China Automotive Systems Reports Third Quarter 2010 Financial Results

Record Sales for any Third Quarter of Operations

News provided by

Nov 09, 2010, 06:00 ET

WUHAN, China, Nov. 9, 2010 /PRNewswire-Asia-FirstCall/ -- China Automotive Systems, Inc., ("CAAS" or the "Company"), (Nasdaq: CAAS), a leading power steering components and systems supplier in China, today announced financial results for the third quarter and nine months ended September 30, 2010.

Third Quarter 2010 Highlights:

Net sales increased 17.7% year-over-year to $76.1 million, a record high for any third quarter of operations;
Gross profit increased 17.4% to $18.2 million, with a gross margin of 23.9%;
Operating income rose 26.1% to $12.2 million, with an operating margin of 16.0%;
Net income was $8.2 million, or $0.26 per diluted share, including only a $0.5 million non-cash gain in the fair value of the derivative compared to a $3.1 million non-cash gain in the fair value of the derivative in the previous year's quarter;
Cash and equivalents were $49.2 million;
Free cash flow was $5.6 million.

Nine Month 2010 Highlights:

Net sales increased 42.8% year-over-year to $245.4 million and compared with $171.8 million reported in fiscal 2009;
Operating income increased 47.1% to $41.8 million, exceeding $28.4 million reported in fiscal 2009;
Net income was $27.1 million, or $0.88 per diluted share, surpassing $16.9 million, or $0.58 per diluted share achieved in fiscal 2009.

Mr. Qizhou Wu, Chief Executive Officer of China Automotive Systems commented, "We are very pleased with the strong sales results posted for the 2010 third quarter, as the summer season is our slowest sales period compared to other quarters. We continue to operate at a high capacity utilization rate and have invested over $24 million in the first nine months of 2010 to make sure we can meet future demand, especially for our new, more advanced products."

"In August, China Automotive Systems was ranked 23rd in FORTUNE Magazine's '100 Fastest-Growing Companies' list for 2010," continued Mr. Wu. "Our high-quality products and excellent performance in this safety-related area have created strong brand recognition among customers, even during the turbulence of the global automotive markets in recent years. We are committed to maintaining the highest standards in production and performance and hope to see this reflected in future growth."

Third Quarter 2010 Results

Net sales increased 17.7% year-over-year to $76.1 million, a record sales performance for any third quarter in the Company's history. Net sales for the third quarter of 2009 were $64.7 million. This revenue increase was driven by purely organic growth. Third quarter, or the summer season, is typically a relatively slow sales period compared with other quarters.

Gross profit increased 17.4% to $18.2 million, compared with $15.5 million for the same quarter in 2009. Since the first quarter of 2010, the Company began reclassifying product warranty expenses under cost of goods sold, instead of its previous classification under selling expenses. The third quarter 2010 reclassified gross margin was 23.9%, in line with the reclassified gross margin for the same period of 2009. Before the warranty adjustment, the gross margin would have been 25.4% in the third quarter of 2010.

Selling expenses in the third quarter were $2.1 million, a slight decline from $2.2 million in the same quarter a year ago. Selling expenses as a percentage of revenue for the third quarter of 2010 declined to 2.8% from 3.4% for the same period in 2009, mainly due to higher sales in the 2010 third quarter, combined with a lower supply expense.

General and administrative (G&A) expenses in the third quarter were $2.3 million compared to $2.7 million in the same quarter a year ago, primarily due to reductions in option expenses. G&A as a percentage of revenue for the third quarter of 2010 decreased to 3.0% from 4.2% during the same quarter in 2009.

Research and development (R&D) expenses rose to $1.2 million in the third quarter from $0.5 million for the third quarter of 2009, as the Company continued to invest in R&D to develop more cost-efficient, advanced products and improve its production capabilities to maintain its industry leadership.

Total operating expenses decreased to $5.8 million from $6.1 million for the same period of 2009. As a percentage of revenue, operating expenses declined to 7.7% in the third quarter of 2010 from 9.5% in the third quarter of 2009 mainly due to enhanced operating efficiencies, which compensated for increased R&D spending.

Operating income increased by 26.1% to $12.2 million in the third quarter of 2010, compared with $9.7 million in the third quarter of 2009. Operating margin was 16.0%, compared with 14.9% for the same quarter in 2009. The increase in operating income reflected higher gross profit and lower operating expenses, notably, general and administrative expenses.

