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 September 30, 2024
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 ☒
Name of each exchange on which registered
As of November 13, 2024, the Company had 30,185,702 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 Nine Months Ended September 30, 2024 and 2023
Condensed Unaudited Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
6
Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023
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.
37
Item 4.
Controls and Procedures.
Part II — Other Information
38
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
39
Signatures
40
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, 2023, 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 September 30,
2024
2023
Net product sales ($13,703 and $8,407 sold to related parties for the three months ended September 30, 2024 and 2023)
$
164,215
137,541
Cost of products sold ($7,217 and $6,266 purchased from related parties for the three months ended September 30, 2024 and 2023)
137,859
112,784
Gross profit
26,356
24,757
Gain on other sales
553
2,177
Less: Operating expenses
Selling expenses
4,357
3,803
General and administrative expenses
5,070
6,108
Research and development expenses
6,383
6,870
Total operating expenses
15,810
16,781
Income from operations
11,099
10,153
Other income, net
1,251
1,155
Interest expense
(271)
(245)
Financial (expense)/income, net
(167)
163
Income before income tax expenses and equity in earnings of affiliated companies
11,912
11,226
Less: Income taxes
4,042
688
Add: Equity in earnings of affiliated companies
203
706
Net income
8,073
11,244
Less: Net income attributable to non-controlling interests
2,562
1,749
Accretion to redemption value of redeemable non-controlling interests
(7)
Net income attributable to parent company’s common shareholders
5,504
9,488
Comprehensive income:
Other comprehensive income:
Foreign currency translation gain, net of tax
6,584
3,580
Comprehensive income
14,657
14,824
Less: Comprehensive income attributable to non-controlling interests
3,287
3,590
Comprehensive income attributable to parent company
11,363
11,227
Net income attributable to parent company’s common shareholders per share -
Basic
0.18
0.31
Diluted
Weighted average number of common shares outstanding -
30,185,702
30,189,363
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Nine Months Ended September 30,
Net product sales ($38,613 and $35,177 sold to related parties for the nine months ended September 30, 2024 and 2023)
462,217
417,194
Cost of products sold ($21,874 and $20,592 purchased from related parties for the nine months ended September 30, 2024 and 2023)
382,490
348,101
79,727
69,093
2,787
3,572
13,044
10,981
18,035
16,132
19,879
19,866
50,958
46,979
31,556
25,686
5,389
4,620
(712)
(770)
(869)
3,704
35,364
33,240
7,893
3,004
Add: Equity in (losses)/earnings of affiliated companies
(1,379)
359
26,092
30,595
5,159
3,799
(22)
20,911
26,774
Foreign currency translation gain/(loss), net of tax
3,390
(8,752)
29,482
21,843
5,659
4,831
23,801
16,990
0.69
0.89
30,190,660
5
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
September 30, 2024
December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
98,310
114,660
Pledged cash
40,514
40,534
Accounts and notes receivable, net - unrelated parties
295,515
261,237
Accounts and notes receivable, net - related parties
18,658
8,169
Inventories
108,880
112,392
Other current assets
28,245
27,083
Total current assets
590,122
564,075
Non-current assets:
Property, plant and equipment, net
100,703
101,359
Land use rights, net
9,130
9,233
Long-term investments
60,236
60,173
Other non-current assets
68,841
31,600
Total assets
829,032
766,440
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
59,744
48,005
Accounts and notes payable-unrelated parties
259,134
240,739
Accounts and notes payable-related parties
12,658
12,839
Accrued expenses and other payables
65,253
44,771
Other current liabilities
36,718
37,385
Total current liabilities
433,507
383,739
Long-term liabilities:
Long-term tax payable
—
8,781
Other non-current liabilities
6,266
5,498
Total liabilities
439,773
398,018
Commitments and Contingencies (See Note 22)
Mezzanine equity:
Redeemable non-controlling interests
635
613
Stockholders’ equity:
Common stock, $0.0001 par value – Authorized – 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of September 30, 2024 and December 31, 2023, respectively, including treasury stock
Additional paid-in capital
69,722
63,731
Retained earnings-
Appropriated
12,174
11,851
Unappropriated
281,271
284,832
Accumulated other comprehensive income
(5,368)
(8,258)
Treasury stock – 2,152,600 and 2,152,600 shares as of September 30, 2024 and December 31, 2023, respectively
(7,695)
Total parent company stockholders’ equity
350,107
344,464
Non-controlling interests
38,517
23,345
Total stockholders’ equity
388,624
367,809
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:
Depreciation and amortization
14,574
13,666
Reversal of credit losses
(903)
(450)
Deferred income taxes
(1,017)
Equity in earnings/(losses) of affiliated companies
1,379
(359)
Loss on property, plant and equipment disposals
1,133
79
(Increase)/decrease in:
Accounts and notes receivable
(40,350)
(24,315)
4,653
6,070
874
(1,391)
(874)
(517)
Increase/(decrease) in:
Accounts and notes payable
12,996
(6,198)
4,945
849
Long-term taxes payable
(7,025)
(5,268)
(952)
(1,004)
Net cash provided by operating activities
16,542
10,740
Cash flows from investing activities:
Cash received from property, plant and equipment sales
1,359
664
Payments to acquire property, plant and equipment (including $4,597 and $6,414 paid to related parties for the nine months ended September 30, 2024 and 2023, respectively)
(18,268)
(12,184)
Payments to acquire intangible assets
(383)
(2,437)
Investments under the equity method
(2,283)
(7,729)
Purchase of short-term investments
(58,472)
(55,290)
Proceeds from maturities of short-term investments
25,373
