China Automotive Systems Reports 2011 Second Quarter Financial Results

WUHAN, China, August 9, 2011 /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 second quarter and six months ended June 30, 2011.

Second Quarter 2011 Highlights

• Net sales were $82.5 million, compared with $85.1 million in the second quarter of 2010;
• Gross profit was $14.8 million, compared to $19.8 million in the second quarter of 2010; Gross margin was 17.9%, compared with 23.3% in the same quarter in 2010;
• Net income attributable to the parent company's common shareholders was $3.9 million, or $0.14 diluted earnings per share, compared with $23.9 million, or $0.28 diluted earnings per share, in the second quarter of 2010;
• Cash and cash equivalents were $55.4 million at June 30, 2011; and
• Cash flow from operating activities in the second quarter was approximately $20.0 million; Cash used to acquire property, plant and equipment for capacity expansion was $3.0 million.

Mr. Qizhou Wu, Chief Executive Officer of China Automotive Systems, commented, "With the expiration of government incentive policies and monetary tightening, China's auto output and sales have slowed after two years of rapid growth. In this environment, we are focused on strengthening our relationships with key OEMs that we believe will lead the sector's recovery. We believe that in downturns such as the current one, OEMs focus on upgrading vehicle quality and making key supplier decisions, especially in the area of safety-related components. CAAS has built a powerful research and development program and it has created new products that match global quality and performance standards. Continuing to generate free cash flow is our goal while we carefully manage our financial risks. We are confident that these strategies will position us to capitalize on the eventual recovery of the automotive market, which may start as early as the 2011 fourth quarter."

Second Quarter 2011 Results

Second quarter net sales were $82.5 million, compared with $85.1 million for the second quarter of 2010. The sales decline was mainly attributable to lower automotive vehicle sales in China and a reduction in the average selling price of the Company's products.

Gross profit was $14.8 million, compared to $19.8 million in the second quarter of 2010. Second quarter gross margin was 17.9%, versus 23.3% in the same quarter in 2010, mainly due to sales price declines exceeding unit cost reductions.

As sales volume declined, second quarter selling expenses decreased to $2.5 million, from $2.9 million in the second quarter of 2010. Selling expenses were 3.1% of sales in the second quarter, down from 3.4% in the second quarter of 2010.

General and administrative ("G&A") expenses were $3.5 million in the second quarter, compared with $2.1 million for the same period of 2010, but below the $3.9 million in the first quarter of 2011. The year-over-year increase was mainly attributable to a decrease in the recovery of bad debt provision and an increase in salaries and wages expenses, and labor insurance expenses.

Research and development expenses were $1.6 million for the second quarter of 2011, compared to $1.7 million for the second quarter of 2010. As a percentage of sales, research and development expenses were 1.9% in the second quarter, in line with 2.0% a year ago.

Income from operations was $7.6 million for the second quarter of 2011 as compared to $13.7 million in the second quarter of 2010. The decline resulted primarily from lower gross profit and higher operating expenses compared to the second quarter of 2010. As a result, operating margin was 9% in the second quarter of 2011, compared to 16% in the same period last year.

Financial expenses decreased to $0.6 million for the second quarter, compared to $0.8 million for the second quarter of 2010. This decrease was mainly due to the increase in gain on foreign currency exchange partially offset by higher interest expenses associated with the Convertible Notes.

For the second quarter of 2011, the loss on the change in fair value of the derivative was $0.1 million, compared with a gain of $19.6 million for the same period of 2010. The gain or loss on the change in fair value of the derivative is mainly determined by the Company's stock price movement during the period coupled with the stock price volatility and other factors. During the second quarter of 2011, the Company's common stock market price dropped slightly to $8.63 from $8.90, but with higher volatility. As a result, the fair value of compound derivative liabilities increased and caused the loss on the change in the fair value of derivatives. During the second quarter of 2010, the Company's common stock market price dropped significantly to $17.60 from $23.10. Thus, the intrinsic value of the embedded conversion feature in financial instruments decreased, the fair value of compound derivative liabilities decreased, which caused the gain on change in fair value of derivatives.

Income before income taxes was $7.0 million compared with $32.7 million for the three months ended June 30, 2010. This decrease was mainly due to a $6.1 million reduction in income from operations and a $19.7 million decrease in gain on change in fair value of the derivative.

Second quarter net income attributable to the parent company's common shareholders was $3.9 million, or $0.14 diluted earnings per share, compared with $23.9 million or $0.28 diluted earnings per share in the second quarter of last year. The weighted average number of basic common shares outstanding was 28,083,534 in the second quarter compared to 27,075,607 in the same quarter of 2010. The weighted average number of diluted common shares outstanding was 28,202,989 in the second quarter compared to 31,562,479 in same quarter of 2010.

As of June 30, 2011, total cash and cash equivalents were $55.4 million and working capital was $132.4 million.

Cash flow from operating activities in the second quarter was approximately $20.0 million. Cash used to acquire property, plant and equipment for capacity expansion was $3.0 million.

