Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
Or
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 000-33123
China Automotive Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0885775
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District
Jing Zhou City, Hubei Province, the People’s Republic of China
(Address of principal executive offices)
(86) 716- 412- 7901
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on whichregistered
Common Stock, $0.0001 par value
CAAS
The Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of August 12, 2022, the Company had 30,662,112 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page
Part I — Financial Information
4
Item 1.
Unaudited Financial Statements.
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six Months Ended June 30, 2022 and 2021
Condensed Unaudited Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021
6
Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021
7
Notes to Condensed Unaudited Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
38
Item 4.
Controls and Procedures.
Part II — Other Information
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
39
Defaults Upon Senior Securities.
Mine Safety Disclosures.
40
Item 5.
Other Information.
Item 6.
Exhibits.
41
Signatures
42
2
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission.
3
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended June 30,
2022
2021
Net product sales ($9,158 and $15,750 sold to related parties for the three months ended June 30, 2022 and 2021)
$
127,161
120,604
Cost of products sold ($6,496 and $7,197 purchased from related parties for the three months ended June 30, 2022 and 2021)
104,450
104,775
Gross profit
22,711
15,829
Gain on other sales
2,105
725
Less: Operating expenses
Selling expenses
4,068
4,446
General and administrative expenses
5,662
6,063
Research and development expenses
7,886
5,926
Total operating expenses
17,616
16,435
Income from operations
7,200
119
Other income, net
2,804
1,506
Interest expense
(370)
(294)
Financial income, net
2,543
182
Income before income tax expenses and equity in earnings of affiliated companies
12,177
1,513
Less: Income taxes
3,156
198
Add: Equity in earnings of affiliated companies
914
1,613
Net income
9,935
2,928
Less: Net income/(loss) attributable to non-controlling interests
500
(279)
Accretion to redemption value of redeemable non-controlling interests
(7)
Net income attributable to parent company’s common shareholders
9,428
3,200
Comprehensive income:
Other comprehensive income:
Foreign currency translation (loss)/income, net of tax
(19,055)
5,586
Comprehensive (loss)/income
(9,120)
8,514
Less: Comprehensive (loss)/income attributable to non-controlling interests
(642)
73
Comprehensive (loss)/income attributable to parent company
(8,485)
8,434
Net income attributable to parent company’s common shareholders per share -
Basic
0.31
0.10
Diluted
Weighted average number of common shares outstanding -
30,847,706
30,851,776
30,849,009
30,855,406
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Six Months Ended June 30,
Net product sales ($20,162 and $32,325 sold to related parties for the six months ended June 30, 2022 and 2021)
263,557
250,945
Cost of products sold ($14,036 and $15,411 purchased from related parties for the six months ended June 30, 2022 and 2021)
226,112
215,368
37,445
35,577
3,036
2,041
8,380
10,055
10,416
10,678
16,023
12,606
34,819
33,339
4,279
6,323
3,229
(772)
(637)
Financial income/(expense), net
4,558
(57)
15,771
6,814
Less: Income taxes expense
4,114
839
Add: Equity in (loss)/earnings of affiliated companies
(1,573)
184
10,084
6,159
700
(261)
(15)
(14)
9,369
6,406
(17,618)
3,315
(7,534)
9,474
Less: Comprehensive loss attributable to non-controlling interests
(353)
(52)
(7,196)
9,512
0.30
0.21
30,849,730
30,850,859
30,856,571
Share-based compensation included in operating expense above is as follows:
—
88
5
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
June 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
112,421
131,695
Pledged cash
31,401
27,804
Accounts and notes receivable, net - unrelated parties
192,894
195,729
Accounts and notes receivable, net - related parties
10,597
14,607
Inventories
109,787
116,493
Other current assets
34,330
15,052
Total current assets
491,430
501,380
Non-current assets:
Property, plant and equipment, net
113,271
127,721
Land use rights, net
10,732
Long-term investments
58,363
36,966
Other non-current assets
20,717
39,963
Total assets
693,836
716,762
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
47,569
47,592
Accounts and notes payable-unrelated parties
200,576
214,590
Accounts and notes payable-related parties
10,123
13,464
Accrued expenses and other payables
54,031
50,332
Other current liabilities
29,046
25,838
Total current liabilities
341,345
351,816
Long-term liabilities:
Long-term tax payable
15,805
21,075
Long-term loans
480
Other non-current liabilities
6,495
6,430
Total liabilities
364,125
379,321
Commitments and Contingencies (See Note 22)
Mezzanine equity:
Redeemable non-controlling interests
568
553
Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of June 30, 2022 and December 31, 2021, respectively
Additional paid-in capital
63,731
Retained earnings-
Appropriated
11,481
Unappropriated
235,732
226,363
Accumulated other comprehensive income
8,152
24,717
Treasury stock – 1,555,711 and 1,486,526 shares as of June 30, 2022 and December 31, 2021, respectively
(5,457)
(5,261)
Total parent company stockholders’ equity
313,642
321,034
Non-controlling interests
15,501
15,854
Total stockholders’ equity
329,143
336,888
Total liabilities, mezzanine equity and stockholders’ equity
Condensed Unaudited Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Share-based compensation
Depreciation and amortization
12,012
13,117
Provision of credit losses
527
311
Deferred income taxes
2,945
469
Equity in loss/(earnings) of affiliated companies
1,573
(184)
Loss on fixed assets disposals
46