48,281
Cash received from long-term investments
1,396
3,115
Net cash used in investing activities
(51,278)
(25,580)
Cash flows from financing activities:
Proceeds from bank loans
64,461
42,828
Repayments of bank loans
(54,394)
(48,147)
Dividends paid to the common shareholders
(9,318)
Cash received from capital contributions of a non-controlling interest
15,504
Net cash provided by/(used in) financing activities
16,253
(5,319)
Effects of exchange rate on cash, cash equivalents and pledged cash
2,113
(3,671)
Net decrease in cash, cash equivalents and pledged cash
(16,370)
(23,830)
Cash, cash equivalents and pledged cash at beginning of the period
155,194
158,951
Cash, cash equivalents and pledged cash at end of the period
138,824
135,121
Three Months and Nine Months Ended September 30, 2024 and 2023
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, 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,” which was 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, “R&D”, support.
The Company owns interests in the following subsidiaries incorporated in the People’s Republic of China, the “PRC,” and Brazil as of September 30, 2024 and December 31, 2023.
Percentage Interest
September 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
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
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 12
60.00
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 13
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 14
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 15
Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong” 16
The Company has business relationships with more than sixty vehicle manufacturers, including BYD Auto Co., Ltd., Zhejiang Geely Automobile Co., Ltd., and Chery Automobile Co., Ltd., three of the largest privately owned car manufacturers in China, Chongqing Changan Automobile Co., Ltd., the largest state-owned car manufacturers in China, SAIC Motor Co., Ltd., FAW Group and others. All of them are our key customers. For overseas customers, the Company has supplied power steering gear to Stellantis N.V. since 2009 and to Ford Motor Company since 2016.
9
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, 2023.
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, 2023 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 nine months ended September 30, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024.
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 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
No accounting standards newly issued during the three months ended September 30, 2024 had a material impact on the Company’s financial statements or disclosures.
In November 2023, the FASB issued Accounting Standards Update 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 improves segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and application should be applied retrospectively, unless it is impracticable to do so. We are currently assessing the potential impact of adopting ASU 2023-07 on our consolidated financial statements.
In December 2023, the FASB issued Accounting Standards Update 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 enhances the transparency and decision usefulness of income tax disclosures. ASU 2023- 09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted and application may be applied prospectively or retrospectively. We are currently assessing the potential impact of adopting ASU 2023-09 on our consolidated financial statements.
10
(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, 2023.
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of September 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
177,145
164,231
Notes receivable - unrelated parties
131,138
112,605
Total accounts and notes receivable - unrelated parties
308,283
276,836
Less: allowance for credit losses - unrelated parties
(12,768)
(15,599)
Accounts and notes receivable - related parties
20,191
9,573
Less: allowance for credit losses - related parties
(1,533)
(1,404)
Accounts and notes receivable, net
314,173
269,406
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 September 30, 2024 and December 31, 2023, the Company pledged its notes receivable with amounts of $2.5 million and $11.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
As of September 30, 2024 and December 31, 2023, the Company pledged its accounts receivable with amounts of $0.4 million and $0.5 million, respectively, as collateral for banks to obtain the long-term loans.
Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.9 million and $0.9 million for the three and nine months ended September 30, 2024, respectively.
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.01 million for the three months ended September 30, 2023.
Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.5 million for the nine months ended September 30, 2023.
During the three months ended September 30, 2024, the Company’s five largest customers accounted for 50.3% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net product sales, i.e., 17.8%. During the nine months ended September 30, 2024, the Company’s five largest customers accounted for 49.2% of its consolidated net product sales, with two customers accounting for more than 10% of consolidated net product sales, i.e., 14.8% and 13.6%. As of September 30, 2024, approximately 10.3% and 3.3% of accounts receivable were from trade transactions with the aforementioned customers.
During the three months ended September 30, 2023, the Company’s five largest customers accounted for 42.2% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net product sales, i.e., 18.3%. During the nine months ended September 30, 2023, the Company’s five largest customers accounted for 40.9% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net product sales, i.e., 19.4%. As of September 30, 2023, approximately 5.3% of accounts receivable were from trade transactions with the aforementioned customer.
