||||||||||||
Balance at beginning of the period | $ | (892 | ) | $ | 18,412 | $ | 18,412 | $ | 17,413 | $ | (3,462 | ) | ||||||||
Other comprehensive income related to the non-controlling interests acquired by the Company | (67 | ) | - | - | ||||||||||||||||
Foreign currency translation adjustment attributable to parent company | 13,681 | (8,128 | ) | (19,304 | ) | (2,128 | ) | (4,508 | ) | |||||||||||
Balance at end of the period | $ | 12,722 | $ | 10,284 | $ | (892 | ) | $ | 15,285 | $ | (7,970 | ) |
Treasury stock | ||
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021. As of March 31, 2021, the Company had cumulatively repurchased 322,269 of the shares that were authorized to be repurchased under the program that was approved on August 13, 2020. The repurchased shares are presented as “treasury stock” on the balance sheet. |
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On December 18, 2015, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions through December 17, 2016. The repurchase program terminated on December 17, 2016. During the year ended December 31, 2016, under the repurchase program, the Company repurchased 477,015 shares of the Company’s common stock for cash consideration of $1.9 million on the open market. The repurchased shares are presented as “treasury stock” on the balance sheet.
Non-controlling interests |
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the ninethree months ended September 30, 2017March 31, 2021 and 2016, and the year ended December 31, 20162020, are summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||
2017 | 2016 | 2016 | ||||||||||
Balance at beginning of the period | $ | 5,412 | $ | 8,252 | $ | 8,252 | ||||||
Income attributable to non-controlling interests | 353 | 164 | 466 | |||||||||
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 15) | (608 | ) | (464 | ) | (464 | ) | ||||||
Acquisition of the non-controlling interest in Brazil Henglong | 458 | - | - | |||||||||
Other comprehensive income related to the non-controlling interests acquired by the Company | 67 | - | - | |||||||||
Non-controlling interests change due to the disposal of Fujian Qiaolong | - | (2,150 | ) | (2,150 | ) | |||||||
Foreign currency translation adjustment attributable to non-controlling interests | 467 | (307 | ) | (692 | ) | |||||||
Balance at end of the period | $ | 6,149 | $ | 5,495 | $ | 5,412 |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance at beginning of the period | $ | 16,170 | $ | 20,250 | ||||
Net income/(loss) attributable to non-controlling interests | 18 | (600 | ) | |||||
Acquisition of the non-controlling interest in USAI | - | 29 | ||||||
Cumulative effect of accounting change - credit loss | - | (102 | ) | |||||
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries | - | (430 | ) | |||||
Foreign currency translation adjustment attributable to non-controlling interests | (143 | ) | (453 | ) | ||||
Balance at end of the period | $ | 16,045 | $ | 18,694 |
GainRevenue Disaggregation
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 25.
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.
Contract liabilities are mainly customer deposits. As of March 31, 2021 and December 31, 2020, the Company has customer deposits of $1.1 million and $1.5 million, respectively, which were included in other current liabilities on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, and scraps. For the nineconsolidated balance sheets. During the three months ended September 30, 2017, gain on otherMarch 31, 2021, $1.0 million was received and $1.4 million (including $1.4 million from the beginning balance of customer deposits) was recognized as net product sales amounted to $5.9 million as compared to $2.0 million forrevenue. During the ninethree months ended September 30, 2016, representingMarch 31, 2020, $0.3 million was received and $0.6 million (including $0.6 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an increaseamount of $3.9 million. During the second quarter of 2017,products produced by the Company disposedunder supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of a building located in Jingzhou and recognized a gain of $2.2 million. the customer deposit liability.
Financial |
During the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, the Company recorded financial income,expense, net which is summarized as follows (figures are in thousands of USD):
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||||
Interest income | $ | 2,474 | $ | 1,777 | $ | 313 | $ | 351 | ||||||||
Foreign exchange loss, net | (173 | ) | (30 | ) | (469 | ) | (711 | ) | ||||||||
Gain of cash discount, net | - | 3 | ||||||||||||||
Bank fees | (392 | ) | (480 | ) | (83 | ) | (171 | ) | ||||||||
Total financial income, net | $ | 1,909 | $ | 1,270 | ||||||||||||
Total financial expense, net | $ | (239 | ) | $ | (531 | ) |
The Company’s subsidiaries registered in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the government, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%, if the foreign investor directly owns at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is regarded as a non-resident enterprise, it is required to pay an additional 5% withholding tax for any dividends payable to it from the PRC subsidiaries.
According to PRC tax regulation, the Company should withhold income taxes for the profits distributed from the PRC subsidiaries to Genesis, the subsidiaries’ holding company incorporated in Hong Kong. For the profits that the PRC subsidiaries intended to distribute to Genesis, the Company accrues the withholding income tax as deferred tax liabilities. As of September 30, 2017, the Company has recognized deferred tax liabilities of $0.2 million for the remaining undistributed profits to Genesis of $4.5 million. The Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries permanently. As of September 30, 2017 and December 31, 2016, the Company still had undistributed earnings of approximately $266.4 million and $239.8 million, respectively, from investment in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earnings been distributed to Genesis and not permanently reinvested, the tax provision as of September 30, 2017 and December 31, 2016 of approximately $13.3 million and $12.0 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. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.
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. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.
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. In 2015, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.
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. In 2015, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015 and 2016. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 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 was subject to enterprise income tax at a rate of 15% for 2013, 2014 and 2015. In 2016, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate from 2016 to 2018.
In 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. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.
According to the New CIT, USAI, Wuhan Chuguanjie, Shanghai Henglong and Testing Center are subject to income tax at a rate of 25% in 2016 and 2017.
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 nine months ended September 30, 2017 and 2016.
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 nine months ended September 30, 2017 and 2016.
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 nine months ended September 30, 2017 and 2016.
The enterprise income tax rate of the United States is 35%. No provision for U.S. tax is made for CAAS and HLUSA as a whole, as the Company had no assessable income in the United States for the nine months ended September 30, 2017 and 2016.
The Company’s effective tax rate was 17.3% and 18.2% for the three months and nine months ended September 30, 2017, respectively, compared with 17.4% and 17.3% for the three months and nine months ended September 30, 2016, respectively.
Basic income per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.
The calculationcalculations of basic and diluted income per share attributable to the parent company for the three months ended September 30, 2017March 31, 2021 and 2016, was2020, were as follows (figures are in thousands of USD, except share and per share amounts):
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net income attributable to the parent company’s common shareholders – Basic and Diluted | $ | 5,059 | $ | 5,682 | ||||
Denominator: | ||||||||
Weighted average shares outstanding | 31,644,004 | 31,911,360 | ||||||
Dilutive effects of stock options | 267 | 362 | ||||||
Denominator for dilutive income per share – Diluted | 31,644,271 | 31,911,722 | ||||||
Net income per share attributable to parent company’s common shareholders – Basic | $ | 0.16 | $ | 0.18 | ||||
Net income per share attributable to parent company’s common shareholders – Diluted | $ | 0.16 | $ | 0.18 |
The calculation of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 2017 and 2016, was (figures are in thousands of USD, except share and per share amounts):
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to the parent company’s common shareholders – Basic and Diluted | $ | 19,694 | $ | 16,755 | ||||||||||||
Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted | $ | 3,206 | $ | (28 | ) | |||||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | 31,644,004 | 32,038,933 | 30,851,776 | 31,174,045 | ||||||||||||
Dilutive effects of stock options | 3,829 | 1,581 | 5,960 | - | ||||||||||||
Denominator for dilutive income per share – Diluted | 31,647,833 | 32,040,514 | ||||||||||||||
Denominator for dilutive income per share - Diluted | 30,857,736 | 31,174,045 | ||||||||||||||
Net income per share attributable to parent company’s common shareholders – Basic | $ | 0.62 | $ | 0.52 | ||||||||||||
Net income per share attributable to parent company’s common shareholders – Diluted | $ | 0.62 | $ | 0.52 | ||||||||||||
Net income/(loss) per share attributable to parent company’s common shareholders - Basic | $ | 0.10 | $ | - | ||||||||||||
Net income/(loss) per share attributable to parent company’s common shareholders - Diluted | $ | 0.10 | $ | - |
As of September 30, 2017 and 2016,March 31, 2021, the exercise prices for 90,00030,000 shares, and 82,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the ninethree months ended September 30, 2017 and 2016, respectively, andMarch 31, 2021. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
For the three months ended March 31, 2020, assumed conversion of the stock options has not been reflected in the dilutive calculation pursuant to ASC 260, “Earnings Per Share,” due to the anti-dilutive effect as a result of the Company’s net loss. The effects of all outstanding share options with common share equivalents of 74 shares, have been excluded from the calculation of the diluted loss per share for the three months ended March 31, 2020, due to their anti-dilutive effect.
