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, 2011.
See Note P to the
attached Unaudited Condensed Consolidated Financial Statements for the information regarding changes in taxation by the government
of China.
Results of Operations
On November 5, 2012,
SORL announced the Company received a 400-unit order for its new electric air compressor from Shen Zhen Wuzhoulong Motors Group.
Released in July 2012, the new electric air compressor is selling at 8,000 RMB per unit. In addition to Wuzhoulong, the Company
has also received indication of purchasing interest for the same products from other large bus manufacturers in China.
On October 15, 2012,
SORL announced that the Company obtained a patent in the People’s Republic of China (“PRC”) for a new proprietary
electric air dryer that is specifically designed for new energy electric buses and specialty commercial vehicles. Equipped with
an internal electronic control unit to achieve continuing desiccant regeneration, SORL’s new electric air dryer has a prolonged
useful life and improves the working environment of the vehicle’s air control system. As a result, the dryer extends the
operating life of the entire air control system and improves the vehicles’ safety performance. The patent will be in effect
from 2012 through 2030.
On September 24, 2012,
the Company announced that it won a new contract from Shanxi Automobile Group Co., Ltd. (“Shanqi”) to supply 90% of
the re-card spring brake chambers for the Delong F3000 heavy-duty truck models. The Delong F3000 series is one of the heavy-duty
truck models from Shaanxi Auto and it possesses the versatility to be used in logistics, heavy loads, construction and bridge building,
ore transportation, municipal sanitation and the transportation of dangerous goods. The new F3000 provides superior quality for
its customers.
On August 27, 2012,
SORL announced the launch of its newly developed electrically controlled power steering pump, marking a technological breakthrough
for the electric bus market. SORL’s electrically controlled power steering pump is specifically designed for use in new energy
electric buses.
On July 18, 2012, Company
announced it had launched a new generation of electric air brake compressors to be used in electric buses. Air brake compressors
used in traditional vehicles are powered by an internal combustion engine. SORL's new generation of electric air brake compressors
are powered by an electric motor, thereby increasing fuel conservation and reducing pollution. The new compressors have an extended
life span as it is far easier to make them start or stop working. An electric air compressor is a necessity for all electric buses
with an air brake system.
Results of operations for the three months ended September
30, 2012 as compared to the three months ended September 30, 2011.
SALES
|
|
Three Months ended
|
|
|
Three Months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
(U.S. dollars in
millions)
|
|
Commercial vehicle brake systems, etc.
|
|
$
|
36.3
|
|
|
|
77.7
|
%
|
|
$
|
35.9
|
|
|
|
75.4
|
%
|
Passenger vehicle brake systems, etc.
|
|
$
|
10.4
|
|
|
|
22.3
|
%
|
|
$
|
11.7
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46.7
|
|
|
|
100.0
|
%
|
|
$
|
47.6
|
|
|
|
100.0
|
%
|
Net sales were $46,708,959 and $47,583,678
for the three months ended September 30, 2012 and 2011, respectively, a decrease of $0.9 million or 1.9%.
The sales from commercial vehicle brake
systems increased by $0.4 million or 1.1%, to $36.3 million for the third quarter of 2012, compared to $35.9 million for
the same period of 2011.
The sales from passenger vehicle brake systems
decreased by $1.3 million or 11.1%, to $10.4 million for the third quarter of 2012, compared to $11.7 million for the same period
of 2011.