11
4. Inventories
The Company’s inventories as of September 30, 2024 and December 31, 2023 consisted of the following (figures are in thousands of USD):
Raw materials
23,243
28,505
Work in process
18,523
17,123
Finished goods
57,310
62,760
Fulfillment costs for development service
9,804
4,004
Total
The Company recorded $1.4 million and $2.1 million of inventory write-down to cost of products sold for the three months ended September 30, 2024 and 2023, respectively, and $7.3 million and $7.0 million for the nine months ended September 30, 2024 and 2023, respectively.
5. Long-term investments
The Company’s long-term investments as of September 30, 2024 and December 31, 2023, are summarized as follows (figures are in thousands of USD):
Sentient AB
19,952
20,417
Chongqing Venture Fund
12,530
13,158
Hubei Venture Fund
12,197
12,217
Suzhou Qingshan
8,453
8,409
Suzhou Venture Fund
2,267
3,387
Suzhou Mingzhi (1)
2,132
1,261
Shanghai IAT (2)
1,422
Henglong Tianyu
732
793
Jiangsu Intelligent
551
531
The condensed financial information of the Company’s significant equity investee for the three and nine months ended September 30, 2024 and 2023, Chongqing Venture Fund, is summarized as follows (figures are in thousands of USD):
Revenue
Loss from continuing operations
(438)
(3,729)
(3,425)
(2,342)
Net loss
12
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of September 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Costs:
Machinery and equipment
248,571
241,761
Buildings
63,786
64,390
Electronic equipment
5,191
5,804
Motor vehicles
4,682
4,587
Construction in progress
13,002
11,821
Gross balance of property, plant and equipment
335,232
328,363
Less: Accumulated depreciation (1)
(233,625)
(226,436)
Less: Impairment
(904)
(568)
Balance of property, plant and equipment, net (2)
7. Loans
Loans consist of the following as of September 30, 2024 and December 31, 2023 (figures are in thousands of USD):
Short-term bank loans
59,029
Current portion of long-term bank loans
715
Subtotal
Long-term bank loans
958
1,221
Less: Current portion of long-term bank loans
(715)
243
59,987
49,226
The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $185.5 million and $195.8 million, respectively, as of September 30, 2024 and December 31, 2023. As of September 30, 2024 and December 31, 2023, the Company has drawn down loans under these facilities with an aggregate amount of $53.7 million and $49.2 million, respectively. The weighted average interest rate was 2.5% and 2.6% per annum, for the three months ending September 30, 2024 and the year ended December 31, 2023, respectively.
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 during the three months ended September 30, 2024.
13
8. Accounts and notes payable
The Company’s accounts and notes payable as of September 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
165,893
147,712
Notes payable - unrelated parties (1)
93,241
93,027
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
271,792
253,578
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of September 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accrued expenses
12,614
10,464
Warranty reserves (1)
36,108
30,440
Payables for overseas transportation and custom clearance
400
Dividends payable to common shareholders (See Note 13)
14,830
Dividends payable to holders of non-controlling interests
428
424
Other payables
1,273
3,043
For the three and nine months ended September 30, 2024 and 2023, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
32,910
33,948
32,435
Additions during the period
5,388
4,164
14,247
13,592
Settlement within the period
(2,790)
(3,340)
(8,983)
(9,973)
Foreign currency translation gain/(loss)
600
217
404
(1,065)
Balance at end of the period
34,989
14
10. Fair value measurement
The Company has entered into foreign exchange forward contracts with a local bank to reduce the exposure of significant changes in exchange rates between RMB and USD. Authoritative guidance requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets based upon quoted market prices for comparable instruments. The Company’s forward contracts have not met the criteria for hedge accounting within authoritative guidance. Therefore, the foreign exchange forward contracts have been recorded at fair value, with the gain or loss on these transactions recorded in the consolidated statements of operations within “other income, net” in the period in which they occur. These foreign exchange forward contracts will mature within 12 months. The Company used a discounted cash-flow methodology to measure fair value, which requires inputs such as interest yield curves and foreign exchange rates. The significant inputs used in the aforementioned model can be corroborated with market observable data and therefore the fair value measurements are classified as level 2. Typically, any losses or gains on the forward exchange contracts are offset by re-measurement losses or gains on the underlying balances denominated in non-functional currencies. The Company’s foreign currency exchange contracts are an over-the-counter instrument. These foreign exchange forward contracts have terminated as of December 31, 2023. The Company recorded loss from change in fair value of foreign exchange forward contracts of nil and $0.04 million during the nine months ended September 30, 2024 and 2023.
11. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to RMB 5.0 million, equivalent to approximately $0.7 million translated at spot rate of transaction date. 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 6.0% per year. As of September 30, 2024, $0.6 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity.