Significant concentrations |
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account,"account", which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchangecurrency for settlement of such "current account" transactions without pre-approval. However, pursuant to applicable regulations, foreign-invested enterprises
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, may pay“China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of their accumulated profits if any,as determined in accordance with theaccounting standards and regulations in China. Under PRC law. In calculating accumulated profits, foreign investment enterprises in Chinalaw China-based Subsidiaries are required to allocateset aside at least 10% of their annual net incomeafter-tax profit based on PRC accounting standards each year if any, to fund certain reserve funds, including mandated employee benefits funds, unless thesetheir general reserves have reacheduntil the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the registered capitaldiscretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on the enterprises.convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
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,U.S. Dollars, 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 People's Republic of China, or the PRC, the Company’s PRCChina 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 PRCChina 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 JingzhouYude, which are related parties of the Company. The Company’s customers are mostly located in the PRC.
During the nine months ended September 30, 2017, the Company’s ten largest customers accounted for 56.1% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 14.75%. As of September 30, 2017, approximately 6.6% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
During the nine months ended September 30, 2016, the Company’s ten largest customers accounted for 62.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 12.9%. As of September 30, 2016, approximately 3.8% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
Related party transactions and balances |
Related party transactions are as follows (figures are in thousands of USD):
Related sales
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Merchandise sold to related parties | $ | 7,563 | $ | 9,950 | ||||
Rental income obtained from related parties | 20 | 23 | ||||||
Materials and others sold to related parties | 376 | 551 | ||||||
Total | $ | 7,959 | $ | 10,524 |
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Merchandise sold to related parties | $ | 25,684 | $ | 28,589 | $ | 16,575 | $ | 7,494 | ||||||||
Materials and others sold to related parties | 426 | 270 | ||||||||||||||
Rental income obtained from related parties | 66 | 91 | 106 | 77 | ||||||||||||
Materials and others sold to related parties | 1,186 | 1,231 | ||||||||||||||
Total | $ | 26,936 | $ | 29,911 | $ | 17,107 | $ | 7,841 |
Related purchases
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Materials purchased from related parties | $ | 6,549 | $ | 5,869 | $ | 8,214 | $ | 3,134 | ||||||||
Technology purchased from related parties | - | 135 | ||||||||||||||
Equipment purchased from related parties | 4,857 | 4,370 | 225 | 69 | ||||||||||||
Others purchased from related parties | 156 | 149 | 10 | 4 | ||||||||||||
Total | $ | 11,562 | $ | 10,523 | $ | 8,449 | $ | 3,207 |
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Materials purchased from related parties | $ | 20,195 | $ | 18,912 | ||||
Technology purchased from related parties | - | 362 | ||||||
Equipment purchased from related parties | 9,281 | 7,900 | ||||||
Others purchased from related parties | 371 | 524 | ||||||
Total | $ | 29,847 | $ | 27,698 |
Loan transaction to a related party
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Related party loan | $ | 29,182 | $ | - |
Related receivables
September 30, 2017 | December 31, 2016 | |||||||
Accounts and notes receivable from related parties | $ | 17,607 | $ | 20,984 |
March 31, 2021 | December 31, 2020 | |||||||
Accounts and notes receivable from related parties | $ | 19,274 | $ | 17,622 |
Related advances and loan balanceadvance payments
September 30, 2017 | December 31, 2016 | |||||||
Advance payments for property, plant and equipment to related parties | $ | 4,813 | $ | 5,005 | ||||
Advance payments and others to related parties | 31,397 | 624 | ||||||
Total | $ | 36,210 | $ | 5,629 |
March 31, 2021 | December 31, 2020 | |||||||
Advance payments for property, plant and equipment to related parties | $ | 2,393 | $ | 3,284 | ||||
Advance payments and others to related parties | 551 | 522 | ||||||
Total | $ | 2,944 | $ | 3,806 |
Related payables
September 30, 2017 | December 31, 2016 | |||||||
Accounts and notes payable | $ | 5,749 | $ | 6,803 |
March 31, 2021 | December 31, 2020 | |||||||
Accounts and notes payable | $ | 10,984 | $ | 12,730 |
These transactions were consummated under similar terms as those with the Company's third party customers and suppliers.
As of November 9, 2017,May 12, 2021, Hanlin Chen, the Company’s Chairman,chairman of the board of directors of the Company, owns 56.4%57.9% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
Commitments and contingencies |
Legal proceedings
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. In November 2020, the Company reached a settlement to resolve the lawsuit for the sum of $55,998. The Company did not admit any liability in reaching the settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement of litigation expenses be reduced from $100,000 to $30,000. The Court’s Final Order and Judgment is publicly available on the Court of Chancery docket. As of March 31, 2021, the Company has received above settlement of $55,998 from the directors and paid the above attorneys’ fees and reimbursement of litigation expenses.
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition,proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of September 30, 2017March 31, 2021 (figures are in thousands of USD):
Payment obligations by period | Payment obligations by period | |||||||||||||||||||||||||||||||||||||||||||
2017 (1) | 2018 | 2019 | 2020 | Thereafter | Total | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
Obligations for investment contracts(1) | - | $ | 5,424 | $ | - | $ | - | $ | - | $ | 5,424 | $ | 2,678 | $ | - | $ | - | $ | - | $ | 2,678 | |||||||||||||||||||||||
Obligations for purchasing and service agreements | 16,496 | 5,650 | 2,530 | - | - | 24,676 | 19,873 | 1,550 | - | - | 21,423 | |||||||||||||||||||||||||||||||||
Total | $ | 16,496 | $ | 11,074 | $ | 2,530 | $ | - | $ | - | $ | 30,100 | $ | 22,551 | $ | 1,550 | $ | - | $ | - | $ | 24,101 |
(1) | In In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the | |||||||||||||||||||||||||||
Off-balance sheet arrangements |
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Segment reporting |
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2020 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter segmentinter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of September 30, 2017,March 31, 2021, the Company had 1115 product sectors, fivesix of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis). The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
As of March 31, 2020, the Company had 14 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis). The other eight sectors were engaged in the production and sale of sensor modular sensors (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), and manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the revenues, net income, research and net assetsdevelopment of these six sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.”
As of September 30, 2016, the Company had eleven product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other six sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong),intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automobile electronicautomotive motors and electromechanical integrated systems and parts (Wuhan Chuguanjie)Hyoseong). Since the revenues, net income and net assets of these seven sectors collectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.”