A breakdown of net sales
revenue for these markets for the third quarter of the 2012 and 2011 fiscal years, respectively, is set forth below:
|
|
Three
Months
|
|
|
|
|
|
Three
Months
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
Percent
|
|
|
ended
|
|
|
Percent
|
|
|
|
|
|
|
September
30, 2012
|
|
|
of
Total Sales
|
|
|
September
30, 2011
|
|
|
of
Total Sales
|
|
|
Percentage
Change
|
|
|
|
(U.S. dollars in millions)
|
|
|
|
|
China OEM market
|
|
$
|
18.7
|
|
|
|
40.0
|
%
|
|
$
|
20.8
|
|
|
|
43.8
|
%
|
|
|
-10.1
|
%
|
China Aftermarket
|
|
$
|
12.2
|
|
|
|
26.1
|
%
|
|
$
|
11.6
|
|
|
|
24.3
|
%
|
|
|
5.2
|
%
|
International market
|
|
$
|
15.8
|
|
|
|
33.8
|
%
|
|
$
|
15.2
|
|
|
|
32.0
|
%
|
|
|
3.9
|
%
|
Total
|
|
$
|
46.7
|
|
|
|
100.0
|
%
|
|
$
|
47.6
|
|
|
|
100.0
|
%
|
|
|
-1.9
|
%
|
Chinese domestic
macro-economic environment, including consumer confidence and industrial activities, as well as relevant policies and
regulations resulted in a low-growth environment for the automotive industry in the nine months of 2012, caused the growth
rate in vehicle sales decline from the comparable period of 2011. For the first time in China’s industrialization and
urbanization era, the growth rate of automotive vehicle sales declined over the nine month periods in two consecutive years,
2011 and 2012. However, this low-growth development is also partially a result of the significant and possibly one-time only
increases in vehicle sales experienced in 2009 and 2010, and the PRC government is guiding the automotive industry to develop
at a more rational long-term growth rate. To prevent sales to the OEM market from deteriorating, the Company enhanced its
product line with a broader range of products through innovative new products as well as penetrating new market segments,
such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM market decreased by $2.1
million or 10.1%, to $18.7 million for the third quarter of 2012, compared to $20.8 million for the three month period ended
September 30 of 2011.
Our sales to the Chinese
aftermarket increased by $0.6 million or 5.2%, to $12.2 million for the third quarter of 2012, compared to $11.6 million for
the same period of 2011, due to overall slowdown in the auto parts market in China. 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 September 30, 2012. 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 increased
by $0.6 million or 3.9%, to $15.8 million for the third quarter of 2012, as compared to $15.2 million for the same period
of 2011. It was mainly due to the improving conditions in the U.S. market and a broadening customer base, as well as the Company’s
continuous strategy to strengthen and extend its distribution networks to focus on increasing recognition of SORL’s
products by end users.
We will take the following
measures to ensure future growth in the international market:
(1) Enhance the Company brand image through
industry exhibitions.
(2) Maintenance of our customer base and market
position while penetrating new markets and capturing new customers.
(3) Building a stronger international marketing
network with the focus on exploring high-value foreign markets, and active marketing to the large automotive chain stores that
directly sell to end users.
(4) Further targeting the international OEM
market by actively supporting initiatives that promote our overseas sales.
COST OF SALES AND GROSS PROFIT
Cost of sales for the three
months ended September 30, 2012 were $33,485,059, a decrease of $1,046,145 or 3.0%, from $34,531,204 for the three month period
ended September 30, 2011. Our gross profit increased by 1.3% from $13,052,474 for the same period in 2011 to $13,223,900 for the
three month period ended September 30, 2012.
Gross margin increased
to 28.3% from 27.4% for the three month period ended September 30, 2012 compared with 2011, primarily resulted from the increase
of gross margin of our passenger vehicle business, but partly offset by the decrease in the gross margin of our commercial vehicle
business. Gross margin is being affected by labor expenses, the fluctuation of the Chinese currency, and raw material costs, as
well as our product mix in each of our commercial vehicle and passenger vehicle businesses.
Cost of sales from commercial
vehicle brake systems for the three months period ended September 30, 2012 were $26.5 million, an increase of $0.5 million or 2.2%
from $ 26.0 million for the same period last year. Such increase was primarily resulted from the increase of sales from commercial
vehicle brake systems by $0.4 million or 1.1%. Since the increase of our cost of sales in the commercial vehicle business
outpaced our increase in the sales from commercial vehicle business, the gross profit from commercial vehicle brake systems decreased
by 1.7% from $9.9 million for three month period ended September 30, 2011, to $9.7 million for the three month period ended September
30, 2012. Gross margin from commercial vehicle brake systems decreased to 26.9% from 27.6% for the three months period ended September
30, 2012, compared to the three month period ended September 30, 2011. The decrease was mainly due to rising labor expenses, the
appreciation of the Chinese currency, and higher raw material prices.
Cost of sales
from passenger vehicle brake systems for the three months period ended September 30, 2012 were $7.0 million, a decrease of
$1.6 million or 18.9%, from $8.6 million for the three month period ended September 30, 2011. Such decrease primarily
resulted from the decrease of sales by $1.3 million, or 11.1% in our passenger vehicle business. The gross profit from passenger
vehicle brake systems increased by 10.9% from $3.1 million for the three month period ended September 30, 2011, to $3.5
million for the three month period ended September 30, 2012.
Gross margin from passenger
vehicle brake systems increased to 33.4% from 26.8% for the three months ended September 30, 2012, as compared with 2011. The increase
of our gross margin primarily resulted from the increase of our production efficiency and the increase of the weight of higher
value-added, more technologically advanced products in our product portfolio in our passenger vehicle business, and partly offset
by the increase in labor expenses, the appreciation of the Chinese currency, and higher raw material costs.
SELLING AND DISTRIBUTION EXPENSES
Selling and
distribution expenses were $3,765,768 for the three months ended September 30, 2012, as compared to $2,923,832 for the same
period of 2011, an increase of $841,936 or 28.8%. The increase was mainly due to increased packaging expense and selling-
and distribution- related travel expenses.
Selling and distribution
expenses as a percentage of sales revenue increased to 8.1% for the three months ended September 30, 2012, as compared to 6.1%
for the same period in 2011, primarily due to the increase of total amount of selling and distribution expenses and the decrease
of sales by $0.9 million from $47.6 million from the three months ended September 30, 2011 to $46.7 million from the three months
ended September 30, 2012.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2,630,786
for the three months ended September 30, 2012, as compared to $2,968,222 for the same period of 2011, a decrease of $337,436 or
11.4%. The general and administrative expenses decreased as a result of certain adjustments for the prior period and decreased
sales for the current period. The Company incurred fewer expenses in relation to reduced sales .Since the decrease of our
general and administrative expenses outpaced the decrease of our sales, general and administrative expenses, as a percentage of
sales revenue, decreased from 6.2% for the same period in 2011 to 5.6% for the three months ended September 30, 2012.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development
expenses include payroll, employee benefits, and other personnel-related expenses associated with product development. Research
and development expenses also include third-party development costs. For the three months ended September 30, 2012, research and
development expense was $2,352,958, as compared to $1,893,985 for the same period of 2011, an increase of $458,973.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization
expense decreased by $7,161 to $1,814,794 for the three months ended September 30, 2012, compared with that of $1,821,955 for the
same period of 2011. The de minis decrease in depreciation and amortization expense primarily resulted from a stable portfolio
of production equipment and facilities.
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 September 30, 2012, decreased by $686,176 to $541,326 from $1,227,502 for the same period
of 2011, which was mainly due to lower interest rates.
OTHER INCOME
Other income was $1,207,961
for the three months ended September 30, 2012, as compared to $488,747 for the three months ended September 30, 2011, an increase
of $719,214. The increase was mainly due to an increase in sales of raw material scrap for the three months ended September 30,
2012.
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 the taxable income
as reported in the PRC statutory financial. 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 fiscal 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 was valid for three years and provided for a reduced tax rate for years 2009
through 2011. Thus, our effective income tax rate was 15% for years 2009 through 2011. For the quarter ended September 30, 2012,
the effective income tax rate was 25%. However, the Company is in the process of renewing its “High-Tech Enterprise”
certificate. If this renewal is successful, the effective income tax rate may be reduced to 15% later in 2012.
Income tax expense of $1,180,601
and $660,446 was recorded for the quarters ended September 30, 2012 and 2011, respectively. The increase was due to the
increase of the income before provision for income taxes from $4.5 million for the three months ended September 30, 2011 to $5.0
million for the three months ended September 30, 2012, and the increase of our effective tax from 15% to 25% for the same period.
STOCK-BASED COMPENSATION
There were no options
or warrants outstanding as of September 30, 2012.
Although the Company anticipates
that future issuances of stock awards could have a material impact on reported net income in future financial statements, we do
not expect them to have a material impact on future cash flows.
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, in each case held by
our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to $486,581 and $358,632
for the third quarter ended September 30, 2012 and 2011, respectively.
NET INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net income attributable
to stockholders for the quarter ended September 30, 2012, decreased by $145,892, to $3,360,914 from $3,506,806 for the quarter
ended September 30, 2011 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for
the quarter ended September 30, 2012 and 2011, were $0.17 and $0.18 per share, respectively.
Results of operations
for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
SALES
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
(U.S. dollars in
millions)
|
|
Commercial vehicles brake systems, etc.
|
|
$
|
111.7
|
|
|
|
77.9
|
%
|
|
$
|
125.1
|
|
|
|
77.9
|
%
|
Passenger vehicles brake systems, etc.
|
|
$
|
31.7
|
|
|
|
22.1
|
%
|
|
$
|
35.6
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143.4
|
|
|
|
100.0
|
%
|
|
$
|
160.7
|
|
|
|
100.0
|
%
|
Net sales were $143,399,372
and $160,683,535 for the nine months ended September 30, 2012 and 2011, respectively, a decrease of $17.3 million or 10.8%.
