![](/cdn/assets/images/search/clock.png)
We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Share Name | Share Symbol | Market | Type |
---|---|---|---|
SORL Auto Parts Inc | NASDAQ:SORL | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 4.71 | 4.69 | 4.72 | 0 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2013 |
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number 000-11991
SORL AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 30-0091294 |
(State or other jurisdiction of incorporation or
organization) |
(IRS Employer Identification No.) |
No. 1169 Yumeng Road
Ruian Economic Development District
Ruian City, Zhejiang Province
People’s Republic Of China
(Address of principal executive offices)
86-577-6581-7720
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer £ Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:
As of August 14, 2013 there were 19,304,921 shares of Common Stock outstanding
SORL AUTO PARTS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2013
INDEX
SORL Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | US$ | 38,009,126 | US$ | 41,253,353 | ||||
Accounts receivable, net of provision, including $92,205 and $0 due from related parties at June 30, 2013 and December 31, 2012, respectively. | 58,580,228 | 62,153,509 | ||||||
Bank acceptance notes from customers | 17,617,065 | 10,098,390 | ||||||
Inventories | 66,448,698 | 56,775,825 | ||||||
Prepayments | 4,240,430 | 5,722,743 | ||||||
Current portion of prepaid capital lease interest | 551,550 | 876,326 | ||||||
Other current assets | 1,235,217 | 1,183,487 | ||||||
Deferred tax assets | 964,113 | 687,632 | ||||||
Total Current Assets | 187,646,427 | 178,751,265 | ||||||
Fixed Assets | ||||||||
Property, plant and equipment, net | 46,714,501 | 46,962,599 | ||||||
Leasehold improvements in progress | 304,622 | 335,714 | ||||||
Land Use Rights, Net | 14,846,161 | 14,742,047 | ||||||
Other Non-Current Assets | ||||||||
Intangible assets, net | 59,677 | 66,889 | ||||||
Security deposits on lease agreement | 1,849,672 | 1,879,831 | ||||||
Long term deferred expense-prepaid interest | 585,550 | 822,640 | ||||||
Total Other Non-Current Assets | 2,494,899 | 2,769,360 | ||||||
Total Assets | US$ | 252,006,610 | US$ | 243,560,985 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable, including $1,873,635 and $94,954 due to related parties at June 30, 2013 and December 31, 2012, respectively. | US$ | 10,074,526 | US$ | 14,324,633 | ||||
Deposit received from customers | 9,491,160 | 6,599,746 | ||||||
Short term bank loans | 9,704,265 | 14,599,753 | ||||||
Accrued expenses | 10,582,698 | 8,501,819 | ||||||
Current portion of capital lease obligations | 3,699,345 | 10,458,352 | ||||||
Other current liabilities, including $74,797 and $33,083 due to related parties at June 30, 2013 and December 31, 2012, respectively. | 677,753 | 313,006 | ||||||
Total Current Liabilities | 44,229,747 | 54,797,309 | ||||||
Non-Current Liabilities | ||||||||
Non-current portion of capital lease obligations | 9,248,362 | - | ||||||
Deferred tax liabilities | 326,140 | 291,995 | ||||||
Total Non-Current Liabilities | ||||||||
Total Liabilities | 53,804,249 | 55,089,304 | ||||||
Stockholders' Equity | ||||||||
Preferred Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as of June 30, 2013 and December 31, 2012 | - | - | ||||||
Common Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 issued and outstanding as of June 30, 2013 and December 31, 2012 | 38,609 | 38,609 | ||||||
Additional paid-in capital | 42,199,014 | 42,199,014 | ||||||
Reserves | 10,195,866 | 9,676,183 | ||||||
Accumulated other comprehensive income | 25,450,591 | 22,020,008 | ||||||
Retained earnings | 100,862,895 | 96,114,407 | ||||||
Total SORL Auto Parts, Inc. stockholders' equity | 178,746,975 | 170,048,221 | ||||||
Noncontrolling Interest In Subsidiaries | 19,455,386 | 18,423,460 | ||||||
Total Equity | 198,202,361 | 188,471,681 | ||||||
Total Liabilities and Stockholders' Equity | US$ | 252,006,610 | US$ | 243,560,985 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1 |
SORL Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Sales | US$ | 57,511,004 | US$ | 52,092,172 | US$ | 98,829,164 | US$ | 96,690,413 | ||||||||
Include: sales to related parties | 1,004,391 | 393,384 | 1,242,572 | 1,458,611 | ||||||||||||
Cost of sales | 41,222,472 | 37,912,979 | 71,363,751 | 70,294,923 | ||||||||||||
Gross profit | 16,288,532 | 14,179,193 | 27,465,413 | 26,395,490 | ||||||||||||
Expenses: | ||||||||||||||||
Selling and distribution expenses | 4,377,777 | 3,523,498 | 7,739,334 | 6,694,400 | ||||||||||||
General and administrative expenses | 5,220,131 | 3,493,009 | 9,383,277 | 7,350,766 | ||||||||||||
Research and development expenses | 1,617,147 | 2,296,820 | 3,007,611 | 3,563,976 | ||||||||||||
Total operating expenses | 11,215,055 | 9,313,327 | 20,130,222 | 17,609,142 | ||||||||||||
Income from operations | 5,073,477 | 4,865,866 | 7,335,191 | 8,786,348 | ||||||||||||
Other income | 569,974 | 412,975 | 865,114 | 764,820 | ||||||||||||
Financial expenses | (492,094 | ) | (532,722 | ) | (1,438,338 | ) | (1,127,619 | ) | ||||||||
Non-operating expenses | (65,093 | ) | (192,296 | ) | (133,170 | ) | (253,192 | ) | ||||||||
Net income before provision for income taxes | 5,086,264 | 4,553,823 | 6,628,797 | 8,170,357 | ||||||||||||
Provision for income taxes | 539,334 | 1,279,762 | 708,188 | 2,298,418 | ||||||||||||
Net income | US$ | 4,546,930 | US$ | 3,274,061 | US$ | 5,920,609 | US$ | 5,871,939 | ||||||||