9
(Increase)/decrease in:
Accounts and notes receivable
(4,333)
6,887
896
(7,036)
(1,218)
(1,250)
Increase/(decrease) in:
Accounts and notes payable
(6,156)
(6,291)
(2,643)
(4,030)
Long-term taxes payable
(2,809)
3,560
105
Net cash provided by operating activities
14,484
5,545
Cash flows from investing activities:
Decrease/(increase) in demand loans included in other non-current assets
291
(137)
Repayment of loan from a related party
154
Cash received from property, plant and equipment sales
572
206
Payments to acquire property, plant and equipment (including $2,143 and $330 paid to related parties for the six months ended June 30, 2022 and 2021, respectively)
(7,881)
(3,927)
Payments to acquire intangible assets
(41)
(303)
Investment under the equity method
(5,480)
Purchase of short-term investments
(59,758)
(31,253)
Proceeds from maturities of short-term investments
45,150
23,806
Cash received from long-term investment
2,704
4,785
Net cash used in investing activities
(24,443)
(6,669)
Cash flows from financing activities:
Proceeds from bank loans
35,852
34,990
Repayments of bank loans
(32,916)
(43,081)
Repayments of the borrowing for sale and leaseback transaction
(1,130)
(2,217)
Repurchase of common shares
(196)
Acquisition of non-controlling interest
(538)
Net cash provided by/(used in) financing activities
1,610
(10,846)
Effects of exchange rate on cash, cash equivalents and pledged cash
(7,327)
1,226
Net decrease in cash, cash equivalents and pledged cash
(15,676)
(10,744)
Cash, cash equivalents and pledged cash at beginning of the period
159,498
128,061
Cash, cash equivalents and pledged cash at end of the period
143,822
117,317
Three Months and Six Months Ended June 30, 2022 and 2021
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 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 subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of June 30, 2022 and December 31, 2021.
Percentage Interest
June 30,
December 31,
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
100.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
70.00
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4
85.00
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5
77.33
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9
95.84
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”12
60.00
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”13
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”14
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”15
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”16
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, 2021.
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, 2021 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 and six months ended June 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.
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 real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b)
Recent Accounting Pronouncements
In November 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, effective for financial statements issued for annual periods beginning after December 15, 2021. ASU 2021-10 requires business entities to disclose information in the notes to the financial statements about certain types of government assistance. The annual disclosure requirements apply to transactions with a government that are accounted for by analogizing to either a grant model or a contribution model. We plan to adopt ASU 2020-10 when we issue our annual financial statements. We do not expect it to have a material impact on our 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, 2021.
10
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of June 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
140,083
146,362
Notes receivable - unrelated parties
64,122
61,328
Total accounts and notes receivable - unrelated parties
204,205
207,690
Less: allowance for credit losses - unrelated parties
(11,311)
(11,961)
Accounts and notes receivable - related parties
12,024
15,505
Less: allowance for credit losses - related parties
(1,427)
(898)
Accounts and notes receivable, net
203,491
210,336
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of June 30, 2022 and December 31, 2021, the Company pledged its notes receivable in amounts of $13.8 million and $18.2 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.6 million and $0.7 million, for the three and six months ended June 30,2022 , respectively.
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.6 million and $0.4 million for the three and six months ended June 30, 2021, respectively.
During the three months ended June 30, 2022, the Company’s five largest customers accounted for 44.9% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 25.3%.
During the six months ended June 30, 2022, the Company’s five largest customers accounted for 45.8% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 23.6%. As of June 30, 2022, approximately 10.9% of accounts receivable were from trade transactions with the aforementioned customer.
During the three months ended June 30, 2021, the Company’s five largest customers accounted for 41.8% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 18.3% and 10.0% respectively. During the six months ended June 30, 2021, the Company’s five largest customers accounted for 42.3% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 17.4%. As of June 30, 2021, approximately 8.5% 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.
4. Inventories
The Company’s inventories as of June 30, 2022 and December 31, 2021 consisted of the following (figures are in thousands of USD):
Raw materials
34,006
33,583
Work in process
8,814
9,415
Finished goods
66,967
73,495
Total
The Company recorded $1.6 million and $1.1 million of inventory write-down to cost of products sold for the three months ended June 30, 2022 and 2021, respectively, and $2.6 million and $2.3 million for the six months ended June 30, 2022 and 2021, respectively.