The Company’s product sector information for the three months ended March 31, 2021 and nine months ended September 30, 2017 and 2016,2020, is as follows (figures are in thousands of USD):
Net Product Sales | Net Income (Loss) | Net Product Sales | Net Income/(Loss) | |||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
September 30 | September 30 | March 31, | March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Henglong | $ | 55,790 | $ | 57,530 | $ | 689 | $ | 3,771 | $ | 49,079 | $ | 23,907 | $ | 799 | $ | (682 | ) | |||||||||||||||
Jiulong | 26,067 | 17,787 | 478 | 1,083 | 33,719 | 12,759 | 1,000 | (1,450 | ) | |||||||||||||||||||||||
Shenyang | 10,103 | 8,239 | 486 | 457 | 4,092 | 2,793 | 353 | (170 | ) | |||||||||||||||||||||||
Wuhu | 6,503 | 5,088 | 118 | 21 | 4,159 | 2,803 | 7 | 239 | ||||||||||||||||||||||||
Hubei Henglong | 24,812 | 13,912 | 2,680 | 735 | 35,458 | 28,132 | 666 | 4,065 | ||||||||||||||||||||||||
Other Sectors | 14,961 | 11,588 | 777 | (269 | ) | |||||||||||||||||||||||||||
Henglong KYB | 18,206 | 6,126 | 165 | (907 | ) | |||||||||||||||||||||||||||
Other Entities | 21,237 | 9,482 | 508 | (1,935 | ) | |||||||||||||||||||||||||||
Total Segments | 138,236 | 114,144 | 5,228 | 5,798 | 165,950 | 86,002 | 3,498 | (840 | ) | |||||||||||||||||||||||
Corporate | - | - | 317 | 808 | - | - | (217 | ) | (61 | ) | ||||||||||||||||||||||
Eliminations | (19,871 | ) | (19,518 | ) | (317 | ) | (747 | ) | (35,609 | ) | (12,447 | ) | (50 | ) | 273 | |||||||||||||||||
Total | $ | 118,365 | $ | 94,626 | $ | 5,228 | $ | 5,859 | $ | 130,341 | $ | 73,555 | $ | 3,231 | $ | (628 | ) |
Net Product Sales | Net Income (Loss) | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Henglong | $ | 191,093 | $ | 195,940 | $ | 6,300 | $ | 13,389 | ||||||||
Jiulong | 75,525 | 54,976 | 3,739 | 2,219 | ||||||||||||
Shenyang | 28,777 | 24,898 | 1,271 | 995 | ||||||||||||
Wuhu | 18,254 | 15,897 | 215 | 96 | ||||||||||||
Hubei Henglong | 66,855 | 42,815 | 5,518 | 2,286 | ||||||||||||
Other Sectors | 40,821 | 29,558 | 1,341 | 162 | ||||||||||||
Total Segments | 421,325 | 364,084 | 18,384 | 19,147 | ||||||||||||
Corporate | - | - | 3,367 | (1,317 | ) | |||||||||||
Eliminations | (65,992 | ) | (51,587 | ) | (1,704 | ) | (911 | ) | ||||||||
Total | $ | 355,333 | $ | 312,497 | $ | 20,047 | $ | 16,919 |
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 relationsrelationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC Motors,motors, Changan Automobile Group, BAIC Group, SAICDongfeng Group, and Dongfeng Auto Group, the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei, Co., Ltd., the largest light vehicle manufacturer in China; Chery, Automobile Co., Ltd., the largest state owned car manufacturer in China; BYD Auto Co., Ltd. and Zhejiang Geely, Automobile Co., Ltd., the largest privately owned car manufacturers in China. The PRC-based joint ventures ofas well as Sino-foreign or foreign automobile manufacturer such as General Motors, (GM), Volkswagen, Citroen, andFiat Chrysler North America are all key customers.and Ford. Starting in 2008, the Company has supplied power steering pumps and power steering geargears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gearsgear to Fiat Chrysler North America since 2009.2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. TheAs of March 31, 2021, the Company has approximately 3,0004,566 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.
In addition, as a result of COVID-19, the Company’s businesses, results of operations, financial position and cash flows had been materially and adversely affected in the first quarter of 2020. The Company resumed operation in March of 2020. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
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 JingzhouHengshengJingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials.
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
· | It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and |
· | Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations. |
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance Sheet Caption | Critical Estimate Item | Nature of Estimates Required | Assumptions/Approaches Used | Key Factors | |||||
Accrued liabilities and other long-term liabilities
| Warranty obligations
| Estimating warranty requires the | The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers. | ·OEM sourcing ·OEM policy decisions regarding warranty claims
| |||||
Property, plant and equipment, intangible assets and other long-term assets | Valuation of long- lived assets and investments
| The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines. | The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. | ·Future production estimates ·Customer preferences and decisions | |||||
Accounts receivable | Allowance for doubtful accounts | The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts. | The Company estimates the collect-ability of the receivables based on the future cash flows using historical experiences. | Customer credit | |||||
Inventory
| Write-down of inventory
| The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories. | The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. | ·Future production estimates ·Customer preferences and decisions |
Deferred income taxes
| Recoverability of deferred tax assets
| The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction. | The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations. | ·Tax law changes ·Variances in future projected profitability, including by taxing entity | |||||
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In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above, including provision of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this Report.report.
Results of Operations
Results of Operations—Three Months Ended September 30, 2017March 31, 2021 and 20162020
Net Product Sales | Cost of Products Sold | |||||||||||||||||||||||||||||||
(in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
Henglong | $ | 55,790 | $ | 57,529 | (1,739 | ) | -3.02 | % | $ | 47,639 | $ | 47,616 | $ | 23 | 0.05 | % | ||||||||||||||||
Jiulong | 26,067 | 17,787 | 8,280 | 46.55 | 22,804 | 14,934 | 7,870 | 52.70 | ||||||||||||||||||||||||
Shenyang | 10,103 | 8,239 | 1,864 | 22.62 | 8,757 | 7,070 | 1,687 | 23.85 | ||||||||||||||||||||||||
Wuhu | 6,503 | 5,089 | 1,414 | 27.79 | 5,926 | 4,696 | 1,230 | 26.20 | ||||||||||||||||||||||||
Hubei Henglong | 24,812 | 13,913 | 10,899 | 78.34 | 17,656 | 10,270 | 7,386 | 71.92 | ||||||||||||||||||||||||
Other Sectors | 14,961 | 11,589 | 3,372 | 29.10 | 12,653 | 9,606 | 3,047 | 31.72 | ||||||||||||||||||||||||
Total Segments | 138,236 | 114,146 | 24,090 | 21.10 | 115,435 | 94,192 | 21,243 | 22.55 | ||||||||||||||||||||||||
Elimination | (19,871 | ) | (19,520 | ) | (351 | ) | 1.80 | (19,557 | ) | (19,551 | ) | (6 | ) | 0.03 | ||||||||||||||||||
Total | $ | 118,365 | $ | 94,626 | $ | 23,739 | 25.09 | % | $ | 95,878 | $ | 74,641 | $ | 21,237 | 28.45 | % |
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Three Months Ended March 31, | ||||||||||||||||
2021 | 2020 | Change | Change% | |||||||||||||
Net product sales | $ | 130,341 | $ | 73,555 | $ | 56,786 | 77.2 | % | ||||||||
Cost of products sold | 110,593 | 62,403 | 48,190 | 77.2 | ||||||||||||
Gain on other sales | 1,316 | 600 | 716 | 119.3 | ||||||||||||
Selling expenses | 5,609 | 2,118 | 3,491 | 164.8 | ||||||||||||
General and administrative expenses | 4,615 | 3,429 | 1,186 | 34.6 | ||||||||||||
Research and development expenses | 6,680 | 5,193 | 1,487 | 28.6 | ||||||||||||
Other income, net | 1,723 | 117 | 1,606 | 1,372.6 | ||||||||||||
Interest expense | 343 | 365 | (22 | ) | -6.0 | |||||||||||
Income taxes | 641 | 514 | 127 | 24.7 | ||||||||||||
Net income/(loss) | 3,231 | (628 | ) | 3,859 | -614.5 | |||||||||||
Net income/(loss) attributable to non-controlling interests | 18 | (600 | ) | 618 | -103.0 | |||||||||||
Net income/(loss) attributable to parent company’s common shareholders | $ | 3,206 | (28 | ) | $ | 3,234 | -11,550.0 | % |
Net Product Sales and Cost of Products Sold
Net Product Sales | Cost of Products Sold | |||||||||||||||||||||||||||||||
(in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||
Henglong | $ | 49,079 | $ | 23,907 | $ | 25,172 | 105.3 | % | $ | 45,119 | $ | 23,069 | $ | 22,050 | 95.6 | % | ||||||||||||||||
Jiulong | 33,719 | 12,759 | 20,960 | 164.3 | 30,668 | 13,347 | 17,321 | 129.8 | ||||||||||||||||||||||||
Shenyang | 4,092 | 2,793 | 1,299 | 46.5 | 3,313 | 2,421 | 892 | 36.8 | ||||||||||||||||||||||||
Wuhu | 4,159 | 2,803 | 1,356 | 48.4 | 3,872 | 2,375 | 1,497 | 63.0 | ||||||||||||||||||||||||
Hubei Henglong | 35,458 | 28,132 | 7,326 | 26.0 | 29,485 | 19,307 | 10,178 | 52.7 | ||||||||||||||||||||||||
Henglong KYB | 18,206 | 6,126 | 12,080 | 197.2 | 16,895 | 6,083 | 10,812 | 177.7 | ||||||||||||||||||||||||
Other Entities | 21,237 | 9,482 | 11,755 | 124.0 | 16,738 | 8,388 | 8,350 | 99.5 | ||||||||||||||||||||||||
Total Segments | 165,950 | 86,002 | 79,948 | 93.0 | 146,090 | 74,990 | 71,100 | 94.8 | ||||||||||||||||||||||||
Elimination | (35,609 | ) | (12,447 | ) | (23,162 | ) | 186.1 | (35,497 | ) | (12,587 | ) | (22,910 | ) | 182.0 | ||||||||||||||||||
Total | $ | 130,341 | $ | 73,555 | $ | 56,786 | 77.2 | % | $ | 110,593 | $ | 62,403 | $ | 48,190 | 77.2 | % |
Net Product Sales
Net product sales were $118.4$130.3 million for the three months ended September 30, 2017,March 31, 2021, compared to $94.6$73.6 million for the same period in 2016,2020, representing an increase of $23.8$56.7 million, or 25.2%.77.0%, mainly due to the market recovery after COVID-19.