Less: Net income attributable to noncontrolling interest in subsidiaries | 512,138 | 278,034 | 652,438 | 541,923 | ||||||||||||
Net income attributable to common stockholders | US$ | 4,034,792 | US$ | 2,996,027 | US$ | 5,268,171 | US$ | 5,330,016 | ||||||||
Comprehensive income | ||||||||||||||||
Net income | US$ | 4,546,930 | US$ | 3,274,061 | US$ | 5,920,609 | US$ | 5,871,939 | ||||||||
Foreign currency translation adjustments | 1,150,709 | (873,696 | ) | 3,810,071 | (607,834 | ) | ||||||||||
Comprehensive income | 5,697,639 | 2,400,365 | 9,730,680 | 5,264,105 | ||||||||||||
Comprehensive income attributable to noncontrolling interest in subsidiaries | 628,535 | 191,084 | 1,031,926 | 485,672 | ||||||||||||
Comprehensive income attributable to common shareholders | US$ | 5,069,104 | US$ | 2,209,281 | US$ | 8,698,754 | US$ | 4,778,433 | ||||||||
Weighted average common shares - Basic | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | ||||||||||||
Weighted average common shares - Diluted | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | ||||||||||||
EPS - Basic | US$ | 0.21 | US$ | 0.16 | US$ | 0.27 | US$ | 0.28 | ||||||||
EPS - Diluted | US$ | 0.21 | US$ | 0.16 | US$ | 0.27 | US$ | 0.28 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended on June 30, 2013
Additional | Retained | Accumu. Other | ||||||||||||||||||||||||||||||||||
Number | Common | Paid-in | Earnings | Comprehensive | Shareholders' | Noncontrolling | Total | |||||||||||||||||||||||||||||
of Shares | Stock | Capital | Reserves | (Deficit) | Income | Equity | Interest | Equity | ||||||||||||||||||||||||||||
Beginning Balance - January 1, 2013 | 19,304,921 | $ | 38,609 | $ | 42,199,014 | $ | 9,676,183 | $ | 96,114,407 | $ | 22,020,008 | $ | 170,048,221 | $ | 18,423,460 | $ | 188,471,681 | |||||||||||||||||||
Net income | - | - | - | - | 5,268,171 | - | 5,268,171 | 652,438 | 5,920,609 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 3,430,583 | 3,430,583 | 379,488 | 3,810,071 | |||||||||||||||||||||||||||
Transfer to reserve | - | - | - | 519,683 | (519,683 | ) | - | - | - | - | ||||||||||||||||||||||||||
Ending Balance -June 30, 2013 | 19,304,921 | $ | 38,609 | $ | 42,199,014 | $ | 10,195,866 | $ | 100,862,895 | $ | 25,450,591 | $ | 178,746,975 | $ | 19,455,386 | $ | 198,202,361 |
The accompanying notes are an integrated part of these unaudited consolidated financial statements
3 |
SORL Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
Cash Flows From Operating Activities | ||||||||
Net Income | US$ | 5,920,609 | US$ | 5,871,939 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Bad debt expense | 1,634,203 | 27,775 | ||||||
Depreciation and amortization | 3,967,891 | 3,787,576 | ||||||
Deferred income taxes | (233,687 | ) | (162,072 | ) | ||||
Loss on disposal of fixed assets | - | 2,333 | ||||||
Changes In Assets and Liabilities: | ||||||||
Account receivables | 3,762,142 | (3,517,570 | ) | |||||
Bank acceptance notes from customers | (7,323,135 | ) | 6,248,483 | |||||
Other currents assets | 18,266 | 2,420,536 | ||||||
Inventory | (8,496,818 | ) | 1,308,149 | |||||
Prepayments | 1,590,962 | (4,688,661 | ) | |||||
Accounts payable and bank acceptance notes to vendors | (5,092,453 | ) | (2,587,357 | ) | ||||
Income tax payable | - | 966,078 | ||||||
Deposits received from customers | 2,737,611 | (43,080 | ) | |||||
Other current liabilities and accrued expenses | 2,513,792 | 577,231 | ||||||
Net Cash Flows Provided By Operating Activities | 999,383 | 10,211,360 | ||||||
Cash Flows From Investing Activities | ||||||||
Acquisition of property and equipment | (2,219,689 | ) | (415,296 | ) | ||||
Proceeds of disposal of fixed assets | - | 3,096 | ||||||
Leasehold improvements in progress | - | (31,069 | ) | |||||
Net Cash Flows Used In Investing Activities | (2,219,689 | ) | (443,269 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Proceeds from bank loans | 48,751,425 | 14,271,080 | ||||||
Repayment of bank loans | (53,812,232 | ) | (18,555,634 | ) | ||||
Proceeds from capital lease | 12,783,841 | - | ||||||
Repayment of capital lease | (10,473,023 | ) | (1,129,247 | ) | ||||
Net Cash Flows Used In Financing Activities | (2,749,989 | ) | (5,413,801 | ) | ||||
Effects on changes in foreign exchange rate | 726,068 | (121,399 | ) | |||||
Net Change in Cash and Cash Equivalents | (3,244,227 | ) | 4,232,891 | |||||
Cash and Cash Equivalents- Beginning of The Year | 41,253,353 | 17,116,692 | ||||||
Cash and Cash Equivalents - End of The Period | US$ | 38,009,126 | US$ | 21,349,583 | ||||
Supplemental Cash Flow Disclosures: | ||||||||
Interest Paid | US$ | 859,771 | US$ | 690,117 | ||||
Income Taxes Paid | US$ | 972,107 | US$ | 1,489,636 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4 |
SORL Auto Parts, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”) is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruian China and 60% ownership of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 65 categories and over 2000 different specifications.
On November 11, 2009, the Company entered into a joint venture agreement with MGR, a Hong Kong-based global auto parts distribution specialist firm and a Taiwanese investor. The new joint venture was named SIH. SORL holds a 60% interest in the joint venture, MGR holds a 30% interest, and the Taiwanese investor holds a 10% interest. SIH is primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. Based in Hong Kong, SIH is expanding and establishing channels of distribution in international markets with SORL's primary products, including spring brake chambers, clutch servos, air dryers, relay valves and hand brake valves.