11
5. Long-term investments
The Company’s long-term investments at June 30, 2022 and December 31, 2021, are summarized as follows (figures are in thousands of USD):
Sentient AB(1)
23,129
Chongqing Venture Fund(2)
13,951
17,530
Hubei Venture Fund (3)
7,887
9,665
Suzhou Venture Fund (4)
6,712
7,413
Suzhou Qingshan (5)
4,475
Henglong Tianyu
834
913
Chongqing Jinghua
585
642
Jiangsu Intelligent
790
803
The condensed financial information of the Company’s significant equity investee for the three and six months ended June 30, 2022 and 2021, including Chongqing Venture Fund, is summarized as follows (figures are in thousands of USD):
Revenue
(Loss)/income from continuing operations
(2,338)
7,705
(14,994)
1,512
Net (loss)/income
12
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of June 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Costs:
Buildings
68,041
69,554
Machinery and equipment
242,666
253,245
Electronic equipment
6,636
Motor vehicles
4,982
5,121
Construction in progress
4,157
6,583
Total amount of property, plant and equipment
326,482
341,390
Less: Accumulated depreciation (1)
(213,211)
(213,669)
Total amount of property, plant and equipment, net (2)(3)
7. Loans
Loans consist of the following as of June 30, 2022 and December 31, 2021 (figures are in thousands of USD):
Short-term bank loans (1)
Long-term bank loans (1)(2)
Total bank loans
48,049
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of June 30, 2022.
13
8. Accounts and notes payable
The Company’s accounts and notes payable as of June 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
125,004
132,593
Notes payable - unrelated parties (1)
75,572
81,997
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
210,699
228,054
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of June 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Warranty reserves(1)
35,028
36,572
Payable for the investment in Sentient AB (See Note 5)
9,570
Accrued expenses
7,316
5,596
Current portion of other long-term payable (See Note 10)
1,115
Payables for overseas transportation and custom clearance
301
4,548
Dividends payable to holders of non-controlling interests
447
471
Accrued interest
126
507
Other payables
1,243
1,523
Balance at end of year/period
For the three and six months ended June 30, 2022 and 2021, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
37,128
35,985
36,215
Additions during the period
3,085
4,017
6,973
7,698
Settlement within the period
(3,178)
(4,085)
(6,654)
(7,730)
Foreign currency translation (loss)/gain
(2,007)
620
(1,863)
354
Balance at end of the period
36,537
14
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 RMB 91.3 million (equivalent to $13.6 million as of June 30, 2022) and the sales price was RMB 100.0 million (equivalent to $14.9 million as of June 30, 2022). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four years with a quarterly lease payment of approximately $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 was accounted for as a financing transaction by the Company. As of June 30, 2022, the payables have been fully paid.
11. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the Company and the other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the issuance date.
For the three and six months ended June 30, 2022, the Company recognized accretion of $0.007 million and $0.015 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
For the three and six months ended June 30, 2021, the Company recognized accretion of $0.007 million and $0.014 million respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
12. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three and six months ended June 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
64,361
64,273
Acquisition of the non-controlling interest in Wuhu
(630)
13. Retained earnings
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three and six months ended June 30, 2022 and 2021, no statutory reserve was appropriated by the subsidiaries in China.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three and six months ended June 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
11,303
15
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and six months ended June 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
226,304
218,697
215,491
Net income attributable to parent company
9,435
3,207
9,384
6,420
Accretion of redeemable non-controlling interests
221,897
14. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and six months ended June 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
26,065
15,285
17,413
Foreign currency translation adjustment attributable to parent company
(17,913)
5,234
(16,565)
3,106
20,519
15. 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 March 29, 2022, 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 March 30, 2023. As of June 30, 2022, the Company had repurchased 69,185 shares of the Company’s common stock under the program. The repurchased shares are presented as “treasury stock” on the balance sheet.
16. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and six months ended June 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
16,143
16,045
16,170
Net income/(loss) attributable to non-controlling interests
(444)
Foreign currency translation adjustment attributable to non-controlling interests
(1,142)
352
(1,053)
209
15,674
17. Net product sales
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.
16
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.
Contract liabilities are mainly customer deposits. As of June 30, 2022 and December 31, 2021, the Company has customer deposits of $2.3 million and $2.4 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the six months ended June 30, 2022, $2.8 million was received and $2.9 million (including $2.4 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the six months ended June 30, 2021, $3.9 million was received and $1.6 million (including $1.5 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.
