China BAK Battery, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012. The financial statements are unaudited and presented in U.S. dollars. The filing identifies the registrant as China BAK Battery, Inc.
Business context
The company manufactures and sells lithium-ion battery cells and packs, principally from operations in China. Its strategy was to expand sales to tier-one OEM customers and develop higher-capacity products, including polymer and high-power cells. Management described the business as in transition from replacement-market sales toward OEM markets.
Financial performance
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Revenue | $46.8 million, down 0.6% year over year | $151.4 million, down 3.8% |
| Gross profit (loss) | $(5.1) million; margin approximately (10.8)% | $5.1 million; margin approximately 3.4% |
| Operating loss | $(24.5) million | $(36.7) million |
| Net loss | $(27.6) million; diluted loss per share $(0.44) | $(45.0) million; diluted loss per share $(0.71) |
| Cash from operating activities | $(2.4) million | $12.4 million |
For the nine-month period, investing cash outflow was $15.9 million, financing cash outflow was $8.2 million, and cash decreased by $11.8 million to $13.1 million. Cash and cash equivalents at June 30 were $13.1 million; pledged deposits were an additional $4.7 million.
At June 30, current assets were $184.9 million and current liabilities were $316.6 million, producing a $131.7 million working-capital deficit. Short-term bank loans were $146.3 million, long-term bank loans were $23.4 million, and bills payable were approximately $66.2 million. The filing reports $40.5 million of remaining availability under short-term credit facilities. Most short-term loans mature within six to twelve months; disclosed interest rates on these loans ranged from 6.14% to 8.53%.
Material changes and operating drivers
- Quarterly revenue was nearly flat, but the company moved from a $3.6 million gross profit in the prior-year quarter to a $5.1 million gross loss. Nine-month gross profit fell from $18.0 million to $5.1 million.
- Management attributed margin deterioration to higher raw-material and labor costs, unprofitable sales in cylindrical and polymer products, lower production yields for polymer cells, and obsolete-inventory write-downs.
- Quarterly cylindrical-cell revenue declined 35.8% year over year; polymer-cell revenue rose 215.5%, and high-power battery-cell revenue increased. For the nine months, cylindrical-cell revenue fell 26.2%, while polymer and high-power cell revenue increased.
- General and administrative expense rose 136.5% in the quarter and 64.7% for the nine months, largely due to higher bad-debt provisions. Nine-month bad-debt expense increased by $8.3 million, and the quarter included a $7.1 million increase in bad-debt provision.
- The company recorded impairment charges of $3.6 million for the quarter and $6.3 million for the nine months; none was recorded in the comparable 2011 periods.
- Cash from operations for the nine months fell from $25.7 million to $12.4 million, which management primarily attributed to settlement of overdue supplier payables. Capital spending was $15.9 million, down from $26.5 million.
Outlook, risks, and contingencies
- Going concern: Management disclosed recurring losses, a working-capital deficit, and significant short-term debt, stating that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Its turnaround plan targets positive operating cash flow in fiscal 2012 and 2013 through OEM growth, cost reductions, and tighter credit controls.
- Liquidity: Management stated that cash and anticipated operating cash flow should meet needs for at least 12 months, while also warning that tight monetary policy could reduce liquidity. It may pursue asset dispositions or additional equity or debt financing; availability and terms are not assured.
- Capital and debt commitments: Contracted capital commitments were $18.9 million. Reported contractual obligations totaled $266.6 million, including short-term loans, bills payable, long-term loans, commitments, and estimated interest.
- Guarantees and bills: Guarantees for non-related parties totaled $34.7 million; no guarantee liability was recognized. The company remained contingently liable for $17.8 million of discounted or transferred bank-acceptance bills if issuers defaulted.
- Other exposures: A 1% increase in interest rates was estimated to increase nine-month pretax loss by approximately $1.7 million. Management estimated that a 5% RMB appreciation or depreciation would change comprehensive income by approximately $6.4 million. The company reported no hedging transactions.
- Listing status: Nasdaq notified the company that its bid price had again been below $1 for 30 consecutive business days. The deadline to regain compliance was November 21, 2012.
- Additional matters: The company was negotiating an extension of the deadline for completing its Tianjin facility; failure to obtain approval could jeopardize the related land-use rights, though management considered that possibility remote. The filing also disclosed $6.3 million of impairment and $4.4 million of inventory-obsolescence provision for the nine-month period.
Management reported that disclosure controls and procedures were effective as of June 30, 2012 and that there were no material changes in internal control over financial reporting during the quarter. No material developments in previously disclosed legal proceedings were reported.
Important facts for investors to verify
- Whether operating cash flow and collections improved, and whether the company could meet near-term loan and bill-payable maturities.
- The collectability and aging of receivables, the adequacy of bad-debt allowances, and the sustainability of inventory valuation and production yields.
- Whether gross margins recovered, particularly in polymer, cylindrical, and prismatic products, and whether OEM growth translated into profitable sales.
- Availability, renewal terms, collateral requirements, and covenant compliance for credit facilities; also the status of the company’s going-concern plan and any new financing or asset sales.
- Whether the company regained Nasdaq’s minimum bid-price compliance by November 21, 2012, and the status of the Tianjin land-use-right extension.