The sales from commercial
vehicle brake systems decreased by $13.4 million or 10.7%, to $111.7 million for the nine months ended September 30, 2012,
compared to $125.1 million for the same period of 2011. Due to the slowdown of the commercial vehicle market in the nine months
ended September 30, 2012, the sales from the OEM market decreased, which impacted the sales of the commercial vehicle brake systems.
The sales from passenger
vehicle brake systems decreased by $3.9 million or 11.0%, to $31.7 million for the nine months ended September 30, 2012, compared
to $35.6 million for the same period of 2011.
A breakdown of net sales revenues for China
OEM markets, China Aftermarket and International markets for the nine months ended September 30, 2012 and 2011 fiscal years, respectively,
is set forth below:
|
|
Nine
months
|
|
|
Percent
|
|
|
Nine
months
|
|
|
Percent
|
|
|
|
|
|
|
ended
|
|
|
of
|
|
|
ended
|
|
|
of
|
|
|
|
|
|
|
September
30, 2012
|
|
|
Total
Sales
|
|
|
September
30, 2011
|
|
|
Total
Sales
|
|
|
Percentage
Change
|
|
|
|
(U.S. dollars in millions)
|
|
China OEM market
|
|
$
|
70.1
|
|
|
|
53.2
|
%
|
|
$
|
85.5
|
|
|
|
53
|
%
|
|
|
-18.0
|
%
|
China Aftermarket
|
|
$
|
33.7
|
|
|
|
22.2
|
%
|
|
$
|
32.9
|
|
|
|
21
|
%
|
|
|
2.4
|
%
|
International market
|
|
$
|
39.6
|
|
|
|
24.6
|
%
|
|
$
|
42.3
|
|
|
|
26
|
%
|
|
|
-6.4
|
%
|
Total
|
|
$
|
143.4
|
|
|
|
100.0
|
%
|
|
$
|
160.7
|
|
|
|
100.0
|
%
|
|
|
-10.8
|
%
|
Chinese domestic
macro-economic environment, including consumer confidence and industrial activities, as well as relevant policies and
regulations have resulted in a low-growth environment for the automotive industry in the nine months of 2012, caused the
growth rate in vehicle sales again declined from the low base in the comparable period of 2011. For the first time in
China’s industrialization and urbanization era, the growth rate of automotive vehicle sales has declined over the nine
month periods in two consecutive years, 2011 and 2012. However, this low-growth development is also partially a result of the
significant and possibly one-time only increases in vehicle sales experienced in the 2009 and 2010 years, and the PRC
government is guiding the automotive industry to develop at a more rational long-term growth rate. To prevent sales to the
OEM market from deteriorating further, the Company has maintained its market position in the Chinese OEM market by enhancing
its product line with a broader range of products through innovative new products as well as penetrating new market segments
such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM market decreased by
$15.4 million or 18.0%, to $51.4 million for the nine months ended September 30, 2012, compared to $85.5 million for the
same period of 2011.
Our sales to the Chinese aftermarket increased
by $0.8 million or 2.4%, to $33.7 million for the nine months ended September 30, 2012, compared to $32.9 million for the same
period of 2011. 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 nine
months ended September 30, 2012. 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 $2.7 million
or 6.4%, to $39.6 million for the nine months of 2012, as compared to $42.3 million for the same period of 2011. The debt
crisis in Europe and the currency depreciation in some countries caused some of our customers to reduce their inventories. Moreover,
the instability of the political situation in the Middle Eastern countries restricted the purchases of our customers from us. We
will take the following measures to ensure future growth in the international market:
(1) Enhance the Company brand image through
industry exhibitions;
(2) Maintain our customer base and market
position while penetrating new markets and capturing new customers;
(3) Build a stronger international marketing
network with the focus on exploring high-value foreign markets, and actively market to the large automotive chain stores that directly
sell to end users, and
(4) Further target the international OEM market
by actively support initiatives that promote our overseas sales.
COST OF SALES AND GROSS PROFIT
Cost of sales for the
nine months ended September 30, 2012 were $103,779,982, a decrease of $12,679,680 or 10.9% from $116,459,662 for the same period
last year. Our gross profit decreased by 10.4% from $44,223,873 for the nine months ended September 30, 2011 to $39,619,390 for
the same period of 2012. Both the decrease of cost of sales and gross profit primarily resulted from the decrease of sales from
$161 million from the nine months ended September 30, 2011 to $143 million for the nine months ended September 30, 2012.