18. Financial income/(expense), net
During the three and six months ended June 30, 2022 and 2021, the Company recorded financial income/(expense), net which is summarized as follows (figures are in thousands of USD):
Interest income
312
562
521
Foreign exchange gain/(loss), net
2,325
191
4,236
(278)
Bank charges
(94)
(215)
(240)
(300)
Total financial income/(expense), net
19. Income per share
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 June 30, 2022 and 2021, were as follows (figures are in thousands of USD, except share and per share amounts):
Numerator:
Net income attributable to the parent company’s common shareholders - Basic and Diluted
Denominator:
Weighted average shares outstanding
Dilutive effects of stock options
1,303
3,630
Denominator for dilutive income per share - Diluted
Net income per share attributable to parent company’s common shareholders - Basic
Net income per share attributable to parent company’s common shareholders - Diluted
17
The calculations of basic and diluted income per share attributable to the parent company for the six months ended June 30, 2022 and 2021, were as follows (figures are in thousands of USD, except share and per share amounts):
1,129
4,795
As of June 30, 2022 and 2021, the exercise prices for 30,000 and 37,500 outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended June 30, 2022 and 2021, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
As of June 30, 2022 and 2021, the exercise prices for 30,000 and 30,000 outstanding stock options were above the weighted average market price of the Company’s common stock during the six months ended June 30, 2022 and 2021, respectively. Therefore, 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 currency for settlement of such “current account” transactions without pre-approval.
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of 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.
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the “current account” and that involve conversion of RMB into foreign currency are classified as “capital account” transactions; examples of “capital account” transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital account” transactions require prior approval from China’s State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
18
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People’s Republic of China, or the PRC, the Company’s China 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 China 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.
21. Related party transactions and balances
Related party transactions are as follows (figures are in thousands of USD):
Related party sales
Merchandise sold to related parties
9,158
15,750
Materials and others sold to related parties
971
522
Rental income obtained from related parties
120
135
10,249
16,407
20,162
32,325
1,576
948
245
241
21,983
33,514
Related party purchases
Materials purchased from related parties
6,496
7,197
Equipment purchased from related parties
671
289
7,167
7,486
14,036
15,411
1,120
1,380
Others purchased from related parties
157
15,313
16,802
Related party investment transaction
Six Months Ended June 30
Equity interest purchase from related parties
19
Related party receivables
Accounts and notes receivable, net from related parties
Other receivables from related parties
10,614
Related party advance payments and others
Advance payments for property, plant and equipment to related parties
1,826
810
Advance payments and others to related parties
797
600
2,623
1,410
Related party payables
Accrued expenses and other payables to related parties
19,693
These transactions were consummated under similar terms as those with the Company’s third party customers and suppliers.
As of August 12, 2022, Hanlin Chen, the chairman of the board of directors of the Company, owns 58.2% 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
The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of June 30, 2022 (figures are in thousands of USD):
Payment obligations by period
2023
2024
Thereafter
Obligations for investment contracts (1)
4,470
Obligations for purchasing and service agreements
22,687
2,300
24,987
6,770
29,457
20
23. Off-balance sheet arrangements
As of June 30, 2022 and December 31, 2021, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
24. Segment reporting
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2021 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 June 30, 2022 and 2021, the Company had 15 product sectors, seven 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, Hubei Henglong, and Brazil Henglong), and one holding company (Genesis). The other eight sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
The Company’s product sector information for the three and six months ended June 30, 2022 and 2021, is as follows (figures are in thousands of USD):
Net Product Sales
Net (Loss)/Income
Three Months Ended
Henglong
52,808
49,135
2,485
144
Jiulong
18,357
25,402
(981)
(476)
Shenyang
2,757
4,237
(265)
84
Wuhu
9,991
5,561
52
104
Hubei Henglong
38,276
31,857
7,660
664
Henglong KYB
21,013
16,660
1,598
(722)
Brazil Henglong
8,477
7,169
(1,262)
413
Other Entities
18,760
14,385
1,647
3,523
Total Segments
170,439
154,406
10,934
3,734
Corporate
(186)
(832)
Eliminations
(43,278)
(33,802)
(813)
26
21
Net Income/(Loss)
Six Months Ended
114,811
98,214
3,684
943
36,085
59,121
(3,415)
524
6,068
8,329
(325)
437
18,863
9,720
54
111
71,219
67,315
4,823
1,330
50,820
34,866
2,167
(557)
18,961
12,084
1,553
2,334
38,609
30,707
2,794
2,110
355,436
320,356
11,335
7,232
(421)
(1,049)
(91,879)
(69,411)
(830)
(24)
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC motors, Changan Automobile Group, BAIC Group, Dongfeng Group, Brilliance Jinbei, Chery, BYD and Zhejiang Geely, as well as Sino-foreign or foreign automobile manufacturer such as General Motors, Citroen, Fiat Chrysler North America and Ford. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. As of June 30, 2022, the Company has approximately 4,239 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing its work to improve its operations and business structure and achieve profitable growth.