For the three and nine months ended September 30, 2024, the Company recognized accretion of $0.007 million and $0.022 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 nine months ended September 30, 2023, the Company recognized accretion of $0.007 million and $0.022 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 nine months ended September 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
Contribution by the non-controlling interest of Henglong KYB
5,991
15
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 months ended September 30, 2024 and 2023, no statutory reserve was appropriated by the subsidiaries in China.For the nine months ended September 30, 2024 and 2023, a subsidiary in China appropriated statutory reserve $0.3 million and nil, respectively.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended September 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
Nine months Ended September 30,
Appropriation of retained earnings
323
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and nine months ended September 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
299,916
264,460
247,174
Net income attributable to parent company
5,511
9,495
20,933
26,796
Accretion of redeemable non-controlling interests
(323)
Dividend payables to common shareholders (1)
(24,149)
273,948
The Company does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.
14. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and nine months ended September 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
(11,227)
(14,936)
(3,413)
Foreign currency translation adjustment attributable to parent company
5,859
1,739
2,890
(9,784)
(13,197)
16
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 September 30, 2024 and December 31, 2023, the Company had repurchased 666,074 shares of the Company’s common stock under the program and the total number of shares held in treasury was 2,152,600. 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 nine months ended September 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
35,230
16,423
15,182
Net income attributable to non-controlling interests
Foreign currency translation adjustment attributable to non-controlling interests
725
1,841
500
1,032
9,513
20,013
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.
Payment to Customer
The Company accounts for consideration payable to a customer as a reduction of revenue at the later of revenue recognition and the Company’s promise to pay the consideration.
Contract Assets and Liabilities
Contract liabilities are mainly customer deposits. As of September 30, 2024 and December 31, 2023, the Company has customer deposits of $11.5 million and $8.6 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the nine months ended September 30, 2024, $5.6 million was received and $2.7 million (including $2.5 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the nine months ended September 30, 2023, $6.9 million was received and $4.1 million (including $2.6 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an 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
18. Financial (expense)/income, net
During the three and nine months ended September 30, 2024 and 2023, the Company recorded financial income, net which is summarized as follows (figures are in thousands of USD):
Interest income
508
322
1,345
886
Foreign exchange (loss)/gain, net
(579)
(130)
(1,967)
2,978
Bank charges
(96)
(29)
(247)
(160)
Total financial (expense)/income, 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 September 30, 2024 and 2023, 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
3,661
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
The calculations of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 2024 and 2023, were as follows (figures are in thousands of USD, except share and per share amounts):
4,958
Net income per share attributable to parent company’s common shareholders – Basic
As of September 30, 2024, the exercise prices for 22,500 and 22,500 outstanding stock options exceeded the weighted average market price of the Company’s common stock during the three and nine months ended September 30, 2024. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
As of September 30, 2023, the exercise prices for 22,500 and 22,500 outstanding stock options exceeded the weighted average market price of the Company’s common stock during the three and nine months ended September 30, 2023. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
18
20. Significant concentrations
A significant portion of the Company’s business is conducted in the PRC 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 China 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.
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-based 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
13,703
8,407
Materials and others sold to related parties
410
233
Rental income obtained from related parties
80
82
14,193
8,722
19
38,613
35,177
1,580
1,560
275
221
40,468
36,958
Related party purchases
Materials purchased from related parties
7,217
Equipment purchased from related parties
1,427
2,820
Others purchased from related parties
59
20
8,703
9,106
21,874
20,592
3,515
3,453
175
44
25,564
24,089
Related party receivables
Accounts and notes receivable, net from related parties
Related party advance payments
Advance payments for property, plant and equipment to related parties
6,923
5,759
Advance payments and others to related parties
1,989
1,991
8,912
7,750
Related party payables
These transactions were consummated under similar terms as those with the Company’s third-party customers and suppliers.
As of September 30, 2024, Hanlin Chen, the chairman of the board of directors of the Company, owns 57.22% 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 and other payables, the following table summarizes the Company’s major commitments and contingencies as of September 30, 2024 (figures are in thousands of USD):
Payment obligations by period
2025
2026
Thereafter
Obligations for investment contracts(1)
2,854
714
3,568
Obligations for purchasing and service agreements
26,498
3,945
30,443
6,799
34,011
In June 2023, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, Suzhou Mingzhi. According to the agreement, Hubei Henlong shall contribute a total capital of RMB 30.0 million, equivalent to approximately $4.3 million. As of September 30, 2024, Hubei Henglong has paid RMB 15.0 million, equivalent to approximately $2.1 million, representing 19.74% of Suzhou Mingzhi’s equity. The remaining consideration of RMB 15.0 million, equivalent to approximately $2.1 million, will be paid in 2025.
23. Off-balance sheet arrangements
As of September 30, 2024 and December 31, 2023, 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 2023 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 September 30, 2024 and 2023, in addition to the holding company (Genesis), the Company had 15 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, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong. The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), power steering parts (Shenyang), 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), manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong) and inspection and testing of automotive products (Zhirong).