On February 8, 2010, the Company sold 1,000,000 shares of its common stock to selected institutional investors at a price of $10.00 per share pursuant to a registered direct offering. This transaction provided net proceeds of approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested $9.349 million in its operating subsidiary, the Joint Venture to maintain its 10% interest in the Joint Venture, the Ruili Group increased its capital investment by USD$1.039 million. Accordingly, SORL continues to hold a 90% controlling interest in the operating subsidiary.
On August 31, 2010, the Company, through the Joint Venture, executed an agreement to acquire the assets of the hydraulic brake, power steering, and automotive electrical operations of the Ruili Group ( a related party under common control). As a result of this acquisition, the Company's product offerings expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts. The purchase price was RMB 170 million, or approximately USD$25 million. The transaction was accounted for using the book value of assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the acquired segment of the auto parts business of the Seller. The Company purchased the machinery and equipment, inventory, accounts receivable at book values of $8.0 million, $8.0 million and $5.2 million, respectively. The Company did not acquire any of the assets of the Seller other than those in the segment of Seller's business described above. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.
The acquisition was accounted for as a transaction between the entities under common control because the CEO of the Company owns 63% of the registered capital of Ruili Group, and owns more than 50% of the outstanding common stock of SORL, together with his wife and brother. This results in the acquisition being accounted for using the historical costs of the financial statements of the Seller. The consolidated financial statements have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2009. The assets purchase was deemed to be the acquisition of a business.
5 |
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission, although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The condensed consolidated balance sheet information as of December 31, 2012 was derived from the audited consolidated financial statements included in Form 10-K. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012, and other reports filed with the SEC.
The accompanying condensed unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.
(2) SIGNIFICANT ACCOUNTING POLICIES
a. ACCOUNTING METHOD
The Company uses the accrual method of accounting for financial statement and tax return purposes.
b. USE OF ESTIMATES
The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.
d. REVENUE RECOGNITION
Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed and determinable, and collection is probable. Revenue consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.
e. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting records in Renminbi (“RMB”), the currency of the PRC, The Company’s functional currency is also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The shareholders’ equity accounts are translated at appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.
6 |
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are include in the results of operations as incurred.
f. RECLASSIFICATIONS
Certain items previously reported under specific financial statement captions have been reclassified to conform to the current year presentation.
NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this update will be effective for fiscal years and interim periods within those years beginning after December 15, 2012. The Company adopted this pronouncement effective January 1, 2013 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830)—Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. These amendments provide guidance on releasing Cumulative Translation Adjustments when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, these amendments provide guidance on the release of CTA in partial sales of equity method investments and in step acquisitions. For public entities, the amendments are effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE D - RELATED PARTY TRANSACTIONS
The Company continued to purchase packaging materials from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority shareholder of Ruian and is controlled by the Zhang family, who is also the controlling party of the Company. The Company sold certain automotive products to Guangzhou Kormee Vehicle brake technology development Co., Ltd., which is controlled by the Ruili Group Co., Ltd. MGR holds a 30% interest in SIH. The stockholders of MGR were the management of SIH.
7 |
The following related party transactions are reported for the three months and six months ended June 30, 2013 and June 30, 2012:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
PURCHASES FROM: | ||||||||||||||||
Ruian Kormee Vehicle brake Co., Ltd. | $ | 816,189 | $ | — | $ | 816,189 | $ | — | ||||||||
Guangzhou Kormee Vehicle brake technology development Co., Ltd. | 551,457 | — | 551,457 | — | ||||||||||||
Ruili Group Co., Ltd. | 1,161,423 | 1,517,619 | 2,046,604 | 2,582,846 | ||||||||||||
Total purchases | $ | 2,529,069 | $ | 1,517,619 | $ | 3,414,250 | $ | 2,582,846 | ||||||||
SALES TO: | ||||||||||||||||
Guangzhou Kormee Vehicle brake technology development Co., Ltd. | $ | 289,571 | $ | — | $ | 289,571 | $ | — | ||||||||
Ruili Group Co., Ltd. | 714,820 | 393,384 | 953,001 | 1,458,611 | ||||||||||||
Total sales | $ | 1,004,391 | $ | 393,384 | $ | 1,242,572 | $ | 1,458,611 |
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
ACCOUNTS RECEIVABLES | ||||||||
Guangzhou Kormee Vehicle brake technology development Co., Ltd. | $ | 92,205 | $ | — | ||||
Total | $ | 92,205 | $ | — | ||||
ACCOUNTS PAYABLE | ||||||||
Ruian Kormee Vehicle brake Co., Ltd. | $ | 814,551 | $ | — | ||||
Ruili Group Co., Ltd. | 1,059,084 | 94,954 | ||||||
Total | $ | 1,873,635 | $ | 94,954 | ||||
OTHER PAYABLES | ||||||||
MGR Hong Kong Limited | $ | 67,049 | $ | 25,559 | ||||
Ruili Group Co., Ltd. | 7,748 | 7,524 | ||||||
Total | $ | 74,797 | $ | 33,083 |
8 |
NOTE E - ACCOUNTS RECEIVABLE
No customer individually accounted for more than 10% of our revenues or accounts receivable for the quarter ended June 30, 2013. The changes in the allowance for doubtful accounts at June 30, 2013 and December 31, 2012 are summarized as follows:
June 30, 2013 | December 31, 2012 | |||||||
Beginning balance | $ | 998,492 | $ | 892,455 | ||||
Add: Increase to allowance | 1,714,406 | 106,037 | ||||||
Less: Accounts written off | — | — | ||||||
Ending balance | $ | 2,712,898 | $ | 998,492 |
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Accounts receivable | $ | 61,293,126 | $ | 63,152,001 | ||||
Less: allowance for doubtful accounts | (2,712,898 | ) | (998,492 | ) | ||||
Account receivable balance, net | $ | 58,580,228 | $ | 62,153,509 |
NOTE F - INVENTORIES
At June 30, 2013 and December 31, 2012, inventories consisted of the following:
June 30, 2013 | December 31, 2012 | |||||||
Raw materials | $ | 11,000,042 | $ | 9,116,931 | ||||
Work in process | 14,176,063 | 20,552,486 | ||||||
Finished goods | 41,272,593 | 27,106,408 | ||||||
Total Inventories | $ | 66,448,698 | $ | 56,775,825 |
9 |
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following, at June 30, 2013 and December 31, 2012:
June 30, 2013 | December 31, 2012 | |||||||
Machinery | $ | 44,813,611 | $ | 52,212,579 | ||||
Molds | 1,412,213 | 1,384,781 | ||||||
Office equipment | 1,951,653 | 1,637,402 | ||||||
Vehicles | 2,089,196 | 2,025,702 | ||||||
Buildings | 9,064,521 | 8,888,441 | ||||||
Machinery held under capital lease | 28,887,698 | 18,165,511 | ||||||
Sub-Total | 88,218,892 | 84,314,416 | ||||||
Less: Accumulated depreciation | (41,504,391 | ) | (37,351,817 | ) | ||||
Property, plant and equipment, net | $ | 46,714,501 | $ | 46,962,599 |
Depreciation expense charged to operations was $3,386,360 and $ 3,550,342 for the six months ended June 30, 2013 and June 30, 2012, respectively.
