China Automotive Systems Reports Record Annual Net Sales and Net Income in Fiscal Year 2010

WUHAN, China, June 29, 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 fiscal year ended December 31, 2010 and the filing of its annual report on Form 10-K with the Securities and Exchange Commission.

Fourth Quarter Results

• Record net sales grew 20% to $100.5 million in the fourth quarter of 2010 as compared to $83.8 million in the same quarter of 2009.
• Gross profit was $19.8 million compared to $19 million in the fourth quarter of 2009, which reflects an increase in net sales and sales volumes that were partially offset by declines in sales price in excess of unit cost reductions.
• Operating income grew 44.7% to $12.3 million for the fourth quarter of 2010 from $8.5 million in the 2009 fourth quarter. Operating margin climbed to 12.2% in the fourth quarter of 2010 from 10.1% in the fourth quarter of 2009.
• Net income was $12.3 million in the fourth quarter of 2010, or diluted earnings per share of $0.22 versus a loss of $24.2 million, or $0.89 loss per share in the same quarter of 2009.

Fiscal Year 2010 Results

• For the year ended December 31, 2010, net sales rose 35.3% to a yearly record of $345.9 million as compared to $255.6 million for 2009.
• Gross profit increased by 30% to $80.3 million, from $61.7 million in 2009. Gross margin was 23.2 % in 2010.
• Operating income grew 46.3% to $54.0 million, compared with $36.9 million in 2009. The operating margin increased to 15.6% of net sales in 2010 from 14.4% in 2009.
• Record annual net income attributable to the parent company was $51.7 million, or diluted earnings per share of $1.10, versus a loss of $26.4 million, or $0.98 loss per share, in 2009.
• Cash flow from operations was $38.5 million.
• Cash and cash equivalents were $49.4 million at December 31, 2010.

CAAS's record annual net sales were $345.9 million, up 35.3% or $90.3 million from the fiscal year 2009 sales of $255.6 million.

Gross profit for the fiscal year 2010 increased by 30.1% to $80.3 million, from a restated $61.7 million for the 2009 year. Gross margin was 23.2% in 2010 compared with 24.2% in 2009 due to price reductions more than offsetting lower unit costs. Gross profit in 2010 and 2009 included warranty expenses that in prior years were included in selling expenses.

Selling expenses in 2010 rose by 18.6%, or $1.5 million, to $9.4 million from a restated $7.9 million in 2009 due to a higher warehouse rental rate, and greater office and transportation expenses reflecting both higher oil prices as well as a greater number of units sold. As a percentage of sales, selling expenses were 2.7% in 2010 and 3.1% in 2009. The 2009 selling expenses were restated to reflect the reclassification of warranty expenses into cost of product sold.

General and administrative expenses declined 34% to $10.0 million from $15.2 million for the year ended December 31, 2009. The decrease in general and administrative expenses was from: a) lower depreciation and amortization, as some equipment became fully depreciated; b) a reduced bad debt provision, as almost $2.6 million of bad debts were recovered in 2010; c) lower repair and maintenance costs; and d) reduced office expenses, which more than offset increased listing and professional fees related to being a public company. As a percent of sales, general and administrative expenses were 2.9% compared with 5.9% in 2009.

Research and development (R&D) expense increased 212% to $8.0 million in 2010 from $2.6 million in 2009 primarily due to development for commercial production of the Company's electric power steering (EPS) products as well as upgrading traditional hydraulic steering products and advancing manufacturing efficiencies. As a percentage of sales, R&D expenses were 2.3% in 2010 as compared to 1.0% in 2009.

Operating income grew 46.3%, to $54.0 million in 2010 from $36.9 million in 2009, due to higher gross profit and strict cost controls limiting the growth of operating expenses, especially general and administrative expenses. As a percent of sales, the operating margin was 15.6% compared with 14.4% in 2009.

Financial expenses decreased to $3.4 million for 2010 compared to $7.9 million for 2009 primarily due to lower interest expenses. Interest expenses relate mainly to amortization expenses of the Convertible Notes discount and accrual on make-whole redemption interest. Pursuant to the terms of the Convertible Notes the Company issued in 2008, Convertible Note holders are entitled to require the Company to redeem all or any portion of the Convertible Notes in cash, if the weighted average price ("WAP"), is less than $3.187 for twenty (20) consecutive trading days at any time following February 15, 2009. In March 2009, due to a default on the WAP under the aforesaid contractual provision (the "WAP Default"), the Company accrued approximately $3,900,000 of all the remaining discount on Convertible Notes immediately and accrued an additional $520,000 of interest expenses in 2009. In 2010, there were no amortization expenses of the Convertible Notes discount. For the years ended December 31, 2010 and 2009, the Company's accrual on make-whole redemption interest was $1.9 million and $3.3 million, respectively.

For 2010, the gain on change in fair value of the derivatives embedded in the Convertible Notes was $20.2 million, compared to a loss of $43.1 million in 2009. Effective on January 1, 2009, the Company adopted ASC 815-10 and was required to bifurcate the embedded conversion feature of the Convertible Notes, classify it as a derivative liability and measure it at fair value at each reporting period. In 2010, the Company's common stock market price dropped to $13.62 from $18.71 at the beginning of the year, which significantly decreased the intrinsic value of the embedded conversion feature of the Convertible Notes. As a result, the fair value of compound derivative liabilities decreased significantly, and correspondingly, the gain on change in fair value of derivatives increased. In 2009, the stock price rose from $3.39 at the beginning of 2009 to $18.71, which significantly increased the intrinsic value of the embedded conversion feature of the Convertible Notes. As a result, the fair value of compound derivative liabilities increased significantly, and correspondingly, the loss on change in fair value of derivatives increased.

Income before income taxes increased by $85.3 million to $71.4 million in 2010, from a loss of $13.9 million in 2009.This gain resulted primarily from an increase of $17.1 million in operating income, a decrease in financial expenses of $4.5 million, and an increase in the gain on change in the fair value of the derivatives by $63.2 million in 2010 versus the 2009 results. Income before taxes represented 20.6% of net sales in 2010 versus a loss in 2009.

Income tax expense was $8.5 million in 2010 compared to $4.7 million in 2009. Income taxes increased mainly due to higher taxable income in 2010.

Net income was $51.8 million in 2010 compared to a loss of $26.4 million for 2009. Diluted earnings per share were $1.10 in 2010 compared with loss per share of $0.98 in 2009. The weighted average number of basic common shares outstanding was 27,098,258 in 2010 and 26,990,649 in 2009. The weighted average number of diluted common shares outstanding was 31,565,422 in 2010 and 26,990,649 in 2009.

As of December 31, 2010, total cash and cash equivalents were $49.4 million, as compared with $43.5 million at the end of 2009. Working capital was $54.2 million at the end of 2010. Net cash flow from operations was $38.6 million for the year ended December 31, 2010. Cash used to acquire property, plant and equipment for capacity expansion was $ 28 million in 2010.

Business Outlook

Management provides revenue guidance of 15% year-over-year growth for the 2011 year. This target is based on the Company's 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. These forward-looking statements include statements regarding the qualitative and quantitative effects of the accounting errors, the periods involved, the nature of the Company's review and any anticipated conclusions of the Company or its management and other statements that are not historical facts. Our actual results may differ materially from the results described in or anticipated by our forward-looking statements due to certain risks and uncertainties. As a result, the Company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading "Risk Factors" in the Company's Form 10-K annual report filed with the Securities and Exchange Commission on June 28, 2011, and in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission. We expressly disclaim 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.