21
The Company’s product sector information for the three and nine months ended September 30, 2024 and 2023, is as follows (figures are in thousands of USD):
Net Product Sales
Net Income/(Loss)
Three Months Ended
Henglong
82,381
63,580
3,123
2,715
Jiulong
17,237
15,605
(285)
302
Wuhu
13,305
11,841
125
(175)
Hubei Henglong
18,684
27,602
382
2,572
Henglong KYB
51,809
33,491
5,025
4,619
Brazil Henglong
14,256
13,335
429
422
Other Entities
35,159
28,483
2,585
1,464
Total Segments
232,831
193,937
11,384
11,919
Corporate
(3,411)
(633)
Eliminations
(68,616)
(56,396)
100
(42)
Nine Months Ended
221,097
192,503
10,827
6,755
52,704
52,106
1,861
1,360
31,163
26,726
(2,503)
471
75,871
91,165
3,557
5,106
129,576
100,846
11,125
9,243
38,931
36,264
2,269
3,459
99,260
75,057
4,339
4,497
648,602
574,667
31,475
30,891
(4,754)
(1,489)
(186,385)
(157,473)
(629)
1,193
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 BYD Auto Co., Ltd., Zhejiang Geely Automobile Co., Ltd., and Chery Automobile Co., Ltd., three of the largest privately owned car manufacturers in China, Chongqing Changan Automobile Co., Ltd., the largest state-owned car manufacturers in China, SAIC Motor Co., Ltd., FAW Group and others. All of them are our key customers. For overseas customers, the Company has supplied power steering gear to Stellantis N.V. 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 September 30, 2024, the Company has approximately 4,313 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.
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 1.2 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. Jingzhou Qingyan deregistered from the local business administration on June 22, 2022. In June 2023, Hubei Henglong contributed certain equipment and intangible assets to Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong”, representing 100% of Zhirong’s paid-up capital. Zhirong mainly engages in inspection and testing of automotive products. In March 2024, KYB obtained an additional 6.6% equity interest in Henglong KYB for total consideration of RMB 110.0 million, equivalent to approximately $15.5 million, after that, Henglong owns 60.0% and KYB owns 40.0% of the shares of Henglong KYB. The Company retained its controlling interest in Henglong KYB.
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 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.
Valuation of investment in venture funds
The Company is required, from time-to-time, to review the fair value of these investments.
The Company determines the fair value of these investments using market approach or income approach with unobservable inputs.
Allowance for credit losses
The Company is required, from time to time, to review the credit of customers and make timely provision of allowance for credit losses.
The Company estimates the collectability of the receivables based on the future cash flows using historical experiences and forward looking factors.
Provision for inventory impairment
The Company is required, from time to time, to review the turnover of inventory, including provision of inventory impairment for over market price and undesirable inventories.
The Company estimates net realisable value using internal budgets based on the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale and related taxes.
Recoverability of deferred tax assets
The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.
The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry-forward period, tax planning opportunities and other relevant considerations.
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 September 30, 2024 and 2023
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change%
Net product sales
26,674
19.4
Cost of products sold
25,075
22.2
(1,624)
(74.6)
554
14.6
(1,038)
(17.0)
(487)
(7.1)
96
8.3
(26)
10.6
(330)
(202.5)
Income taxes
3,354
487.5
(3,171)
(28.2)
813
46.5
(3,984)
(42.0)
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
18,801
29.6
76,844
57,217
19,627
34.3
1,632
10.5
15,340
13,637
1,703
12.5
12.4
12,744
11,494
1,250
10.9
(8,918)
(32.3)
14,891
23,201
(8,310)
(35.8)
18,318
54.7
45,307
28,339
16,968
59.9
921
6.9
12,297
11,203
1,094
9.8
6,676
23.4
28,745
23,396
5,349
22.9
38,894
20.1
206,168
168,487
37,681
22.4
Elimination
(12,220)
21.7
(68,309)
(55,703)
(12,606)
22.6
Net product sales were $164.2 million for the three months ended September 30, 2024, compared to $137.5 million for the same period in 2023, representing an increase of $ 26.7 million, or 19.4%, mainly due to the Company’s increased sales of electric power steering, “EPS”, systems and parts and partially offset by the appreciation of the USD against the RMB.
Net sales of traditional steering products and parts were $98.6 million for the three months ended September 30, 2024, compared to $91.8 million for the same period in 2023, representing an increase of $6.8 million, or 7.4%. Net sales of EPS systems and parts were $65.6 million for the three months ended September 30, 2024 and $45.7 million for the same period in 2023, representing an increase of $19.9 million, or 43.5%. As a percentage of net sales, sales of EPS were 39.9% for the three months ended September 30, 2024, compared with 33.2% for the same period in 2023.
Further analysis by segment (before elimination) is as follows:
25
For the three months ended September 30, 2024, the cost of products sold was $137.9 million, compared to $112.8 million for the same period of 2023, representing an increase of $25.1 million, or 22.2%. The increase in cost of sales was mainly due to the increased sales volumes. Further analysis is as follows:
26
Gross margin was 16.0% for the three months ended September 30, 2024, compared to 18.0% for the same period of 2023, representing a decrease of 2.0%. The decrease was mainly due to the change in product mix for the three months ended September 30, 2024.