Gross margin
increased to 27.6% from 27.5% for the nine months ended September 30, 2012, as compared with the same period of 2011,
primarily resulted from the increase of gross margin of our passenger vehicle business, but offset by the decrease in the
gross margin of our commercial vehicle business. Gross margin is being affected by labor expenses, the fluctuation of the
Chinese currency, and raw material costs, as well as our product mix in each of our commercial vehicle and passenger vehicle
businesses.
Cost of sales
from commercial vehicle brake systems for the nine months ended September 30, 2012 were $80.9 million, a decrease of $9.6
million or 10.6% from $90.4 million for the same period of 2011. The gross profit from commercial vehicle brake systems
decreased by 11.2% from $34.7 million for the nine months ended September 30, 2011 to $30.8 million for the same period of
2012. Both the decrease of cost of sales and the decrease of gross profit primarily resulted from the decrease of sales from
$125.1 million from the nine months ended September 30, 2011 to $111.7 million for the nine months ended September 30, 2012
for our commercial vehicle business.
Gross margin from commercial
vehicle brake systems decreased to 27.6% from 27.7% for the nine months ended September 30, 2012 compared with the same period
of 2011. The decrease in the gross margin was mainly due to rising labor expenses, the appreciation of the Chinese currency, and
higher raw material costs.
Cost of sales from
passenger vehicle brake systems for the nine months ended September 30, 2012 were $22.9 million, a decrease of $3.1 million
or 11.9% from $26.0 million for the same period of 2011. The gross profit from passenger vehicle brake systems decreased by
7.5% from $9.5 million for the nine months ended September 30, 2011 to $8.8 million for the same period of 2012. Both the
decrease of cost of sales and the decrease of gross profit from our passenger vehicle business primarily resulted from the
decrease of our sales from passenger vehicle business from $35.6 million for the nine months ended September 30, 2011
to $31.7 million for the nine months ended September 30, 2012.
Gross margin from passenger
vehicle brake systems increased to 27.8% from 26.8% for the nine months ended September 30, 2012, as compared with the same period
in 2011. The increase of our gross margin primarily resulted from the increase of our production efficiency and the increase of
the weight of higher value-added, more technologically advanced products in our product portfolio in our passenger vehicle business,
partly offset by the increase in labor expenses, the appreciation of the Chinese currency, and higher raw material costs.
SELLING AND DISTRIBUTION EXPENSES
Selling and distribution
expenses were $10,460,168 for the nine months ended September 30, 2012, as compared to $9,452,586 for the same period of 2011,
an increase of $1,007,582 or 10.7%.
The increase was mainly
due to increased packaging expense and selling-
and distribution- related travel expenses. As a percentage of sales revenue, selling expenses increased to 7.3%
for the nine months ended September 30, 2012, as compared to 5.9% for the same period in 2011, primarily because as the total
selling and distribution expenses increased, our total sales revenues decreased about 10.8%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative
expenses were $9,981,552 for the nine months ended September 30, 2012, as compared to $9,647,944 for the same period of 2011, an
increase of $333,608 or 3.5%.
The increase was mainly
due to increases in labor and salary expenses related to general and administrative functions of the Company and the increases
in expenses related to general business development. As a percentage of sales revenue, general and administrative expenses increased
to 7.0% for the nine months ended September 30, 2012, as compared to 6.0% for the same period in 2011, primarily because as
the total general and administrative expenses increased, while our total sales revenues decreased about 10.8%.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development
expenses include payroll, employee benefits, and other personnel-related expenses associated with product development. Research
and development expenses also include third-party development costs. For the nine months ended September 30, 2012, research and
development expenses were $5,916,934, as compared to $6,071,593 for the same period of 2011, a decrease of $154,659.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization
expenses increased to $5,602,370 for the nine months ended September 30, 2012, compared with that of $5,253,922 for the same period
of 2011, an increase of $348,448. The increase in depreciation and amortization expenses was primarily due to the increased pool
of the capital equipment resulted from the purchase of production equipment.
FINANCIAL EXPENSE
Financial expense mainly
consists of interest expenses and exchange losses. The financial expense for the nine months ended September 30, 2012, decreased
by $998,755 to $1,668,945 from $2,667,700 for the same period of 2011, which was mainly due to lower interest expenses.
OTHER INCOME
Other income was $1,972,781
for the nine months ended September 30, 2012, as compared to $953,104 for the nine months ended September 30, 2011, an increase
of $1,019,677. The increase was mainly due to an increase in sales of raw material scrap for the nine months ended September 30,
2012.
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 fiscal year 2006. This tax exemption was
superseded as a result of the Chinese government awarded "High-Tech Enterprise" designation to the Joint Venture.
The High-Tech Enterprise certificate is valid for three years and it provides the Joint Venture a reduced tax rate of 15% for
years 2009 through 2011. Thus, our effective income tax rate is 15% for years 2009 through 2011. For the nine months ended September
30, 2012, the effective income tax rate is 25%. However, the Company is in the process of renewing its “High-Tech Enterprise”
certificate. If this renewal is successful, the effective income tax rate may be reduced to 15% in later 2012.
Income tax expenses
of $3,479,019 and $2,583,266 were recorded for the nine months ended September 30, 2012 and 2011, respectively.
The increase was primarily due to (i) the increase the increase of our effective tax from 15% from the nine months ended
September 30, 2011 to 25% for the same period in 2012, and (ii) the decrease of the income before provision for income taxes from
$17.3 million for the nine months ended September 30, 2011 to $13.2 million for the three months ended September 30, 2012
.
STOCK-BASED COMPENSATION
There were no options
or warrants outstanding as of September 30, 2012.
Although the Company anticipates
that future issuances of stock awards could have a material impact on reported net income in future financial statements, we do
not expect them to have a material impact on future cash flows.
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
$1,028,504 and $1,380,839 for the nine months ended September 30, 2012 and 2011, respectively.
NET INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net income attributable
to stockholders for the nine months ended September 30, 2012, decreased by $4,640,396, to $8,690,930 from $13,331,326 for
the nine months ended September 30, 2011 due to the factors discussed above. Earnings per share (“EPS”), both basic
and diluted, for the nine months ended September 30, 2012 and 2011, were $0.45 and $0.69 per share, respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
OPERATING - Net cash provided by operating
activities was $17,517,547 for nine months ended September 30, 2012, an increase of $13,425,408, as compared with $4,092,139
of net cash provided in operating activities in the same period in 2011. Such increase was primarily due to increased cash inflow
resulting from changes in accounts receivable and inventories. Most accounts receivable of our OEM customers were converted into
bank acceptance notes from customers during the nine months ended September 30, 2011.
At September 30, 2012, the Company had cash
and cash equivalents of $27,894,332, as compared to cash and cash equivalents of $17,116,692 at December 31, 2011. The Company
had working capital of $126,821,915 at September 30, 2012, as compared to working capital of $115,127,783 at December 31, 2011,
reflecting current ratios of 4.09:1 and 3.31:1, respectively.
INVESTING - During the nine months ended
September 30, 2012, the Company expended net cash of $965,469 in investing activities. For the nine months ended September 30,
2011, the Company utilized $7,589,518 in investing activities, mainly for acquisition of new equipment to support the growth of
the business.
FINANCING - During the nine month period ended
September 30, 2012, the Company repaid the bank loans and a capital lease in the aggregate amount or $5,629,263. Net cash provided
by financing activities was $9,656,339 for the nine months ended September 30, 2011.
Management has taken a
number of steps to restructure the Company’s customer base and phase out accounts which failed to make prompt payments. We
also placed more emphasis on collection of accounts receivable from our customers. During 2012, we continued to develop new products
that we believe will have a higher profit margin, and adopting steps for further cost saving such as improving the material utilization
rate. We maintain good relationships with local banks. We believe that our current cash, cash equivalents, 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 the U.S. dollar, the functional currency of the 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 financial statements 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, their 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. The Company is adopting such
steps as the diversification of currencies used in export sales, and the negotiation of export contracts with fixed exchange rates.
As the Company’s
historical debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any 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
On September 30, 2012 we did 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.
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 quarter ended September 30, 2012 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.
None.
ITEM 1A. RISK FACTORS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
31.1
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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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)
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(1)
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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.
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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 : November 14, 2012
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SORL AUTO PARTS, INC.
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By: /s/ Xiao Ping Zhang
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Name: Xiao Ping Zhang
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Title: Chief Executive Officer
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(Principal Executive Officer)
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By: /s/ Zong Yun Zhou
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Name: Zong Yun Zhou
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Title: Chief Financial Officer
(Principal Financial Officer)
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