NOTE H - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred tax assets consisted of the following as of June 30, 2013 and December 31, 2012:
June 30, 2013 | December 31, 2012 | |||||||
Deferred tax assets - current | ||||||||
Provision | $ | 405,848 | $ | 156,673 | ||||
Warranty | 635,733 | 568,161 | ||||||
Deferred tax assets | 1,041,581 | 724,834 | ||||||
Valuation allowance | ― | ― | ||||||
Net deferred tax assets - current | 1,041,581 | 724,834 | ||||||
Deferred tax liabilities - current | ||||||||
Revenue (net off cost) | 77,468 | 37,202 | ||||||
Deferred tax liabilities - current | ||||||||
Net deferred tax assets - current | $ | 964,113 | $ | 687,632 | ||||
Deferred tax liabilities - non-current | ||||||||
Land use right | $ | 326,140 | $ | 291,995 | ||||
Deferred tax liabilities - non-current | $ | 326,140 | $ | 291,995 |
10 |
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no United States taxable income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.
NOTE I – SHORT-TERM BANK LOANS
Bank loans represented the following as of June 30, 2013 and December 31, 2012:
June 30,
2013 |
December 31,
2012 |
|||||||
Secured | $ | 9,704,265 | $ | 14,599,753 |
The Company obtained those short term loans from Bank of China and Agricultural Bank of China, respectively, to finance general working capital as well as new equipment acquisition. Interest rate for the loans ranged from1.35% to 6.44% per annum. The maturity dates of the loans ranged from July 23, 2013 to December 13 , 2013. As of June 30, 2013, accounts receivable with a total balance of $4,808,300 were pledged as collateral for the bank loan with a balance of $4,848,874. As of December 31, 2012, accounts receivable with an amount of $9,860,742 were pledged as collateral for the bank loan with an amount of $9,846,615. The difference between the accounts receivable pledged and the bank loans obtained was due to the fluctuation of exchange rate as some accounts receivables pledged were denominated in US dollars.
Corporate or personal guarantee: | |
$2.4 Million | Guaranteed by Ruili Group Co., Ltd., a related party; |
$7.3 Million | Guaranteed by Ruili Group Co., Ltd., a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders. |
NOTE J –CAPITAL LEASE OBLIGATIONS
June 30,
2013 |
December 31,
2012 |
|||||||
Total Capital Lease Obligations | $ | 12,947,707 | $ | 10,458,352 | ||||
Less: Current portion | $ | (3,699,345 | ) | $ | (10,458,352 | ) | ||
Non-current portion | $ | 9,248,362 | $ | — |
The 2012 capital lease obligation was under an agreement with International Far Eastern Leasing Co., Ltd., for a term of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears. International Far Eastern Leasing Co., Ltd. is the subsidiary of China Sinochem Corporation. To reduce the financing expense, the Company entered into a new leasing agreement with International Far Eastern Leasing Co., Ltd. after communication with it in December 2012 and terminated the original agreement. The duration of the new agreement is forty eight (48) months. The value of the leased equipment is RMB91, 428,571, with a security deposit of RMB11, 428,571. The actual amount received by the Company is RMB80,000,000. The Company prepaid all interests of RMB10, 705,357 after the discount and has the lease payment of RMB1, 904,761.90 monthly. The prepaid capital lease interest will be amortized over the life of capital lease agreement using the effective interest method.
11 |
NOTE K - INCOME TAXES
The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture is eligible for additional preferential tax treatment. For the years 2007 and 2008, the Joint Venture entitled to an income tax exemption on all pre-tax income generated by the company above its pre-tax income generated in the year 2006. Thereafter, the Joint Venture will enjoy a 50% exemption from the effective income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and 2011. The above taxation exemption was superseded, because the Joint Venture has been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate of 15% for years 2009 through 2011. The Company used tax rate of 25% for the first three quarters of 2012. In December 2012, the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at 15% rate in 2012 through 2014.
The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the PRC for the six months ended June 30, 2013 and 2012 is as follows:
Six months ended
June 30, 2013 |
Six months ended
June 30, 2012 |
|||||||
US Statutory income tax rate | 35.00 | % | 35.00 | % | ||||
Valuation allowance recognized with respect to the loss in the US company | -35.00 | % | -35.00 | % | ||||
HK Statutory income tax rate | 16.50 | % | 16.50 | % | ||||
Valuation allowance recognized with respect to the loss in those HK company | -16.50 | % | -16.50 | % | ||||
China Statutory income tax rate | 25.00 | % | 25.00 | % | ||||
China Statutory income exemption | -10.00 | % | 0.00 | % | ||||
Other items | -4.32 | % | 3.13 | % | ||||
Effective tax rate | 10.68 | % | 28.13 | % |
12 |
Six months ended
June 30, 2013 |
Six months ended
June 30, 2012 |
|||||||
Computed income tax provision at the statutory rate | $ | 1,627,455 | $ | 2,086,965 | ||||
Tax exemption | (728,783 | ) | ― | |||||
Deferred tax provision | (233,688 | ) | (162,071 | ) | ||||
Current period permanent differences and other reconciling items | 43,204 | 373,524 | ||||||
Total income taxes | $ | 708,188 | $ | 2,298,418 |
Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets and liabilities are approximately as mentioned above at June 30, 2013. There currently is no tax benefit recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended. In the six months ended June 30, 2013 , there were no penalties and interest, which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the six months ended June 30, 2013 and 2012, respectively, are summarized as follows:
Six months ended
June 30, 2013 |
Six months ended
June 30, 2012 |
|||||||
Current | $ | 941,876 | $ | 2,460,489 | ||||
Deferred | (233,688 | ) | (162,071 | ) | ||||
Total | $ | 708,188 | $ | 2,298,418 |
As of June 30, 2013 and December 31, 2012, the Company has no unrecognized tax benefits.