Selling Expenses
Selling expenses were $4.4 million for the three months ended September 30, 2024, as compared to $3.8 million for the same period of 2023, representing an increase of $0.6 million, or 14.6%, which was mainly due to the increased warehouse and logistic expenses related to the increased revenue.
General and Administrative Expenses
General and administrative expenses were $5.1 million for the three months ended September 30, 2024, as compared to $6.1 million for the same period of 2023, representing a decrease of $1.0 million, or 17.0%, which was mainly due to the reversal of bad debt provision for receivables.
Research and Development Expenses
Research and development expenses were $6.4 million for the three months ended September 30, 2024, as compared to $6.9 million for the same period of 2023, representing a decrease of $0.5 million, or 7.1%, which was mainly due to the decreased miscellaneous expenses related to R&D, caused by a decrease in R&D activities for new projects.
Other Income, net
Other income, net was $1.3 million for the three months ended September 30, 2024, which is stable compared to $1.2 million for the three months ended September 30, 2023.
Interest Expense
Interest expense was $0.3 million for the three months ended September 30, 2024, which is stable compared to $0.2 million for the same period of 2023.
Financial expense, net was $0.2 million for the three months ended September 30, 2024, as compared to financial income, net of $0.2 million for the three months ended September 30, 2023, representing an increase in financial expense of $0.4 million, which was primarily due to an increase in the foreign exchange loss due to the foreign exchange volatility.
Income Taxes
Income tax expense was $4.0 million for the three months ended September 30, 2024, as compared to $0.7 million for the three months ended September 30, 2023, which was primarily due to the a one-time income tax expense settlement for the subsidiaries in the PRC and an increase in the Global Intangible Low-Taxed Income (“GILTI”) tax expenses.
27
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $2.6 million for the three months ended September 30, 2024, compared to $1.7 million for the three months ended September 30, 2023, representing an increase of $0.9 million.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $5.5 million for the three months ended September 30, 2024, compared to $9.5 million for the three months ended September 30, 2023, representing a decrease of $4.0 million.
Results of Operations - Nine Months Ended September 30, 2024 and 2023
45,023
10.8
34,389
9.9
(785)
(22.0)
2,063
18.8
1,903
11.8
0.1
769
16.6
58
(7.5)
(4,573)
(123.5)
4,889
162.7
(4,503)
(14.7)
35.8
(5,863)
(21.9)
28,594
14.9
201,030
175,803
25,227
14.3
598
1.1
45,490
45,436
54
4,437
31,763
24,945
6,818
27.3
(15,294)
(16.8)
61,101
78,990
(17,889)
(22.6)
28,730
28.5
112,774
88,075
24,699
28.0
2,667
7.4
31,716
30,418
1,298
4.3
24,203
32.2
82,728
60,347
22,381
37.1
73,935
12.9
566,602
504,014
62,588
(28,912)
18.4
(184,112)
(155,913)
(28,199)
18.1
Net product sales were $462.2 million for the nine months ended September 30, 2024, compared to $417.2 million for the same period of 2023, representing an increase of $45.0 million, or 10.8%, mainly due to the Company’s increased sales of both traditional steering and EPS products.
Net sales of traditional steering products and parts were $293.6 million for the nine months ended September 30, 2024, compared to $282.1 million for the same period in 2023, representing an increase of $11.5 million, or 4.1%. Net sales of EPS systems and parts were $168.6 million for the nine months ended September 30, 2024 and $135.1 million for the same period in 2023, representing an increase
28
of $33.6 million, or 24.8%. As a percentage of net sales, sales of EPS were 36.5% for the nine months ended September 30, 2024, compared to 32.4% for the same period in 2023.
For the nine months ended September 30, 2024, the cost of products sold was $382.5 million, compared to $348.1 million for the same period of 2023, representing an increase of $34.4 million, or 9.9%. The increase in cost of sales was mainly due to the increase in sales volumes. Further analysis is as follows:
29
Gross margin was 17.2% for the nine months ended September 30, 2024, compared to 16.6% for the same period of 2023, representing an increase of 0.6%. The increase was mainly due to the change in product mix for the nine months ended September 30, 2024.
Selling expenses were $13.0 million for the nine months ended September 30, 2024, as compared to $11.0 million for the same period of 2023, representing an increase of $2.1 million, or 18.8%, which was primarily due to the increased warehouse and logistic expenses related to the increased revenue.
General and administrative expenses were $18.0 million for the nine months ended September 30, 2024, as compared to $16.1 million for the nine months ended September 30, 2023, representing an increase of $1.9 million, or 11.8%, which was primarily due to higher consulting fees and business tax and surcharges.
Research and development expenses were $19.9 million for the nine months ended September 30, 2024, which is substantially consistent with $19.9 million for the same period of 2023.
Other income, net was $5.4 million for the nine months ended September 30, 2024, which was mainly comprised of government subsidies, as compared to $4.6 million for the nine months ended September 30, 2023, representing an increase of $0.8 million, or 16.6%, which was mainly due to higher government subsidies received for the nine months ended September 30, 2024 compared to the amount received for the nine months ended September 30, 2023.
Interest expense was $0.7 million for the nine months ended September 30, 2024, which is stable compared to $0.8 million for the same period of 2023.
Financial expense, net was $0.9 million for the nine months ended September 30, 2024, as compared to financial income, net of $3.7 million for the nine months ended September 30, 2023, representing an increase in financial expense of $4.6 million, which was primarily due to an increase in the foreign exchange loss due to the foreign exchange volatility.
30
Income tax expense was $7.9 million for the nine months ended September 30, 2024, compared to $3.0 million for the nine months ended September 30, 2023, representing an increase of $4.9 million, which was primarily due to a one-time income tax expense settlement for the subsidiaries in the PRC and an increase in the Global Intangible Low-Taxed Income (“GILTI”) tax expenses.
Net income attributable to non-controlling interests amounted to $5.2 million for the nine months ended September 30, 2024, compared to $3.8 million for the nine months ended September 30, 2023, representing an increase of $1.4 million.
Net income attributable to parent company’s common shareholders was $20.9 million for the nine months ended September 30, 2024, compared to net income attributable to parent company’s common shareholders of $26.8 million for the nine months ended September 30, 2023, representing a decrease of $5.9 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 September 30, 2024, the Company had cash and cash equivalents and short-term investments of $111.8 million, compared to $125.7 million as of December 31, 2023, representing a decrease of $13.9 million, or 11.1%.
The Company had working capital (total current assets less total current liabilities) of $156.6 million as of September 30, 2024, compared to $180.3 million as of December 31, 2023, representing a decrease of $23.7 million, or 13.1%.
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 and the special cash dividend in August 2024, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
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 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.
Common share dividends
On July 19, 2024, the Company’s Board of Directors declared a special cash dividend of $0.8 per common share (See Note 13). The aggregate amount of the special dividend payment was $24.1 million. $9.3 million of the dividend has been paid in August 2024 and the remaining $14.8 million will be paid before December 31, 2024.
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 $59.7 million, long-term loans of $0.2 million and bankers’ acceptances of $97.5 million (See Note 8) as of September 30, 2024.
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
31
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 $16.3 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 $8.4 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $8.4 million, which is 51.7%, the mortgage ratio, of $16.3 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 September 30, 2024, 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(2)
Used(3)
Value(4)
1. Comprehensive credit facilities
China CITIC Bank (1)
Jun-2025
106,316
64,805
23,434
2. Comprehensive credit facilities
May-2025
4,281
1,299
3. Comprehensive credit facilities
Chongqing Bank
Apr-2025
999
786
4. Comprehensive credit facilities
China Constitution Bank
Sep-2025
2,997
5. Comprehensive credit facilities
China Merchants Bank (1)
Jun-2027
14,271
6. Comprehensive credit facilities
Bank of China
Nov-2024
7,135
7. Comprehensive credit facilities
China Everbright Bank (1)
Dec-2025
3,425
8. Comprehensive credit facilities
Huishang Bank (1)
Oct-2024
1,391
9. Comprehensive credit facilities
Industrial and Commercial Bank of China
3,996
10. Comprehensive credit facilities
Hankou Bank (1)
435
11. Comprehensive credit facilities
Hubei Bank (1)
Aug-2026
24,260
2,560
29,569
185,518
90,609
61,280
32
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 36 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 $27.3 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
2. Buildings with an assessed value of approximately $1.8 million as security for its comprehensive credit facility with Chongqing Bank.
3. Land use rights and buildings with an assessed value of approximately $6.5 million as security for its revolving comprehensive credit facility with China Constitution Bank.
4. Land use rights and buildings with an assessed value of approximately $9.0 million as security for its revolving comprehensive credit facility with China Everbright Bank.
5. Land use rights and buildings with an assessed value of approximately $73.9 million as security for its revolving comprehensive credit facility with Hubei Bank.
33
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 September 30, 2024 (figures are in thousands of USD).
