China BAK Battery, Inc. — Form 10-Q Summary
Period: Fiscal first quarter 2013, the three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011. Balance-sheet comparisons are with September 30, 2012. The interim financial statements are unaudited. The filing names the registrant as China BAK Battery, Inc.
Business context and financial performance
The company manufactures and sells lithium-ion battery cells and packs, primarily in China. Management described a shift away from aluminum-case cells and replacement-market sales toward smartphone-related polymer batteries, cylindrical cells, and high-power batteries.
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Revenue | $63.7 million | $71.8 million |
| Gross profit/(loss); margin | ($4.2) million; (6.6%) | $14.0 million; 19.6% |
| Operating income/(loss) | ($15.1) million | $2.3 million |
| Net loss | $25.2 million | $1.8 million |
| Basic and diluted loss per share | $2.00 | $0.14 |
| Net cash from operating activities | $5.9 million | $5.6 million |
| Net cash used in investing activities | $9.9 million | $3.4 million |
| Net cash from/(used in) financing activities | $4.0 million | ($21.3) million |
At December 31, cash and cash equivalents were $9.3 million and pledged deposits were $4.9 million. Current assets were $150.0 million against current liabilities of $336.2 million, a working-capital deficiency of approximately $186.1 million. Short-term bank loans totaled $157.4 million and long-term bank loans $22.3 million. The filing also reports $75.8 million of bills payable under credit facilities. Total liabilities were $393.6 million and shareholders’ equity was $47.6 million.
Material changes and management commentary
- Revenue fell 11.2%, while cost of revenue rose 17.8%, moving gross margin from 19.6% to negative 6.6%. Management attributed the deterioration to lower aluminum-case cell sales and pricing, raw-material and labor costs, competition, and sales of obsolete or low-margin products.
- Aluminum-case cell revenue declined 72.8% to $9.3 million. Battery-pack revenue rose 7.7% to $22.4 million; cylindrical-cell revenue rose 51.1% to $19.6 million; polymer-cell revenue rose to $6.9 million from $2.6 million; and high-power battery revenue rose to $5.4 million from $1.1 million.
- A $7.36 million loss was recognized for a guarantee after Shenzhen Langjin Technology defaulted. After quarter-end, the company paid $2.57 million and expected to pay the remaining approximately $4.81 million in March 2013.
- Cash from operations was supported by improved receivables collections. Investing outflows largely funded construction of the Shenzhen R&D center; capital expenditures were $10.6 million, versus $4.2 million in the prior-year quarter.
- Management estimated fiscal 2013 capital expenditures of approximately $18 million, principally for production equipment and the R&D center. It expected campus construction completion and potential rental income beginning in the third quarter of fiscal 2013.
Outlook, risks, and unusual items
Management’s turnaround plan focuses on expanding OEM sales, reducing manufacturing and operating costs, improving margins, and tightening credit controls. It also anticipated government grant income related to an electric-vehicle battery R&D project. These are expectations, not assurances.
The filing states that recurring losses, accumulated deficit, working-capital deficiency, and substantial short-term debt obligations raise substantial doubt about the company’s ability to continue as a going concern. Management said existing cash and anticipated operating cash flows should meet needs for at least 12 months, but acknowledged that additional financing may be required and may not be available on acceptable terms. The company reported $32.6 million of short-term and $1.8 million of long-term funds available under credit facilities.
Other risks include customer and credit concentration, pledged assets, contingent guarantees, and unresolved property documentation. One customer accounted for 11.92% of quarterly revenue and 16.81% of receivables. The company had guaranteed loans of unrelated parties with a reported maximum exposure of $25.2 million; it also guaranteed related-party borrowing. The filing describes a pending extension for completion of the Tianjin facility and says the Shenzhen R&D center had not yet received its property ownership certificate. Management considered the risk of invalidation of the Tianjin land-use certificate remote. No material legal proceedings were reported. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the company can address its approximately $186.1 million working-capital deficiency and refinance or repay short-term obligations as they mature.
- Whether the Langjin guarantee balance was paid as expected, and the status and recoverability of other guarantees, including related-party guarantees.
- Whether the shift in product mix and planned cost reductions improve gross margins and restore operating profitability.
- Whether receivables are collectible, given the $36.9 million allowance for doubtful accounts and customer concentration.
- Whether the projected fiscal 2013 capital spending, R&D-center completion, grant income, and rental income occur on the stated timeline and support liquidity.
- Whether required property certificates and government approvals are obtained and pledged assets remain available to support financing.