NOTE L - NONCONTROLLING INTEREST IN SUBSIDIAIRES
Non-controlling interest in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling interest, owned by the Company’s Joint Venture partners, in SIH. Net income attributable to non-controlling interests in subsidiaries amounted to $652,438 and $ 541,923 for the six months ended June 30, 2013 and 2012, respectively.
June 30, 2013 | June 30, 2012 | |||||||
10% non-controlling interest in Ruian | $ | 577,425 | $ | 604,909 | ||||
40% non-controlling interest in SIH | $ | 75,013 | $ | (62,986 | ) | |||
Total | $ | 652,438 | $ | 541,923 |
13 |
NOTE M - WARRANTY CLAIMS
Warranty claims were $1,023,349 and $ 999,717 for the six months ended June 30, 2013 and June 30, 2012 , respectively. Warranty claims are classified as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the six months ended June 30, 2013 was as follows:
Beginning balance at January 01, 2013 | $ | 3,787,738 | ||
Aggregate reduction for payments made | 572,867 | |||
Aggregate increase for new warranties issued during current period | 1,023,349 | |||
Effect on changes in foreign exchange rate | ― | |||
Ending balance at June 30, 2013: | $ | 4,238,220 |
NOTE N – SEGMENT INFORMATION
The Company produces brake systems and other related components (“commercial vehicles brake systems, etc.”) for different types of commercial vehicles. On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger vehicle auto parts business (passenger vehicles brake systems, etc.) of Ruili Group Co., Ltd. As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts.
The Company has two operating segments: commercial vehicles brake systems, etc. and passenger vehicles brake systems, etc.
All of the Company’s long-lived assets are located in the PRC and Hong Kong. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
14 |
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
NET SALES TO EXTERNAL CUSTOMERS | ||||||||
Commercial vehicles brake systems | $ | 80,954,463 | $ | 75,401,096 | ||||
Passenger vehicles brake systems | 17,874,701 | 21,289,317 | ||||||
Net sales | $ | 98,829,164 | $ | 96,690,413 | ||||
INTERSEGMENT SALES | ||||||||
Commercial vehicles brake systems | $ | — | $ | — | ||||
Passenger vehicles brake systems | — | — | ||||||
Intersegment sales | $ | — | $ | — | ||||
GROSS PROFIT | ||||||||
Commercial vehicles brake systems | $ | 21,848,515 | $ | 21,068,947 | ||||
Passenger vehicles brake systems | 5,616,898 | 5,326,543 | ||||||
All other | ||||||||
Gross profit | $ | 27,465,413 | $ | 26,395,490 | ||||
Selling and distribution expenses | 7,739,334 | 6,694,400 | ||||||
General and administrative expenses | 9,383,277 | 7,350,766 | ||||||
Research and development expenses | 3,007,611 | 3,563,976 | ||||||
Income from operations | 7,335,191 | 8,786,348 | ||||||
Financial expenses | (1,438,338 | ) | (1,127,619 | ) | ||||
Other income (expense), net | 731,944 | 511,628 | ||||||
Income before income tax expense | $ | 6,628,797 | $ | 8,170,357 | ||||
CAPITAL EXPENDITURE | ||||||||
Commercial vehicles brake systems | $ | 1,827,244 | $ | 362,315 | ||||
Passenger vehicles brake systems | 392,445 | 80,954 | ||||||
Total | $ | 2,219,689 | $ | 443,269 | ||||
DEPRECIATION AND AMORTIZATION | ||||||||
Commercial vehicles brake systems | $ | 3,266,238 | $ | 2,983,607 | ||||
Passenger vehicles brake systems | 701,653 | 803,969 | ||||||
Total | $ | 3,967,891 | $ | 3,787,576 |
June 30, 2013 |
December 31,
2012 |
|||||||
TOTAL ASSETS | ||||||||
Commercial vehicles brake systems | $ | 207,502,243 | $ | 192,842,721 | ||||
Passenger vehicles brake systems | 44,504,367 | 50,718,264 | ||||||
Total | $ | 252,006,610 | $ | 243,560,985 |
15 |
June 30, 2013 |
December 31,
2012 |
|||||||
LONG LIVED ASSETS | ||||||||
Commercial vehicles brake systems | $ | 52,994,175 | $ | 50,662,641 | ||||
Passenger vehicles brake systems | 11,366,008 | 13,324,439 | ||||||
Total | $ | 64,360,183 | $ | 63,987,080 |
All of the Company’s long-lived assets are located in the PRC and Hong Kong. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements, as well as information relating to the plans of our current management. This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
OVERVIEW
The Company manufactures and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks and buses, and in passenger vehicles. Management believes that it is the largest manufacturer of automotive brake systems in China for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2012.
See Note K to the attached Unaudited Condensed Consolidated Financial Statements for the information regarding changes in taxation by the government of China.
16 |
Results of Operations
Results of operations for the three months ended June
30, 2013 as compared to the three months ended June 30, 2012.
SALES
Three Months ended | Three Months ended | |||||||||||||||
June 30, 2013 | June 30, 2012 | |||||||||||||||
(U.S. dollars in
millions) |
||||||||||||||||
Commercial vehicle brake systems, etc. | $ | 46.9 | 81.6 | % | $ | 39.9 | 76.6 | % | ||||||||
Passenger vehicle brake systems, etc. | $ | 10.6 | 18.4 | % | $ | 12.2 | 23.4 | % | ||||||||
Total | $ | 57.5 | 100.0 | % | $ | 52.1 | 100.0 | % |
Net sales were $57,511,004 and $52,092,172 for the three months ended June 30, 2013 and 2012, respectively, an increase of $5.4 million or 10.4%.