Income before taxes was flat at $12.4 million for the third quarter compared to the previous year's period. The non-cash gain due to the change in the fair value of the derivative was $0.5 million for the current quarter compared to $3.1 million in the same quarter of 2009. This $2.6 million decrease in non-cash gain due to the change in the fair value of the derivative offset the higher income generated in the current quarter.

Primarily as a result of the decrease in non-cash gain due to the change in the fair value of the derivative, net income attributable to common shareholders was $8.2 million for the third quarter of 2010, or $0.26 per diluted share, compared with $8.6 million, or $0.28 per diluted share in the same quarter in 2009. The net margin for net income attributable to common shareholders was 10.9% in the 2010 third quarter. The diluted weighted average shares outstanding were 31.6 million in the third quarter of 2010, compared with 31.4 million in the third quarter of 2009.

Nine Month Results

Total revenue for the first nine months of 2010 increased 42.8% to $245.4 million from $171.8 million for the nine months of last year. Gross profit for the nine-month period increased 41.7% to $60.5 million, from $42.7 million in the comparable period a year ago. Gross margin was 24.7% for the first nine months of 2010. Income from operations increased 47.1% to $41.8 million from $28.4 million in the first nine months of 2009, and operating margin for the 2010 period was 17.0% compared with 16.5% in the nine months of 2009. Net income attributable to common shareholders for the nine-month period was $27.1 million, with fully diluted earnings per share of $0.88, compared with $16.9 million, or diluted earnings per share of $0.58 for the first nine months of 2009.

Financial Conditions

As of September 30, 2010, total cash and cash equivalents were $49.2 million, $5.7 million higher than $43.5 million as of December 31, 2009. Stockholders' equity increased to $168.7 million as of September 30, 2010, from $132.8 million as of December 31, 2009. Net cash flow from operations was $29.6 million, compared with $24.3 million for the same period of 2009, an increase of $5.3 million. Working capital was $83.2 million. Free cash flow, defined as net cash flow from operations minus capital expenditure, was $5.6 million, despite investing approximately $24 million in plant and equipment costs in the first nine months of 2010.

Business Outlook

Management raises revenue guidance to 30% growth for the 2010 fiscal year. This target is based on the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update this guidance.

Conference Call

Management will conduct a conference call on Tuesday, November 9th at 8:00 A.M. ET/9:00 P.M. Beijing Time to discuss these results. A question and answer session will follow management's presentation.

To participate, please call the following numbers 10 minutes before the call start time and ask to be connected to the "China Automotive Systems" conference call:

Phone Number: +1-877-407-9205 (North America)

Phone Number: +1-201-689-8054 (International)

In addition, the conference call will be broadcast live over the Internet at: http://www.caasauto.com

Please go to the website at least 15 minutes early to register, download and install any necessary software.

A telephone replay of the call will be available after the conclusion of the conference call through 11:59 PM ET on December 9, 2010. The dial-in details for the replay are: U.S. Toll Free Number +1-877-660-6853, International dial-in number +1-201-612- 7415; using Account "286" and Conference ID "359756" to access the replay.

About China Automotive Systems, Inc.

Based in Hubei Province, People's Republic of China, China Automotive Systems, Inc. is a leading supplier of power steering components and systems to the Chinese automotive industry, operating through nine Sino-foreign joint ventures. The Company offers a full range of steering system parts for passenger automobiles and commercial vehicles. The Company currently offers 4 separate series of power steering with an annual production capacity of over 2.5 million sets, steering columns, steering oil pumps and steering hoses. Its customer base is comprised of leading Chinese auto manufacturers such as China FAW Group, Corp., Dongfeng Auto Group Co., Ltd., BYD Auto Company Limited, Beiqi Foton Motor Co., Ltd. and Chery Automobile Co., Ltd., etc. For more information, please visit: http://www.caasauto.com.

Safe Harbor Statement

This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning the Company's operations, financial performance and condition and the impact of acquisitions on its financial performance. For this purpose, statements that are not statements of historical fact may be deemed to be forward-looking statements. The Company cautions that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including, among others, the impact of competitive products, pricing and new technology; changes in demand for the Company's products; changes in consumer preferences and tastes and effectiveness of marketing; changes in laws and regulations; fluctuations in costs of production, delays and cost overruns related to developing and opening new production facilities; and other factors as discussed in the Company's reports filed with the Securities and Exchange Commission from time to time.