In addition, as a result of COVID-19, the Company’s businesses, results of operations, financial position and cash flows had been affected in the first two quarters of 2022 with the Company commencing its 2022 operation in March of 2022. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Corporate Structure
The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations,high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu, for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. Following the acquisition, the Company owned 100% of the equity interests of Wuhu Henglong.
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance SheetCaption
CriticalEstimateItem
Nature of EstimatesRequired
Assumptions/ApproachesUsed
Key Factors
Accrued liabilities and other long-term liabilities
Warranty obligations
Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.
The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.
OEM sourcing
OEM policy decisions regarding warranty claims
Property, plant and equipment, intangible assets and other long-term assets
Valuation of long- lived assets and investments
The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.
The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.
Future production estimates
Customer preferences and decisions
Accounts
receivable
Allowance for
doubtful
accounts
The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts.
The Company estimates the collect ability of the receivables based on the future cash flows using historical experiences.
Customer credit
Inventory
Write-down of inventory
The Company is required from time to time to review the cash-ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories.
Recoverability of deferred tax assets
The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.
The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations.
Tax law changes
Variances in future projected profitability, including by taxing entity
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
24
Results of Operations
Three Months Ended June 30, 2022 and 2021
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change %
Net product sales
6,557
5.4
Cost of products sold
(0.3)
190.3
(378)
(8.5)
(401)
(6.6)
1,960
33.1
1,298
86.2
(76)
25.9
2,361
1,297.3
Income taxes
2,958
1,493.9
7,007
239.6
779
(279.2)
6,228
194.6
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
3,673
7.5
48,347
45,874
2,473
(7,045)
(27.7)
15,763
23,631
(7,868)
(33.3)
(1,480)
(34.9)
2,265
3,435
(1,170)
(34.1)
4,430
79.7
9,417
4,862
4,555
93.7
6,419
20.1
31,015
25,800
5,215
20.2
4,353
26.1
17,798
15,896
1,902
12.0
1,308
18.2
7,494
6,713
781
11.6
4,375
30.4
14,269
12,311
1,958
15.9
16,033
10.4
146,368
138,522
7,846
5.7
Elimination
(9,476)
28.0
(41,918)
(33,747)
(8,171)
24.2
Net product sales were $127.2 million for the three months ended June 30, 2022, compared to $120.6 million for the same period in 2021, representing an increase of $6.6 million, or 5.5%, mainly due to the Company’s increased share of foreign markets.
Net sales of traditional steering products and parts were $94.8 million for the three months ended June 30, 2022, compared to $97.4 million for the same period in 2021, representing a decrease of $2.6 million, or 2.7%. Net sales of electric power steering (“EPS”) were $32.4 million for the three months ended June 30, 2022 and $23.2 million for the same period in 2021, representing an increase of $9.2 million, or 39.7%. As a percentage of net sales, sales of EPS were 25.5% for the three months ended June 30, 2022, compared with 19.2% for the same period in 2021.
The increase in net product sales was due to the effects of three major factors: i) the increase in sales volume led to a sales increase of $3.5 million due to the Company’s increased share of foreign markets; ii) the increase in average selling price of steering gears led to a sales increase of $5.8 million; and iii) the depreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year resulted in a sales decrease of $2.7 million.
25
Further analysis by segment (before elimination) is as follows:
For the three months ended June 30, 2022, the cost of products sold was $104.5 million, compared to $104.8 million for the same period of 2021, representing a decrease of $0.3 million, or 0.3%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the increase in sales volumes led to a cost of sales increase of 1.5 million; ii) an increase in unit cost resulting in a cost of sales increase of $0.3 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $2.1 million. Further analysis is as follows:
Gross margin was 17.9% for the three months ended June 30, 2022, compared to 13.1% for the same period of 2021, representing an increase of 4.8%, mainly due to the changes in the product mix and the increase in selling price for the three months ended June 30, 2022.
27
Selling Expenses
Selling expenses were $4.1 million for the three months ended June 30, 2022, as compared to $4.4 million for the same period of 2021, representing a decrease of $0.3 million, which was primarily due to the decrease in transportation expenses.
General and Administrative Expenses
General and administrative expenses were $5.7 million for the three months ended June 30, 2022, as compared to $6.1 million for the same period of 2021, representing a decrease of $0.4 million, which was primarily due to lower office expenses and travel expenses.
Research and Development Expenses
Research and development expenses were $7.9 million for the three months ended June 30, 2022, as compared to $5.9 million for the same period of 2021, representing an increase of $2.0 million, or 33.9%, which was mainly due to increased R&D activities for new projects.
Other Income, net
Other income, net was $2.8 million for the three months ended June 30, 2022, as compared to $1.5 million for the three months ended June 30, 2021, representing an increase of $1.3 million, which was mainly due to the various government subsidies of $2.3 million received for the three months ended June 30, 2022, whereas only $0.9 million was received in the same period of last year.
Interest Expense
Interest expense was $0.4 million for the three months ended June 30, 2022, which is substantially consistent with $0.3 million for the three months ended June 30, 2021.
Financial Income, net
Financial income, net was $2.5 million for the three months ended June 30, 2022, compared to financial income, net of $0.2 million for the three months ended June 30, 2021, representing an increase in financial income of $2.3 million, which was primarily due to an increase in the foreign exchange gains due to sharp fluctuations of the US dollar against the RMB and the Brazilian Real.
Income Taxes
Income tax expense was $3.2 million for the three months ended June 30, 2022, compared to income tax expense of $0.2 million for the three months ended June 30, 2021, which was primarily due to the increase in valuation allowance recognized in the three months ended June 30, 2022.
Net Income/(Loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.5 million for the three months ended June 30, 2022, compared to net loss attributable to non-controlling interests of $0.2 million for the three months ended June 30, 2021.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $9.4 million for the three months ended June 30, 2022, compared to net income attributable to parent company’s common shareholders of $3.1 million for the three months ended June 30, 2021, representing an increase in net income attributable to parent company’s common shareholders of $6.3 million.
28
Results of Operations - Six Months Ended June 30, 2022 and 2021
Change%
12,612
5.0
10,744
995
48.8
(1,675)
(16.7)
(262)
(2.5)
3,417
27.1
3,094
95.8
(135)
21.2
4,615
8,096.5
3,275
390.3
3,925
63.7
961
(368.2)
2,963
46.3
16,597
16.9
105,788
90,993
14,795
16.3
(23,036)
(39.0)
33,369
54,299
(20,930)
(38.5)
(2,261)
(27.1)
5,081
6,748
(1,667)
(24.7)
9,143
94.1
17,719
8,734
8,985
102.9
3,904
5.8
61,137
55,285
5,852
10.6
15,954
45.8
45,119
32,791
12,328
37.6
6,877
56.9
16,992
10,049
6,943
69.1
7,902
25.7
30,313
25,713
4,600
17.9
35,080
11.0
315,518
284,612
30,906
10.9
(22,468)
32.4
(89,406)
(69,244)
(20,162)
29.1
Net product sales were $263.6 million for the six months ended June 30, 2022, compared to $250.9 million for the same period of 2021, representing an increase of $12.7 million, or 5.1%, mainly due to the Company’s increased share of foreign markets.
Net sales of traditional steering products and parts were $190.2 million for the six months ended June 30, 2022, compared to $203.0 million for the same period in 2021, representing a decrease of $12.8 million, or 6.3%. Net sales of electric power steering (“EPS”) were $73.4 million for the six months ended June 30, 2022 and $47.9 million for the same period in 2021, representing an increase of $25.5 million, or 53.2%. As a percentage of net sales, sales of EPS were 27.8% for the six months ended June 30, 2022, compared to 19.1% for the same period in 2021.
The increase in net product sales was due to the effects of three major factors: i) the increase in sales volume led to a sales increase of $5.7 million due to the Company’s increased share of foreign markets; ii) the increase in average selling price of steering gears led to a sales increase of $6.3 million; and iii) the appreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year resulted in a sales increase of $0.7 million.
29
For the six months ended June 30, 2022, the cost of products sold was $226.1 million, compared to $215.4 million for the same period of 2021, representing an increase of $10.7 million, or 5.0%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the increase in sales volumes led to a cost of sales increase of $5.5 million; ii) the increase in unit cost led to a cost of sales increase of $4.3 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $0.9 million. Further analysis is as follows:
30
Gross margin was 14.2% for the six months ended June 30, 2022, which is consistent with 14.2% for the same period of 2021.
Selling expenses were $8.4 million for the six months ended June 30, 2022, as compared to $10.1 million for the same period of 2021, representing a decrease of $1.7 million, or 16.8%, which was primarily due to the decrease in transportation expenses.
General and administrative expenses were $10.4 million for the six months ended June 30, 2022, which is substantially consistent with $10.7 million for the six months ended June 30, 2021.
Research and development expenses were $16.0 million for the six months ended June 30, 2022, as compared to $12.6 million for the six months ended June 30, 2021, representing an increase of $3.4 million, or 27.0%, which was mainly due to increased R&D activities for new projects.
31
Other income, net was $6.3 million for the six months ended June 30, 2022, which was comprised of government subsidies, as compared to $3.2 million for the six months ended June 30, 2021, representing an increase of $3.1 million, which was mainly due to the various government subsidies of $5.3 million for the six months ended June 30, 2022, whereas only $2.4 million was received in the same period of last year.
Interest expense was $0.8 million for the six months ended June 30, 2022, which is substantially consistent with $0.6 million for the six months ended June 30, 2021.
