China Automotive Systems, Inc. (NASDAQ:CAAS) Q4 2019 Results Earnings Conference Call May 14, 2020 8:00 AM ET Company Participants Kevin Theiss - Manager of Investor Relations Qizhou Wu - Chief Executive Officer Conference Call Participants William Gregozeski - Greenridge Global Robert Pavlovich - Private Investor Operator Greetings. And welcome to the China Automotive Systems Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer sessio ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 Or ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 000-33123 CHINA AUTOMOTIVE SYSTEMS, INC. (Exact name of Registrant as specified in its charter) | Delaware 33-0885 ...

Financial Data and Key Metrics Changes - In Q3 2019, net sales were $100.5 million, down from $112.1 million in Q3 2018, primarily due to a change in product mix and lower domestic sales volume [18][19] - Gross profit increased to $17.3 million in Q3 2019 from $15.4 million in Q3 2018, with gross margin rising to 17.2% from 13.7% [19][21] - Net income attributable to parent company's common shareholders rose to $4.2 million or diluted earnings per share of $0.13, compared to $0.4 million or $0.01 in Q3 2018 [15][21] Business Line Data and Key Metrics Changes - Net sales of traditional hydraulic steering products declined by 10% year-over-year to $82 million in Q3 2019, while electric power steering (EPS) product sales were $18.5 million, an 11.9% decline compared to Q3 2018 [10][19] - EPS accounted for 18.4% of net sales in Q3 2019, consistent with Q2 2019 [11] Market Data and Key Metrics Changes - In the first nine months of 2019, production and sales of passenger vehicles in China decreased by 13.1% and 11.7% year-over-year, respectively [9] - The market share of Chinese branded passenger cars decreased by 3.3% year-over-year, with total sales down 18.5% in the first nine months of 2019 [9] Company Strategy and Development Direction - The company is focusing on expanding its OEM customer base outside of China and developing new growth engines through joint ventures in EPS and autonomous steering technologies [18] - The joint venture with Hyoseong Electric Company aims to produce high-quality small electric automotive motors, enhancing the company's product offerings [12] Management's Comments on Operating Environment and Future Outlook - Management noted that despite challenges in the Chinese economy, government policies are expected to stimulate growth, particularly in the automotive sector [16][17] - The company remains cautiously optimistic about regaining growth in its EPS business in Q4 2019 and 2020, citing improvements in operational efficiency and product quality [29] Other Important Information - As of September 30, 2019, total cash and equivalents were $102.3 million, an increase from $89.1 million on June 30, 2019 [15][23] - The company repurchased approximately 96,000 common shares in Q3 2019 to enhance shareholder value [15][24] Q&A Session Summary Question: Expected shipments to Great Wall - The company confirmed that it expects to ship 75,000 units to Great Wall in 2019, with over 20,000 units shipped in Q3 [26][27] Question: EPS sales performance - Management acknowledged that EPS sales are below expectations due to market conditions but noted improvements in operational efficiency and product quality from the joint venture [28][29] Question: Plans for cash on the balance sheet - The company plans to continue share buybacks and actively seek investment opportunities in the automotive sector [30][31] Question: Status of electric motor joint venture - The electric motor joint venture is on track, with small volume production currently underway and mass production expected to start in April 2020 [34][37] Question: Expansion in Brazil - The company is expanding production capacity in Brazil and has signed a major contract with FCA Brazil, positioning itself well within the Fiat Chrysler Group [38][40]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Title of each class Trading symbol Name of each exchange on which registered 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 September 30, 2019 Or ¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number: 000-33123 China Automotive Systems, Inc. (E ...

China Automotive Systems, Inc. (NASDAQ:CAAS) Q2 2019 Earnings Conference Call August 8, 2019 8:00 AM ET Company Participants Kevin Theiss - Manager of Investor Relations Qizhou Wu - Chief Executive Officer Jie Li - Chief Financial Officer Conference Call Participants William Gregozeski - Greenridge Global Operator Greetings, welcome to China Automotive Systems Second Quarter 2019 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal pr ...

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q%20Filing%20Information) This document is a Quarterly Report on Form 10-Q for China Automotive Systems, Inc., filed for the period ended June 30, 2019 - The document is a Quarterly Report on Form 10-Q for the period ended **June 30, 2019**[1](index=1&type=chunk) - The registrant is **China Automotive Systems, Inc.**, incorporated in Delaware[1](index=1&type=chunk) - The company is classified as a **Non-accelerated filer**, a **Smaller reporting company**, and an **Emerging growth company**[3](index=3&type=chunk) - Common Stock (**CAAS**) is registered on **The Nasdaq Capital Market**[5](index=5&type=chunk) - As of **August 8, 2019**, **31,497,723 shares** of common stock were issued and outstanding[5](index=5&type=chunk) [Cautionary Statement Regarding Forward-Looking Statements](index=4&type=section&id=Cautionary%20Statement) This section highlights that the report contains forward-looking statements subject to risks and uncertainties, which may cause actual results to differ materially - The report contains **forward-looking statements** subject to risks and uncertainties that could cause actual results to differ materially from projections[6](index=6&type=chunk) - Forward-looking statements speak only as of the filing date and will not be updated unless required by law[6](index=6&type=chunk) - Readers are referred to **Item 1A. 'Risk Factors'** in the Company's Annual Report on Form 10-K for the year ended **December 31, 2018**, for a comprehensive discussion of factors[6](index=6&type=chunk) [Part I — Financial Information](index=5&type=section&id=Part%20I%20%E2%80%94%20Financial%20Information) [Item 1. Unaudited Financial Statements](index=5&type=section&id=Item%201.