Borrowing
Annual
Date of
Term
Interest
Government
Purpose
(Months)
Principal
Rate
Payment
Due Date
Working Capital
Mar 31, 2024
2.58
Pay monthly
Mar 30, 2025
Feb 22, 2024
2.60
Feb 21, 2025
Bank of China (1)
Oct 30, 2023
2.78
Oct 29, 2024
China CITIC Bank
Apr 26, 2024
3.00
Apr 25, 2025
Mar 21, 2024
2.80
Pay quarterly
Mar 20, 2025
Jun 25, 2024
Jun 25, 2025
Chongqing Bank (1)
Apr 14, 2022
3.60
Pay semiannually
Oct 13, 2024
36
Apr 13, 2025
Apr 27, 2022
120
May 12, 2022
35
74
May 24, 2022
Jun 16, 2022
34
43
Jun 29, 2022
116
Jul 28, 2022
Jan 16, 2023
161
Feb 20, 2023
Mar 21, 2023
Jul 18, 2023
Feb 7, 2024
6,850
2.20
Pay in arrear
Feb 6, 2025
Mar 29, 2024
2.24
Mar 14, 2025
Aug 7, 2024
5,280
1.55
Aug 7, 2025
Aug 22, 2024
2,569
Aug 21, 2025
Jul 31, 2024
4,224
Jul 30, 2025
Aug 19, 2024
2,283
Aug 15, 2025
May 31, 2024
1.35
Oct 22, 2024
284
1.42
Nov 4, 2024
Nov 8, 2024
241
Nov 7, 2024
Nov 6, 2024
Jun 26, 2024
171
Oct 26, 2024
China Merchants Bank
Sep 23, 2024
427
1.48
Nov 24, 2024
285
329
1.40
Nov 22, 2024
Jul 3, 2024
425
1.50
Dec 27, 2024
142
Dec 20, 2024
710
1.05
Jan 29, 2025
Jan 30, 2025
Aug 15, 2024
1.65
64
1.30
Nov 15, 2024
Sep 2, 2024
172
1.25
Sep 14, 2024
1.20
Feb 27, 2025
250
Sep 18, 2024
1.15
Sep 25, 2024
168
Feb 1, 2025
Banco Safra S/A (1)
Jul 6, 2023
7.31
Oct 7, 2024
Banco Safra S/A
Dec 6, 2024
Jan 6, 2025
Mar 6, 2025
Apr 7, 2025
May 6, 2025
Jun 6, 2025
Jul 7, 2025
Aug 6, 2025
Sep 8, 2025
Jun 29, 2023
7.44
Nov 29, 2024
Dec 30, 2024
Feb 28, 2025
Mar 31, 2025
Apr 29, 2025
May 29, 2025
Jun 30, 2025
Jul 29, 2025
Aug 29, 2025
Sep 29, 2025
158
Jul 6, 2026
85
Jun 29, 2026
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 a penalty interest payment of 30% to 100%. The Company had complied with such financial covenants as of September 30, 2024.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of September 30, 2024 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Oct. 2024
12,716
Nov. 2024
16,319
Dec. 2024
18,689
Jan. 2025
15,449
Feb. 2025
16,383
Mar. 2025
17,985
Total (See Note 8)
97,541
(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 September 30, 2024.
Cash Flows
Net cash provided by operating activities for the nine months ended September 30, 2024 was $16.5 million, compared to net cash provided in operating activities of $10.7 million for the same period of 2023, representing an increase in net cash inflows by $5.8 million, which was mainly due to (1) the increase in the cash inflows from movements of accounts and notes payable by $19.2 million, (2) the increase in cash inflows from accrued expenses and other payables by $4.1 million, and (3) the increase in the cash outflows from movements of accounts and notes receivable by $16.0 million.
Net cash used in investing activities for the nine months ended September 30, 2024 was $51.3 million, as compared to net cash used in investing activities of $25.6 million for the same period of 2023, representing an increase in net cash outflows by 25.7 million, which was mainly due to the net effect of (1) a decrease in cash inflows from proceeds from maturities of short-term investments by $22.9 million, (2) an increase in cash outflows from payments to acquire property plant and equipment of $6.1 million, (3) the decrease in cash outflows from investment under the equity method by $5.4 million, and (4) an increase in cash outflows from purchase of short-term investments by $3.2 million.
Net cash provided by financing activities for the nine months ended September 30, 2024 was $16.3 million, compared to net cash used in financing activities of $5.3 million for the same period of 2023, representing an increase in net cash inflows by $21.6 million, which was mainly due to the net effect of (1) the increase in cash inflows from proceeds from bank loan by $21.6 million, (2) the increase in cash received from capital contributions by $15.5 million, (3) the increase in cash outflows from dividends paid to the common stock by $9.3 million, and (4) an increase in cash outflows from repayment of bank loan by $6.2 million.
Off-Balance Sheet Arrangements
Cybersecurity
Risk Management and Strategy
We recognize the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data.
Managing Material Risks & Integrated Overall Risk Management
We have strategically integrated cybersecurity risk management into our broader risk management framework to promote a company-wide culture of cybersecurity risk management. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level. Our management team continuously evaluates and addresses cybersecurity risks in alignment with our business objectives and operational needs.
Oversee Third-party Risk
Because we are aware of the risks associated with third-party service providers, we have implemented stringent processes to oversee and manage these risks. We conduct thorough security assessments of all third-party providers before engagement and maintain ongoing
monitoring to ensure compliance with our cybersecurity standards. This approach is designed to mitigate risks related to data breaches or other security incidents originating from third-parties.
Risks from Cybersecurity Threats
We have not encountered cybersecurity challenges that have materially impaired our operations or financial standing.
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, 2023 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 September 30, 2024, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2024.
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 September 30, 2024 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.
There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2023 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
31.1
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
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: November 13, 2024
By:
/s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer