China Automotive Systems(CAAS) - 2018 Q4 - Annual Report

Part I Business China Automotive Systems, Inc. is a holding company primarily manufacturing and selling power steering systems in the PRC, serving over sixty vehicle manufacturers - The Company operates as a holding company primarily manufacturing power steering systems in the PRC through nine Sino-joint ventures and five wholly-owned subsidiaries, with a US R&D subsidiary and a Brazil trading company[7][8][9] Top 5 Customers by Revenue (2018) | Name of Major Customers | Percentage of Total Revenue in 2018 | | :--- | :--- | | Fiat Chrysler North America | 18.6% | | Beiqi Foton | 6.1% | | Chery Automobile Co Ltd. | 5.2% | | Ford Motor Company | 4.8% | | Dongfeng Auto Group Co., Ltd. | 4.6% | | Total | 39.3% | - The company's strategic plan emphasizes brand recognition, quality control, cost efficiency, research and development, international expansion, and acquisitions[22] Research & Development Expenses and Impact | Year | R&D Expense (USD Million) | Sales from New Products (% of Total Sales) | | :--- | :--- | :--- | | 2018 | $31.7 | 27.6% | | 2017 | $33.5 | 22.0% | Geographic Sales Distribution (2017-2018) | Geographic Region | Net Sales % (2018) | Net Sales % (2017) | | :--- | :--- | :--- | | China | 71.5% | 76.8% | | United States | 22.8% | 16.9% | | Other foreign countries | 5.7% | 6.3% | Risk Factors The company faces significant business, industry, and operational risks, particularly in China, alongside investor risks related to management control and auditor oversight - The company's business is highly dependent on cyclical automotive production, making it sensitive to general economic conditions and potential declines[53][54] - Significant customer concentration risk exists, with the top five customers accounting for 39.3% of total sales in 2018, and Fiat Chrysler North America representing 18.6%[64] - As of December 31, 2018, management beneficially owns approximately 62.4% of outstanding common stock, granting control over corporate decisions and potential conflicts of interest[78][79] - The company's PRC-based independent auditor is in a jurisdiction where the PCAOB cannot conduct inspections, limiting investor oversight benefits[125][126] - The 2017 U.S. Tax Cuts and Jobs Act introduced a one-time transition tax and GILTI, potentially subjecting the company's non-U.S. activities to U.S. taxation[136][138] Unresolved Staff Comments The company reports no unresolved staff comments - Not Applicable[141] Properties The company's headquarters are in Jing Zhou City, PRC, operating multiple manufacturing facilities across China with long-term land use rights Summary of Manufacturing Facilities | Entity | Product | Total Area (sq.m.) | Building Area (sq.m.) | Original Cost of Equipment (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Henglong | Automotive Parts | 111,211 | 33,933 | $55,438 | | Jiulong | Power Steering Gear | 39,478 | 23,728 | $35,690 | | Shenyang | Automotive Steering Gear | 35,354 | 10,425 | $6,169 | | Chongqing | Power Steering Gear | 57,849 | 10,413 | $2,431 | | Hubei Henglong | Automotive Steering Gear | 177,747 | 65,749 | $17,438 | | Wuhu | Automotive Steering Gear | 83,705 | 27,288 | $4,610 | | Total | | 559,019 | 171,536 | $127,610 | Legal Proceedings The company faced two legal proceedings: a dismissed stockholder complaint regarding meeting timing and an ongoing derivative complaint against directors for compensation, expected to be immaterial - A September 2018 complaint to compel an annual stockholders' meeting was voluntarily dismissed after the company scheduled the meeting for December 5, 2018[146] - A January 2019 stockholder derivative complaint against directors alleges excessive compensation and inadequate disclosure, with management expecting an immaterial impact[147] Mine Safety Disclosures This item is not applicable to the company - Not applicable[150] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under CAAS, with a $5.0 million share repurchase program approved in 2018, and no anticipated cash dividends - The Board approved a share repurchase program on December 5, 2018, authorizing up to $5.0 million in common stock repurchases through December 4, 2019[153] - In 2018, the company repurchased 17,400 shares for $0.05 million, with an additional 128,881 shares repurchased for $0.3 million in January 2019[153] - As of December 31, 2018, 31,626,604 shares of common stock were outstanding, held by approximately 57 stockholders of record[154] Selected Financial Data This item is not applicable to the company - Not Applicable[158] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's 2018 financial performance, highlighting decreased sales, a significant drop in operating income, and a shift to net income due to a one-time 2017 tax expense Results of Operations Net product sales slightly decreased in 2018 to $496.2 million, while operating income shifted to a $2.9 million loss due to lower gross margins, and net income improved to $2.4 million from a 2017 loss impacted by a one-time tax Consolidated Results of Operations (2017 vs. 2018) | Metric (in thousands USD) | 2018 | 2017 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net product sales | $496,158 | $499,063 | $(2,905) | -0.6% | | Gross Profit | $65,413 | $84,634 | $(19,221) | -22.7% | | Operating (loss)/income | $(2,908) | $19,270 | $(22,178) | -115.1% | | Net income/(loss) | $79 | $(18,639) | $18,718 | -100.4% | | Net income/(loss) attributable to parent | $2,377 | $(19,346) | $21,723 | -112.3% | - Net product sales decreased due to lower sales volume and average selling prices, partially offset by RMB appreciation against the U.S. dollar[168] - Gross margin decreased from 17.0% in 2017 to 13.2% in 2018, primarily due to increased raw material costs and product mix changes[183] - The company recorded a $1.5 million income tax benefit in 2018, a significant change from a $41.6 million expense in 2017 primarily due to a $35.6 million one-time transition tax from U.S. Tax Reform[197] Liquidity and Capital Resources The company's liquidity improved with cash and short-term investments reaching $103.9 million in 2018, despite a decrease in working capital and net cash from operating activities, supported by $145.6 million in credit facilities Liquidity Position (as of Dec 31) | Metric (in millions USD) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $86.3 | $64.6 | | Short-term investments | $17.5 | $29.6 | | Total Cash & ST Investments | $103.9 | $94.1 | | Working Capital | $154.1 | $159.1 | Summary of Cash Flows (Year Ended Dec 31) | Activity (in millions USD) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12.5 | $48.9 | | Net cash provided by/(used in) investing activities | $2.5 | $(47.3) | | Net cash provided by financing activities | $10.1 | $28.5 | - As of December 31, 2018, the company had $145.6 million in total available credit facilities, with $101.4 million utilized for bank loans and notes payable[213][214] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks primarily from foreign currency fluctuations between the USD and RMB, and significant credit risk due to customer concentration, notably with Fiat Chrysler North America - The company's primary market risk is foreign currency exchange rate fluctuations, particularly between the U.S. dollar and the Chinese RMB, impacting revenues, costs, and operating margins[243][244] - Significant credit risk exists due to customer concentration, with Fiat Chrysler North America accounting for 18.6% of consolidated revenues in 2018[247] Financial Statements and Supplementary Data This section presents selected quarterly financial data for 2018 and 2017, with full financial statements beginning on page 62 Selected Quarterly Financial Data (2018) | (in thousands USD) | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $134,018 | $125,782 | $112,084 | $124,274 | | Gross profit | $21,639 | $17,021 | $15,366 | $11,387 | | Net income/(loss) attributable to parent | $4,312 | $847 | $377 | $(3,159) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[251] Controls and Procedures As of December 31, 2018, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported for Q4 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[252] - Management assessed internal control over financial reporting using the COSO framework and determined it was effective as of December 31, 2018[256] Other Information The company reports no other information - None[260] Part III Directors, Executive Officers and Corporate Governance This section details the company's directors and executive officers as of December 31, 2018, including the composition and roles of the Board's independent Audit, Compensation, and Nominating Committees - The Board of Directors includes Chairman Hanlin Chen, CEO Qizhou Wu, and three independent directors: Arthur Wong, Robert Tung, and Guangxun Xu[261][262] - The company has standing Audit, Compensation, and Nominating Committees, each composed of the three independent directors, with Arthur Wong chairing the Audit Committee and designated as the financial expert[273][274][278] Executive Compensation Executive compensation includes base salary, potential performance bonuses, and stock options, with no bonuses awarded in 2018 due to unmet sales growth targets, as detailed in compensation tables Named Executive Officer Compensation (2018) | Name and Principal Position | Year | Salary (USD thousands) | Bonus (USD thousands) | Total (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Hanlin Chen (Chairman) | 2018 | $246 | $ - | $246 | | Qizhou Wu (CEO) | 2018 | $164 | $ - | $164 | | Jie Li (CFO) | 2018 | $98 | $ - | $98 | | Haimian Cai (Vice President) | 2018 | $150 | $ - | $150 | - No performance bonuses were awarded to Named Executive Officers in 2018 as the company's year-over-year sales growth did not meet the minimum 5% threshold[289][290] - Independent directors received $55,998 in aggregate supplemental fees in 2018 for their work on a special committee evaluating a withdrawn privatization proposal[300] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's common stock beneficial ownership as of December 31, 2018, with Chairman Hanlin Chen holding 56.44% and all directors and executive officers collectively owning 62.37% Security Ownership of Management (as of Dec 31, 2018) | Name/Title | Total Number of Shares | Percentage Ownership | | :--- | :--- | :--- | | Hanlin Chen, Chairman | 17,849,014 | 56.44% | | Qizhou Wu, CEO and Director | 1,325,136 | 4.19% | | All Directors and Executive Officers (8 persons) | 19,727,051 | 62.37% | Certain Relationships and Related Transactions, and Director Independence The company's related party transactions are disclosed in financial statement notes and are reviewed and approved by the Audit Committee to ensure arm's-length terms - The company has a formal policy for Audit Committee review and approval of related party transactions, ensuring arm's-length terms no less favorable than with unaffiliated third parties[306] Principal Accounting Fees and Services This section details fees paid to PricewaterhouseCoopers for 2017 and 2018 audit and other services, all pre-approved by the Audit Committee Accountant Fees (in thousands USD) | Fee Type | Fiscal Year 2018 | Fiscal Year 2017 | | :--- | :--- | :--- | | Audit Fees | $674 | $708 | | Other Fees | $104 | $80 | | Total Fees | $778 | $788 | Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits included in the Annual Report on Form 10-K, such as the auditor's report, consolidated financial statements, and corporate governance documents - The filing includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and related Notes to Consolidated Financial Statements[310] - Exhibits filed include the Certificate of Incorporation, Bylaws, joint-venture and equity transfer agreements, and Sarbanes-Oxley Act certifications (Sections 302 and 902)[313] Form 10-K Summary This item is not applicable to the company - Not Applicable[314] Financial Statements Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers ZhongTian LLP issued an unqualified opinion on the company's 2017 and 2018 consolidated financial statements, affirming fair presentation in accordance with U.S. GAAP, but did not audit internal control over financial reporting - The auditor, PricewaterhouseCoopers ZhongTian LLP, provided an unqualified opinion, stating the financial statements are presented fairly in accordance with U.S. GAAP[319] - The audit was conducted per PCAOB standards, but the auditor did not express an opinion on the effectiveness of the company's internal control over financial reporting[321] Consolidated Financial Statements The consolidated financial statements present the company's financial position as of December 31, 2018, with total assets of $690.5 million, total liabilities of $385.7 million, and net product sales of $496.2 million Consolidated Balance Sheet Highlights (as of Dec 31, 2018) | Account (in thousands USD) | Amount | | :--- | :--- | | Total current assets | $495,428 | | Total assets | $690,499 | | Total current liabilities | $341,300 | | Total liabilities | $385,672 | | Total stockholders' equity | $304,827 | Consolidated Income Statement Highlights (Year ended Dec 31, 2018) | Account (in thousands USD) | Amount | | :--- | :--- | | Net product sales | $496,158 | | Gross profit | $65,413 | | Operating loss | $(2,908) | | Net income | $79 | | Net income attributable to parent | $2,377 | Notes to Consolidated Financial Statements This section provides detailed disclosures supplementing the consolidated financial statements, covering accounting policies, income taxes, related party transactions, segment reporting, and commitments, including the adoption of ASC 606 - The company adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method, with management determining an immaterial transition impact on its revenue recognition model[383][384] - The company recognized a $35.6 million one-time transition tax in Q4 2017 due to U.S. Tax Reform, with a $29.5 million long-term liability remaining as of December 31, 2018[489][537] - The company has significant related party transactions, including $37.6 million in sales and $25.6 million in purchases in 2018, conducted at fair market prices[554][555][559] - As of December 31, 2018, the company had $43.0 million in non-cancelable commitments, primarily for investment contracts ($10.8 million) and purchasing/service obligations ($32.2 million)[571]