For further information, please contact:

Jie Li
Chief Financial Officer
China Automotive Systems
[email protected]

Kevin Theiss
Investor Relations
Grayling
+1-646-284-9409
[email protected]

China Automotive Systems, Inc. Condensed Consolidated Balance Sheets
	September 30, 2010		December 31, 2009
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	49,201,859	$	43,480,176
Pledged cash deposits		21,090,382		12,742,187
Accounts and notes receivable, net, including $2,573,240 and $1,441,939 from related parties at September 30, 2010 and December 31, 2009		181,845,502		154,863,292
Advance payments and other, including $1,409,460 and $0 to related parties at September 30, 2010 and December 31, 2009		3,150,827		2,413,556
Inventories		40,867,074		27,415,697
Current deferred tax assets		2,891,740		1,381,868
Total current assets	$	299,047,384	$	242,296,776
Long-term Assets:
Property, plant and equipment, net	$	66,977,567	$	60,489,798
Intangible assets, net		586,474		561,389
Other receivables, net, including $369,351 and $65,416 from related parties at September 30, 2010 and December 31, 2009		3,278,171		1,064,224
Advance payments for property, plant and equipment, including $7,444,795 and $2,579,319 to related parties at September 30, 2010 and December 31, 2009		17,636,239		6,369,043
Long-term investments		80,584		79,084
Non-current deferred tax assets		1,278,198		2,172,643
Total assets	$	388,884,617	$	313,032,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans	$	8,953,754	$	5,125,802
Accounts and notes payable, including $2,126,954 and $1,537,827 to related parties at September 30, 2010 and December 31, 2009		143,298,745		107,495,833
Convertible notes payable		28,961,253		28,640,755
Compound derivative liabilities		127,012		880,009
Customer deposits		1,908,479		1,918,835
Accrued payroll and related costs		3,165,578		3,040,705
Accrued expenses and other payables		14,647,357		17,708,681
Accrued pension costs		3,987,756		3,778,187
Taxes payable		10,686,208		11,365,016
Amounts due to shareholders/directors		103,215		-
Total current liabilities	$	215,839,357	$	179,953,823
Long-term liabilities:
Other long-term liabilities		4,377,538		233,941
Total liabilities	$	220,216,895	$	180,187,764
Significant concentrations
Related party transactions
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value - Authorized - 20,000,000 shares Issued and outstanding – None	$	-	$	–
Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued and Outstanding 27,115,826 and 27,046,244 shares at September 30, 2010 and December 31, 2009		2,711		2,704
Additional paid-in capital		28,216,671		27,515,064
Retained earnings-
Appropriated		8,767,797		8,324,533
Unappropriated		85,269,215		58,642,023
Accumulated other comprehensive income		13,746,601		11,187,744
Total parent company stockholders' equity		136,002,995		105,672,068
Non-controlling interests		32,664,727		27,173,125
Total stockholders' equity	$	168,667,722	$	132,845,193
Total liabilities and stockholders' equity	$	388,884,617	$	313,032,957

China Automotive Systems, Inc. Condensed Consolidated Statements of Operations (US$, Unaudited)
	Three Months Ended September 30,
	2010		2009
Net product sales, including $1,717,483 and $1,384,458 to related parties for the three months ended September 30, 2010 and 2009	$	76,102,844	$	64,654,369
Cost of product sold, including $4,885,768 and $3,477,109 purchased from related parties for the three months ended September 30, 2010 and 2009		57,929,284		49,168,626
Gross profit		18,173,560		15,485,743
Add: Gain (loss) on other sales		(152,481)		284,234
Less: Operating expenses-
Selling expenses		2,095,321		2,180,864
General and administrative expenses		2,286,784		2,739,886
R&D expenses		1,247,881		531,383
Depreciation and amortization		219,720		663,408
Total Operating expenses		5,849,706		6115541
Income from operations		12,171,373		9,654,436
Add: Other income, net		-		-
Financial income (expenses) net		(271,422)		(401,121)
Gain on change in fair value of derivative		509,705		3,129,794
Income before income taxes		12,409,656		12,383,109
Less: Income taxes		1,866,157		1,789,836
Net income	$	10,543,499	$	10,593,273
Net income attributable to non-controlling interest		2,350,280		2,036,762
Net income attributable to parent company	$	8,193,219	$	8,556,511
Net income per common share attributable to parent company–
Basic	$	0.30	$	0.32
Diluted	$	0.26	$	0.28
Weighted average number of common shares outstanding –
Basic		27,112,689		26,983,717
Diluted		31,564,305		31,412,485

China Automotive Systems, Inc. Condensed Consolidated Statements of Operations (US$, Unaudited)
	Nine Months Ended September 30,
	2010		2009
Net product sales, including $6,319,594 and $3,257,716 to related parties for the nine months ended September 30, 2010 and 2009	$	245,416,671	$	171,836,094
Cost of product sold, including $14,481,952 and $8,463,331 purchased from related parties for the nine months ended September 30, 2010 and 2009		184,897,834		129,141,078
Gross profit		60,518,837		42,695,016
Add: Gain on other sales		981,128		523,860
Less: Operating expenses-
Selling expenses		6,866,249		4,866,041
General and administrative expenses		7,737,989		6,787,918
R&D expenses		4,291,044		1,415,531
Depreciation and amortization		829,865		1,742,162
Total Operating expenses		19,725,147		14,811,652
Income from operations		41,774,818		28,407,224
Add: Other income, net		266,379		-
Financial income (expenses) net		(1,052,782)		(1,318,829)
Gain (loss) on change in fair value of derivative		752,997		591,511
Income before income taxes		41,741,412		27,679,906
Less: Income taxes		6,442,971		4,714,124
Net income	$	35,298,441	$	22,965,782
Net income attributable to non-controlling interest		8,227,985		6,074,110
Net income attributable to parent company	$	27,070,456	$	16,891,672
Net income per common share attributable to parent company–
Basic	$	1.00	$	0.63
Diluted	$	0.88	$	0.58
Weighted average number of common shares outstanding –
Basic		27,078,180		26,983,402
Diluted		31,539,402		31,627,696

China Automotive Systems, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine Months Ended September 30,
	2010		2009
Cash flows from operating activities:
Net income	$	35,298,441	$	22,965,782
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Stock-based compensation		422,714		321,663
Depreciation and amortization		6,955,969		5,940,068
Allowance for doubtful accounts (Recovered)		(1,127,767)		(1,484,680)
Deferred income taxes assets		(540,385)		(531,244)
Amortization for discount of convertible note payable		320,498		612,635
(Gain) loss on change in fair value of derivative		(752,997)		(591,511)
Other operating adjustments		324,963		(226,916)
Changes in operating assets and liabilities:
(Increase) decrease in:
Pledged deposits		(8,012,615)		(2,505,479)
Accounts and notes receivable		(22,430,886)		(33,727,451)
Advance payments and other		(678,156)		(593,563)
Inventories		(12,728,686)		(2,794,500)
Accounts and notes payable		33,298,924		30,025,373
Customer deposits		(34,138)		316,133
Accrued payroll and related costs		67,681		346,723
Accrued expenses and other payables		(174,491)		2,685,922
Accrued pension costs		137,283		53,613
Taxes payable		(891,031)		3,528,700
Advances payable		149,229		(317)
		-------------		------------------
Net cash provided by operating activities	$	29,604,550	$	24,340,951
		-------------		------------------
Cash flows from investing activities:
(Increase) decrease in other receivables		(2,221,935)		125,815
Cash received from equipment sales		396,489		678,132
Cash paid to acquire property, plant and equipment		(24,005,602)		(8,814,876)
Cash paid to acquire intangible assets		(60,586)		(321,671)
		-------------		------------------
Net cash (used in) investing activities	$	(25,891,634)	$	(8,332,600)
		-------------		------------------
Cash flows from financing activities:
Proceeds from bank loans		3,685,215		2,197,177
Dividends paid to the non-controlling interest holders of Joint-venture companies		(2,871,603)		(4,176,583)
Repayment of convertible note payable		-		(5,000,000)
Shares issued for stock options exercised		278,900		8,790
Increase (decrease) in amounts due to shareholders/directors		97,406		(287,854)
		-------------		------------------
Net cash provided by (used in) financing activities	$	1,189,918	$	(7,258,470)
		-------------		------------------
Cash and cash equivalents affected by foreign currency	$	818,849	$	31,219
		-------------		------------------
Net increase in cash and cash equivalents		5,721,683		8,781,100
Cash and cash equivalents at beginning of period		43,480,176		37,113,375
		-------------		------------------
Cash and cash equivalents at end of period	$	49,201,859	$	45,894,475
		========		=========