The accompanying notes are an integral
part of these condensed unaudited consolidated financial statements.
The accompanying notes are an integral
part of these condensed unaudited consolidated financial statements.
The accompanying notes are an integral
part of these condensed unaudited consolidated financial statements.
The accompanying notes are an integral part of these condensed
unaudited consolidated financial statements.
Notes to Condensed Unaudited Consolidated
Financial Statements
Three Months Ended March 31, 2016 and
2015
1.
|
Organization and business
|
China Automotive Systems, Inc., “China
Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive,
including, when the context so requires, its subsidiaries and the joint ventures described below, is referred to herein as the
“Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described
below.
Great Genesis Holdings Limited, a company
incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,”
is a wholly-owned subsidiary of the Company. Great Genesis is mainly engaged in the manufacture and sale of automotive systems
and components through its controlled subsidiaries and the joint ventures, as described below.
Henglong USA Corporation, “HLUSA,”
incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and is mainly engaged in marketing
of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate
net interests in the entities established in the People's Republic of China, the “PRC,” and Brazil as of March 31,
2016 and December 31, 2015.
|
|
Percentage Interest
|
|
Name of Entity
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”
1
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”
2
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”
3
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
Universal Sensor Application Inc., “USAI”
4
|
|
|
83.34
|
%
|
|
|
83.34
|
%
|
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”
5
|
|
|
85.00
|
%
|
|
|
85.00
|
%
|
Wuhu HengLong Automotive Steering System Co., Ltd., “Wuhu”
6
|
|
|
77.33
|
%
|
|
|
77.33
|
%
|
Hubei Henglong Automotive System Group Co., Ltd, “Hubei Henglong”
7
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”
8
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Beijing Henglong Automotive System Co., Ltd., “Beijing Henglong”
9
|
|
|
50.00
|
%
|
|
|
50.00
|
%
|
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong”
10
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong”
11
|
|
|
80.00
|
%
|
|
|
80.00
|
%
|
Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”
12
|
|
|
51.00
|
%
|
|
|
51.00
|
%
|
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”
13
|
|
|
85.00
|
%
|
|
|
85.00
|
%
|
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”
14
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
1.
|
Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
|
|
2.
|
Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.
|
|
3.
|
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
|
|
4.
|
USAI was established in 2005 and mainly engages in the production and sales of sensor modules.
|
|
5.
|
Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.
|
|
6.
|
Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
|
|
7.
|
On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.
|
|
8.
|
In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of new products.
|
|
9.
|
Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric power steering systems and parts. According to the joint venture agreement, the Company does not have voting control of Beijing Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such investment is accounted for using the equity accounting method.
|
|
10.
|
On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.
|
|
11.
|
On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil.
|
|
12.
|
In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles.
|
|
13.
|
In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China.
|
|
14.
|
In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics.
|
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, 2015.
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, 2015 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 2015 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission.
The results of operations for the three
months ended March 31, 2016 are not necessarily indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2016.
Estimation - The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
|
(b)
|
Recent Accounting Pronouncements
|
In March 2016, the FASB issued
ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting. The amendments in this Update
eliminate the requirement that, when an investment qualifies for use of the equity method as a result of an increase in the
level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and
retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous
periods that the investment had been held. The amendments require that the equity method investor add the cost of
acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and
adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.
Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The
amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for
the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other
comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this
Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. The amendments should be applied prospectively upon their effective date to increase in
the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier
application is permitted. The Company is in the process of evaluating the impact of the Update on its consolidated financial
statements.
In May 2014, the FASB and the
International Accounting Standards Board (IASB) jointly issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic
606), which was further updated by ASU No. 2016-08 in March 2016 and ASU 2016-10 in April 2016. The new guidance clarifies
the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting
Standards (IFRS). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods and services. In July 2015, the FASB approved a deferral of the ASU effective date from
annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017.
The Company is in the process of evaluating the impact of the Update on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
- Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB
Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including the income
tax consequences and classification on the statement of cash flows. The guidance is effective for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim
or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments
in the same period. The Company is in the process of evaluating the impact of the Update on its consolidated financial statements.
|
(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, 2015.
Pledged cash is used as guarantees for
the Company’s notes payable and its use is restricted. The Company regularly pays some of its suppliers by bank notes. The
Company has to make a cash deposit, generally equivalent to 40% - 100% of the face value of the relevant bank note, in order to
obtain the bank note.
4.
|
Short-term investments
|
Short-term investments are comprised
of time deposits with terms of three months or more which are due within one year and wealth management financial products
with maturity 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 value was measured 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 March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Time deposits
|
|
$
|
23,325
|
|
|
$
|
21,209
|
|
Wealth management financial products measured at fair value
|
|
|
5,251
|
|
|
|
-
|
|
Total
|
|
$
|
28,576
|
|
|
$
|
21,209
|
|
5.
|
Accounts and notes receivable, net
|
The Company’s accounts and notes
receivable as of March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accounts receivable - unrelated parties
(1)
|
|
$
|
154,800
|
|
|
$
|
141,828
|
|
Notes receivable - unrelated parties
(2) (3)
|
|
|
122,705
|
|
|
|
113,777
|
|
Total accounts and notes receivable- unrelated parties
|
|
|
277,505
|
|
|
|
255,605
|
|
Less: allowance for doubtful accounts - unrelated parties
|
|
|
(1,160
|
)
|
|
|
(1,208
|
)
|
Accounts and notes receivable, net - unrelated parties
|
|
|
276,345
|
|
|
|
254,397
|
|
Accounts and notes receivable, net - related parties
|
|
|
24,760
|
|
|
|
21,918
|
|
Accounts and notes receivable, net
|
|
$
|
301,105
|
|
|
$
|
276,315
|
|
(1)
|
As of March 31, 2016 and December 31, 2015, the Company has pledged nil and $32.5 million, respectively, of accounts receivable as security for its comprehensive credit facilities with banks in China.
|
|
|
(2)
|
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
|
|
|
(3)
|
As of March 31, 2016, Henglong collateralized
its notes receivable in an amount of RMB243.6 million, equivalent to approximately $37.7 million, as security for the credit facilities
with banks in China and the Chinese government, including RMB218.4 million, equivalent to approximately $33.8 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 RMB25.0 million,
equivalent to approximately $3.9 million, as security in favor of the Chinese government for the low-interest government loan (See
Note 13).
As of December
31, 2015, Henglong collateralized its notes receivable in an amount of RMB232.9 million, equivalent to approximately $35.8 million,
as security for the credit facilities with banks in China and the Chinese government, including RMB207.4 million, equivalent to
approximately $31.9 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 RMB25.5 million, equivalent to approximately $3.9 million, in favor of the Chinese government as security for
the low-interest government loan.
|
The Company’s inventories as of March 31, 2016 and December
31, 2015 consisted of the following (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
17,920
|
|
|
$
|
15,653
|
|
Work in process
|
|
|
15,757
|
|
|
|
14,222
|
|
Finished goods
|
|
|
37,049
|
|
|
|
35,695
|
|
Total
|
|
$
|
70,726
|
|
|
$
|
65,570
|
|
Provision for inventories amounted to $1.4 million and $0.8
million for the three months ended March 31, 2016 and 2015, respectively.
7.
|
Other receivables, net
|
The Company’s other receivables as of March 31, 2016 and
December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Other receivables - unrelated parties
(1)
|
|
$
|
1,784
|
|
|
$
|
1,770
|
|
Other receivables - employee housing loans
(2)
|
|
|
2,062
|
|
|
|
2,175
|
|
Less: allowance for doubtful accounts - unrelated parties
|
|
|
(63
|
)
|
|
|
(63
|
)
|
Other receivables, net - unrelated parties
|
|
$
|
3,783
|
|
|
$
|
3,882
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Other receivables - related parties
(1)
|
|
$
|
655
|
|
|
$
|
621
|
|
Less: allowance for doubtful accounts - related parties
|
|
|
(610
|
)
|
|
|
(607
|
)
|
Other receivables, net - related parties
|
|
$
|
45
|
|
|
$
|
14
|
|
(1)
|
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans. These receivables originate as part of the Company's normal operating activities and are periodically settled in cash.
|
(2)
|
On May 28, 2014, the board of directors of the Company approved a loan program under which the Company will lend an aggregate of up to RMB50.0 million, equivalent to approximately $7.7 million, to the employees of the Company to assist them in purchasing houses. Employees are required to pay interest at an annual rate of 6.4%. These loans are unsecured and the term of the loans is generally five years.
|
8.
|
Long-term time deposits
|
In July 2015, the Company purchased long-term
time deposits of RMB33.0 million, equivalent to approximately $5.1 million, with an annual interest rate of 3.12%.
As of March 31, 2016 and December 31, 2015,
the Company had pledged long-term time deposits of RMB33.0 million, equivalent to approximately $5.1 million, to secure loans under
the credit facility issued by HSBC Bank (China) Company Limited Hong Kong branch (“HSBC HK”) and the use of the pledged
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 March 31,
2016 and December 31, 2015, the Company had $3.8 million and $3.8 million of net equity in Beijing Henglong,
respectively.
On September 22, 2014, Hubei Henglong entered
into an agreement with other parties to establish a venture capital fund, the “Venture Fund”, which mainly focuses
on investments in emerging automobiles and parts industries. As of March 31, 2016, Hubei Henglong has completed a capital contribution
of RMB15 million, equivalent to approximately $2.4 million, representing 16.1% of the Venture Fund’s shares. As a limited
partner, Hubei Henglong has more than virtually no influence over the Venture Fund’s operating and financial policies. The
investment is accounted for using the equity method. As of March 31, 2016 and December 31, 2015, the Company had $2.3 million and
$2.4 million of net equity in the Venture Fund, respectively.
The Company’s consolidated financial
statements reflect the net income of non-consolidated affiliates of $0.1 million and $0.1 million for the three months
ended March 31, 2016 and 2015, respectively.
10.
|
Property, plant and equipment, net
|
The Company’s property, plant and
equipment as of March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Land use rights and buildings
|
|
$
|
51,941
|
|
|
$
|
51,384
|
|
Machinery and equipment
|
|
|
128,805
|
|
|
|
120,706
|
|
Electronic equipment
|
|
|
7,553
|
|
|
|
7,527
|
|
Motor vehicles
|
|
|
4,576
|
|
|
|
4,526
|
|
Construction in progress
|
|
|
14,265
|
|
|
|
11,225
|
|
Total amount of property, plant and equipment
|
|
|
207,140
|
|
|
|
195,368
|
|
Less: Accumulated depreciation
(1)
|
|
|
(115,310
|
)
|
|
|
(111,217
|
)
|
Total amount of property, plant and equipment, net
(2)(3)
|
|
$
|
91,830
|
|
|
$
|
84,151
|
|
(1)
|
As of March 31, 2016 and December 31, 2015, the Company had pledged property, plant and equipment with net book value of $33.1 million and $34.1 million, respectively, for its comprehensive credit facilities with banks in China.
|
(2)
|
Depreciation charges were $3.6 million and $3.8 million for the three months ended March 31, 2016 and 2015, respectively.
|
(3)
|
During the three months ended March 31, 2016, $1.2 million of government subsidies were recorded as a reduction of the cost of property, plant and equipment.
|
(4)
|
Interest costs capitalized for the three months ended March 31, 2016 were $0.1 million. No interest costs were capitalized for the three months ended March 31, 2015 since they were not significant.
|
The
Company’s intangible assets as of March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands
of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Costs:
|
|
|
|
|
|
|
|
|
Patent technology
|
|
$
|
4,629
|
|
|
$
|
4,605
|
|
Management software license
|
|
|
1,043
|
|
|
|
1,036
|
|
Total intangible assets
|
|
|
5,672
|
|
|
|
5,641
|
|
Less: Amortization
(1)
|
|
|
(3,008
|
)
|
|
|
(2,848
|
)
|
Total intangible assets, net
|
|
$
|
2,664
|
|
|
$
|
2,793
|
|
(1)
|
Amortization expenses were $0.2 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively.
|
12.
|
Deferred income tax assets
|
In accordance with the provisions of
ASC
Topic 740, “Income Taxes”,
the Company assesses, on a quarterly basis, its ability to realize its deferred tax
assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a
valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company
considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities;
the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing
and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting
further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry
period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of estimated deferred income tax assets as of
March 31, 2016 and December 31, 2015 are as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Losses carry forward (U.S.)
(1)
|
|
$
|
6,440
|
|
|
$
|
6,498
|
|
Losses carry forward (Non-US)
(1)
|
|
|
2,560
|
|
|
|
2,901
|
|
Product warranties and other reserves
|
|
|
4,528
|
|
|
|
4,344
|
|
Property, plant and equipment
|
|
|
4,678
|
|
|
|
4,656
|
|
Share-based compensation
|
|
|
222
|
|
|
|
222
|
|
Bonus accrual
|
|
|
432
|
|
|
|
379
|
|
Other accruals
|
|
|
850
|
|
|
|
995
|
|
Others
|
|
|
1,498
|
|
|
|
1,350
|
|
Total deferred tax assets
|
|
|
21,208
|
|
|
|
21,345
|
|
Less: taxable temporary difference related to revenue recognition
|
|
|
(693
|
)
|
|
|
(105
|
)
|
Total deferred tax assets, net
|
|
|
20,515
|
|
|
|
21,240
|
|
Less: Valuation allowance
|
|
|
(8,951
|
)
|
|
|
(9,379
|
)
|
Total deferred tax assets, net of valuation allowance
(2)
|
|
$
|
11,564
|
|
|
$
|
11,861
|
|
(1)
|
The net operating losses carry forward for the U.S. entities for income tax purposes are available to reduce future years' taxable income. These losses will expire, if not utilized, in 20 years. Net operating losses carry forward for China entities can be carried forward for 5 years to offset taxable income. However, as of March 31, 2016, the valuation allowance was $9.0 million, including $6.7 million allowance for the Company’s deferred tax assets in the United States and $2.3 million allowance for the Company’s non-U.S deferred tax assets in China. Based on the Company’s current operations in the United States, management believes that the deferred tax assets in the United States are not likely to be realized in the future. For the deferred tax assets in other countries, pursuant to certain tax laws and regulations, the management believes such amount will not be used to offset future taxable income.
|
(2)
|
Approximately $4.9 million and $4.9 million of net deferred income tax asset as of March 31, 2016 and December 31, 2015, respectively, are included in non-current deferred tax assets in the accompanying condensed unaudited consolidated balance sheets. The remaining $6.6 million and $7.0 million of net deferred income tax assets as of March 31, 2016 and December 31, 2015, respectively, are included in current deferred tax assets.
|
13.
|
Bank and government loans
|
Loans consist of the following as of March 31, 2016 and December
31, 2015 (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Short-term bank loan
(1)
|
|
$
|
6,500
|
|
|
$
|
2,079
|
|
Short-term bank loan
(2) (3)
|
|
|
35,000
|
|
|
|
35,000
|
|
Short-term government loan
(4)
|
|
|
3,870
|
|
|
|
3,850
|
|
Bank and government loans
|
|
$
|
45,370
|
|
|
$
|
40,929
|
|
(1)
|
These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note 10). As of March 31, 2016 and December 31, 2015, the weighted average interest rate was 6.3% and 8.0% per annum, respectively. Interest is to be paid monthly or quarterly on the twentieth day of the applicable month or quarter and the principal repayment is at maturity.
|
|
|
(2)
|
On May 18, 2012, the Company entered into
a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving credit facility in the
amount of $30.0 million, the “Credit Facility”. The Credit Facility would have expired on November 3, 2012 unless the
Company drew down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown was the
earlier of (i) 18 months from the drawdown or (ii) 1 month before the expiry of the standby letter of credit obtained by Henglong
from ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate
of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the availability of funds and
fluctuation at ICBC Macau’s discretion. The interest is calculated daily based on a 360-day year and it is fixed one day
before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security
for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total
amount not less than $31.6 million if the Credit Facility is fully drawn.
On May 22, 2012, the Company drew down
the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of
$31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s
notes receivable of RMB207.1 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.
On May 7, 2013, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 13, 2014. The interest rate of the Credit Facility under the extended term was
revised as the three-month LIBOR plus 2.0% per annum. Except for the above, all other terms and conditions as stipulated in the
Credit Agreement remained unchanged.
On May 13, 2014, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 12, 2015. The interest rate of the Credit Facility under the extended term was
revised as the three-month LIBOR plus 2.55% per annum. Except for the above, all other terms and conditions as stipulated in the
Credit Agreement remained unchanged.
On May 8, 2015, ICBC Macau agreed to extend
the maturity date of the Credit Facility to May 13, 2016. The interest rate of the Credit Facility under the extended term is revised
as the three-month LIBOR plus 1.40% per annum. Except for the above, all other terms and conditions as stipulated in the Credit
Agreement remain unchanged. As of March 31, 2016, the interest rate of the Credit Facility was 2.83% per annum.
|
(3)
|
On July 16, 2014, Great Genesis entered into a
credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million, the
“HSBC Credit Facility”. The HSBC Credit Facility expired on July 1, 2015, and had an annual interest rate of
1.7%. Interest was paid on the twentieth day of each month and the principal repayment was at maturity. As security for the
HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with the Standby Letter
of Credit for a total amount of not less than $5.4 million if the HSBC Credit Facility was fully drawn.
|
|
On July 22, 2014, Great Genesis drew down
a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4
million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan
branch and is collateralized by long-term time deposits of Hubei Henglong of RMB33.0 million, equivalent to approximately $5.4
million.
On October 6, 2015, HSBC HK agreed to extend
the maturity date of the Credit Facility to July 1, 2016. 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
is collateralized by long-term time deposits of Hubei Henglong of RMB33.0 million, equivalent to approximately $5.1 million. The
interest rate of the Credit Facility under the extended term is revised as 1.5% per annum. Except for the above, all other terms
and conditions as stipulated in the Credit Agreement remained unchanged.
|
(4)
|
On March 31, 2015, the Company received a Chinese government loan of RMB25.0 million, equivalent to approximately $3.9 million, with an interest rate of 2.5% per annum, which will mature on April 20, 2016. Henglong pledged RMB25.2 million, equivalent to approximately $3.9 million, of notes receivable as security for such Chinese government loan (See Note 5).
|
14.
|
Accounts and notes payable
|
The Company’s accounts and notes
payable as of March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accounts payable - unrelated parties
|
|
$
|
135,635
|
|
|
$
|
126,759
|
|
Notes payable - unrelated parties
(1)
|
|
|
75,150
|
|
|
|
70,346
|
|
Accounts and notes payable - unrelated parties
|
|
|
210,785
|
|
|
|
197,105
|
|
Accounts payable - related parties
|
|
|
5,335
|
|
|
|
5,578
|
|
Notes payable-related parties
|
|
|
659
|
|
|
|
785
|
|
Accounts and notes payable - related parties
|
|
|
5,994
|
|
|
|
6,363
|
|
Balance at end of period
|
|
$
|
216,779
|
|
|
$
|
203,468
|
|
(1)
|
Notes payable represent accounts payable in the form of bills of exchange whose acceptances are guaranteed and settlements are handled by banks. The Company has pledged cash deposits, notes receivable and certain property, plant and equipment to secure notes payable granted by banks.
|
15.
|
Accrued expenses and other payables
|
The Company’s accrued expenses and
other payables as of March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accrued expenses
|
|
$
|
5,804
|
|
|
$
|
6,186
|
|
Accrued interest
|
|
|
345
|
|
|
|
116
|
|
Other payables
|
|
|
1,659
|
|
|
|
1,517
|
|
Dividends payable to common shareholders
(1)
|
|
|
505
|
|
|
|
505
|
|
Warranty reserves
(2)
|
|
|
23,187
|
|
|
|
23,059
|
|
Total
|
|
$
|
31,500
|
|
|
$
|
31,383
|
|
(1)
|
On May 27, 2014, the Company announced the payment of a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014. As of March 31, 2016, dividends payable of $0.5 million remained unpaid.
|
(2)
|
The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances.
|
For
the three months ended March 31, 2016 and 2015, and for the year ended December 31, 2015, the warranties activities were as follows
(figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
23,059
|
|
|
$
|
25,011
|
|
|
$
|
25,011
|
|
Additions during the period
|
|
|
1,795
|
|
|
|
2,095
|
|
|
|
9,758
|
|
Settlement within period, by cash or actual materials
|
|
|
(1,551
|
)
|
|
|
(1,094
|
)
|
|
|
(10,179
|
)
|
Foreign currency translation loss
|
|
|
(116
|
)
|
|
|
(94
|
)
|
|
|
(1,531
|
)
|
Balance at end of the period
|
|
$
|
23,187
|
|
|
$
|
25,918
|
|
|
$
|
23,059
|
|
The Company’s taxes payable as of
March 31, 2016 and December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Value-added tax payable
|
|
$
|
5,830
|
|
|
$
|
7,016
|
|
Income tax payable
|
|
|
1,589
|
|
|
|
1,744
|
|
Other tax payable
|
|
|
549
|
|
|
|
524
|
|
Total
|
|
$
|
7,968
|
|
|
$
|
9,284
|
|
As of March 31, 2016 and December 31, 2015, advances payable
by the Company were $0.8 million and $1.9 million, respectively.
The amounts are special subsidies made
by the Chinese government to the Company to offset the costs and charges related to the improvement of production capacities and
improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are recorded
as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances
payable when received and will be recorded as a deduction of related expenses and cost of acquired assets when the conditions are
met.
The balances are unsecured, interest-free
and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.
18.
|
Additional paid-in capital
|
The Company’s positions in respect
of the amounts of additional paid-in capital for the three months ended March 31, 2016 and 2015, and the year ended December 31,
2015 are summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
64,627
|
|
|
$
|
64,522
|
|
|
$
|
64,522
|
|
Share-based compensation
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
Balance at end of the period
|
|
$
|
64,627
|
|
|
$
|
64,522
|
|
|
$
|
64,627
|
|
(1)
|
On December 11, 2015, the Company granted 22,500 stock options to the Company’s independent directors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ on the date of grant. The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company’s dividends.
|
Assumptions used to estimate the fair value
of stock options on the grant dates are as follows:
Issuance Date
|
|
Expected volatility
|
|
|
Risk-free rate
|
|
|
Expected term (years)
|
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 11, 2015
|
|
|
126.25
|
%
|
|
|
1.62
|
%
|
|
|
5
|
|
|
|
0.00
|
%
|
The above stock options were vested and
exercisable immediately. Their fair value on the grant date of
December 11, 2015
using
the Black-Scholes option pricing model was $0.1 million. For the year ended December 31, 2015, the Company recognized stock-based
compensation expenses of $0.1 million.
Appropriated
Pursuant to the relevant PRC laws and regulations,
the profits distribution of the Company’s PRC subsidiaries, which are based on their PRC statutory financial statements,
rather than the financial statement that was prepared in accordance with U.S. GAAP, are available for distribution in the form
of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and
made appropriations to statutory surplus at 10%.
When the statutory surplus reserve reaches
50% of the registered capital of a company, additional reserve is no longer required. However, the reserve cannot be distributed
to venture partners. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang,
USAI, Jielong, Wuhu, Hubei Henglong, Fujian and Chongqing are $10.0 million, $4.2 million (equivalent to RMB35.0 million), $8.1
million (equivalent to RMB67.5 million), $2.6 million, $6.0 million, $3.8 million (equivalent to RMB30.0 million), $39.0 million
and $9.5 million (equivalent to RMB60.0 million), respectively.
The Company’s activities in respect of the amounts of
appropriated retained earnings for the three months ended March 31, 2016 and 2015, and the year ended December 31, 2015 are summarized
as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
10,379
|
|
|
$
|
10,178
|
|
|
$
|
10,178
|
|
Appropriation of retained earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
201
|
|
Balance at end of the period
|
|
$
|
10,379
|
|
|
$
|
10,178
|
|
|
$
|
10,379
|
|
Unappropriated
The Company’s activities in respect
of the amounts of the unappropriated retained earnings for the three months ended March 31, 2016 and 2015, and the year ended December
31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
206,622
|
|
|
$
|
179,435
|
|
|
$
|
179,435
|
|
Net income attributable to parent company
|
|
|
5,709
|
|
|
|
8,510
|
|
|
|
27,388
|
|
Appropriation of retained earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
(201
|
)
|
Balance at end of the period
|
|
$
|
212,331
|
|
|
$
|
187,945
|
|
|
$
|
206,622
|
|
20.
|
Accumulated other comprehensive income
|
The Company’s activities in respect
of the amounts of the accumulated other comprehensive income for the three months ended March 31, 2016 and 2015, and the year ended
December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
18,412
|
|
|
$
|
36,119
|
|
|
$
|
36,119
|
|
Foreign currency translation adjustment attributable to parent company
|
|
|
1,573
|
|
|
|
(1,192
|
)
|
|
|
(17,707
|
)
|
Balance at end of the period
|
|
$
|
19,985
|
|
|
$
|
34,927
|
|
|
$
|
18,412
|
|
21.
|
Non-controlling interests
|
The Company’s activities in respect
of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2016 and 2015, and the year
ended December 31, 2015 are summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
8,252
|
|
|
$
|
8,912
|
|
|
$
|
8,912
|
|
Income/(loss) attributable to non-controlling interests
|
|
|
(165
|
)
|
|
|
(118
|
)
|
|
|
509
|
|
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 15)
|
|
|
-
|
|
|
|
(318
|
)
|
|
|
(317
|
)
|
Foreign currency translation adjustment attributable to non-controlling interests
|
|
|
79
|
|
|
|
(83
|
)
|
|
|
(852
|
)
|
Balance at end of the period
|
|
$
|
8,166
|
|
|
$
|
8,393
|
|
|
$
|
8,252
|
|
Gain on other sales mainly consisted of
net amount retained from sales of materials, property, plant and equipment, and scraps. For the three months ended March 31, 2016,
gain on other sales amounted to $0.8 million as compared to $1.7 million for the three months ended March 31, 2015, representing
a decrease of $0.9 million.
23.
|
Financial income, net
|
During the three months ended March 31, 2016 and 2015, the Company
recorded financial income, net which is summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
424
|
|
|
$
|
672
|
|
Foreign exchange loss, net
|
|
|
14
|
|
|
|
165
|
|
Gain of cash discount, net
|
|
|
3
|
|
|
|
30
|
|
Bank fees
|
|
|
(119
|
)
|
|
|
(114
|
)
|
Total financial income, net
|
|
$
|
322
|
|
|
$
|
753
|
|
The Company’s subsidiaries registered
in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income
as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested
enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential
terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the
government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law
and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January
1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign
investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable
have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned
subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong
Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China
to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%, if the foreign investor
owns directly at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is regarded as a non-resident
enterprise, it is required to pay an additional 5% withholding tax for any dividends payable to it from the PRC subsidiaries.
According to PRC tax regulation, the Company
should withhold income taxes for the 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 March 31, 2016, the Company has recognized deferred tax liabilities
of $0.19 million for the remaining undistributed profits to Genesis of $3.9 million. The Company intended to re-invest the remaining
undistributed profits generated from the PRC subsidiaries in those subsidiaries permanently. As of March 31, 2016 and December
31, 2015, the Company still has undistributed earnings of approximately $237.0 million and $228.7 million, respectively, from investment
in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earnings been distributed to Genesis
and not permanently reinvested, the tax provision as of March 31, 2016 and December 31, 2015 of approximately $11.9 million and
$11.4 million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis and not further
distributed to the parent company incorporated in the United States going forward.
In 2014, Jiulong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% from 2014 to 2016.
In 2014, Henglong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% from 2014 to 2016.
In 2009, Shenyang was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment of the government based on PRC income
tax laws. Accordingly, it continued to be taxed at the 15% tax rate in 2012, 2013 and 2014. 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.
In 2013, Jielong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% for 2013, 2014 and 2015. The Company estimated the applied tax rate in 2016 to be 15% as it is likely to pass
the re-assessment in 2016 and continue to qualify as “High & New Technology Enterprise”.
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.
According to the New CIT, USAI and Testing
Center are subject to income tax at a rate of 25% in 2015 and 2016.
Chongqing Henglong was established in 2012.
According to the New CIT, Chongqing Henglong is subject to income tax at a uniform rate of 25%. No provision for Chongqing Henglong
is made as it had no assessable income for the three months ended March 31, 2016 and 2015.
Based on Brazilian income tax laws, Brazil
Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate
of 10% for the part of taxable income over $0.12 million, equivalent to approximately BRL 0.24 million. The Company had no assessable
income in Brazil for the three months ended March 31, 2016 and 2015.
Fujian Qiaolong was acquired in the second
quarter of 2014. In November 2011, Fujian Qiaolong was awarded the title of “High & New Technology Enterprise”
and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2011, 2012 and 2013. In 2014,
the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it will continue to be taxed
at the 15% tax rate in 2014, 2015 and 2016. No provision for Fujian Qiaolong is made as it had no assessable income for the three
months ended March 31, 2016 and 2015.
The profits tax rate of Hong Kong is 16.5%.
No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong for
the three months ended March 31, 2016 and 2015.
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 three months ended March 31, 2016 and 2015.
The Company’s effective tax rate
was 16.1% for the three months ended March 31, 2016, compared with 14.4% for the three months ended March 31, 2015.
Basic income per share is calculated by
dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is
calculated using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the
period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.
The calculation of basic and diluted income
per share attributable to the parent company for the three months ended March 31, 2016 and 2015, was (figures are in thousands
of USD, except share and per share amounts):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to the parent company’s common shareholders – Basic and Diluted
|
|
$
|
5,709
|
|
|
$
|
8,510
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
32,121,019
|
|
|
|
32,121,019
|
|
Dilutive effects of stock options
|
|
|
2,569
|
|
|
|
13,713
|
|
Denominator for dilutive income per share – Diluted
|
|
|
32,123,588
|
|
|
|
32,134,732
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to parent company’s common shareholders – Basic
|
|
$
|
0.18
|
|
|
$
|
0.26
|
|
Net income per share attributable to parent company’s common shareholders – Diluted
|
|
$
|
0.18
|
|
|
$
|
0.26
|
|
As of March 31, 2016 and 2015, the exercise
prices for 82,500 shares and 60,000 shares, respectively, of outstanding stock options were above the weighted average market price
of the Company’s common stock during the three months ended March 31, 2016 and 2015, respectively, and these stock options
were excluded from the calculation of the diluted income per share for the corresponding periods presented.
26.
|
Significant concentrations
|
A significant portion of the Company’s
business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert
the RMB into foreign currency for transactions that fall under the "current account," which includes trade related receipts
and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange
for settlement of such "current account" transactions without pre-approval. However, pursuant to applicable regulations,
foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance
with the PRC law. In calculating accumulated profits, foreign investment enterprises in China are required to allocate at least
10% of their annual net income each year, if any, to fund certain reserve funds, including mandated employee benefits funds, unless
these reserves have reached 50% of the registered capital of the enterprises.
Transactions other than those that fall
under the "current account" and that involve conversion of RMB into foreign currency are classified as "capital
account" transactions; examples of "capital account" transactions include repatriations of investment by or loans
to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions
require prior approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance
into a foreign currency, such as USD, and transmit the foreign currency outside of China.
This system could be changed at any time
and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any,
outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this
discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese
balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional
restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the PRC,
the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The
Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the
ability of the Company’s PRC subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its
liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of
China, could have a material and adverse effect on the Company’s liquidity and its business.
The Company grants credit to its customers
including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Fenglong and Jingzhou Yude, which are related parties of the Company.
The Company’s customers are mostly located in the PRC.
During the three months ended March 31,
2016, the Company’s ten largest customers accounted for 67.1% of its consolidated net product sales, with two customers individually
accounting for more than 10% of consolidated net sales, i.e., 12.4% and 12.1%. As of March 31, 2016, approximately 13.8% of accounts
receivable were from trade transactions with the aforementioned two customers, and there was no individual customer with a receivables
balance of more than 10% of total accounts receivable.
During the three months ended March 31,
2015, the Company’s ten largest customers accounted for 67.3% of its consolidated net product sales, with one customer individually
accounting for more than 10% of consolidated net sales, i.e., 11.5%. As of March 31, 2015, approximately 3.0% of accounts receivable
were from trade transactions with the aforementioned one customer, and there was no individual customer with a receivables balance
of more than 10% of total accounts receivable.
27.
|
Related party transactions and balances
|
Related party transactions are as follows (figures are in thousands
of USD):
Related sales
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Merchandise sold to related parties
|
|
$
|
8,585
|
|
|
$
|
8,299
|
|
Rental income obtained from related parties
|
|
|
31
|
|
|
|
33
|
|
Materials and others sold to related parties
|
|
|
223
|
|
|
|
429
|
|
Total
|
|
$
|
8,839
|
|
|
$
|
8,761
|
|
Related purchases
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Materials purchased from related parties
|
|
$
|
6,875
|
|
|
$
|
7,008
|
|
Equipment purchased from related parties
|
|
|
2,515
|
|
|
|
2,244
|
|
Others purchased from related parties
|
|
|
265
|
|
|
|
218
|
|
Total
|
|
$
|
9,655
|
|
|
$
|
9,470
|
|
Related receivables
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accounts and notes receivable from related parties
|
|
$
|
24,760
|
|
|
$
|
21,918
|
|
Other receivables from related parties
|
|
|
45
|
|
|
|
14
|
|
Total
|
|
$
|
24,805
|
|
|
$
|
21,932
|
|
Related advances
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Advance
payments for p
roperty,
plant and e
quipment to
r
elated
p
arties
|
|
$
|
8,133
|
|
|
$
|
8,863
|
|
Advance payments and others to related parties
|
|
|
606
|
|
|
|
544
|
|
Total
|
|
$
|
8,739
|
|
|
$
|
9,407
|
|
Related payables
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accounts and notes payable
|
|
$
|
5,994
|
|
|
$
|
6,363
|
|
These transactions were consummated under
similar terms as those with the Company's third party customers and suppliers.
Related parties pledged certain land use
rights and buildings as security for the Company’s credit facilities provided by banks.
As of May 12, 2016, Hanlin Chen, the Company’s
Chairman, owns 55.6% of the common stock of the Company and has the effective power to control the vote on substantially all significant
matters without the approval of other stockholders.
28.
|
Commitments and contingencies
|
Legal proceedings
The Company is not a party to any pending
or, to the best of the Company’s knowledge, any threatened legal proceedings. In addition, no director, officer or affiliate
of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director,
officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to
pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables
and the related interest, the following table summarizes the Company’s major commitments and contingencies as of March 31,
2016 (figures are in thousands of USD):
|
|
Payment obligations by period
|
|
|
|
2016
(1)
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
|
Total
|
|
Obligations for investment contracts
(1)
|
|
|
3,095
|
|
|
$
|
2,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,417
|
|
Obligations for purchasing and service agreements
|
|
|
24,720
|
|
|
|
11,651
|
|
|
|
4,747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,118
|
|
Total
|
|
$
|
27,815
|
|
|
$
|
13,973
|
|
|
$
|
4,747
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
46,535
|
|
(1)
|
On September 22, 2014, Hubei Henglong entered into an agreement with other parties to establish the Venture Fund, under which Hubei Henglong has committed to make investments of RMB50.0 million, equivalent to approximately $7.8 million, into the Venture Fund in three installments. As of March 31, 2016, Hubei Henglong has completed a capital contribution of RMB15 million, equivalent to approximately $2.4 million, representing 16.1% of the Venture Fund’s shares. According to the agreement, the remaining capital commitment of RMB35.0 million, equivalent to approximately $5.4 million, will be paid upon capital calls received from the Venture Fund.
|
29.
|
Off-balance sheet arrangements
|
As of March 31, 2016 and December 31, 2015, the Company did
not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
The accounting policies of the product
sectors are the same as those described in the summary of significant accounting policies except that the disaggregated financial
results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in
which management internally disaggregates financial information for the purposes of assisting them in making internal operating
decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter
segment sales and transfers as if the sales or transfers were to third parties, at current market prices.
As of March 31, 2016, the Company had 12
product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production
and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other
seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision
of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong),
commercial vehicle repacking and sales (Fujian Qiaolong), and manufacture and sales of automobile electronic systems and parts
(Wuhan Chuguanjie). Since the revenues, net income and net assets of these seven sectors collectively are less than 10% of consolidated
revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated
these seven sectors into “Other Sectors.”
As of March 31, 2015, the Company had 12
product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production
and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other
seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong), provision
of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong),
commercial vehicle repacking and sales (Fujian Qiaolong), and manufacture and sales of automobile electronic systems and parts
(Wuhan Chuguanjie). Since the revenues, net income and net assets of these seven sectors collectively are less than 10% of consolidated
revenues, net income and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated
these seven sectors into “Other Sectors.”
The Company’s product sector information
for the three months ended March 31, 2016 and 2015, is as follows (figures are in thousands of USD):
|
|
Net Product Sales
|
|
|
Net Income (Loss)
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Henglong
|
|
$
|
75,893
|
|
|
$
|
83,802
|
|
|
$
|
5,715
|
|
|
$
|
7,551
|
|
Jiulong
|
|
|
16,740
|
|
|
|
17,781
|
|
|
|
27
|
|
|
|
(478
|
)
|
Shenyang
|
|
|
7,221
|
|
|
|
7,962
|
|
|
|
52
|
|
|
|
308
|
|
Wuhu
|
|
|
5,379
|
|
|
|
6,157
|
|
|
|
(72
|
)
|
|
|
(161
|
)
|
Hubei Henglong
|
|
|
14,378
|
|
|
|
14,893
|
|
|
|
(30
|
)
|
|
|
1,591
|
|
Other Sectors
|
|
|
11,155
|
|
|
|
8,926
|
|
|
|
454
|
|
|
|
311
|
|
Total Segments
|
|
|
130,766
|
|
|
|
139,521
|
|
|
|
6,146
|
|
|
|
9,122
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
(441
|
)
|
|
|
(767
|
)
|
Eliminations
|
|
|
(13,912
|
)
|
|
|
(16,078
|
)
|
|
|
(160
|
)
|
|
|
37
|
|
Total
|
|
$
|
116,854
|
|
|
$
|
123,443
|
|
|
$
|
5,545
|
|
|
$
|
8,392
|
|
On April 7, 2016, the board of directors
of the Company approved the disposal of the 51% equity interest in Fujian Qiaolong. On April 17, 2016, Hubei Henglong entered into
a share purchase agreement (“Share Purchase Agreement”) with Longyan Huanyu Emergency Equipment Technology Co., Ltd.
(“Longyan Huanyu”). According to the Share Purchase Agreement, Hubei Henglong will transfer its 51% equity interests
in Fujian Qiaolong to Longyan Huanyu for consideration of RMB 20.0 million, equivalent to approximately $3.1 million. As of May
12, 2016, the transaction has not been consummated. Gain on disposal of Fujian Qiaolong was estimated to be approximately $0.7
million based on the financial information as of March 31, 2016.