The Company’s net product sales were affected by the change in the product mix. Net sales of traditional steering products and parts were $92.7$105.6 million for the three months ended September 30, 2017,March 31, 2021, compared to $69.0$65.5 million for the same period in 2016,2020, representing an increase of $23.7$40.1 million, or 34.3%61.2%. Net sales of EPSelectric power steering (“EPS”) were $25.7$24.7 million for the three months ended September 30, 2017, consistent with $25.6March 31, 2021 and $8.1 million for the same period in 2016.2020, representing an increase of $16.6 million. As a percentage of net sales, sales of EPS were 21.7%19.0% for the three months ended September 30, 2017,March 31, 2021, compared to 27.0%with 11.0% for the same period in 2016. 2020.
The increase in net product sales was mainly due to increasedthe effects of three major factors: i) the increase in sales volume led to a sales increase of $60.7 million due to the increase in demand as a result of the recovery of manufacturing and operations of the changesCompany’s customers after COVID-19 around the world; ii) the decrease in average selling price of steering gears led to a sales decrease of $7.9 million; and iii) the product mix in the three months ended September 30, 2017.
The foreign exchange rateappreciation of the RMB against the U.S. dollar in the thirdthis quarter of 2017 was generally consistent withcompared to the same periodquarter last year resulted in 2016, so there was no significant impact on the Company’s revenue and costs as a result of foreign currency translation differences.
In summary, due to the recovery of Chinese automobile industry, the sales of steering gears started to grow, which led to an increase in sales volume and contributed to a sales increase of $11.6 million. Some of the Company’s subsidiaries are gradually shifting their strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports, and the change in product mix led to an increase in average selling price of steering gears and contributed to a sales increase of $12.3 million. The effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.2$3.9 million.
Further analysis by segment (before elimination) is as follows:
Cost of Products Sold
For the three months ended September 30, 2017, the cost of products sold was $95.9 million, compared to $74.6 million for the same period of 2016, representing an increase of $21.3 million, or 28.6%. The increase in the cost of products sold was mainly due to the effect of an increase in sales volumes which led to a cost of products sold increase of $10.0 million and an increase in unit cost which led to a cost of products sold increase of $11.3 million. Further analysis is as follows:
Gross margin was 19.0% for the three months ended September 30, 2017, compared to 21.1% for the same period of 2016, representing a decrease of 2.1%, mainly due to the changes in the product mix for the three months ended September 30, 2017.
Gain on Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the three months ended September 30, 2017, gain on other sales amounted to $0.6 million, as compared to$0.1 million for the three months ended September 30, 2016, representing an increase of $0.5 million. The increase was mainly due to increased sales volume of materials.
Selling Expenses
Selling expenses were $4.5 million for the three months ended September 30, 2017, as compared to $3.8 million for the same period of 2016, representing an increase of $0.7 million, or 18.4%, which was mainly due to increased logistics fees related to the increase in revenue.
General and Administrative Expenses
General and administrative expenses were $4.4 million for the three months ended September 30, 2017, as compared to $3.7 million for the same period of 2016, representing an increase of $0.7 million, or 18.9%, which was mainly due to higher payroll expenses.
Research and Development Expenses
Research and development expenses were $9.2 million for the three months ended September 30, 2017, as compared to $6.7 million for the three months ended September 30, 2016, representing an increase of $2.5 million, or 37.3%, which was mainly due to increased expenditures on R&D activities for EPS products. The Company’s research and development expenses were mainly used for the development and trial production of EPS and other new products. The Company’s research and development expenditures have continued to be significant in the past several years.
The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive basis. In the past several years, the Company has continued to purchase advanced manufacturing equipment for newly developed products, hiring senior technicians and actively seeking external technical support.
Income from Operations
Income from operations was $4.9 million for the three months ended September 30, 2017, compared to $5.7 million for the three months ended September 30, 2016, representing a decrease of $0.8 million, or 14.0%,including an increase of $2.5 million in gross profit, an increase of $0.5 million in gain on other sales and an increase of $3.8 million in operating expenses.
Other Income, Net
Other income, net was $0.1 million for the three months ended September 30, 2017, compared to other income, net of $0.4 million for the three months ended September 30, 2016, representing a decrease of $0.3 million, or 75.0%, primarily as a result of the gain on disposal of a subsidiary amounting to $0.7 million in 2016, whereas there was no such gain in the current quarter.
Interest Expense
Interest expense was $0.3 million for the three months ended September 30, 2017, compared to interest expense of $0.2 million for the three months ended September 30, 2016, representing an increase of $0.1 million, or 50.0%, primarily due to the new bank loans borrowed in 2017.
Financial Income, Net
Financial income, net, was $1.0 million for the three months ended September 30, 2017, compared to financial income of $0.8 million for the three months ended September 30, 2016, representing an increase of $0.2 million, or 25%, which was mainly due to the interest income of $0.5 million generated from the loan to Henglong Real Estate, one of the Company’s related parties (See Note 5).
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 $5.7 million for the three months ended September 30, 2017, compared to $6.7 million for the three months ended September 30, 2016, representing a decrease of $1.0 million, or 14.9%, which was mainly due to a decrease in operating income of $0.8 million, a decrease in other income of $0.3 million, an increase in interest expense of $0.1 million and an increase in financial income of $0.2 million.
Income Taxes
Income tax expense was $1.0 million for the three months ended September 30, 2017, compared to $1.2 million of income tax expense for the three months ended September 30, 2016, representing a decrease of $0.2 million, or 16.7%. The income before income tax decreased to $5.7 million for the three months ended September 30, 2017 from $6.7 million for the same period in 2016 and the effective tax rate decreased to 17.3% from 17.4% for the same period in 2016.
Net Income
Net income was $5.2 million for the three months ended September 30, 2017, compared to net income of $5.9 million for the three months ended September 30, 2016, representing a decrease of $0.7 million, or 11.9%, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies of $1.0 million, a decrease in income tax of $0.2 million and an increase in equity in earnings of affiliated companies of $0.2 million.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.2 million for the three months ended September 30, 2017, substantially consistent with $0.2 million for the three months ended September 30, 2016.
The Company owns equity interests in nine non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong and Chongqing Jinghua, which are accounted for under the equity method, all of the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s financial statements as of September 30, 2017 and 2016.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $5.1 million for the three months ended September 30, 2017, compared to net income attributable to parent company’s common shareholders of $5.7 million for the three months ended September 30, 2016, representing a decrease of $0.6 million, which was mainly due to a decrease in net income of $0.7 million.
Results of Operations—Nine Months Ended September 30, 2017 and 2016
Net Product Sales | Cost of Products Sold | |||||||||||||||||||||||||||||||
(in thousands of USD, except percentages) | (in thousands of USD, except percentages) | |||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||||||||||
Henglong | $ | 191,093 | $ | 195,940 | (4,847 | ) | -2.47 | % | $ | 164,765 | $ | 165,421 | $ | (656 | ) | -0.40 | % | |||||||||||||||
Jiulong | 75,525 | 54,976 | 20,549 | 37.38 | 65,358 | 47,583 | 17,775 | 37.36 | ||||||||||||||||||||||||
Shenyang | 28,777 | 24,898 | 3,879 | 15.58 | 25,123 | 21,710 | 3,413 | 15.72 | ||||||||||||||||||||||||
Wuhu | 18,254 | 15,897 | 2,357 | 14.83 | 16,891 | 14,459 | 2,432 | 16.82 | ||||||||||||||||||||||||
Hubei Henglong | 66,855 | 42,815 | 24,040 | 56.15 | 46,220 | 31,418 | 14,802 | 47.11 | ||||||||||||||||||||||||
Other Sectors | 40,821 | 29,558 | 11,263 | 38.11 | 34,492 | 24,216 | 10,276 | 42.43 | ||||||||||||||||||||||||
Total Segments | 421,325 | 364,084 | 57,241 | 15.72 | 352,849 | 304,807 | 48,042 | 15.76 | ||||||||||||||||||||||||
Elimination | (65,992 | ) | (51,587 | ) | (14,405 | ) | 27.92 | (65,693 | ) | (51,455 | ) | (14,238 | ) | 27.67 | ||||||||||||||||||
Total | $ | 355,333 | $ | 312,497 | $ | 42,836 | 13.71 | % | $ | 287,156 | $ | 253,352 | $ | 33,804 | 13.34 | % |
Net Product Sales
Net product sales were $355.3 million for the nine months ended September 30, 2017, compared to $312.5 million for the same period in 2016, representing an increase of $42.8 million, or 13.7%.
The Company’s net product sales were affected by the change in the product mix. Net sales of traditional steering products and parts were $270.2 million for the nine months ended September 30, 2017, compared to $226.8 million for the same period in 2016, representing an increase of $43.4 million, or 19.1%. Net sales of EPS were $85.1 million for the nine months ended September 30, 2017, compared to $85.7 million for the same period in 2016, representing a decrease of $0.6 million, or 0.7%. As a percentage of net sales, sales of EPS were 24.0% for the nine months ended September 30, 2017, compared to 27.4% for the same period in 2016. The increase in net product sales was mainly due to increased sales and the changes in the product mix for the nine months ended September 30, 2017.
The depreciation of China’s currency, the RMB, against the U.S. dollar in the first nine months of 2017 as compared to the first nine months of 2016 had a negative impact on net sales as more than 80% of the Company’s business is conducted in China.
In summary, due to the recovery of Chinese automobile industry, the sales of steering gears started to grow, which led to an increase in sales volume and contributed to a sales increase of $52.2 million. Some of the Company’s subsidiaries are gradually shifting their strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports, and the change in product mix led to an increase in average selling price of steering gears and contributed to a sales increase of $4.5 million. The effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $13.9 million.
Further analysis by segment (before elimination) is as follows:
Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd. (“Chery”), one of the major automotive manufacturers in China. Net product sales for Wuhu were $4.2 million for the three months ended March 31, 2021, compared to $2.8 million for the same period in 2020, representing an increase of $1.4 million, or 50.0%. An increase in sales volumes led to a sales increase of $2.5 million, a decrease in selling prices led to a sales decrease of $1.3 | ||
Cost of Products Sold
For the nine months ended September 30, 2017, the cost of products sold was $287.2 million, compared to $253.4 million for the same period of 2016, representing an increase of $33.8 million, or 13.3%. 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 $41.1 million, an increase in unit cost which led to a cost of products sold increase of $4.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products sold decrease of $11.6 million. Further analysis is as follows:
Cost of Products Sold
For the three months ended March 31, 2021, the cost of products sold was $110.6 million, compared to $62.4 million for the same period of 2020, representing an increase of $48.2 million, or 77.2%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the decrease in unit price led to a cost of products soldsales decrease of $0.8$6.3 million; (ii) the increase in sales volumes led to a cost of sales increase of $50.6 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $3.9 million.
Further analysis is as follows:
• | Cost of products sold for Jiulong was $30.7 million for the three months ended March 31, 2021, compared to $13.3 million for the same period of 2020, representing an increase of $17.4 million, or 130.8%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $20.5 million, a decrease in unit cost resulting in a cost of sales decrease of $3.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.8 million. |
Gross margin was 19.2%15.1% for the ninethree months ended September 30, 2017, compared to 18.9%March 31, 2021, which is consistent with 15.2% for the same period of 2016, representing an increase of 0.3%, mainly due to increased sales and the changes in the product mix in the nine months ended September 30, 2017.
Gain on Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the nine months ended September 30, 2017, gain on other sales amounted to $5.9 million, as compared to $2.0 million for the nine months ended September 30, 2016, representing an increase of $3.9 million. The increase was mainly due to the gain on disposal of a building of $2.2 million and increased sales volume of materials.2020.
Selling Expenses
Selling expenses were $13.2$5.6 million for the ninethree months ended September 30, 2017,March 31, 2021, as compared to $12.3$2.1 million for the same period of 2016,2020, representing an increase of $0.9$3.5 million, or 7.3%, which was mainlyprimarily due to higher sales volume and increased logistics fees related to the increase in revenue.air freight charge.
General and Administrative Expenses
General and administrative expenses were $14.0$4.6 million for the ninethree months ended September 30, 2017,March 31, 2021, as compared to $12.0$3.4 million for the same period of 2016,2020, representing an increase of $2.0$1.2 million, or 16.7%35.3%, which was mainly due to the allowance for doubtful accounts of $1.0 million and higherincreased payroll expenses.
Research and Development Expenses
Research and development expenses were $23.7$6.7 million for the ninethree months ended September 30, 2017,March 31, 2021, as compared to $18.8$5.2 million for the ninethree months ended September 30, 2016,March 31, 2020, representing an increase of $4.9$1.5 million or 26.1%, which was mainly due to increased expenditures on R&D activities for EPS products. The Company’s research and development expenses were mainly used for the development and trial production of EPS and other new products. The Company’s research and development expenditures have continued to be significant in the past several years.
The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive basis. In the past several years, the Company has continued to purchase advanced manufacturing equipment for newly developed products, hiring senior technicians and actively seeking external technical support.
Other Income from Operations
Income from operationsOther income, net was $23.2$1.7 million for the ninethree months ended September 30, 2017,March 31, 2021, as compared to $18.0$0.1 million for the ninethree months ended September 30, 2016,March 31, 2020, representing an increase of $5.2$1.6 million, or 28.9%, including an increasewhich was mainly due to the various government subsidies of $9.0$1.4 million in gross profit, an increase of $3.9 million in gain on other sales and an increase of $7.7 million in operating expenses.
Other Expense/Income, Net
Other expense, net was $0.1 million for the nine months ended September 30, 2017, compared to other income, net of $1.0 million for the nine months ended September 30, 2016, representing an increase in other expense of $1.1 million, primarily as a result of the gain on disposal of a subsidiary amounting to $0.7 million in 2016 whereas there was no such gainreceived in the current period.first three months of 2021, whereas only $0.5 million was received in the same period of last year.
Interest Expense
Interest expense was $1.2$0.3 million for the ninethree months ended September 30, 2017, compared to interest expense of $0.5March 31, 2021, which is consistent with $0.4 million for the ninethree months ended September 30, 2016, representing an increase of $0.7 million, primarily due to the new bank loans borrowed in 2017 and higher interest rates.
March 31, 2020.
Financial Income, Net
Financial income, net, was $1.9 million for the nine months ended September 30, 2017, compared to financial income, net of $1.3 million for the nine months ended September 30, 2016, representing an increase of $0.6 million, or 46.2%, which was mainly due to the interest income of $0.9 million generated from the loan to Henglong Real Estate, one of the Company’s related parties (See Note 5).
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 $23.9 million for the nine months ended September 30, 2017, compared to $19.8 million for the nine months ended September 30, 2016, representing an increase of $4.1 million, or 20.7%, which was mainly due to an increase in operating income of $5.2 million, an increase in other expense of $1.1 million, an increase in interest expense of $0.7 million and an increase in financial income of $0.6 million.
Income Taxes
Income tax expense was $4.4$0.6 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to $3.4 million of income tax expense for the nine months ended September 30, 2016, representing an increase of $1.0 million, or 29.4%. The income before income tax increased to $23.9$0.5 million for the ninethree months ended September 30, 2017 from $19.8 million for the same period in 2016 and the effective tax rate increased to 18.2% from 17.3%.
Net Income
Net income was $20.0 million for the nine months ended September 30, 2017, compared to net income of $16.9 million for the nine months ended September 30, 2016, representing an increase of $3.1 million, or 18.3%,March 31, 2020, which was mainly due to anthe increase in income before income tax expenses and equity in earnings of affiliated companies of $4.1 million, an increase in income tax of $1.0 million and a decrease in equity in earnings of affiliated companies of $0.1 million. expenses.
Net IncomeIncome/(loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.4$0.02 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to $0.2net loss attributable to non-controlling interests of $0.6 million for the ninethree months ended September 30, 2016.
The Company owns equity interests in nine non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong and Chongqing Jinghua, which are accounted for under the equity method, all the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s financial statements as of September 30, 2017 and 2016.March 31, 2020.
Net IncomeIncome/(loss) Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $19.7$3.2 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to net loss attributable to parent company’s common shareholders of $0.03 million for the three months ended March 31, 2020, representing an increase in net income attributable to parent company’s common shareholders of $16.8 million for the nine months ended September 30, 2016, representing an increase of $2.9 million, or 17.3%, which was mainly due to an increase in net income of $3.1 million and an increase in net income attributable to non-controlling interests of $0.2$3.2 million.
Privatization Proposal
On August 2, 2017, the Company issued a press release announcing the appointment by the special committee (the “Special Committee”) of the Company’s board of directors (the “Board”) of HoulihanLokey Capital, Inc. as its financial advisor and Kirkland & Ellis as its U.S. legal counsel in connection with its review and evaluation of the previously announced preliminary non-binding proposal letter that the Board received on May 14, 2017 from Mr.Hanlin Chen, the Chairman of the Board of the Company, relating to a possible “going private” transaction, as well as in connection with its review and evaluation of any other sale, merger, business combination or other corporate transaction, with Mr. Chen or any other party, and any other strategic alternatives.
As previously announced, Mr. Chen has submitted a preliminary non-binding proposal to the Board to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by Mr. Chen for $5.45 per share of common stock in cash. Mr. Chen and his affiliates currently beneficially own approximately 56.4% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The proposal is expressly conditioned on approval by a special committee of the Board comprised of independent directors and is subject to a non-waivable condition requiring approval by a majority vote of the Company’s unaffiliated stockholders. The Special Committee, consisting of Mr. Arthur Wong, Mr. Robert Tung and Mr. Guangxun Xu, is empowered to, and will be responsible for, among other things, investigating, evaluating, negotiating and making a recommendation to the Board with respect to the proposal. The Special Committee is also empowered to retain its own independent advisors to assist in the evaluation of the proposal and any alternative proposals.
The Board cautions the Company's shareholders, and others considering trading in its securities, that it has only received a proposal. No decision has been made with respect to the Company's response to the proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with Mr. Chen or any other transaction will be approved or consummated. The Company is not obligated to make, and does not at this time anticipate making, any further public statements about this matter or the activities of the special committee unless and until either the Company enters into a definitive agreement for a transaction or the special committee determines that no such transaction will be effected.
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of September 30, 2017,March 31, 2021, the Company had cash and cash equivalents and time deposits included in short-term investments of $79.2$105.2 million, compared to $61.6$107.4 million as of December 31, 2016,2020, representing an increasea decrease of $17.6$2.2 million, or 28.7%2.0%. Short-term investments included pledged short-term investments of $2.1 million and $5.7 million as of September 30, 2017 and December 31, 2016, respectively.
The Company had working capital (total current assets less total current liabilities) of $167.2$130.5 million as of September 30, 2017,March 31, 2021, compared to $161.0$121.2 million as of December 31, 2016,2020, representing an increase of $6.2$9.3 million, or 3.9%7.7%.
TheExcept for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
The Company believesWe cannot predict the impact COVID-19 may have on our cash flow for the rest of 2021. However, based on our liquidity assessment, we believe that in view of its currentour cash position, the cash expected to be generatedflow from the operations and funds availableproceeds from bank borrowings as detailed in subsequent paragraphsour financing activities will be sufficient to meet itsour anticipated cash needs, including our cash needs for working capital and capital expenditure requirements, includingexpenditures, for the repayment of bank loans,foreseeable future and for at least twelve months commencing fromsubsequent to the datefiling of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banker’sbanks’ 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.to two years. 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.one to two years.
The Company had short-term loans of $73.6$46.2 million (See Note 13)7) and bankers’ acceptances of $79.9$86.6 million (See Note 14)8) as of September 30, 2017.March 31, 2021.
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. OwingDue to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances willis expected to be reduced by approximately $12.3$16.2 million over the next 12 months. If the Company wishes to obtainmaintain the same amount of bank loans and banker's acceptances in the future, it will havemay be required by the banks to provide additional mortgages of $12.3$16.2 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $8.9$8.6 million, which is 72.0%52.9%, the mortgage rate,ratio, of $12.3$16.2 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
Bank | Due Date | Amount Available (4) | Amount Used | Assessed Mortgage Value(5) | ||||||||||||
1. Comprehensive credit facilities | Hubei Bank(6) | Sep-2017 | $ | 27,121 | $ | 6,192 | $ | 56,193 | ||||||||
2. Comprehensive credit facilities | China Construction Bank | Dec-2017 | 4,520 | 653 | 10,604 | |||||||||||
3. Comprehensive credit facilities | Shanghai Pudong Development Bank(1)(6) | Oct-2017 | 19,587 | 9,608 | 15,559 | |||||||||||
4. Comprehensive credit facilities | China CITIC Bank (1) | Sep-2017 | 60,269 | 52,990 | 9,256 | |||||||||||
China CITIC Bank (1) | Jul-2019 | 3,255 | 2,260 | 5,730 | ||||||||||||
5. Comprehensive credit facilities | Hua Xia Bank(1) | Jul-2017 | 30,135 | 1,784 | - | |||||||||||
6. Comprehensive credit facilities | China Everbright Bank | Dec-2017 | 4,520 | 2,728 | 7,715 | |||||||||||
7. Comprehensive credit facilities | ICBC Macau | May-2018 | 23,844 | 20,000 | 23,945 | |||||||||||
8. Comprehensive credit facilities | HSBC (Brazil) Company Limited | Oct-2017 | 70 | 4 | 75 | |||||||||||
9. Comprehensive credit facilities | Bank of China (Brazil) | Feb-2018 | 610 | 622 | 904 | |||||||||||
10. Comprehensive credit facilities | Bank of China(1) | Apr-2018 | 22,601 | 8,109 | - | |||||||||||
11. Comprehensive credit facilities | China Merchants Bank(1) | Apr-2018 | 15,067 | 2,117 | - | |||||||||||
12. Comprehensive credit facilities | Taishin International Bank | Apr-2018 | 10,000 | 9,858 | 12,570 | |||||||||||
Total | $ | 221,599 | $ | 116,925 | (2) | $ | 142,551 | (3) |
Bank Arrangements
As of September 30, 2017,March 31, 2021, 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(3) | Amount Used(4) | Assessed Mortgage Value(5) | ||||||||||||
1. Comprehensive credit facilities | China Everbright Bank (1) | Mar 2021 | 4,565 | 3,453 | 9,678 | |||||||||||
2. Comprehensive credit facilities | Shanghai Pudong Development Bank (2) | Oct 2021 | 19,783 | 10,637 | 22,385 | |||||||||||
3. Comprehensive credit facilities | China CITIC Bank (2) | Aug 2022 | 64,675 | 22,605 | 21,680 | |||||||||||
China CITIC Bank (2) | Aug 2021 | 10,652 | 2,563 | - | ||||||||||||
China CITIC Bank | Jun 2022 | 3,287 | 1,671 | 6,712 | ||||||||||||
4. Comprehensive credit facilities | Hubei Bank | Mar 2022 | 25,870 | 24,070 | 70,943 | |||||||||||
5. Comprehensive credit facilities | Bank of Chongqing | Sep 2021 | 761 | 228 | 2,377 | |||||||||||
6. Comprehensive credit facilities | Bank of China (2) | Sep 2020 | 17,653 | 13,087 | - | |||||||||||
7. Comprehensive credit facilities | China Merchants Bank (2) | Oct 2021 | 22,826 | 8,742 | - | |||||||||||
8. Comprehensive credit facilities | Agricultural Bank of China | Mar 2022 | 1,522 | 1,065 | 4,227 | |||||||||||
9. Comprehensive credit facilities | Huishang Bank | May 2021 | 1,522 | - | - | |||||||||||
Total | $ | 173,116 | $ | 88,121 | $ | 138,002 |
(1) | |
(2) | The comprehensive credit facilities with Shanghai Pudong Development Bank |
“Amount available” is used for the drawdown of bank loans and issuance of bank notes at the Company’s discretion. If the Company elects to utilize the facility by issuance of bank notes, additional collateral is requested to be pledged to the bank. | |
(4) | “Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire. The amount used includes bank loans of |
In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of |
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
The Company’s bank loan terms range from eleven9 months to eighteen23 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Equipment with an assessed value of approximately $56.2 million as security for its revolving comprehensive credit facility with Hubei Bank.
2. Land use rights, buildings and equipment with an assessed value of approximately $10.6 million as security for its revolving comprehensive credit facility with China Construction Bank.
3. Land use rights and buildings with an assessed value of approximately $15.6$9.7 million as security for its comprehensive credit facility with China Everbright Bank.
2. Buildings with an assessed value of approximately $22.4 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
4.3. Land use rights and buildings with an assessed value of approximately $9.3$21.7 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.Branch.
5.4. Land use rights and buildings with an assessed value of approximately $5.7$6.7 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.Branch.
6. Land use rights and buildings5. Equipment with an assessed value of approximately $7.7$70.9 million as security for its revolving comprehensive credit facility with Hubei Bank.
6. Buildings with an assessed value of approximately $2.4 million as security for its comprehensive credit facility with China Everbright Bank.Bank of Chongqing.
7. On April 20, 2017, the Company entered into a Credit AgreementBuildings with ICBC Macau to obtain the Credit Facility. The interest ratean assessed value of the Credit Facility is calculated based on a three-month LIBOR plus 1.30% per annum, subject to the availabilityapproximately $4.2 million as security for its comprehensive credit facility with Agricultural Bank of funds and fluctuation at ICBC Macau’s discretion. 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.China.
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 $23.9 million if the Credit Facility is fully drawn.
On May 5, 2017, the Company drew down the full amount of $20.0 million under the Credit FacilityShort-term and provided the Henglong Standby Letter of Credit for an amount of $23.9 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 158.5 million, equivalent to approximately $23.9 million. The Company also paid an arrangement fee of $0.04 million to ICBC Jingzhou. The maturity date of the Credit Facility is May 12, 2018.
8. On April 1, 2016, Brazil Henglong entered into a credit facility agreement with HSBC Brazil to obtain a credit facility in the amount of $0.1 million, the “HSBC Brazil Credit Facility”. The HSBC Brazil Credit Facility expired on October 27, 2017. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC Brazil with the Standby Letter of Credit for a total amount of $0.1 million if the HSBC Brazil Credit Facility was fully drawn.
On May 6, 2016, Brazil Henglong drew down a loan amounting to $0.1 million provided by HSBC Brazil. The loan matured on October 9, 2017 and had an annual interest rate of 8.2%.Hubei Henglong provided a Standby Letter of Credit for an amount of $0.1 million in favor of HSBC Brazil. Hubei Henglong’s Standby Letter of Credit was issued by China CITIC Bank Wuhan branch and was collateralized by short-term investments of Hubei Henglong of RMB 0.5 million, equivalent to approximately $0.1 million. The Company repaid this bank loan in October 9, 2017.
9. On August 26, 2016, Brazil Henglong entered into a credit facility agreement with Bank of China (Brazil) to obtain a credit facility in the amount of $0.6 million, the “Bank of China Credit Facility”. The Bank of China Credit Facility will expire on January 15, 2018. As security for the Bank of China Credit Facility, the Company’s subsidiary Hubei Henglong is required to provide Bank of China (Brazil) with a Standby Letter of Credit for a total amount of $0.9 million if the Bank of China Credit Facility is fully drawn.
On August 26, 2016, Brazil Henglong drew down a loan amounting to $0.6 million provided by Bank of China (Brazil). The loan will mature on January 15, 2018 and has an annual interest rate of 4.0%. Interest is paid semiannually and the principal repayment is at maturity. Hubei Henglong provided a Standby Letter of Credit for an amount of $0.9 million in favor of Bank of China (Brazil). Hubei Henglong’s Standby Letter of Credit was issued by Bank of China Jingzhou branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 6.0 million, equivalent to approximately $0.9 million.
10. On April 25, 2017, Great Genesis entered into a credit facility agreement with Taishin Bank to obtain a non-revolving credit facility in the amount of $10.0 million, the “Taishin Bank Credit Facility”. The Taishin Bank Credit Facility will expire on April 25, 2018 and has an annual interest rate of 2.7%. Interest is paid quarterly and the principal repayment is payable at maturity. As security for the Taishin Bank Credit Facility, the Company’s subsidiary Henglong is required to provide Taishin Bank with the Standby Letter of Credit for a total amount of not less than $10.0 million if the Taishin Bank Credit Facility is fully drawn.
On April 28, 2017, Great Genesis drew down the full amount of $9.9 million under the Taishin Bank Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $10.0 million in favor of Taishin Bank. Henglong’s Standby Letter of Credit issued by China CITIC Bank Wuchang branch is collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.4 million, equivalent to approximately $12.0 million.
Cash Requirements
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments (in thousands of USD). The Company has not included information on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closely reflecting the Company’s levels of production, and are not long-term in nature (being less than three months in length).
Payment Due Dates | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 Years | ||||||||||||||||
Short-term loan including interest payable | $ | 74,951 | $ | 74,951 | $ | - | $ | - | $ | - | ||||||||||
Notes payable(1) | 82,165 | 82,165 | - | - | - | |||||||||||||||
Obligation for investment contract(2) | 5,424 | - | 5,424 | - | - | |||||||||||||||
Other contractual purchase commitments, including service agreements | 24,676 | 16,496 | 8,180 | - | - | |||||||||||||||
Total | $ | 187,216 | $ | 173,612 | $ | 13,604 | $ | - | $ | - |
Short-term Bank and GovernmentLong-term Loans
The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of September 30, 2017March 31, 2021 (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 | |||||||||||||||||||||||||||||||||
Bank of China (Brazil) | Working Capital | Aug. 26, 2016 | 18 | 4.01 | % | Pay semi annually | Jan. 15, 2018 | 622 | ||||||||||||||||||||||||||||||||
Borrowing | Annual | Date of | ||||||||||||||||||||||||||||||||||||||
HSBC (Brazil) Company Limited | Working Capital | May 6, 2016 | 17 | 8.21 | % | Pay quarterly | Oct. 9, 2017 | 4 | ||||||||||||||||||||||||||||||||
Bank | Borrowing | Term | Interest | Interest | ||||||||||||||||||||||||||||||||||||
Government | Purpose | Date | (Months) | Principal | Rate | Payment | Due Date | |||||||||||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Aug 07, 2019 | 23 | 3,044 | 3.80 | % | Pay annually | Jun 30, 2021 | ||||||||||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Sep 03, 2019 | 22 | 4,565 | 3.80 | % | Pay annually | Jun 30, 2021 | ||||||||||||||||||||||||||||||||
Agricultural Bank of China | Working Capital | Mar 18, 2021 | 12 | 1,065 | 4.05 | % | Pay monthly | Mar 17, 2022 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Jun 19, 2020 | 12 | 2,729 | 2.50 | % | Pay in arrear | Jun 18, 2021 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar 22, 2021 | 12 | 4,112 | 3.45 | % | Pay in arrear | Mar 22, 2022 | ||||||||||||||||||||||||||||||||
Bank of China (1) | Working Capital | Apr 29, 2020 | 12 | 6,087 | 3.92 | % | Pay monthly | Apr 28, 2021 | ||||||||||||||||||||||||||||||||
China CITIC Bank (1) | Working Capital | Apr 29, 2020 | 12 | 1,522 | 4.35 | % | Pay monthly | Apr 29, 2021 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Nov. 4, 2016 | 12 | 5.22 | % | Pay monthly | Nov. 4, 2017 | 2,260 | Working Capital | May 20, 2020 | 12 | 1,522 | 4.35 | % | Pay monthly | May 20, 2021 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 5, 2018 | 4,896 | Working Capital | May 29, 2020 | 12 | 1,522 | 4.00 | % | Pay monthly | May 29, 2021 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 6, 2018 | 4,895 | Working Capital | Jun 19, 2020 | 12 | 2,922 | 2.50 | % | Pay in arrear | Jun 18, 2021 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 7, 2018 | 4,607 | Working Capital | Mar 22, 2021 | 12 | 6,831 | 3.45 | % | Pay in arrear | Mar 18, 2022 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 8, 2018 | 4,318 | ||||||||||||||||||||||||||||||||
Bank of China | Working Capital | Jun 28, 2020 | 12 | 7,000 | 3.80 | % | Pay monthly | Jun 27, 2021 | ||||||||||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 2, 2018 | 4,322 | Working Capital | Sep 03, 2020 | 12 | 1,522 | 4.35 | % | Pay monthly | Sep 03, 2021 | ||||||||||||||||||||||||
China CITIC Bank | Working Capital | Mar. 3, 2017 | 11 | 4.99 | % | Pay in arrear | Feb. 9, 2018 | 5,758 | Working Capital | Sep 11, 2020 | 12 | 1,522 | 5.22 | % | Pay monthly | Sep 11, 2021 | ||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Apr. 21, 2017 | 8 | 0.00 | % | N/A | Dec. 8, 2017 | 1,507 | ||||||||||||||||||||||||||||||||
Bank of ChongQing | Working Capital | Dec 29, 2020 | 9 | 228 | 4.05 | % | Pay monthly | Sep 19, 2021 | ||||||||||||||||||||||||||||||||
$ | 46,193 | |||||||||||||||||||||||||||||||||||||||
ICBC Macau | Working Capital | May 5, 2017 | 12 | 2.63 | % | Pay quarterly | May 4, 2018 | 20,000 | ||||||||||||||||||||||||||||||||
Taishin International Bank | Working Capital | Apr. 28, 2017 | 12 | 2.65 | % | Pay quarterly | Apr. 23, 2018 | 9,858 | ||||||||||||||||||||||||||||||||
Financial Bureau of Jingzhou Development Zone | Working Capital | Aug. 17, 2017 | 12 | 1.50 | % | Pay in arrear | Aug. 16, 2018 | 3,013 | ||||||||||||||||||||||||||||||||
Bank of China (JingzhouShashi) | Working Capital | Sep. 28, 2017 | 12 | 4.57 | % | Pay monthly | Sep. 27, 2018 | 7,534 | ||||||||||||||||||||||||||||||||
Total | $ | 73,594 |
(1) | These bank loans were repaid between April and May 2021 when they became due. |
The Company must use the loans for the purpose described in the table. For the two bank loans with ICBC Macau and HSBC Bank (China) Company Limited, 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, quarter or semiannual period, 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 aadditional 30% to 100% penalty interest at 50% of the specified loan rate.interest.
Management believes that theThe Company has complied with such financial covenants as of September 30, 2017, and will continue to comply with them.March 31, 2021.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of September 30, 2017March 31, 2021 (figures are in thousands of USD):
Purpose | Term (Month) | Due Date | Amount Payable on Due Date | Term (Months) | Due Date | Amount Payable on Due Date | ||||||||||||||
Working Capital(1) | 6 | Apr. 2021 | 13,167 | |||||||||||||||||
Working Capital (1) | 6 | Oct. 2017 | $ | 18,501 | 6 | May. 2021 | 14,691 | |||||||||||||
Working Capital | 6 | Nov. 2017 | 12,057 | 6 | Jun. 2021 | 15,390 | ||||||||||||||
Working Capital | 12 | Nov. 2017 | 2,260 | 6 | Jul. 2021 | 11,879 | ||||||||||||||
Working Capital | 6 | Dec. 2017 | 11,553 | 6 | Aug. 2021 | 16,273 | ||||||||||||||
Working Capital | 6 | Jan. 2018 | 10,982 | 6 | Sep. 2021 | 15,152 | ||||||||||||||
Working Capital | 6 | Feb. 2018 | 11,338 | |||||||||||||||||
Working Capital | 6 | Mar. 2018 | 15,474 | |||||||||||||||||
Total (See Note 15) | $ | 82,165 | ||||||||||||||||||
Total (See Note 8) | $ | 86,552 |
(1) | The notes payable were repaid in full on their respective due dates. |
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit a 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 aan additional 50% penalty interest at 50% of the loan rate that is published by the People’s Bank of China for the same period.interest. The Company complied with such financial covenants as of September 30, 2017, and believes it will continue to comply with them.March 31, 2021.
Cash Flows
(a) | Operating Activities |
Net cash provided byused in operating activities for the ninethree months ended September 30, 2017March 31, 2021 was $43.0$0.8 million, compared with net cash provided byin operating activities of $13.1$29.2 million for the same period of 2016,2020, representing an increase in net cash outflows by $30.0 million, which was mainly due to (1) the increase in net income excluding non-cash items by $5.7 million, (2) the decrease in cash inflows from movements of $29.9accounts and notes receivable by $37.4 million, (3) the decrease in the cash outflows from movements of accounts and notes payable by $19.6 million, and (4) a combination of other factors contributing an increase of cash outflows by $17.9 million.
(b) | Investing Activities |
Net cash used in investing activities for the three months ended March 31, 2021 was $5.8 million, as compared to net cash provided by investing activities of $1.7 million for the same period of 2020, representing an increase in net cash outflows by $7.5 million, which was mainly due to the net effect of (1) thean increase in net income excluding non-cash itemspayments to acquire property, plant and equipment by $6.7$1.3 million, and (2) a combination of other factors contributing an increase of cash inflows by $6.3 million, primarily including an increase in purchase of short-term investment by $14.7 million, offset by the increase in cash inflowsreceived from movements of operating assets and liabilities by $23.2 million. The increase in cash inflows was primarily due to the offsetting effect of (1) thedecrease in cash inflows due to the movement of pledged deposits by $8.5 million, (2) the increase in cash outflows due to the movement of accounts and notes payable by $18.0 million, (3) the increase in cash inflows due to the movement of accounts and notes receivable by $51.3 million, (4) the decrease in cash outflows due to the movement of inventories by $11.8 million, (5) the increase in cash outflows due to the movement of accrued expenses and other payables by $7.5 million and (6) the increase in cash outflows due to the movement of tax payable by $8.2 million.
The Company used net cash of $50.5 million in investment activities during the nine months ended September 30, 2017, compared to $46.0 million for the same period of 2016, representing an increase of cash outflows by $4.5 million, which was mainly due to (1) a decrease in purchases of property, plant and equipment of $8.0 million, (2) a decrease in cash used in purchases of short-term investments of $3.2 million, (3) an increase in other receivables of $2.2 million, (4) an increase in cash used in purchase of long-term time deposit by $5.8 million, (5) an increase in proceeds from maturities of short-term investmentsinvestment and long-term time deposits by $20.5$4.1 million, and (6) an increasea decrease in cash outflows due to a loan to a related partyinvestment under the equity method by $29.0$2.6 million.
(c) | Financing Activities |
Net cash provided by financing activities for the ninethree months ended September 30, 2017March 31, 2021 was $30.4$1.4 million, compared to net cash provided byused in financing activities of $3.6$2.9 million for the same period of 2016,2020, representing an increase of $26.8in net cash inflows by $4.3 million, which was mainly due to the net effect of (1) increaseda decrease in proceeds of $57.9 million from bank and government loansloan by $1.8 million, and (2) increased repaymentsa decrease in repayment of $32.1 million to banks and the government.bank loans by $6.1 million.
Off-Balance Sheet Arrangements
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, 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, 20162020 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 September 30, 2017,March 31, 2021, 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 September 30, 2017.March 31, 2021.
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 September 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS. |
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. In November 2020, the Company reached a settlement to resolve the lawsuit for the sum of $55,998. The Company did not admit any liability in reaching the settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement of litigation expenses be reduced from $100,000 to $30,000. The Court’s Final Order and Judgment is publicly available on the Court of Chancery docket. As of March 31, 2021, the Company has received above settlement of $55,998 from the directors and paid the above attorneys’ fees and reimbursement of litigation expenses.
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition,proceedings and 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 20162020 Annual Report on Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
None.
ITEM 6. | EXHIBITS. |
INDEX TO EXHIBITS
(i) | Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income, | |
(ii) | Condensed Unaudited Consolidated Balance Sheets, | |
(iii) | Condensed Unaudited Consolidated Statements of Cash Flows, and | |
(iv) | related notes | |
* | filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA AUTOMOTIVE SYSTEMS, INC. | ||||
(Registrant) | ||||
Date: | May 12, 2021 | By: | / s/Qizhou Wu | |
Qizhou Wu | ||||
President and Chief Executive Officer | ||||
Date: | May 12, 2021 | By: | /s/Jie Li | |
Jie Li | ||||
Chief Financial Officer |