%20Unaudited%20Financial%20Statements.) This section presents the company's condensed unaudited consolidated financial statements and related notes for the periods ended **June 30, 2019 and 2018** [Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income](index=5&type=section&id=Condensed%20Unaudited%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) **Three Months Ended June 30 (2019 vs. 2018, in thousands USD):** | Metric | 2019 | 2018 | Change (USD) | Change (%) | | :---------------------------------------------- | :--- | :--- | :----------- | :--------- | | Net product sales | 105,748 | 125,782 | (20,034) | -15.9% | | Gross profit | 15,185 | 17,021 | (1,836) | -10.8% | | Income from operations | 2,740 | 584 | 2,156 | 369.2% | | Net income attributable to parent shareholders | 2,510 | 847 | 1,663 | 196.3% | | Basic EPS | 0.08 | 0.03 | 0.05 | 166.7% | | Diluted EPS | 0.08 | 0.03 | 0.05 | 166.7% | **Six Months Ended June 30 (2019 vs. 2018, in thousands USD):** | Metric | 2019 | 2018 | Change (USD) | Change (%) | | :---------------------------------------------- | :--- | :--- | :----------- | :--------- | | Net product sales | 214,941 | 259,800 | (44,859) | -17.3% | | Gross profit | 29,230 | 38,660 | (9,430) | -24.4% | | Income from operations | 3,777 | 5,178 | (1,401) | -27.1% | | Net income attributable to parent shareholders | 3,977 | 5,159 | (1,182) | -22.9% | | Basic EPS | 0.13 | 0.16 | (0.03) | -18.8% | | Diluted EPS | 0.13 | 0.16 | (0.03) | -18.8% | [Condensed Unaudited Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Unaudited%20Consolidated%20Balance%20Sheets) **Balance Sheet Highlights (June 30, 2019 vs. December 31, 2018, in thousands USD):** | Metric | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :--------------------------- | :------------ | :---------------- | :----------- | :--------- | | Total current assets | 465,920 | 495,428 | (29,508) | -6.0% | | Total assets | 670,744 | 690,499 | (19,755) | -2.9% | | Total current liabilities | 320,253 | 341,300 | (21,047) | -6.2% | | Total liabilities | 362,215 | 385,672 | (23,457) | -6.1% | | Total stockholders' equity | 308,529 | 304,827 | 3,702 | 1.2% | [Condensed Unaudited Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) **Cash Flow Highlights (Six Months Ended June 30, 2019 vs. 2018, in thousands USD):** | Metric | 2019 | 2018 | Change (USD) | | :---------------------------------------- | :----- | :----- | :----------- | | Net cash (used in)/provided by operating activities | (25,730) | (5,393) | (20,337) | | Net cash (used in)/provided by investing activities | (9,780) | 1,748 | (11,528) | | Net cash provided by/(used in) financing activities | 8,773 | (5,359) | 14,132 | | Net decrease in cash, cash equivalents and pledged cash | (26,909) | (10,608) | (16,301) | | Cash, cash equivalents and pledged cash at end of period | 89,060 | 85,485 | 3,575 | [Notes to Condensed Unaudited Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Unaudited%20Consolidated%20Financial%20Statements) [Organization and Business](index=9&type=section&id=1.%20Organization%20and%20business) China Automotive Systems, Inc. manufactures and sells automotive systems and components through subsidiaries and joint ventures in the PRC and Brazil - The Company is primarily engaged in the manufacture and sale of **automotive systems and components**[16](index=16&type=chunk) - **Henglong KYB** (66.6% ownership) was established in **August 2018** for automobile electronic systems[27](index=27&type=chunk) - **Wuhan Hyoseong** (51.0% ownership) was established in **March 2019** for automotive motors and electromechanical systems[27](index=27&type=chunk) [Basis of Presentation and Significant Accounting Policies](index=11&type=section&id=2.%20Basis%20of%20presentation%20and%20significant%20accounting%20policies) Financial statements adhere to U.S. GAAP, with **ASC 842 Leases** adopted on **January 1, 2019**, having no material impact on key financial metrics - Condensed unaudited consolidated financial statements are prepared in accordance with **U.S. GAAP** for interim financial information[28](index=28&type=chunk) - **ASU 2016-02, Leases (ASC 842)**, was adopted on **January 1, 2019**, using the modified retrospective method[33](index=33&type=chunk)[36](index=36&type=chunk) - **No material impact** on retained earnings, right-of-use assets, or lease liabilities resulted from ASC 842 adoption as of **January 1, 2019**[37](index=37&type=chunk) - Operating lease right-of-use assets totaled **$0.4 million** as of **June 30, 2019**[41](index=41&type=chunk) - Current portion of operating lease liabilities was **$0.1 million** as of **June 30, 2019**[41](index=41&type=chunk) [Accounts and Notes Receivable, Net](index=12&type=section&id=3.%20Accounts%20and%20notes%20receivable,%20net) Total accounts and notes receivable, net, slightly decreased to **$255.1 million** by **June 30, 2019**, while related party receivables significantly increased **Accounts and Notes Receivable, Net (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :---------------------------------------- | :------------ | :---------------- | :----------- | :--------- | | Accounts and notes receivable, net - unrelated parties | 225,681 | 237,519 | (11,838) | -5.0% | | Accounts and notes receivable - related parties | 29,449 | 18,825 | 10,624 | 56.4% | | Total accounts and notes receivable, net | 255,130 | 256,344 | (1,214) | -0.5% | - Provision for doubtful accounts was **$0.2 million** for the six months ended **June 30, 2019** (vs. $0.3 million in 2018)[45](index=45&type=chunk) [Inventories](index=13&type=section&id=4.%20Inventories) Total inventories increased to **$90.9 million** by **June 30, 2019**, driven by finished goods, while inventory write-downs decreased **Inventories (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :------------------ | :------------ | :---------------- | :----------- | :--------- | | Raw materials | 24,174 | 27,190 | (3,016) | -11.1% | | Work in process | 10,289 | 11,932 | (1,643) | -13.8% | | Finished goods | 56,387 | 48,899 | 7,488 | 15.3% | | Total | 90,850 | 88,021 | 2,829 | 3.2% | - Inventory write-downs totaled **$2.2 million** for the six months ended **June 30, 2019** (vs. $3.5 million in 2018)[46](index=46&type=chunk) [Long-term Investments](index=13&type=section&id=5.%20Long-term%20investments) The company's long-term investments, primarily in joint ventures and venture capital funds, saw an additional investment in Chongqing Venture Fund and the establishment of Henglong Tianyu in **June 2019** - Net equity in **Beijing Henglong** (50% JV) was **$4.5 million** as of **June 30, 2019** (vs. $4.2 million as of Dec 31, 2018)[47](index=47&type=chunk) - Net equity in **Suzhou Venture Fund** (12.5% LP) was **$8.9 million** as of **June 30, 2019** (vs. $9.7 million as of Dec 31, 2018), with a **$0.6 million** distribution received in **April 2019**[48](index=48&type=chunk) - Net equity in **Chongqing Venture Fund** (18.5% LP) was **$15.3 million** as of **June 30, 2019** (vs. $13.1 million as of Dec 31, 2018), with an additional **$2.3 million** investment in **May 2019**[49](index=49&type=chunk) - **Henglong Tianyu** (40% associate) was established in **June 2019** with a **$1.2 million** investment, resulting in **$1.1 million** net equity[53](index=53&type=chunk) - Net income of non-consolidated affiliates was **nil** for the six months ended **June 30, 2019** (vs. $0.5 million in 2018)[54](index=54&type=chunk) [Property, Plant and Equipment, Net](index=14&type=section&id=6.%20Property,%20plant%20and%20equipment,%20net) Net property, plant, and equipment increased to **$142.0 million** by **June 30, 2019**, primarily due to construction in progress and machinery, with a significant portion pledged as security **Property, Plant and Equipment, Net (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :---------------------------- | :------------ | :---------------- | :----------- | :--------- | | Land use rights and buildings | 64,768 | 60,593 | 4,175 | 6.9% | | Machinery and equipment | 197,341 | 192,538 | 4,803 | 2.5% | | Construction in progress | 20,506 | 12,526 | 7,980 | 63.7% | | Total PP&E, net | 142,008 | 129,853 | 12,155 | 9.4% | - Depreciation charges totaled **$9.2 million** for the six months ended **June 30, 2019** (vs. $8.8 million in 2018)[55](index=55&type=chunk) - **$59.6 million** of property, plant, and equipment was pledged as security for bank credit facilities as of **June 30, 2019** (vs. $55.9 million as of Dec 31, 2018)[56](index=56&type=chunk) [Loans](index=15&type=section&id=7.%20Loans) Total bank and government loans increased to **$71.3 million** by **June 30, 2019**, driven by short-term bank loans, while the weighted average interest rate for short-term bank loans decreased to **4.9%** **Loans (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :---------------------------- | :------------ | :---------------- | :----------- | :--------- | | Short-term bank loans | 70,976 | 60,952 | 10,024 | 16.4% | | Long-term government loan | 291 | 291 | 0 | 0.0% | | Total bank and government loans | 71,267 | 61,243 | 10,024 | 16.4% | - Weighted average interest rate for short-term bank loans was **4.9%** as of **June 30, 2019** (vs. 5.3% as of Dec 31, 2018)[58](index=58&type=chunk) - A Chinese government loan of approximately **$7.3 million** was repaid on **June 20, 2019**[61](index=61&type=chunk) [Accounts and Notes Payable](index=16&type=section&id=8.%20Accounts%20and%20notes%20payable) Total accounts and notes payable decreased to **$184.2 million** by **June 30, 2019**, primarily due to a reduction in notes payable to unrelated parties **Accounts and Notes Payable (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :---------------------------------------- | :------------ | :---------------- | :----------- | :--------- | | Accounts and notes payable - unrelated parties | 176,118 | 205,643 | (29,525) | -14.4% | | Accounts payable - related parties | 8,041 | 4,477 | 3,564 | 79.6% | | Total | 184,159 | 210,120 | (25,961) | -12.4% | [Accrued Expenses and Other Payables](index=16&type=section&id=9.%20Accrued%20expenses%20and%20other%20payables) Total accrued expenses and other payables decreased to **$44.0 million** by **June 30, 2019**, mainly due to reduced other payables and warranty reserves **Accrued Expenses and Other Payables (in thousands USD):** | Category | June 30, 2019 | December 31, 2018 | Change (USD) | Change (%) | | :---------------------------------------- | :------------ | :---------------- | :----------- | :--------- | | Accrued expenses | 7,263 | 8,341 | (1,078) | -12.9% | | Accrued interest | 920 | 423 | 497 | 117.5% | | Current portion of other long-term payable | 3,516 | 3,400 | 116 | 3.4% | | Other payables | 1,329 | 3,783 | (2,454) | -64.9% | | Warranty reserves | 30,936 | 31,085 | (149) | -0.5% | | Total | 43,964 | 47,032 | (3,068) | -6.5% | - Warranty additions totaled **$7.5 million** for the six months ended **June 30, 2019** (vs. $9.9 million in 2018)[66](index=66&type=chunk) [Other Long-term Payable](index=16&type=section&id=10.%20Other%20long-term%20payable) Other long-term payable totaled **$6.9 million** as of **June 30, 2019**, related to an equipment sale and leaseback transaction accounted for as financing - Other long-term payable was **$6.9 million** as of **June 30, 2019**, related to an equipment sale and leaseback transaction[67](index=67&type=chunk) - The sale and leaseback transaction is accounted for as a **financing transaction**[67](index=67&type=chunk) [Additional Paid-in Capital](index=17&type=section&id=11.%20Additional%20paid-in%20capital) Additional paid-in capital remained stable at **$64.4 million**, with **$0.02 million** in stock-based compensation expenses recognized for **2018** stock options - Additional paid-in capital was **$64.429 million** as of **June 30, 2019**, and **December 31, 2018**[68](index=68&type=chunk) - Stock-based compensation expenses totaled **$0.02 million** for the year ended **December 31, 2018**[69](index=69&type=chunk) [Retained Earnings](index=17&type=section&id=12.%20Retained%20earnings) Appropriated retained earnings remained at **$11.1 million**, while unappropriated retained earnings increased to **$215.4 million** by **June 30, 2019**, driven by parent company net income - Appropriated retained earnings were **$11.104 million** as of **June 30, 2019**, and **December 31, 2018**[72](index=72&type=chunk) - Unappropriated retained earnings were **$215.416 million** as of **June 30, 2019** (vs. $211.439 million as of Dec 31, 2018)[74](index=74&type=chunk) - Net income attributable to the parent company was **$3.977 million** for the six months ended **June 30, 2019**[74](index=74&type=chunk) [Accumulated Other Comprehensive Income](index=18&type=section&id=13.%20Accumulated%20other%20comprehensive%20income) Accumulated other comprehensive income decreased to **$1.4 million** by **June 30, 2019**, primarily due to foreign currency translation losses - Accumulated other comprehensive income was **$1.379 million** as of **June 30, 2019** (vs. $1.855 million as of Dec 31, 2018)[75](index=75&type=chunk) - Foreign currency translation adjustment attributable to the parent company was **$(476) thousand** for the six months ended **June 30, 2019**[75](index=75&type=chunk) [Treasury Stock](index=18&type=section&id=14.%20Treasury%20stock) The company repurchased **840,579 shares** of common stock by **June 30, 2019**, under a **$5.0 million** share repurchase program approved in **December 2018** - **840,579 shares** were repurchased as of **June 30, 2019** (vs. 711,698 as of Dec 31, 2018)[76](index=76&type=chunk) - The share repurchase program allows for up to **$5.0 million**, not exceeding **$4.00 per share**, through **December 4, 2019**[76](index=76&type=chunk) [Non-controlling Interests](index=18&type=section&id=15.%20Non-controlling%20interests) Non-controlling interests' equity increased to **$19.5 million** by **June 30, 2019**, due to a capital contribution from **Wuhan Hyoseong**, partially offset by net loss - Non-controlling interests equity was **$19.493 million** as of **June 30, 2019** (vs. $18.950 million as of Dec 31, 2018)[77](index=77&type=chunk) - Net loss attributable to non-controlling interests was **$(520) thousand** for the six months ended **June 30, 2019**[77](index=77&type=chunk) - A contribution of **$1.438 million** was made by a non-controlling shareholder of **Wuhan Hyoseong** for the six months ended **June 30, 2019**[77](index=77&type=chunk) [Net Product Sales](index=19&type=section&id=16.%20Net%20product%20sales) Revenue recognition considers contract assets and liabilities, with customer deposits, the main contract liability, increasing to **$1.3 million** by **June 30, 2019** - Contract assets are an **insignificant component** of the Company's revenue recognition process[80](index=80&type=chunk) - Contract liabilities primarily consist of **customer deposits**[81](index=81&type=chunk) - Customer deposits totaled **$1.3 million** as of **June 30, 2019** (vs. $0.8 million as of Dec 31, 2018)[82](index=82&type=chunk) - **$5.7 million** was recognized as net product sales revenue from customer deposits during the six months ended **June 30, 2019**[82](index=82&type=chunk) [Financial Income, Net](index=19&type=section&id=17.%20Financial%20income,%20net) Net financial income significantly increased to **$0.9 million** for the six months ended **June 30, 2019**, driven by higher interest income and reduced foreign exchange losses **Financial Income, Net (Six Months Ended June 30, in thousands USD):** | Category | 2019 | 2018 | Change (USD) | Change (%) | | :------------------------ | :--- | :--- | :----------- | :--------- | | Interest income | 1,477 | 944 | 533 | 56.5% | | Foreign exchange gain/(loss), net | (396) | (641) | 245 | -38.2% | | Bank fees | (194) | (171) | (23) | 13.5% | | Total financial income, net | 887 | 132 | 755 | 572.0% | [Income Tax](index=19&type=section&id=18.%20Income%20tax) The effective tax rate increased to **20.2%** for the six months ended **June 30, 2019**, primarily due to a valuation allowance for **Henglong KYB's** deferred tax assets - The effective tax rate for the six months ended June 30 was **20.2%** in **2019** (vs. 14.9% in 2018)[84](index=84&type=chunk) - Changes in valuation allowance amounted to **$0.3 million** for the six months ended **June 30, 2019**[84](index=84&type=chunk) - The increase in effective tax rate was primarily due to a valuation allowance for deferred tax assets of **Henglong KYB**[84](index=84&type=chunk) [Income Per Share](index=19&type=section&id=19.%20Income%20per%20share) Basic and diluted EPS increased to **$0.08** for the three months ended **June 30, 2019**, but decreased to **$0.13** for the six-month period **Basic and Diluted EPS (in USD):** | Period | 2019 | 2018 | Change (USD) | | :-------------------------------------- | :--- | :--- | :----------- | | Three Months Ended June 30 - Basic | 0.08 | 0.03 | 0.05 | | Three Months Ended June 30 - Diluted | 0.08 | 0.03 | 0.05 | | Six Months Ended June 30 - Basic | 0.13 | 0.16 | (0.03) | | Six Months Ended June 30 - Diluted | 0.13 | 0.16 | (0.03) | [Significant Concentrations](index=20&type=section&id=20.%20Significant%20concentrations) The company's business is highly concentrated in China, with RMB currency conversion subject to PRC regulations, and **45.1%** of sales from its top five customers - A significant portion of the Company's business is conducted in **China**, where **RMB currency conversion** is subject to PRC regulations[88](index=88&type=chunk)[89](index=89&type=chunk)[91](index=91&type=chunk) - The Company's five largest customers accounted for **45.1%** of consolidated net product sales for the six months ended **June 30, 2019** (vs. 40.2% in 2018)[93](index=93&type=chunk)[94](index=94&type=chunk) - One customer individually accounted for more than **10%** of consolidated net sales (**20.2%** in 2019 vs. 17.6% in 2018)[93](index=93&type=chunk)[94](index=94&type=chunk) - Approximately **6.1%** of accounts receivable were from the aforementioned major customer as of **June 30, 2019**[93](index=93&type=chunk) [Related Party Transactions and Balances](index=21&type=section&id=21.%20Related%20party%20transactions%20and%20balances) Related party transactions include increased merchandise sales and significantly increased receivables, while material purchases from related parties decreased **Related Sales (in thousands USD):** | Category | Three Months 2019 | Three Months 2018 | Six Months 2019 | Six Months 2018 | | :---------------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Merchandise sold to related parties | 14,310 | 10,856 | 27,146 | 21,702 | | Materials and others sold to related parties | 435 | 498 | 896 | 944 | | Rental income obtained from related parties | 121 | 45 | 201 | 147 | | Total Related Sales | 14,866 | 11,399 | 28,243 | 22,793 | **Related Purchases (in thousands USD):** | Category | Three Months 2019 | Three Months 2018 | Six Months 2019 | Six Months 2018 | | :---------------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Materials purchased from related parties | 6,130 | 7,428 | 11,634 | 15,677 | | Equipment purchased from related parties | 1,511 | 2,037 | 2,271 | 3,285 | | Others purchased from related parties | 10 | 208 | 21 | 257 | | Total Related Purchases | 7,651 | 9,673 | 13,926 | 19,219 | - Accounts and notes receivable from related parties totaled **$29,449 thousand** as of **June 30, 2019** (vs. $18,825 thousand as of Dec 31, 2018)[98](index=98&type=chunk) - Accounts and notes payable to related parties totaled **$8,041 thousand** as of **June 30, 2019** (vs. $4,477 thousand as of Dec 31, 2018)[99](index=99&type=chunk) - **Hanlin Chen**, Chairman, owns **56.4%** of the Company's common stock[100](index=100&type=chunk) [Commitments and Contingencies](index=23&type=section&id=22.%20Commitments%20and%20contingencies) A stockholder derivative lawsuit is ongoing, but management expects an immaterial impact; major commitments for investment and purchasing agreements total **$27.1 million** - A stockholder derivative complaint alleging breach of fiduciary duties and excessive compensation was filed on **January 7, 2019**, with the motion to dismiss denied on **July 17, 2019**[101](index=101&type=chunk)[207](index=207&type=chunk) - Management expects the lawsuit's impact on consolidated financial statements to be **immaterial**[101](index=101&type=chunk) **Major Commitments and Contingencies (as of June 30, 2019, in thousands USD):** | Category | 2019 | 2020 | 2021 | Thereafter | Total | | :---------------------------------------- | :--- | :--- | :--- | :--------- | :---- | | Obligations for investment contracts | 5,528 | - | - | - | 5,528 | | Obligations for purchasing and service agreements | 19,477 | 1,943 | 199 | - | 21,619 | | Total | 25,005 | 1,943 | 199 | - | 27,147 | - Remaining capital commitment for the **Hubei Venture Fund** is approximately **$5.6 million**[103](index=103&type=chunk) [Off-balance Sheet Arrangements](index=23&type=section&id=23.%20Off-balance%20sheet%20arrangements) The company had no significant off-balance sheet arrangements as of **June 30, 2019**, and **December 31, 2018** - **No significant off-balance sheet arrangements** existed as of **June 30, 2019**, and **December 31, 2018**[104](index=104&type=chunk)[201](index=201&type=chunk) [Segment Reporting](index=24&type=section&id=24.%20Segment%20reporting) The company operates **14 product sectors**, with six focused on power steering, and evaluates performance based on standalone product sector operating income - As of **June 30, 2019**, the Company had **14 product sectors**, with six principal profit makers engaged in power steering[107](index=107&type=chunk) - **Henglong KYB** primarily operates the **EPS business** following restructuring in the **fourth quarter of 2018**[107](index=107&type=chunk)[131](index=131&type=chunk)[159](index=159&type=chunk) **Total Segments Net Product Sales (in thousands USD):** | Period | 2019 | 2018 | Change (USD) | Change (%) | | :-------------------------------------- | :------ | :------ | :----------- | :--------- | | Three Months Ended June 30 | 134,677 | 155,564 | (20,887) | -13.4% | | Six Months Ended June 30 | 275,081 | 314,180 | (39,099) | -12.4% | **Total Segments Net Income (in thousands USD):** | Period | 2019 | 2018 | Change (USD) | Change (%) | | :-------------------------------------- | :--- | :--- | :----------- | :--------- | | Three Months Ended June 30 | 6,253 | 4,238 | 2,015 | 47.5% | | Six Months Ended June 30 | 7,257 | 7,249 | 8 | 0.1% | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management discusses the company's financial performance, condition, critical accounting estimates, and liquidity for the periods ended **June 30, 2019** [General Overview](index=26&type=section&id=General%20Overview) - **China Automotive Systems, Inc.** is a leading power steering systems supplier for the China automobile industry[112](index=112&type=chunk) - The Company maintains business relations with over **sixty vehicle manufacturers**, including major Chinese and joint venture brands[112](index=112&type=chunk) - The Company aims to grow its leading position in automotive power steering systems and improve overall margins, profitability, and cash flows[113](index=113&type=chunk) [Critical Accounting Estimates](index=27&type=section&id=Critical%20Accounting%20Estimates) - Critical accounting estimates encompass **warranty obligations**, **valuation of long-lived assets and investments**, **allowance for doubtful accounts**, **inventory write-downs**, and **recoverability of deferred tax assets**[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk) - These estimates require management assumptions about uncertain matters, where changes could **materially impact financial condition or results of operations**[117](index=117&type=chunk) - Estimates are based on historical trends, claims understanding, internal budgets, sales data, production volume estimates, and customer commitments[118](index=118&type=chunk)[119](index=119&type=chunk) [Results of Operations - Three Months Ended June 30](index=29&type=section&id=Three%20Months%20Ended%20June%2030,%202019%20and%202018) - Net product sales decreased by **$20.1 million (15.9%)** to **$105.7 million** for the three months ended **June 30, 2019**, due to soft demand and RMB depreciation[123](index=123&type=chunk)[125](index=125&type=chunk) - Net sales of traditional steering products decreased by **15.9%** to **$83.1 million**, and EPS sales decreased by **16.3%** to **$22.6 million**[124](index=124&type=chunk) - Gross margin increased by **0.9%** to **14.4%** due to changes in the product mix[141](index=141&type=chunk) - Selling expenses decreased by **20.4%** to **$3.9 million** due to decreased logistics fees[143](index=143&type=chunk) - Research and development expenses decreased by **18.5%** to **$6.6 million** due to cost control[144](index=144&type=chunk) - Net income attributable to parent company's common shareholders increased by **196.3%** to **$2.5 million**[147](index=147&type=chunk) [Results of Operations - Six Months Ended June 30](index=33&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030,%202019%20and%202018) - Net product sales decreased by **$44.9 million (17.3%)** to **$214.9 million** for the six months ended **June 30, 2019**, due to soft demand and RMB depreciation[151](index=151&type=chunk)[153](index=153&type=chunk) - Net sales of traditional steering products decreased by **18.2%** to **$170.0 million**, and EPS sales decreased by **13.7%** to **$44.9 million**[152](index=152&type=chunk) - Gross margin decreased by **1.3%** to **13.6%** due to increased raw material costs and changes in product mix[167](index=167&type=chunk) - Selling expenses decreased by **35.5%** to **$6.9 million** due to decreased logistics fees[168](index=168&type=chunk) - Research and development expenses decreased by **19.5%** to **$13.2 million** due to cost control[169](index=169&type=chunk) - Net income attributable to parent company's common shareholders decreased by **23.1%** to **$4.0 million**[172](index=172&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) - Cash, cash equivalents, and short-term investments decreased by **15.0%** to **$88.3 million** as of **June 30, 2019** (vs. $103.9 million as of Dec 31, 2018)[173](index=173&type=chunk) - Working capital decreased by **5.5%** to **$145.7 million** as of **June 30, 2019** (vs. $154.1 million as of Dec 31, 2018)[174](index=174&type=chunk) - The Company intends to indefinitely reinvest funds in PRC subsidiaries, except for dividends to fund the **U.S. Tax Reform transition tax**[174](index=174&type=chunk) - Short-term loans totaled **$71.0 million** and bankers' acceptances **$58.9 million** as of **June 30, 2019**[177](index=177&type=chunk) - Expected reduction in mortgage value for credit lines is approximately **$12.4 million** over the next 12 months, potentially reducing the line of credit by **$8.7 million**[178](index=178&type=chunk) **Total Credit Facilities (as of June 30, 2019, in thousands USD):** | Metric | Amount Available | Amount Used | Assessed Mortgage Value | | :----------------- | :--------------- | :---------- | :---------------------- | | Total | 174,475 | 104,449 | 111,926 | - Net cash used in operating activities increased by **$20.3 million** to **$25.7 million** for the six months ended **June 30, 2019**[196](index=196&type=chunk) - Net cash used in investing activities increased by **$11.5 million** to **$9.8 million** for the six months ended **June 30, 2019** (vs. $1.7 million provided in 2018)[197](index=197&type=chunk) - Net cash provided by financing activities increased by **$14.2 million** to **$8.8 million** for the six months ended **June 30, 2019** (vs. $5.4 million used in 2018)[198](index=198&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) No material changes occurred in market risk disclosures from the company's **2018 Annual Report on Form 10-K** - **No material changes** to market risk disclosure from the Company's Annual Report on Form 10-K for the year ended **December 31, 2018**[202](index=202&type=chunk) [Item 4. Controls and Procedures](index=42&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management concluded the company's disclosure controls and procedures were effective as of **June 30, 2019**, with no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and concluded to be **effective** as of **June 30, 2019**[203](index=203&type=chunk) - **No material changes** in internal control over financial reporting occurred during the three months ended **June 30, 2019**[205](index=205&type=chunk) [Part II — Other Information](index=43&type=section&id=Part%20II%20%E2%80%94%20Other%20Information) [Item 1. Legal Proceedings](index=43&type=section&id=Item%201.%20Legal%20Proceedings.) A stockholder derivative complaint's motion to dismiss was denied on **July 17, 2019**, but the company is not a party to other material legal proceedings - A stockholder derivative complaint alleging breach of fiduciary duties and excessive compensation was filed on **January 7, 2019**[207](index=207&type=chunk) - The motion to dismiss the complaint was **denied** on **July 17, 2019**[207](index=207&type=chunk) - The Company is not a party to any other pending or threatened **material legal proceedings**[208](index=208&type=chunk) [Item 1A. Risk Factors](index=43&type=section&id=Item%201A.%20Risk%20Factors.) No material changes occurred in the risk factors previously disclosed in the company's **2018 Annual Report on Form 10-K** - **No material changes** from the risk factors previously disclosed in **Item 1A** of the Company's **2018 Annual Report on Form 10-K**[209](index=209&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=43&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) No unregistered sales of equity securities or use of proceeds to report - None[209](index=209&type=chunk) [Item 3. Defaults Upon Senior Securities](index=43&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) No defaults upon senior securities to report - None[209](index=209&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) Not applicable to the company - Not applicable[209](index=209&type=chunk) [Item 5. Other Information](index=43&type=section&id=Item%205.%20Other%20Information.) No other information to report - None[209](index=209&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits.) This section lists exhibits filed with the Form 10-Q, including organizational documents, joint venture agreements, and XBRL financial statements - Exhibits include **Certificate of Incorporation**, **Bylaws**, and various **Joint-venture Agreements**[209](index=209&type=chunk)[210](index=210&type=chunk)[211](index=211&type=chunk)[212](index=212&type=chunk) - **XBRL formatted financial statements** (Statements of Operations, Balance Sheets, Cash Flows, and related notes) are filed as **Exhibit 101**[213](index=213&type=chunk) [Signatures](index=44&type=section&id=Signatures) - The report was signed by **Qizhou Wu**, President and CEO, and **Jie Li**, CFO, on **August 8, 2019**[214](index=214&type=chunk)

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 March 31, 2019 Or ¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number: 000-33123 China Automotive Systems, Inc. (Exact name of registrant as specified in its charter) Delaware 33-0885775 (State o ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) China Automotive Systems, Inc. is a holding company primarily manufacturing and selling power steering systems in the PRC, serving over sixty vehicle manufacturers - The Company operates as a holding company primarily manufacturing power steering systems in the PRC through nine Sino-joint ventures and five wholly-owned subsidiaries, with a US R&D subsidiary and a Brazil trading company[7](index=7&type=chunk)[8](index=8&type=chunk)[9](index=9&type=chunk) Top 5 Customers by Revenue (2018) | Name of Major Customers | Percentage of Total Revenue in 2018 | | :--- | :--- | | Fiat Chrysler North America | 18.6% | | Beiqi Foton | 6.1% | | Chery Automobile Co Ltd. | 5.2% | | Ford Motor Company | 4.8% | | Dongfeng Auto Group Co., Ltd. | 4.6% | | **Total** | **39.3%** | - The company's strategic plan emphasizes **brand recognition, quality control, cost efficiency, research and development, international expansion, and acquisitions**[22](index=22&type=chunk) Research & Development Expenses and Impact | Year | R&D Expense (USD Million) | Sales from New Products (% of Total Sales) | | :--- | :--- | :--- | | 2018 | $31.7 | 27.6% | | 2017 | $33.5 | 22.0% | Geographic Sales Distribution (2017-2018) | Geographic Region | Net Sales % (2018) | Net Sales % (2017) | | :--- | :--- | :--- | | China | 71.5% | 76.8% | | United States | 22.8% | 16.9% | | Other foreign countries | 5.7% | 6.3% | [Risk Factors](index=13&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant business, industry, and operational risks, particularly in China, alongside investor risks related to management control and auditor oversight - The company's business is highly dependent on cyclical automotive production, making it sensitive to general economic conditions and potential declines[53](index=53&type=chunk)[54](index=54&type=chunk) - Significant customer concentration risk exists, with the **top five customers accounting for 39.3% of total sales in 2018**, and **Fiat Chrysler North America representing 18.6%**[64](index=64&type=chunk) - As of December 31, 2018, management beneficially owns approximately **62.4% of outstanding common stock**, granting control over corporate decisions and potential conflicts of interest[78](index=78&type=chunk)[79](index=79&type=chunk) - The company's PRC-based independent auditor is in a jurisdiction where the PCAOB cannot conduct inspections, limiting investor oversight benefits[125](index=125&type=chunk)[126](index=126&type=chunk) - The 2017 U.S. Tax Cuts and Jobs Act introduced a one-time transition tax and GILTI, potentially subjecting the company's non-U.S. activities to U.S. taxation[136](index=136&type=chunk)[138](index=138&type=chunk) [Unresolved Staff Comments](index=26&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - Not Applicable[141](index=141&type=chunk) [Properties](index=27&type=section&id=Item%202.%20Properties) The company's headquarters are in Jing Zhou City, PRC, operating multiple manufacturing facilities across China with long-term land use rights Summary of Manufacturing Facilities | Entity | Product | Total Area (sq.m.) | Building Area (sq.m.) | Original Cost of Equipment (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Henglong | Automotive Parts | 111,211 | 33,933 | $55,438 | | Jiulong | Power Steering Gear | 39,478 | 23,728 | $35,690 | | Shenyang | Automotive Steering Gear | 35,354 | 10,425 | $6,169 | | Chongqing | Power Steering Gear | 57,849 | 10,413 | $2,431 | | Hubei Henglong | Automotive Steering Gear | 177,747 | 65,749 | $17,438 | | Wuhu | Automotive Steering Gear | 83,705 | 27,288 | $4,610 | | **Total** | | **559,019** | **171,536** | **$127,610** | [Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) The company faced two legal proceedings: a dismissed stockholder complaint regarding meeting timing and an ongoing derivative complaint against directors for compensation, expected to be immaterial - A September 2018 complaint to compel an annual stockholders' meeting was voluntarily dismissed after the company scheduled the meeting for December 5, 2018[146](index=146&type=chunk) - A January 2019 stockholder derivative complaint against directors alleges excessive compensation and inadequate disclosure, with management expecting an immaterial impact[147](index=147&type=chunk) [Mine Safety Disclosures](index=28&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[150](index=150&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under CAAS, with a $5.0 million share repurchase program approved in 2018, and no anticipated cash dividends - The Board approved a share repurchase program on December 5, 2018, authorizing up to **$5.0 million** in common stock repurchases through December 4, 2019[153](index=153&type=chunk) - In 2018, the company repurchased **17,400 shares for $0.05 million**, with an additional **128,881 shares repurchased for $0.3 million** in January 2019[153](index=153&type=chunk) - As of December 31, 2018, **31,626,604 shares of common stock were outstanding**, held by approximately **57 stockholders of record**[154](index=154&type=chunk) [Selected Financial Data](index=29&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to the company - Not Applicable[158](index=158&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's 2018 financial performance, highlighting decreased sales, a significant drop in operating income, and a shift to net income due to a one-time 2017 tax expense [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Net product sales slightly decreased in 2018 to $496.2 million, while operating income shifted to a $2.9 million loss due to lower gross margins, and net income improved to $2.4 million from a 2017 loss impacted by a one-time tax Consolidated Results of Operations (2017 vs. 2018) | Metric (in thousands USD) | 2018 | 2017 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net product sales | $496,158 | $499,063 | $(2,905) | -0.6% | | Gross Profit | $65,413 | $84,634 | $(19,221) | -22.7% | | Operating (loss)/income | $(2,908) | $19,270 | $(22,178) | -115.1% | | Net income/(loss) | $79 | $(18,639) | $18,718 | -100.4% | | Net income/(loss) attributable to parent | $2,377 | $(19,346) | $21,723 | -112.3% | - Net product sales decreased due to lower sales volume and average selling prices, partially offset by RMB appreciation against the U.S. dollar[168](index=168&type=chunk) - Gross margin decreased from **17.0% in 2017 to 13.2% in 2018**, primarily due to increased raw material costs and product mix changes[183](index=183&type=chunk) - The company recorded a **$1.5 million income tax benefit in 2018**, a significant change from a **$41.6 million expense in 2017** primarily due to a **$35.6 million one-time transition tax** from U.S. Tax Reform[197](index=197&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity improved with cash and short-term investments reaching $103.9 million in 2018, despite a decrease in working capital and net cash from operating activities, supported by $145.6 million in credit facilities Liquidity Position (as of Dec 31) | Metric (in millions USD) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $86.3 | $64.6 | | Short-term investments | $17.5 | $29.6 | | **Total Cash & ST Investments** | **$103.9** | **$94.1** | | Working Capital | $154.1 | $159.1 | Summary of Cash Flows (Year Ended Dec 31) | Activity (in millions USD) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12.5 | $48.9 | | Net cash provided by/(used in) investing activities | $2.5 | $(47.3) | | Net cash provided by financing activities | $10.1 | $28.5 | - As of December 31, 2018, the company had **$145.6 million in total available credit facilities**, with **$101.4 million utilized** for bank loans and notes payable[213](index=213&type=chunk)[214](index=214&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=43&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks primarily from foreign currency fluctuations between the USD and RMB, and significant credit risk due to customer concentration, notably with Fiat Chrysler North America - The company's primary market risk is foreign currency exchange rate fluctuations, particularly between the U.S. dollar and the Chinese RMB, impacting revenues, costs, and operating margins[243](index=243&type=chunk)[244](index=244&type=chunk) - Significant credit risk exists due to customer concentration, with **Fiat Chrysler North America accounting for 18.6% of consolidated revenues in 2018**[247](index=247&type=chunk) [Financial Statements and Supplementary Data](index=44&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents selected quarterly financial data for 2018 and 2017, with full financial statements beginning on page 62 Selected Quarterly Financial Data (2018) | (in thousands USD) | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $134,018 | $125,782 | $112,084 | $124,274 | | Gross profit | $21,639 | $17,021 | $15,366 | $11,387 | | Net income/(loss) attributable to parent | $4,312 | $847 | $377 | $(3,159) | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=44&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[251](index=251&type=chunk) [Controls and Procedures](index=44&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2018, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported for Q4 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[252](index=252&type=chunk) - Management assessed internal control over financial reporting using the COSO framework and determined it was effective as of December 31, 2018[256](index=256&type=chunk) [Other Information](index=46&type=section&id=Item%209B.%20Other%20Information) The company reports no other information - None[260](index=260&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=46&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section details the company's directors and executive officers as of December 31, 2018, including the composition and roles of the Board's independent Audit, Compensation, and Nominating Committees - The Board of Directors includes Chairman Hanlin Chen, CEO Qizhou Wu, and three independent directors: Arthur Wong, Robert Tung, and Guangxun Xu[261](index=261&type=chunk)[262](index=262&type=chunk) - The company has standing Audit, Compensation, and Nominating Committees, each composed of the three independent directors, with Arthur Wong chairing the Audit Committee and designated as the financial expert[273](index=273&type=chunk)[274](index=274&type=chunk)[278](index=278&type=chunk) [Executive Compensation](index=50&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation includes base salary, potential performance bonuses, and stock options, with no bonuses awarded in 2018 due to unmet sales growth targets, as detailed in compensation tables Named Executive Officer Compensation (2018) | Name and Principal Position | Year | Salary (USD thousands) | Bonus (USD thousands) | Total (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Hanlin Chen (Chairman) | 2018 | $246 | $ - | $246 | | Qizhou Wu (CEO) | 2018 | $164 | $ - | $164 | | Jie Li (CFO) | 2018 | $98 | $ - | $98 | | Haimian Cai (Vice President) | 2018 | $150 | $ - | $150 | - No performance bonuses were awarded to Named Executive Officers in 2018 as the company's year-over-year sales growth did not meet the **minimum 5% threshold**[289](index=289&type=chunk)[290](index=290&type=chunk) - Independent directors received **$55,998 in aggregate supplemental fees in 2018** for their work on a special committee evaluating a withdrawn privatization proposal[300](index=300&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=53&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section details the company's common stock beneficial ownership as of December 31, 2018, with Chairman Hanlin Chen holding **56.44%** and all directors and executive officers collectively owning **62.37%** Security Ownership of Management (as of Dec 31, 2018) | Name/Title | Total Number of Shares | Percentage Ownership | | :--- | :--- | :--- | | Hanlin Chen, Chairman | 17,849,014 | 56.44% | | Qizhou Wu, CEO and Director | 1,325,136 | 4.19% | | All Directors and Executive Officers (8 persons) | 19,727,051 | 62.37% | [Certain Relationships and Related Transactions, and Director Independence](index=54&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company's related party transactions are disclosed in financial statement notes and are reviewed and approved by the Audit Committee to ensure arm's-length terms - The company has a formal policy for Audit Committee review and approval of related party transactions, ensuring arm's-length terms no less favorable than with unaffiliated third parties[306](index=306&type=chunk) [Principal Accounting Fees and Services](index=54&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) This section details fees paid to PricewaterhouseCoopers for 2017 and 2018 audit and other services, all pre-approved by the Audit Committee Accountant Fees (in thousands USD) | Fee Type | Fiscal Year 2018 | Fiscal Year 2017 | | :--- | :--- | :--- | | Audit Fees | $674 | $708 | | Other Fees | $104 | $80 | | **Total Fees** | **$778** | **$788** | Part IV [Exhibits, Financial Statement Schedules](index=55&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits included in the Annual Report on Form 10-K, such as the auditor's report, consolidated financial statements, and corporate governance documents - The filing includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and related Notes to Consolidated Financial Statements[310](index=310&type=chunk) - Exhibits filed include the Certificate of Incorporation, Bylaws, joint-venture and equity transfer agreements, and Sarbanes-Oxley Act certifications (Sections 302 and 902)[313](index=313&type=chunk) [Form 10-K Summary](index=56&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable to the company - Not Applicable[314](index=314&type=chunk) Financial Statements [Report of Independent Registered Public Accounting Firm](index=59&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers ZhongTian LLP issued an unqualified opinion on the company's 2017 and 2018 consolidated financial statements, affirming fair presentation in accordance with U.S. GAAP, but did not audit internal control over financial reporting - The auditor, PricewaterhouseCoopers ZhongTian LLP, provided an unqualified opinion, stating the financial statements are presented fairly in accordance with U.S. GAAP[319](index=319&type=chunk) - The audit was conducted per PCAOB standards, but the auditor did not express an opinion on the effectiveness of the company's internal control over financial reporting[321](index=321&type=chunk) [Consolidated Financial Statements](index=60&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements present the company's financial position as of December 31, 2018, with total assets of **$690.5 million**, total liabilities of **$385.7 million**, and net product sales of **$496.2 million** Consolidated Balance Sheet Highlights (as of Dec 31, 2018) | Account (in thousands USD) | Amount | | :--- | :--- | | Total current assets | $495,428 | | Total assets | $690,499 | | Total current liabilities | $341,300 | | Total liabilities | $385,672 | | Total stockholders' equity | $304,827 | Consolidated Income Statement Highlights (Year ended Dec 31, 2018) | Account (in thousands USD) | Amount | | :--- | :--- | | Net product sales | $496,158 | | Gross profit | $65,413 | | Operating loss | $(2,908) | | Net income | $79 | | Net income attributable to parent | $2,377 | [Notes to Consolidated Financial Statements](index=66&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures supplementing the consolidated financial statements, covering accounting policies, income taxes, related party transactions, segment reporting, and commitments, including the adoption of ASC 606 - The company adopted **ASC Topic 606** on January 1, 2018, using the modified retrospective method, with management determining an immaterial transition impact on its revenue recognition model[383](index=383&type=chunk)[384](index=384&type=chunk) - The company recognized a **$35.6 million one-time transition tax in Q4 2017** due to U.S. Tax Reform, with a **$29.5 million long-term liability remaining as of December 31, 2018**[489](index=489&type=chunk)[537](index=537&type=chunk) - The company has significant related party transactions, including **$37.6 million in sales and $25.6 million in purchases in 2018**, conducted at fair market prices[554](index=554&type=chunk)[555](index=555&type=chunk)[559](index=559&type=chunk) - As of December 31, 2018, the company had **$43.0 million in non-cancelable commitments**, primarily for **investment contracts ($10.8 million)** and **purchasing/service obligations ($32.2 million)**[571](index=571&type=chunk)

Financial Data and Key Metrics Changes - In Q4 2018, net sales were $124.3 million, down from $143.7 million in Q4 2017, primarily due to a weaker Chinese auto market [14] - Gross profit for Q4 2018 was $11.4 million, compared to $16.5 million in Q4 2017, with a gross margin of 9.2% versus 11.4% in the previous year [14] - For the fiscal year 2018, annual net sales were $496.2 million, slightly down from $499.1 million in 2017, with gross profit decreasing to $65.4 million from $84.6 million [18][19] - Net loss attributable to common shareholders was $3.2 million in Q4 2018, significantly improved from a loss of $39 million in Q4 2017 [17] Business Line Data and Key Metrics Changes - Sales of traditional hydraulic steering products increased by 1.7% in 2018, while electric power steering (EPS) sales declined by $12.8 million to $107.9 million, representing 21.9% of total sales revenue [9] - Research and development expenses were $10.2 million in Q4 2018, up from $9.9 million in Q4 2017, reflecting ongoing investment in EPS technology and advanced driver assistance systems [12][16] Market Data and Key Metrics Changes - In Q4 2018, passenger vehicle sales in China declined by 15.5% year-over-year, with total sales for 2018 at 23.7 million units, down 4.1% year-over-year [7] - Commercial vehicle sales increased approximately 1% year-over-year in Q4 2018, with total commercial vehicle sales for 2018 at approximately $4.4 million, up 5.1% [8] Company Strategy and Development Direction - The company has formed joint ventures to enhance its EPS product offerings and improve market position, including partnerships with KYB Company Limited and Hyoseong Electric Company [9][10] - The company aims to leverage its broad product portfolio and expand its market share in both domestic and international markets, particularly in electric vehicle segments [13] Management Comments on Operating Environment and Future Outlook - Management noted that the slowing GDP growth in China and increased vehicle tax levies have negatively impacted consumer confidence and auto sales [6][8] - The company provided revenue guidance for 2019 of $510 million, reflecting cautious optimism amid ongoing market challenges [20] Other Important Information - As of December 31, 2018, total cash and cash equivalents were $133.5 million, with net cash flow from operating activities at $12.5 million for the year [12][19] - The company has repurchased 146,281 shares for $0.8 million under a repurchase program approved in December 2018 [20] Q&A Session Summary Question: Market share and domestic sales decline - Management acknowledged a 7.5% decline in domestic sales, attributing it to a gap in new model launches and intensified price competition in the mechanical steering sector [21][22] Question: Revenue guidance breakdown - Management indicated that international sales are expected to remain flat year-over-year, with domestic sales making up the remainder, influenced by the U.S.-China trade dispute [23][24] Question: Gross margin decline - Management identified four factors affecting gross margin: pricing decline, increased costs, warranty expenses, and foreign exchange impacts, with plans to adjust pricing and reduce costs to improve margins [25][26] Question: Operating expenses outlook - Management noted that G&A expenses were elevated due to one-time legal costs related to a privatization proposal, which has since been withdrawn, and expects G&A expenses to improve going forward [27][28] Question: Global vehicle supply details - Management provided details on their supply relationships with major automakers in North America and China, including exclusive contracts with Chrysler and Ford [30][31] Question: Electric vehicle programs - Management confirmed involvement in electric vehicle programs, particularly with EPS products, and is exploring partnerships to enhance their offerings in this growing market [34]