The sales from commercial vehicle brake systems increased by $7.0 million or 17.5%, to $46.9 million for the second quarter of 2013, compared to $39.9 million for the same period of 2012. Due to the increase of the commercial vehicle market in the second quarter of 2013, the sales from the OEM market increased, which impacted the sales of the commercial vehicle brake systems.
The sales from passenger vehicle brake systems decreased by $1.6 million or 13.1%, to $10.6 million for the second quarter of 2013, compared to $12.2 million for the same period of 2012.
A breakdown of net sales revenue for these markets for the second quarter of the 2013 and 2012 fiscal years, respectively, is set forth below:
Three
Months |
Percent |
Three
Months ended |
Percent | |||||||||||||||||
ended | of | June 30, | of | Percentage | ||||||||||||||||
June 30, 2013 | Total Sales | 2012 | Total Sales | Change | ||||||||||||||||
(U.S. dollars in million) | ||||||||||||||||||||
China OEM market | $ | 30.6 | 53.2 | % | $ | 25.6 | 49.1 | % | 19.5 | % | ||||||||||
China Aftermarket | $ | 12.8 | 22.3 | % | $ | 11.7 | 22.5 | % | 9.4 | % | ||||||||||
International market | $ | 14.1 | 24.5 | % | $ | 14.8 | 28.4 | % | -4.7 | % | ||||||||||
Total | $ | 57.5 | 100.0 | % | $ | 52.1 | 100.0 | % | 10.4 | % |
17 |
With the implementation of China IV emission standard beginning on July 1, 2013, the consumption of commercial vehicles equipped with China III engines spurred in the second quarter of 2013, which resulted in the higher than usual output and sales volume of commercial vehicles. As a result, our sales to the Chinese OEM market increased by $5.0 million or 19.5%, to $30.6 million for the second quarter of 2013, compared to $25.6 million for the three month period ended June 30 of 2012.
Our sales to the Chinese aftermarket increased by $1.1 million or 9.4%, to $12.8 million for the second quarter of 2013, compared to $11.7 million for the same period of 2012. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the three months ended June 30, 2013. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.
Our export sales decreased by $0.7 million or 4.7%, to $14.1 million for the second quarter of 2013, as compared to $14.8 million for the same period of 2012. The decrease in export sales was mainly due to currency depreciation in some countries, leading to delayed payments. To control this risk, we did not deliver orders before receiving full payments.
COST OF SALES AND GROSS PROFIT
Cost of sales for the three months ended June 30, 2013 were $41,222,472 an increase of $3,309,493 or 8.7% from $37,912,979 for the three month period ended June 30, 2012. Our gross profit increased by 14.9% from $14,179,193 for the period of 2012 to $16,288,532 for the three month period ended June 30, 2013.
Gross margin increased to 28.3% from 27.2% for the three month period ended June 30, 2013 compared with 2012. Gross margin is being affected by rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices. We intend to focus in 2013 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.
Cost of sales from commercial vehicle brake systems for the three months period ended June 30, 2013 were $33.5 million, an increase of $4.5 million or 15.5% from $29.0 million for the same period last year. The gross profit from commercial vehicle brake systems increased by 23.0% from $10.9 million for three month period ended June 30, 2012 to $13.4 million for the three month period ended June 30, 2013. Gross margin from commercial vehicle brake systems increased to 28.6% from 27.3% for the three months period ended June 30, 2013 compared to the three month period ended June 30, 2012.
Cost of sales from passenger vehicle brake systems for the three months period ended June 30, 2013 were $7.7 million, a decrease of $1.2 million or 13.5% from $8.9 million for the three month period ended June 30, 2012. The gross profit from passenger vehicle brake systems decreased by 12.1% from $3.3 million for the three month period ended June 30, 2012 to $2.9 million for the three month period ended June 30, 2013. Gross margin from passenger vehicle brake systems increased to 27.3% from 26.9% for the three months ended June 30, 2013, as compared with 2012. The cost decrease was mainly due to the increase of production efficiency, the improvement of the technologies of products, and the improvement of our product portfolio. Such decrease in cost helps us to maintain or increase our gross profit margins.
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses were $4,377,777 for the three months ended June 30, 2013, as compared to $3,523,498 for the same period of 2012, an increase of $854,279 or 24.2%.
18 |
The increase was mainly due to increased packaging expenses. As a percentage of sales revenue, selling expenses increased to 7.6% for the three months ended June 30, 2013, as compared to 6.8% for the same period in 2012.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5,220,131 for the three months ended June 30, 2013, as compared to $3,493,009 for the same period of 2012, an increase of $1,727,122 or 49.4%. The increase was mainly due to increases in labor expenses and bad debts provision. As a percentage of sales revenue, general and administrative expenses increased to 9.1% for the three months ended June 30, 2013, as compared to 6.7% for the same period in 2012.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended June 30, 2013, research and development expense was $1,617,147, as compared to $2,296,820 for the same period of 2012, a decrease of $679,673.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $1,975,546 for the three months ended June 30, 2013, compared with that of $1,847,984 for the same period of 2012, an increase of $127,562. The increase in depreciation and amortization expense was primarily due to the addition of purchased production equipment.
FINANCIAL EXPENSE
Financial expense mainly consists of interest expense, the financing expense associated with our capital lease transaction and exchange loss. The financial expense for the three months ended June 30, 2013, decreased by $40,628 to $492,094 from $532,722 for the same period of 2012, which was mainly due to decreased currency exchange loss.
OTHER INCOME
Other income was $569,974 for the three months ended June 30, 2013, as compared to $412,975 for the three months ended June 30, 2012, an increase of $156,999. The increase was mainly due to an increase in sales of raw material scrap for the three months ended June 30, 2013.
INCOME TAX
The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the year 2006. This tax exemption was superseded as a result of the Joint Venture having been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011. In December, 2012 the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. So the tax rate was 25% for the first three quarters of 2012. Accordingly, it continues to be, or will be, taxed at the 15% tax rate in 2013 and 2014.
19 |
Income tax expense was $539,334, or an 10.6% effective tax rate, for the three months ended June 30, 2013, as compared to $1,279,762, or a 28.1% effective tax rate, for the three months ended June 30, 2012. The main reason was the tax rate variation. Specifically, the tax rate for the second quarter of 2012 was 25%, and it was 15% for the second quarter of 2013 due to renewal of the "High-Tech Enterprise" not received until 2012 December.
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST IN SUBSIDIARIES
Noncontrolling interest in subsidiaries represents a 10% noncontrolling interest in Ruian and 40% noncontrolling interest in SIH, in each case held by our Joint Venture partners. Net income attributable to noncontrolling interest in subsidiaries amounted to $512,138 and $278,034 for the second quarter ended June 30, 2013 and 2012, respectively.
NET INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net income attributable to stockholders for the quarter ended June 30, 2013, increased by $1,038,765, to $4,034,792 from $2,996,027 for the quarter ended June 30, 2012 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the quarter ended June 30, 2013 and 2012, were $0.21 and $0.16 per share, respectively.
Results of operations for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.
SALES
Six months ended
June 30, 2013 |
Six months ended
June 30, 2012 |
|||||||||||||||
(U.S. dollars in
millions) |
||||||||||||||||
Commercial vehicles brake systems, etc. | $ | 80.9 | 81.9 | % | $ | 75.4 | 78.0 | % | ||||||||
Passenger vehicles brake systems, etc. | $ | 17.9 | 18.1 | % | $ | 21.3 | 22.0 | % | ||||||||
Total | $ | 98.8 | 100.0 | % | $ | 96.7 | 100.0 | % |
Net sales were $98,829,164 and $96,690,413 for the six months ended June 30, 2013 and 2012, respectively, an increase of $2,138,751 million or 2.2%.
The sales from commercial vehicle brake systems increased by $5.5 million or 7.3%, to $80.9 million for the six months ended June 30, 2013, compared to $75.4 million for the same period of 2012. Due to the increase of the commercial vehicle market in the six months ended June 30, 2013, the sales from the OEM market increased, which impacted the sales of the commercial vehicle brake systems.
The sales from passenger vehicle brake systems decreased by $3.4 million or 16.0%, to $17.9 million for the six months ended June 30, 2013, compared to $21.3 million for the same period of 2012.
20 |
A breakdown of net sales revenues for China OEM markets, China Aftermarket and International markets for the six months ended June 30, 2013 and 2012 fiscal years, respectively, is set forth below:
Six
months |
Percent |
Six
months |
Percent | |||||||||||||||||
ended | of | ended | of | |||||||||||||||||
June 30,
2013 |
Total
Sales |
June 30,
2012 |
Total
Sales |
Percentage
Change |
||||||||||||||||
(U.S. dollars in million) | ||||||||||||||||||||
China OEM market | $ | 53.4 | 54.0 | % | $ | 51.4 | 53.2 | % | 3.9 | % | ||||||||||
China Aftermarket | $ | 22.0 | 22.3 | % | $ | 21.5 | 22.2 | % | 2.3 | % | ||||||||||
International market | $ | 23.4 | 23.7 | % | $ | 23.8 | 24.6 | % | -1.7 | % | ||||||||||
Total | $ | 98.8 | 100.0 | % | $ | 96.7 | 100.0 | % | 2.2 | % |
The decline of the overall sales of heavy-duty trucks in China in the first quarter of 2013 could be attributed to the deceleration of the growth in capital investment, domestic consumption and international trade, which resulted in the reduced demand for heavy-duty trucks in the construction of residential and commercial real estate development projects, infrastructure projects, as well as highway transportation of goods.
With the implementation of China IV emission standard beginning on July 1, 2013, the consumption of commercial vehicles equipped with China III engines spurred in the second quarter of 2013, which resulted in the higher than usual output and sales volume of commercial vehicles. As a result, our sales to the Chinese OEM market increased by $2.0 million or 3.9%, to $53.4 million for the first half year of 2013, compared to $51.4 million for the same period of 2012.
Our sales to the Chinese aftermarket increased by $0.5 million or 2.3%, to $22.0 million for the first six months of 2013, compared to $21.5 million for the first six months of 2012. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive the increase in our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the six months ended June 30, 2013. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.
Our export sales decreased by $0.4 million or 1.7%, to $23.4 million for the six months of 2013, as compared to $23.8 million for the same period of 2012. The decrease in export sales was mainly due to currency depreciation in some countries, leading to delayed payments. To control this risk, we did not deliver orders before receiving full payments.
COST OF SALES AND GROSS PROFIT
Cost of sales for the six months ended June 30, 2013 were $71,363,751, an increase of $1,068,828 or 1.5% from $70,294,923 for the same period last year. Our gross profit increased by 4.1% from $26,395,490 for the six months ended June 30, 2013 to $27,465,413 for the same period of 2012.
Gross margin increased to 27.8% from 27.3% for the six months ended June 30, 2013, as compared with the same period of 2012. Gross margin is being affected by rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices. We intend to focus in 2013 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.
21 |
Cost of sales from commercial vehicle brake systems for the six months ended June 30, 2013 were $59.1 million, an increase of $4.8 million or 8.8% from $54.3 million for the same period of 2012. The gross profit from commercial vehicle brake systems increased by 3.3% from $21.1 million for the six months ended June 30, 2012 to $21.8 for the same period of 2013. Gross margin from commercial vehicle brake systems decreased to 27.0% from 27.9% for the six months ended June 30, 2013 compared with the same period of 2012.
Cost of sales from passenger vehicle brake systems for the six months ended June 30, 2013 were $12.3 million, a decrease of $3.7 million or 23.1% from $16.0 million for the same period of 2012. The gross profit from passenger vehicle brake systems increased by 5.7% from $5.3 for the six months ended June 30, 2012 to $5.6 for the same period of 2013. Gross margin from passenger vehicle brake systems increased to 31.3% from 25.0% for the six months ended June 30, 2013, as compared with the same period in 2012.
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution expenses were $7,739,334 for the six months ended June 30, 2013, as compared to $6,694,400 for the same period of 2012, an increase of $1,044,934 or 15.6%.
The increase was mainly due to increased wages expense and package expenses. As a percentage of sales revenue, selling expenses increased to 7.8% for the six months ended June 30, 2013, as compared to 6.9% for the same period in 2012.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $9,383,277 for the six months ended June 30, 2013, as compared to $7,350,766 for the same period of 2012, an increase of $2,032,511 or 27.7%.
The increase was mainly due to increases in labor expenses and bad debts provision. As a percentage of sales revenue, general and administrative expenses increased to 9.5% for the six months ended June 30, 2013, as compared to 7.6% for the same period in 2012.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the six months ended June 30, 2013, research and development expenses were $3,007,611, as compared to $3,563,976 for the same period of 2012, a decrease of $556,365.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $3,967,891 for the six months ended June 30, 2013, compared with that of $3,787,576 for the same period of 2012, an increase of $180,315. The increase in depreciation and amortization expenses was primarily due to the purchase of production equipment.
22 |
FINANCIAL EXPENSE
Financial expense mainly consists of interest expenses and exchange losses. The financial expense for the six months ended June 30, 2013, increased by $310,719 to $1,438,338 from $1,127,619 for the same period of 2012, which was mainly due to increased exchange losses.
OTHER INCOME
Other income was $865,114 for the six months ended June 30, 2013, as compared to $764,820 for the six months ended June 30, 2012, an increase of $100,294. The increase was mainly due to an increase in sales of raw material scrap for the six months ended June 30, 2013.
INCOME TAX
The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the year 2006. This tax exemption was superseded as a result of the Joint Venture having been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011. In 2012 December, the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. So the tax rate was 25% for the first three quarters of 2012. Accordingly, it continues to be, or will be, taxed at the 15% tax rate in 2013 and 2014.
Income tax expense was $708,188, or an 10.7% effective tax rate, for the three months ended June 30, 2013, as compared to $2,298,418, or a 28.1% effective tax rate, for the three months ended June 30, 2012. The main reason was because the tax rate for the six months of 2012 was 25%, and it was 15% for the six months of 2013 due to renewal of the "High-Tech Enterprise" not received until 2012 December.
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH. Each of the non-controlling interest is held by our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to $652,438 and $541,923 for the six months ended June 30, 2013 and 2012, respectively.
NET INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net income attributable to stockholders for the six months ended June 30, 2013, decreased by $61,845, to $5,268,171 from $5,330,016 for the six months ended June 30, 2012 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the six months ended June 30, 2013 and 2012, were $0.27 and $0.28 per share, respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
OPERATING - Net cash provided by operating activities was $999,383 for six months ended June 30, 2013 a decrease of $9,211,977, as compared with $10,211,360 of net cash provided in operating activities in the same period in 2012. Such decrease was primarily due to increased cash inflow resulting from changes in accounts receivable which was offset by changes in inventories and bank acceptance notes to vendors. Most accounts receivable of our OEM customers were converted into bank acceptance notes from customers during the six months ended June 30, 2013.
23 |
At June 30, 2013, the Company had cash and cash equivalents of $38,009,126, as compared to cash and cash equivalents of $41,253,353 at December 31, 2012. The Company had working capital of $143,416,680 at June 30, 2013, as compared to working capital of $123,953,956 at December 31, 2012, reflecting current ratios of 4.24:1 and 3.26:1, respectively.
INVESTING - During the six months ended June 30, 2013, the Company expended net cash of $2,219,689 in investing activities mainly for acquisition of new equipment to support the growth of the business. For the six months ended June 30, 2012, the Company utilized $443,269 in investing activities.
FINANCING - During the six month period ended June 30, 2013, the amount the Company repaid for bank loans and capital lease obligation was $64,285,255. Cash provided by financing activities was $61,535,266 for the six months ended June 30, 2013. Net cash used in financing activities was $2,749,989. During the six months period ended June 30, 2012, the amount the Company repaid for bank loans and capital lease was $19,684,881. The amount the Company received from bank loans was $14,271,080. Net cash used in financing activities was $5,413,801.
The Company has taken a number of steps to improve the management of its cash flow. We place more emphasis on collection of accounts receivable from our customers. We maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future.
CURRENCY RISK AND FINANCIAL INSTRUMENTS - Although our reporting currency is U.S. dollar, the functional currency of Joint Venture is RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our Renminbi revenues, earnings and assets, as expressed in our U.S. dollar, will decline. In recent years, the RMB has been appreciating against the U.S. dollar.
Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date. The equity accounts are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. Oversea contracts are primarily dominated by U.S. dollars. As a result of the RMB’s appreciation in value against U.S. dollars in the three months ended June 30, 2013, the Company’s revenue declined. The Company plan to take measures to manage its exposure to foreign currency exchange rate fluctuations, such as diversifying its customer basis overseas into different currency zones, and stipulating predetermined foreign currency exchange rates for payments to be received under its export sales contracts.
As the Company’s current outstanding debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any material risk from an increase in market interest rates. However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rate would cause a commensurate increase in the interest expense related to such borrowings.
OFF-BALANCE SHEET AGREEMENTS
At June 30, 2013 we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
According to the law of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September 28, 2007. The company has been negotiating with the government for a reduction in or exemption from the tax being sought by the government in connection with the transfer of the land use rights, and pending resolution of that issue, we have deferred accrual or payment of the tax. Due to the lack of resolution of that issue, the land use right certificate has not been issued to the Company. We plan to conclude negotiations with the government and to obtain the land use rights certificate as soon as practicable.
24 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion in Item 2 above, “Liquidity and Capital Resources”.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective in all material respects to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2013 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.
Not applicable.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
25 |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C 1350) (1) |
(1) | Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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.
Dated : August 14, 2013 | SORL AUTO PARTS, INC. |
By: /s/ Xiao Ping Zhang | |
Name: Xiao Ping Zhang | |
Title: Chief Executive Officer | |
(Principal Executive Officer) | |
By: /s/ Zong Yun Zhou | |
Name: Zong Yun Zhou | |
Title: Chief Financial Officer | |
(Principal Accounting Officer) |
26 |
1 Year SORL Auto Parts Chart |
1 Month SORL Auto Parts Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions