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, 2019 and
2018
|
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 March 31, 2019 and December 31, 2018.
|
|
Percentage Interest
|
|
Name of Entity
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
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
|
%
|
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong”
9
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”
10
|
|
|
95.84
|
%
|
|
|
95.84
|
%
|
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”
11
|
|
|
85.00
|
%
|
|
|
85.00
|
%
|
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”
12
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”
13
|
|
|
60.00
|
%
|
|
|
60.00
|
%
|
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”
14
|
|
|
66.60
|
%
|
|
|
66.60
|
%
|
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 Testing Center, which mainly engages in the research and development of new products.
|
|
|
9.
|
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.
|
|
|
10.
|
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.
|
|
|
11.
|
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.
|
|
|
12.
|
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.
|
|
|
13.
|
In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Rearch Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.
|
|
|
14.
|
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.
|
|
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 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, 2018.
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, 2018 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.
The results of operations for the three
months ended March 31, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year
ending December 31, 2019.
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, “BRL,”
its functional currency. In accordance with 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
|
On January 1, 2019, the Company adopted
ASU 2016-02,
Leases
(as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and 2019-01), using the modified retrospective method.
The impact of the adoption of the new standard on the consolidated financial statements is discussed in “Significant Accounting
Policies” below.
|
(c)
|
Significant Accounting Policies
|
The following significant accounting policies have been added
or changed since the date of the Company’s 2018 Annual Report on Form 10-K.
Leases
- As described in the “Recent
Accounting Pronouncements” section, the Company adopted ASU 2016-02, Leases, and other related ASUs (collectively, ASC 842)
on January 1, 2019, using the modified retrospective method of adoption.
The Company elected the transition method
which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not been restated.
There is no material impact on the balance of retained earnings, right of use assets or associated lease liabilities as of January
1, 2019 due to the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition
guidance within ASC 842, which includes not reassessing lease classification of existing leases. The Company did not elect the
hindsight practical expedient.
The Company determines if an arrangement
is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified
asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain
substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is
used. The Company’s major plants and buildings are self-owned and limited temporary small offices were rented.
For leases with a term of 12 months or
less, the Company makes an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
The Company recognizes lease expenses for such leases on a straight-line basis over the lease term.
Operating lease assets and liabilities
are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to
calculate present value is the Company’s incremental borrowing rate or, if available, the rate implicit in the lease. The
Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment
of the applicable country or region. The discount rate used by the Company for its operating lease was 4.49%.
The operating lease right of use assets
was included in other current assets and current portion of operating lease liabilities was included in other current liabilities
and the non-current portion was included in other non-current liabilities. The weighted average remaining lease term was 4 years.
The Company does not have finance lease arrangements as of March 31, 2019.
|
3.
|
Accounts and notes receivable, net
|
The Company’s accounts and notes
receivable, net as of March 31, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable - unrelated parties
|
|
$
|
150,415
|
|
|
$
|
149,100
|
|
Notes receivable - unrelated parties
(1)(2)
|
|
|
94,255
|
|
|
|
90,412
|
|
Total accounts and notes receivable- unrelated parties
|
|
|
244,670
|
|
|
|
239,512
|
|
Less: allowance for doubtful accounts - unrelated parties
(3)
|
|
|
(2,096
|
)
|
|
|
(1,993
|
)
|
Accounts and notes receivable, net - unrelated parties
|
|
|
242,574
|
|
|
|
237,519
|
|
Accounts and notes receivable - related parties
|
|
|
21,701
|
|
|
|
18,825
|
|
Accounts and notes receivable, net
|
|
$
|
264,275
|
|
|
$
|
256,344
|
|
|
(1)
|
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks or third parties.
|
|
(2)
|
As of March 31, 2019 and December 31, 2018, the Company pledged its notes receivable in an amount of approximately $7.6 million and $18.4 million, respectively, as security for its comprehensive credit facilities or loans.
|
|
|
|
|
(3)
|
Provision for doubtful accounts and notes receivable amounted to $0.1 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively.
|
The Company’s inventories as of March
31, 2019 and December 31, 2018 consisted of the following (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
29,206
|
|
|
$
|
27,190
|
|
Work in process
|
|
|
12,340
|
|
|
|
11,932
|
|
Finished goods
|
|
|
48,656
|
|
|
|
48,899
|
|
Total
|
|
$
|
90,202
|
|
|
$
|
88,021
|
|
The write down of inventories amounted
to $1.1 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively.
In January 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, 2019 and December 31, 2018, the Company
had $4.3 million and $4.2 million, respectively, of net equity in Beijing Henglong.
In September 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 $7.4 million, in the Suzhou Venture Fund in three installments. As of March 31, 2019, Hubei Henglong
has completed a capital contribution of RMB 50.0 million, equivalent to approximately $7.4 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 March 31, 2019 and
December 31, 2018, the Company had $10.0 million and $9.7 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 $18.0 million, in three installments, representing
23.5% of the Chongqing Venture Fund’s shares. As of March 31, 2019, Hubei Henglong has completed a capital contribution of
RMB 84.0 million, equivalent to approximately $12.5 million. 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 March 31, 2019 and December 31, 2018, the Company had $13.3 million and $13.1 million, respectively, of net equity in the
Chongqing Venture Fund.
In October 2016, Hubei Henglong invested
RMB 3.0 million, equivalent to approximately $0.4 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 using the equity method. As of March 31, 2019
and December 31, 2018, the Company had $0.2 million and $0.2 million, respectively, of net equity in Chongqing Jinghua.
In March 2018, Hubei Henglong entered into
an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”. Hubei Henglong has committed
to make investments of RMB 76.0 million, equivalent to approximately $11.5 million, in three installments, representing 27.1% of
the Hubei Venture Fund’s shares. As of March 31, 2019, Hubei Henglong has completed a capital contribution of RMB 38.0 million,
equivalent to approximately $5.6 million. As a limited partner, Hubei Henglong has more than virtually no influence over the Hubei
Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of March 31,
2019 and December 31, 2018, the Company had $5.6 million and $5.5 million, respectively, of net equity in the Hubei Venture Fund.
The Company’s consolidated financial
statements reflect the net income of non-consolidated affiliates of $0.2 million and $0.6 million for the three months ended March
31, 2019 and 2018, respectively.
|
6.
|
Property, plant and equipment, net
|
The Company’s property, plant and
equipment, net as of March 31, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Costs:
|
|
|
|
|
|
|
|
|
Land use rights and buildings
|
|
$
|
62,846
|
|
|
$
|
60,593
|
|
Machinery and equipment
|
|
|
198,351
|
|
|
|
192,538
|
|
Electronic equipment
|
|
|
5,858
|
|
|
|
5,810
|
|
Motor vehicles
|
|
|
4,933
|
|
|
|
4,852
|
|
Construction in progress
|
|
|
15,214
|
|
|
|
12,526
|
|
Total amount of property, plant and equipment
|
|
|
287,202
|
|
|
|
276,319
|
|
Less: Accumulated depreciation
(1)
|
|
|
(150,169
|
)
|
|
|
(146,466
|
)
|
Total amount of property, plant and equipment, net
(2)(3)
|
|
$
|
137,033
|
|
|
$
|
129,853
|
|
|
(1)
|
As of March 31, 2019 and December 31, 2018, the Company pledged property, plant and equipment with a net book value of approximately $57.4 million and $55.9 million, respectively, as security for its comprehensive credit facilities with banks in China.
|
|
|
|
|
(2)
|
Depreciation charges were $3.9 million and $4.2 million for the three months ended March 31, 2019 and 2018, respectively.
|
|
|
|
|
(3)
|
Interest costs capitalized for the three months ended March 31, 2019 and 2018, were $0.1 million and $0.2 million, respectively.
|
Loans consist of the following as of March 31, 2019 and December
31, 2018 (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Short-term bank loans
(1)
|
|
$
|
58,462
|
|
|
$
|
53,667
|
|
Short-term government loan
(2)
|
|
|
7,426
|
|
|
|
7,285
|
|
Total short-term bank and government loans
|
|
$
|
65,888
|
|
|
$
|
60,952
|
|
Long-term government loan
(3)
|
|
|
297
|
|
|
|
291
|
|
Total bank and government loans
|
|
$
|
66,185
|
|
|
$
|
61,243
|
|
(1)
|
These loans are secured by property, plant and equipment of the Company and are repayable within one year (See Note 6). As of March 31, 2019 and December 31, 2018, the weighted average interest rate was 5.0% and 5.3% per annum, respectively. Interest is to be paid monthly or quarterly, on the twentieth day of the applicable month or quarter, or at maturity and the principal repayment is at maturity.
|
|
|
|
On October 27, 2017, Henglong entered into
a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 224.0 million (equivalent to
$33.3 million as of March 31, 2019), the “Henglong CITIC Credit Facility”. The original maturity date of the Henglong
CITIC Credit Facility was October 27, 2018 and was extended to October 26, 2019. The amount of Henglong CITIC Credit Facility changed
into RMB 200.0 million (equivalent to $29.7 million as of March 31, 2019). As security for the Henglong CITIC Credit Facility,
Henglong’s property, plant and equipment were pledged and Hubei Henglong provided a guarantee. Henglong provided Jielong
with a Standby Letter of Credit under the Credit Facility. On August 21, 2018, Henglong drew down loans amounting to RMB 23.2 million
and RMB 48.1 million (equivalent to $3.4 million and $7.1 million), respectively. On August 23 and September 7, 2018, Henglong
drew down loans amounting to RMB 19.3 million and RMB 5.8 million (equivalent to $2.9 million and $0.9 million), respectively.
On March 15 and March 26, 2019, Henglong drew down loans amounting to RMB 7.2 million and RMB 7.8 million (equivalent to $1.0 million
and $1.2 million), respectively. The annual interest rate of the loans was 3.63%, 3.98%, 3.79%, 3.95%, 3.52% and 3.52%, respectively.
On October 27, 2017, Hubei Henglong entered
into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 140.0 million (equivalent
to $20.8 million as of March 31, 2019), the “Hubei Henglong CITIC Credit Facility”. The Hubei Henglong CITIC Credit
Facility expired on October 27, 2018. Henglong provided a guarantee for the Hubei Henglong CITIC Credit Facility. The original
maturity date of the Hubei Henglong CITIC Credit Facility was October 27, 2018 and was extended to October 26, 2019. The amount
of the Hubei Henglong CITIC Credit Facility changed into RMB 200.0 million (equivalent to $29.7 million as of March 31, 2019).
Hubei Henglong provided Jiulong with a Standby Letter of Credit under the Credit Facility. On August 10, 2018, Hubei Henglong drew
down loans amounting to RMB 11.5 million and RMB 27.0 million (equivalent to $1.7 million and $4.0 million), respectively. On August
22 and September 6, 2018, Hubei Henglong drew down loans amounting to RMB 26.0 million and RMB 7.6 million (equivalent to $3.9
million and $1.1 million), respectively. On March 15, 2019, Hubei Henglong drew down loans amounting to RMB 28.0 million and RMB
14.1 million (equivalent to $4.2 million and $2.1 million), respectively. The annual interest rate of the loans was 3.93%, 3.84%,
3.98%, 4.01%, 3.63% and 3.52%, respectively.
|
|
|
(2)
|
On September 27, 2018, the Company received a Chinese government loan of RMB 50.0 million, equivalent to approximately $7.4 million, with an interest rate of 3.48% per annum, which will mature on June 28, 2019. Henglong pledged RMB 51.5 million, equivalent to approximately $7.6 million, of notes receivable as security for the Chinese government loan (See Note 3).
|
|
|
(3)
|
On November 13, 2017, the Company received a Chinese government loan of RMB 2.0 million, equivalent to approximately $0.3 million, with an interest rate of 4.75% per annum, which will mature on November 12, 2020.
|
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 or trigger early
repayment. The Company complied with such financial covenants as of March 31, 2019, and believes it will continue to comply with
them.
|
8.
|
Accounts and notes payable
|
The Company’s accounts and notes
payable as of March 31, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts payable - unrelated parties
|
|
$
|
115,355
|
|
|
$
|
124,610
|
|
Notes payable - unrelated parties
(1)
|
|
|
72,257
|
|
|
|
81,033
|
|
Accounts and notes payable- unrelated parties
|
|
|
187,612
|
|
|
|
205,643
|
|
Accounts payable - related parties
|
|
|
5,668
|
|
|
|
4,477
|
|
Balance at end of the period
|
|
$
|
193,280
|
|
|
$
|
210,120
|
|
(1)
|
Notes payable represent accounts payable in the form of notes issued by the Company. The notes are endorsed by banks to ensure that noteholders will be paid after maturity. The Company has pledged cash deposits, short-term investments, notes receivable and certain property, plant and equipment to secure notes payable granted by banks.
|
|
9.
|
Accrued expenses and other payables
|
The Company’s accrued expenses and
other payables as of March 31, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accrued expenses
|
|
$
|
6,884
|
|
|
$
|
8,341
|
|
Accrued interest
|
|
|
748
|
|
|
|
423
|
|
Current portion of other long-term payable (See Note 10)
|
|
|
3,529
|
|
|
|
3,400
|
|
Other payables
|
|
|
2,579
|
|
|
|
3,783
|
|
Warranty reserves
(1)
|
|
|
32,157
|
|
|
|
31,085
|
|
Total
|
|
$
|
45,897
|
|
|
$
|
47,032
|
|
(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 March 31, 2019
and 2018, and for the year ended December 31, 2018, the warranties activities were as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
31,085
|
|
|
$
|
29,033
|
|
|
$
|
29,033
|
|
Additions during the period
|
|
|
2,776
|
|
|
|
4,248
|
|
|
|
24,102
|
|
Settlement within period
|
|
|
(2,294
|
)
|
|
|
(4,206
|
)
|
|
|
(20,599
|
)
|
Foreign currency translation loss/(gain)
|
|
|
590
|
|
|
|
1,126
|
|
|
|
(1,451
|
)
|
Balance at end of the period
|
|
$
|
32,157
|
|
|
$
|
30,201
|
|
|
$
|
31,085
|
|
|
10.
|
Other long-term payable
|
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 $13.6 million and the sales
price was $14.9 million. Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments
over 4 years with a quarterly lease payment of $1.1 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 is accounted for as a financing transaction by the Company. As of March 31, 2019, $3.5 million is recognized as
other payable (See Note 9) and $8.0 million is recognized as other long-term payable to the buyer-lessor according to the contract
term.
|
11.
|
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, 2019 and 2018, are summarized as follows (figures
are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
64,429
|
|
|
$
|
64,406
|
|
Balance at end of the period
|
|
$
|
64,429
|
|
|
$
|
64,406
|
|
Assumptions used to estimate the fair value
of the stock options on the grant date are as follows:
Issuance Date
|
|
Expected volatility
|
|
|
Risk-free rate
|
|
|
Expected term (years)
|
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 5, 2018
|
|
|
44.72
|
%
|
|
|
2.79
|
%
|
|
|
5
|
|
|
|
0.00
|
%
|
The stock options granted during 2018 were
exercisable immediately. Their aggregate fair value on the grant date using the Black-Scholes option pricing model was $0.02 million.
For the year ended December 31, 2018, the Company recognized stock-based compensation expenses of $0.02 million.
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%.
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 shareholders. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang,
USAI, Jielong, Wuhu, Hubei Henglong, Henglong KYB 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, $41.7 million (equivalent to RMB 320.0 million) and $9.5 million (equivalent to RMB 60.0 million), respectively.
The Company’s activities in respect
of the amounts of appropriated retained earnings for the three months ended March 31, 2019 and 2018, are summarized as follows
(figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
11,104
|
|
|
$
|
10,707
|
|
Balance at end of the period
|
|
$
|
11,104
|
|
|
$
|
10,707
|
|
Unappropriated
The Company’s activities in respect
of the amounts of the unappropriated retained earnings for the three months ended March 31, 2019 and 2018, are summarized as follows
(figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
211,439
|
|
|
$
|
209,459
|
|
Net income attributable to parent company
|
|
|
1,467
|
|
|
|
4,312
|
|
Balance at end of the period
|
|
$
|
212,906
|
|
|
$
|
213,771
|
|
|
13.
|
Accumulated other comprehensive income
|
The Company’s activities in respect
of the amounts of accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, are summarized as
follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
1,855
|
|
|
$
|
17,780
|
|
Foreign currency translation adjustment attributable to parent company
|
|
|
5,906
|
|
|
|
12,726
|
|
Balance at end of the period
|
|
$
|
7,761
|
|
|
$
|
30,506
|
|
|
14.
|
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 December 5, 2018, 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 $4.00 per share through December 4, 2019. During the three months ended March 31, 2019, the Company repurchased 128,881 shares of the Company’s common stock for cash consideration of $0.3 million on the open market. As of March 31, 2019 and December 31, 2018, the Company had cumulatively repurchased 840,579 shares and 711,698 shares, respectively, of the Company’s common stock since inception. The repurchased shares are presented as “treasury stock” on the balance sheet.
|
|
|
|
|
15.
|
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, 2019 and 2018, are summarized
as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Balance at beginning of the period
|
|
$
|
18,950
|
|
|
$
|
6,681
|
|
Loss attributable to non-controlling interests
|
|
|
(243
|
)
|
|
|
(280
|
)
|
Foreign currency translation adjustment attributable to non-controlling interests
|
|
|
457
|
|
|
|
516
|
|
Balance at end of the period
|
|
$
|
19,164
|
|
|
$
|
6,917
|
|
Revenue 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 24.
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.
Customer Deposits
As of March 31, 2019 and December 31, 2018,
the Company has customer deposits of $0.7 million and $0.8 million, respectively. During the three months ended March 31, 2019,
$3.2 million was received and $3.2 million (including $0.8 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 amount
of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize
revenue and bill the customers to reduce the amount of the customer deposit liability.
|
17.
|
Financial expense, net
|
During the three months ended March 31,
2019 and 2018, the Company recorded financial expense, net which is summarized as follows (figures are in thousands of USD):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Interest income
|
|
$
|
764
|
|
|
$
|
374
|
|
Foreign exchange loss, net
|
|
|
(1,250
|
)
|
|
|
(1,037
|
)
|
Bank fees
|
|
|
(179
|
)
|
|
|
(102
|
)
|
Total financial expense, net
|
|
$
|
(665
|
)
|
|
$
|
(765
|
)
|
The Company’s effective tax rates
were 16.4% and 14.7% in the three months ended March 31, 2019 and 2018, respectively. The increase in effective tax rate was primarily
due to the increase in the valuation allowance provided for loss-making entities.
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 calculations of basic and diluted income
per share attributable to the parent company for the three months ended March 31, 2019 and 2018, were as follows (figures are in
thousands of USD, except share and per share amounts):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to the parent company’s common shareholders – Basic and Diluted
|
|
$
|
1,467
|
|
|
$
|
4,312
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
31,507,487
|
|
|
|
31,644,004
|
|
Dilutive effects of stock options
|
|
|
5,810
|
|
|
|
-
|
|
Denominator for dilutive income per share - Diluted
|
|
|
31,513,297
|
|
|
|
31,644,004
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to parent company’s common shareholders - Basic
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
Net income per share attributable to parent company’s common shareholders - Diluted
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
As of March 31, 2019 and 2018, the exercise
prices for 112,500 shares and 112,500 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, 2019 and 2018, respectively, and these stock
options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
|
20.
|
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. Regulations in the PRC currently permit payment
of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations
in China. Under PRC law, China-based subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC
accounting standards each year to their general reserves until 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 discretion 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.
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
in the ordinary course of its business, including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Jinjie 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,
2019, the Company’s five largest customers accounted for 44.0% of its consolidated net product sales, with one customer individually
accounting for more than 10% of consolidated net sales i.e., 18.1%. As of March 31, 2019, approximately 6.2% 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
three months ended March 31, 2018, the Company’s five largest customers accounted for 41.9% of its consolidated net product
sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 18.9%. As of March 31, 2018,
approximately 4.8% 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.
|
21.
|
Related party transactions and balances
|
Related party transactions are as follows (figures are in thousands
of USD):
Related sales
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Merchandise sold to related parties
|
|
$
|
12,836
|
|
|
$
|
10,846
|
|
Materials and others sold to related parties
|
|
|
461
|
|
|
|
446
|
|
Rental income obtained from related parties
|
|
|
80
|
|
|
|
102
|
|
Total
|
|
$
|
13,377
|
|
|
$
|
11,394
|
|
Related purchases
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Materials purchased from related parties
|
|
$
|
5,504
|
|
|
$
|
8,249
|
|
Equipment purchased from related parties
|
|
|
760
|
|
|
|
1,248
|
|
Others purchased from related parties
|
|
|
11
|
|
|
|
49
|
|
Total
|
|
$
|
6,275
|
|
|
$
|
9,546
|
|
Related receivables
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts and notes receivable from related parties
|
|
$
|
21,701
|
|
|
$
|
18,825
|
|
Related advances and loan balance
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Advance payments for property, plant and equipment to related parties
|
|
$
|
3,819
|
|
|
$
|
8,723
|
|
Advance payments and others to related parties
|
|
|
1,100
|
|
|
|
1,281
|
|
Total
|
|
$
|
4,919
|
|
|
$
|
10,004
|
|
Related payables
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts and notes payable
|
|
$
|
5,668
|
|
|
$
|
4,477
|
|
These transactions were consummated under
similar terms as those with the Company's third party customers and suppliers.
As of May 9, 2019, Hanlin Chen, Chairman,
owns 56.4% 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.
|
22.
|
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, Arthur Wong, Guangxun Xu 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.
Management expects the impact of the suit on the Company’s consolidated financial statements to be immaterial.
Other than as described above, (a) the
Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and (b)
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,
2019 (figures are in thousands of USD):
|
|
Payment obligations by period
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Obligations for investment contracts
(1)
|
|
$
|
10,990
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,990
|
|
Obligations for purchasing and service agreements
|
|
|
30,558
|
|
|
|
3,894
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,452
|
|
Total
|
|
$
|
41,548
|
|
|
$
|
3,894
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,442
|
|
(1)
|
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 $18.0 million, in the Chongqing Venture Fund in
three installments, representing 23.5% of the Chongqing Venture Fund’s shares. As of March 31, 2019, Hubei Henglong has completed
a capital contribution of RMB 84.0 million, equivalent to approximately $12.5 million, According to the agreement, the remaining
capital commitment of RMB 36.0 million, equivalent to approximately $5.3 million, will be paid upon capital calls received from
the Chongqing Venture Fund.
In March 2018, Hubei Henglong entered into
an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”. Hubei Henglong has committed
to make investments of RMB 76.0 million, equivalent to approximately $11.5 million, in the Hubei Venture Fund in three installments,
representing 27.1% of the Hubei Venture Fund’s shares. As of March 31, 2019, Hubei Henglong has completed a capital contribution
of RMB 38.0 million, equivalent to approximately $5.6 million. According to the agreement, the remaining capital commitment of
RMB 38.0 million, equivalent to approximately $5.6 million, will be paid upon capital calls received from the Hubei Venture Fund.
|
23.
|
Off-balance sheet arrangements
|
As of March 31, 2019 and December 31, 2018,
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 (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 2018 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- 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 March 31, 2019, the Company had 13
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 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), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of
intelligent automotive technology (Jingzhou Qingyan).
As of March 31, 2018, 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),
manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of intelligent
automotive technology (Jingzhou Qingyan).
The Company’s product sector information for the
three months ended March 31, 2019 and 2018, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Henglong
|
|
$
|
40,964
|
|
|
$
|
68,896
|
|
|
$
|
(2,121
|
)
|
|
$
|
(312
|
)
|
Jiulong
|
|
|
22,122
|
|
|
|
27,445
|
|
|
|
1,168
|
|
|
|
455
|
|
Shenyang
|
|
|
4,895
|
|
|
|
6,348
|
|
|
|
(299
|
)
|
|
|
(618
|
)
|
Wuhu
|
|
|
6,998
|
|
|
|
4,636
|
|
|
|
(175
|
)
|
|
|
(397
|
)
|
Hubei Henglong
|
|
|
28,175
|
|
|
|
33,393
|
|
|
|
1,372
|
|
|
|
3,089
|
|
Henglong KYB
|
|
|
19,954
|
|
|
|
-
|
|
|
|
(396
|
)
|
|
|
-
|
|
Other Entities
|
|
|
17,296
|
|
|
|
17,898
|
|
|
|
1,455
|
|
|
|
794
|
|
Total Segments
|
|
|
140,404
|
|
|
|
158,616
|
|
|
|
1,004
|
|
|
|
3,011
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
(301
|
)
|
|
|
564
|
|
Eliminations
|
|
|
(31,211
|
)
|
|
|
(24,598
|
)
|
|
|
521
|
|
|
|
457
|
|
Total
|
|
$
|
109,193
|
|
|
$
|
134,018
|
|
|
$
|
1,224
|
|
|
$
|
4,032
|
|