Six Months 2011 Results

Net sales for the first six months of 2011 increased 2.5% to $173.5 million compared to $169.3 million in the first six months of last year. Six-month gross profit was $34.8 million, compared with $42.3 million in the same period a year ago. Six-month gross margin was 20.0%, compared with 25.0% for the same period in 2010. Income from operations was $19.4 million, compared with $29.6 million in the first six months of 2010. Operating margin was 11.2%, compared with 17.5% for the same period of 2010. Net income attributable to the parent company's common shareholders increased to $21.2 million from $20.3 million in the first six months of 2010. Diluted earnings per share were $0.40, compared with $0.62 in the first six months of 2010.

Cash flows from operating activities in the first six months were approximately $16.5 million. Cash used to acquire property, plant and equipment for capacity expansion was $9.1 million in the first six months of 2011.

Non-GAAP Measures

Second quarter adjusted net income attributable to the parent company (Non-GAAP) was $5.1 million compared to adjusted net income attributable to the parent company of $8.6 million in the second quarter last year. Adjusted diluted earnings per share was $0.16 for the three months ended June 30, 2011 compared to adjusted diluted earnings per share of $0.27 for the same period of 2010.

Six-month adjusted net income attributable to the parent company (Non-GAAP) was $12.0 million compared to adjusted net income attributable to the parent company of $18.8 million for the same period of 2010. Adjusted diluted earnings per share was $0.38 for the six months ended June 30, 2011 compared to adjusted diluted earnings per share of $0.60 for same period of 2010.

Reconciliation of GAAP to Non-GAAP results:

To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles (U.S. GAAP), we use non-GAAP measures of net income attributable to parent company and earnings per share, which are adjusted from results based on U.S. GAAP to exclude certain expenses, and gains and losses associated with the Company's Convertible Notes. These non-GAAP financial measures are provided to enhance the reader's overall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAP results provide useful information to both management and investors, as these non-GAAP results exclude certain expenses, and gains and losses that we believe are not indicative of our core operating results, because these are consistent with the financial models and estimates published by many analysts who follow the Company, and these non-GAAP results assist in evaluating the Company's operating performance compared with that of other companies in its industry. These non-GAAP results are some of the primary indicators management uses for assessing our performance, allocating resources and planning, and forecasting future periods. Furthermore, management uses non-GAAP information that excludes certain non-cash charges such as accrued make-whole redemption interest expense and allocation to Convertible Notes holders associated with our Convertible Notes, as these non-GAAP items do not reflect the cash operating results of the business or the ongoing results.

Non-GAAP net income attributable to parent company and earnings per share are not measures of performance under accounting principles generally accepted in the United States (U.S. GAAP). The Company includes them in this press release in order to:

• improve transparency for investors;
• assist investors in their assessment of the Company's performance;
• facilitate comparisons to historical performance;
• ensure that these measures are fully understood in light of how the Company evaluates its operating results; and
• properly define metrics used and confirm their calculation.

These non-GAAP results should not be regarded as a substitute for corresponding U.S. GAAP measures, but instead utilized as a supplemental measure of operating performance in evaluating the Company's business. The Company recognizes that the usefulness of non-GAAP measures of net income attributable to parent company and earnings per share has certain limitations, including the following:

• non-GAAP net income attributable to parent company and earnings per share do not include certain gains and losses associated with the Company's Convertible Notes. Because the Convertible Notes are a recurring, non-cash item, related gains and losses are a necessary element of the Company's costs and ability to generate profits and cash flows. Therefore, any measure that excludes certain gains and losses associated with the Company's Convertible Notes may have material limitations; and
• the manner in which the Company calculates non-GAAP net income attributable to parent company and earnings per share may differ from that of other companies, which limits their usefulness as a comparative measure.

The Company compensates for the aforementioned limitations by using non-GAAP net income attributable to parent company and earnings per share as comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of its operating performance. As such, these non-GAAP measures should be viewed in conjunction with the Company's financial statements prepared in accordance with U.S. GAAP, as presented above and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on August 9, 2011.

Business Outlook

Reflecting current conditions, management has lowered its guidance and now expects annual revenues to increase by 5% to 10% for 2011. This target is based on the Companys current views on operating and market conditions, which are subject to change.

About China Automotive Systems, Inc.

Based in Hubei Province, the 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 four separate series of power steering with an annual production capacity of over 3.5 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., Chery Automobile Co., Ltd. and Chrysler North America outside of North America. For more information, please visit: http://www.caasauto.com.

Forward Looking Statements

This press release contains statements that are "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent our estimates and assumptions only as of the date of this press release. Our actual results may differ materially from the results described in or anticipated by our forward-looking statements due to certain risks and uncertainties, including those described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 28, 2011, and in documents subsequently filed by the Company from time to time. The Company expressly disclaims any duty to provide updates to any forward-looking statements made in this press release, whether as a result of new information, future events or otherwise.