Financial (Income)/expense, net
Financial income, net was $4.6 million for the six months ended June 30, 2022, compared to financial expense, net of $0.1 million for the six months ended June 30, 2021, representing a decrease in financial expense of $4.7 million, which was primarily due to an increase in the foreign exchange gains due to the sharp fluctuations of the US dollar against the RMB and the Brazilian Real.
Income tax expense was $4.1 million for the six months ended June 30, 2022, compared to $0.8 million for the six months ended June 30, 2021, which was primarily due to the increase in valuation allowance recognized in the six months ended June 30, 2022.
Net Income/(loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.7 million for the six months ended June 30, 2022, compared to net loss attributable to non-controlling interests of $0.2 million for the six months ended June 30, 2021.
Net income attributable to parent company’s common shareholders was $9.4 million for the six months ended June 30, 2022, compared to net income attributable to parent company’s common shareholders of $6.4 million for the six months ended June 30, 2021, representing an increase in net income attributable to parent company’s common shareholders of $3.0 million.
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of June 30, 2022, the Company had cash and cash equivalents and short-term investments of $132.9 million, compared to $133.5 million as of December 31, 2021, representing a decrease of $0.6 million, or 0.4%.
The Company had working capital (total current assets less total current liabilities) of $150.1 million as of June 30, 2022, compared to $149.6 million as of December 31, 2021, representing an increase of $0.5 million, or 0.3%.
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
We cannot predict the impact COVID-19 may have on our cash flow for the rest of 2022. However, based on our liquidity assessment, we believe that our cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash
32
needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least twelve months subsequent to the filing of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two years.
The Company had short-term loans of $47.6 million, long-term loans of $0.5 million (See Note 7) and bankers’ acceptances of $78.4 million (See Note 8) as of June 30, 2022.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker’s acceptances is expected to be reduced by approximately $17.0 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker’s acceptances in the future, it may be required by the banks to provide additional mortgages of $17.0 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $11.1 million, which is 65.1%, the mortgage ratio, of $17.0 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
Bank Arrangements
As of June 30, 2022, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):
Assessed
Due
Amount
Mortgage
Bank
Date
Available(3)
Used(4)
Value(5)
1. Comprehensive credit facilities
China CITIC Bank (1) (2)
Aug 2022
63,325
37,374
21,229
2. Comprehensive credit facilities
Hankou Bank (2)
Nov 2022
14,900
5,111
3. Comprehensive credit facilities
China Industrial Bank
1,043
4. Comprehensive credit facilities
Shanghai Pudong Development Bank (2)
Jan 2023
19,370
1,193
17,360
5. Comprehensive credit facilities
Hubei Bank (2)
Mar 2024
25,330
18,579
77,183
6. Comprehensive credit facilities
Chongqing Bank
Mar 2025
509
125,011
63,809
120,619
33
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
The Company’s bank loan terms range from 2 months to 35 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Land use rights and buildings with an assessed value of approximately $21.2 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
2. Buildings with an assessed value of approximately $2.9 million as security for its comprehensive credit facility with China Industrial Bank.
3. Land use rights and buildings with an assessed value of approximately $17.4 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
4. Equipment with an assessed value of approximately $77.2 million as security for its revolving comprehensive credit facility with Hubei Bank.
5. Buildings with an assessed value of approximately $1.9 million as security for its comprehensive credit facility with Chongqing Bank.
Short-term and Long-term Loans
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of June 30, 2022 (figures are in thousands of USD).
Borrowing
Annual
Date of
Term
Interest
Government
Purpose
(Months)
Principal
Rate
Payment
Due Date
Bank of China
Working Capital
Sep 27, 2021
2,980
3.80
Pay monthly
Sep 27, 2022
Nov 24, 2021
3,874
Nov 24, 2022
Aug 27, 2021
Aug 26, 2022
Oct 27, 2021
Oct 26, 2022
Dec 22, 2021
3.85
Pay quarterly
Dec 21, 2022
China CITIC Bank
Apr 27, 2022
1,490
3.90
Jan 27, 2023
May 20, 2022
Jan 20, 2023
34
Apr 14, 2022
Oct 14, 2022
Apr 14, 2023
35
55
Mar 20, 2025
125
May 12, 2022
77
May 24, 2022
57
Jun 16, 2022
45
Jun 29, 2022
7,131
2.30
Pay in arrear
Jun 15, 2023
Mar 21, 2022
1,445
3.00
Mar 21, 2023
Mar 23, 2022
4,623
Mar 23, 2023
5,094
Hankou Bank
Mar 18, 2022
2,923
1.90
Mar 13, 2023
5,345
China CITIC Bank (1)
Mar 7, 2022
443
2.50
Jul 21, 2022
Apr 21, 2022
Aug 22, 2022
133
Sept 8, 2022
635
Sept 14, 2022
715
Sept 28, 2022
Sept 22, 2022
May 17, 2022
162
2.20
Sept 2, 2022
369
Oct 8, 2022
Jul 18, 2022
74
Oct 28, 2022
Oct 24, 2022
103
Oct 31, 2022
102
446
2.05
Jul 7, 2022
The Company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged additional 30% to 100% penalty interest.
The Company had complied with such financial covenants as of June 30, 2022.
36
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of June 30, 2022 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Jul. 2022
15,214
Aug.2022
10,438
Sep. 2022
15,598
Oct. 2022
11,983
Nov.2022
12,042
Dec. 2022
13,135
Total (See Note 8)
78,410
(1)
The notes payable were repaid in full on their respective due dates.
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit a sufficient amount of cash on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company complied with such financial covenants as of June 30, 2022.
Cash Flows
Net cash provided by operating activities for the six months ended June 30, 2022 was $14.5 million, compared to net cash provided by operating activities of $5.5 million for the same period of 2021, representing an increase in net cash inflows by $9.0 million, which was mainly due to (1) the increase in net income excluding non-cash items by $7.2 million, (2) the decrease in the cash outflows from movements of inventory by $7.9 million, (3) the decrease in the cash inflows from movements of accounts and notes receivable by $11.2 million, and (4) a combination of other factors contributing an increase of cash inflows by $5.1 million.
Net cash used in investing activities for the six months ended June 30, 2022 was $24.4 million, as compared to net cash used in investing activities of $6.7 million for the same period of 2021, representing an increase in net cash outflows by $17.7 million, which was mainly due to the net effect of (1) an increase in purchase of short-term investments of $28.5 million, (2) an increase in proceeds from maturities of short-term investments by $21.3 million, (3) an increase in investment under the equity method by $5.5 million, and (4) a combination of other factors contributing a decrease of cash inflows by $5.0 million, primarily including a decrease of cash received from long-term investment by $2.1 million.
Net cash provided by financing activities for the six months ended June 30, 2022 was $1.6 million, compared to net cash used in financing activities of $10.8 million for the same period of 2021, representing an increase in net cash inflows by $12.4 million, which was mainly due to the net effect of (1) a decrease in repayment of bank loan by $10.2 million, (2) a decrease in repayment of the borrowing for sale and leaseback transaction by $1.1 million, and (3) a combination of other factors contributing an increase of cash inflows by $1.1 million.
Off-Balance Sheet Arrangements
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 regarding this matter.
ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2022, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
There have been no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
Other than as set forth below, there have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2021 Annual Report on Form 10-K.
Our shares may be delisted from Nasdaq Stock Market and prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China. In April 2022, the Staff conclusively identified us under the HFCAA as an issuer that uses an auditor that the PCAOB is unable to inspect or investigate completely. If the PCAOB continues to be unable to inspect audit firms in the PRC for three consecutive years, the HFCAA requires the SEC to prohibit the trading of our securities on a national securities exchange, including Nasdaq, or on over-the-counter markets in the United States. The delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, the Holding Foreign Companies Accountable Act, or the HFCAA was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from
being traded on a national securities exchange or in the over-the counter trading market in the U.S. Accordingly, under the current law this could happen in 2024.
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the “Final Amendments”). The Final Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party, including the text of any such charter. The Final Amendments also establish procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA.
On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely.
In April 2022, SEC staff conclusively identified the Company as a Commission-Identified Issuer. If we continue to be identified as a Commission-Identified Issuer that uses an auditor not subject to PCAOB inspection for three consecutive years, our securities may be delisted from Nasdaq as a result.
The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the shares could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements to be included in our Form 10-K for the year ending December 31, 2023 which is due by March 31, 2024, or at all, is subject to substantial uncertainty and depends on factors out of our and our auditor’s control. If our auditor is unable to be inspected in time, we could be delisted from Nasdaq Stock Market and prohibited from trading in the over-the-counter market.
Delisting of our securities would force holders of our securities to sell their securities. Further, we may be prohibited from listing our securities on another U.S. securities exchange. The market price of our securities could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about the Company’s share repurchase activity for the three months ended June 30, 2022 (in thousands of USD):
Issuer Purchases of Equity Securities
Approximate
dollar value of
Total number of
shares that may
shares purchased
yet be purchased
as part of publicly
Average price
announced
Period
paid per share
programs (1)
program
April 1, 2022 to April 30, 2022
5,000
May 1, 2022 to May 31, 2022
June 1, 2022 to June 30, 2022
69,185
2.8284
4,804
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
3.1(i)
Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
3.1(ii)
Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
10.2
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
10.3
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
31.1
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
32.2
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104*
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Date: August 12, 2022
By:
/ s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer