China BAK Battery, Inc. (now identified in the request as CBAK Energy Technology, Inc.) — Form 10-Q summary
Reporting period: Fiscal first quarter ended December 31, 2011, compared with the three months ended December 31, 2010. The filing is for China BAK Battery, Inc.; it reports unaudited interim results in U.S. dollars under U.S. GAAP.
Business context and results
The company manufactures and sells lithium-ion batteries and battery packs, with operations primarily in China. Products serve mobile phones and other electronics, as well as power tools and electric vehicles. Revenue remained concentrated in China and in aluminum-case cells and battery packs.
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $71.8 million | $63.5 million | +12.9% |
| Gross profit / margin | $14.0 million / 19.6% | $10.0 million / 15.7% | Margin +3.9 percentage points |
| Operating income (loss) | $2.3 million | $(1.8) million | Improved by $4.1 million |
| Net loss | $(1.8) million | $(3.7) million | Loss narrowed 50.2% |
| Basic and diluted loss per share | $(0.03) | $(0.06) | Improved |
| Operating cash flow | $5.6 million | $18.4 million | Down $12.7 million |
Financial position, liquidity and debt
- At December 31, 2011, cash and cash equivalents were $5.9 million, down from $24.9 million at September 30, 2011; pledged deposits were $5.0 million.
- Current assets were $186.3 million and current liabilities $284.5 million, leaving a $98.2 million working-capital deficit. Total assets were $462.0 million, total liabilities $326.5 million, and shareholders’ equity $135.5 million.
- Short-term bank loans were $130.9 million; long-term bank loans were $28.1 million, including $7.9 million due within one year. The filing also reports $64.6 million of bills payable under credit facilities. Much of the company’s borrowing is secured, and the CEO provides personal guarantees on certain facilities.
- Operating cash flow was positive, but investing activities used $4.2 million and financing activities used $20.4 million. Cash fell by $19.0 million during the quarter. Management attributed lower operating cash flow primarily to settling overdue supplier payables.
- Trade receivables, net, rose to $109.2 million from $88.3 million at September 30, while inventory declined to $55.5 million from $67.1 million. The filing reports a $27.3 million allowance for doubtful accounts.
Changes, outlook and notable items
- Revenue growth came mainly from battery packs, cylindrical cells and aluminum-case cells. Lithium-polymer and high-power battery-cell revenue declined. Management attributed stronger gross margin chiefly to higher cylindrical-cell selling prices and more direct battery-pack sales to OEM customers.
- Operating expenses were broadly flat overall: lower research, sales and marketing, and general and administrative expenses were substantially offset by a $2.7 million impairment charge on property and equipment. General and administrative expense fell in part because bad-debt provision decreased.
- Net loss narrowed despite a $2.1 million income-tax expense, versus a $0.1 million tax benefit in the prior-year quarter. Management said the tax change reflected an increased allowance for deferred tax assets that may not be realized. The effective tax rate was unusually high because of this item.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing working-capital deficiency, recurring losses and significant debt due within one year. Its FY2012–FY2013 turnaround plan targets positive operating cash flow through stronger OEM sales, cost reductions, and tighter receivables controls. Management nevertheless stated it believed available cash and anticipated operating cash flow would meet needs for at least 12 months; financing availability is not assured.
- Management anticipated approximately $20.0 million of capital expenditures for fiscal 2012, mainly for manufacturing equipment and the Shenzhen research and development test center. It also cited competition and a weak global economy as operating challenges.
- Other exposures include $20.6 million of supplier-related guarantees, contingent liability for certain discounted or transferred bills, customer concentration (one customer represented 15% of quarterly revenue; the two largest shown represented 24%), and PRC land-use and property-certificate matters. The filing says the Tianjin facility’s land-use-right extension remained under negotiation, although management considered invalidation risk remote.
- Management reported effective disclosure controls as of December 31, 2011 and no material changes to internal control over financial reporting during the quarter. The filing reported no material legal-proceeding developments or defaults upon senior securities.
Important facts for investors to verify
- Near-term refinancing and repayment capacity, including the status and terms of loans and bills payable due within one year, and whether credit facilities remain available.
- Progress against the turnaround plan, especially recurring positive operating cash flow, receivables collection, and the effect of cost reductions on margins.
- Receivable quality and customer concentration, including the adequacy of the doubtful-account allowance.
- The basis and potential future consequences of the deferred-tax-asset valuation allowance and the quarter’s property impairment.
- Resolution of the going-concern uncertainty, Tianjin land-use extension and property-certificate applications, and any exposure from guarantees or transferred bills.
- The filing contains some inconsistent or unclear loan-facility and maturity details; reconcile the narrative, debt tables and underlying loan agreements before relying on specific facility availability.