China BAK Battery, Inc. Reports Fourth Quarter and Fiscal Year 2006 Financial Results

China BAK Battery, Inc. ("China BAK", or "BAK") (Nasdaq: CBAK), one of the largest lithium-ion battery cell manufacturers in China and in the world, today announced its financial results for the fourth quarter and fiscal year ended September 30, 2006 ("FY06").

Recent Achievements and Highlights

* Reached agreements with five new OEM customers, including four new

customers for prismatic cells and one new customer for cylindrical

cells, due in large part to the higher quality and process reliability

of our new automated production lines.

* OEM manufacturing facility nearing completion, expected to be completed

in the first quarter of calendar year 2007.

* Repaid $22.5 million in bank loans and arranged for $36.7 million in new

bank loans; $92.9 million available under credit facilities at 2006

fiscal year end.

Fourth Quarter FY06 Financial Results

Revenues for the fourth quarter of FY06 were a record $46.1 million, up 72.3% from $26.8 million in the fourth quarter of fiscal year ended September 30, 2005 ("FY05"), and up 38.1% sequentially from the quarter ended June 30, 2006. Net income was $4.7 million, or $0.10 per diluted share, compared to $4.8 million, or $0.12 per diluted share, in the fourth quarter of FY05, and $4.7 million, or $0.09 cents per diluted share, in the third quarter of FY06. Net income in the fourth quarter of FY06 was adversely impacted by $3.7 million ($0.08 per diluted share) of unexpected pretax non-operating and nonrecurring items.

Nonrecurring items in the quarter include $2.2 million in stock compensation expenses related to the company's adoption of SFAS 123 (R), including $1.6 million related to the termination of the company's stock option plan and grant of certain restricted shares to replace 1.4 million shares of stock options cancelled on September 28, 2006, $1.2 million in non-recurring expenses related to the re-audit of its financial statements for the previous three years by its recently appointed certified independent auditors, and $0.3 million in penalties related to the withdrawal of the effective SB-2 registration statement in connection to its September 2005 equity offering. Based on the re-audit and subsequent restatement of its financial results, the company was required to withdraw its effective SB-2 registration statement in connection to its September 2005 equity offering, resulting in penalties of approximately $0.3 million.

"Operationally, the fourth quarter of FY2006 was the strongest quarter in our history. Revenues increased 72% on a year-over-year basis, and 38% from the prior quarter. After removing the impact of one-time items, our net income was approximately $8.4 million, in line with our expectations," commented Xiangqian Li, China BAK's Chief Executive Officer.

The sequential increase in revenues was largely due to greater demand from existing customers. Sales of steel-case and aluminum-case battery cells, the largest contributors to the company's revenues during the quarter, increased 53.0% and 52.9%, respectively, from the third quarter of FY06. Sales of high-power lithium-phosphate cells increased 15.0% from the third quarter of FY06, and comprised 18.6% of total revenues. Sales of China BAK's new line of cylindrical cells generated $0.5 million in revenues during the quarter.

Gross profit for the fourth quarter of FY06 was a record $11.8 million, up 35.5% from $8.7 million in the fourth quarter of FY05, and up 39.0% from the third quarter of FY06. Gross margin was 25.6% in the fourth quarter of FY06, compared to 32.6% in the fourth quarter of FY2005 and 25.4% in the third quarter of FY06. Gross margin in the fourth quarter of FY06 was adversely impacted by additional qualification and facility certification requirements from potential cylindrical cell customers in the wake of product safety issues and subsequent recalls by a well-known manufacturer of laptop cells. Lower average selling prices and minor increases in manufacturing costs also affected margin.

"Increasing our presence in the OEM market is one of our major initiatives, and we are pleased with the number of high profile customers we have won over the last three months," Mr. Li continued. "We experienced a slow down in the ramp up of our higher-margin production lines given the recent product safety issues and product recalls by a competing manufacturer of laptop cells. However, we believe BAK's automated cylindrical cell production line mitigates some of these safety concerns, which could potentially result in a large number of new customers as manufacturers transition to alternate suppliers."

Operating expenses totaled $5.9 million during the fourth quarter of FY06, up 83.2% from $3.2 million in the fourth quarter of FY05. Operating expenses in the fourth quarter of FY06 include $2.2 million in non-cash, stock compensation expenses related to the adoption of SFAS 123(R), including $1.6 million related to certain restricted shares granted to replace 1.4 million shares of stock options cancelled on September 28, 2006. Operating expenses in the fourth quarter of FY06 also include $1.2 million in non-recurring expenses related the re-audit of the company's financial statements for the previous three years by its recently appointed certified independent auditors, and $0.3 million in penalties related to the withdrawal of the effective SB-2 registration statement in connection to its September 2005 equity offering. Excluding the non-recurring items, operating expenses totaled $2.2 million, down 31.1% from the fourth quarter of FY05.

Research and development and sales and marketing expenses also increased, reflecting additional staff as well as higher depreciation expenses as the company purchased more equipment utilized in the R&D efforts.

Operating income for the fourth quarter of FY06 was $5.9 million, an increase of 7.3% over operating income of $5.5 million reported a year ago. Operating margin for the fourth quarter of FY06 was 12.8%, as compared to 20.5% in the fourth quarter of FY05. Excluding the non-recurring items, operating income and margin were $9.6 million and 20.8%, respectively, in the fourth quarter of FY06.

Net income was $4.7 million in the fourth quarter of FY06, compared to $4.8 million in the fourth quarter of FY05. Diluted earnings per share was $0.10 for the fourth quarter of FY06, compared to $0.12 for the fourth quarter of FY05.

FY06 Financial Results

For the fiscal year ended September 30, 2006, revenues increased 41.1% to $143.8 million, compared to $101.9 million in FY05. Gross profit was $39.6 million, or 27.6% of revenues, compared to $25.9 million, or 25.4% of revenues, in FY05. Operating income was $22.6 million, up 45.8% over operating income of $15.5 million reported in FY05. Operating income for FY06 includes the previously mentioned $3.7 million ($0.08 per diluted share) of pretax non-operating and nonrecurring items. Operating margin was 15.7%, as compared to 15.2% in FY05. Excluding the nonrecurring items, operating income and margin were $26.3 million and 18.3%, respectively, in FY06. Net income was $20.2 million, an increase of 49.4% over $13.5 million in FY05. Diluted earnings per share was $0.41, compared to $0.35 in FY05.

Financial Condition

At September 30, 2006, China BAK had $21.1 million in cash, and working capital of $1.2 million, reflecting a current ratio of 1.01:1. Days sales outstanding (DSO) were 127 for the fourth quarter of FY06, down from 150 days in the fourth quarter of FY05, and down from 156 days in the third quarter of FY06. Total debt, including short-term bank loans and bills payable, stood at $97.1 million. During the fourth quarter, the company repaid $22.5 million in bank loans and arranged for $36.7 million in new bank loans at fixed interest rates. As of September 30, 2006, the company had approximately $92.9 million available under its credit facilities. Stockholders' equity totaled $113.6 million.

Business Outlook

Given the scope and magnitude of a number of pending new business opportunities, the company does not believe it is prudent to give guidance for fiscal 2007 at this time.

"Our outlook for fiscal 2007 is optimistic. Our reputation for high quality and product safety is proving to be a competitive advantage, as more and more OEMs are factoring safety into their qualification requirements. We expect demand for our prismatic cells will continue to experience strong growth. We also anticipate strong demand for our new line of cylindrical cells and we are currently in serious discussions with a number of top tier OEMs. As sales of our newer, more innovative products contribute a larger portion of our product mix, our margins should expand. We believe we are poised to take advantage of the many growth opportunities in our marketplace." Mr. Li concluded.

Conference Call

China BAK Battery Inc. will host a conference call at 8:00 am ET on Monday, December 11, 2006, to discuss results for the fourth quarter and fiscal year ended September 30, 2006. Joining Xiangqian Li, China BAK's President and Chief Executive Officer, on the call will be Yongbin Han, China BAK's Chief Financial Officer, and Dr. Huanyu Mao, China BAK's Chief Operating Officer and Chief Technology Officer. Also participating on the call will be Jim Groh, the company's U.S. based representative. To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (866) 800-8648. International callers should dial (617) 614-2702. The pass code for the call is 23943966. If you are unable to participate in the call at this time, a replay will be available on Monday, December 11 at 10:00 a.m. ET, through Monday, December 18, at 10:00 a.m. ET. To access the replay dial (888) 286-8010 and enter the conference ID number 23943966. This conference call will be broadcast live over the Internet and can be accessed by all interested parties on the CBAK website at http://www.bak.com.cn/. To listen to the live webcast, please go to the CBAK website at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. For those unable to participate during the live broadcast, a replay will be available shortly after the call on CBAK's website for 90 days.

About China BAK Battery Inc.

China BAK Battery, Inc. is one of the largest manufacturers of lithium-based battery cells in China and in the world. It produces battery cells that are the principal component of rechargeable batteries commonly used in cellular phones, notebook computers, cordless power tools and portable consumer electronics, such as digital media devices, portable media players, portable audio players, portable gaming devices and PDAs. China BAK Battery, Inc.'s 1.9 million square feet facilities are located in Shenzhen, PRC, and have been recently expanded to produce new products. China BAK Battery, Inc. is the largest manufacturer of lithium-ion battery cells for China's cellular phone replacement battery market.

Safe Harbor Statement

This press release contains forward-looking statements, which are subject to change. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All "forward-looking statements" relating to the business of China BAK Battery, Inc. and its subsidiary companies, which can be identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties which could cause actual results to differ. These risks and uncertainties include but are not limited to: risks related to our business, risks related to operating in China, risks related to our common stock, and other risks disclosed in the company's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K and other filings. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward- looking statements. The Company's actual results could differ materially from those contained in the forward-looking statements. All information provided in this press release and in the attachments is as of the date of this press release, and the company does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

For more information, please contact:

Company Contact:

Jim Groh

Tel: +1-843-277-0024

Email: jim@BAKbattery.com

Or

Investor Relations Contact:

Crocker Coulson

Tel: +1-646-213-1915

Email: crocker.coulson@ccgir.com

Or

Elaine Ketchmere

Tel: +1-310-477-9800, ext. 119

Email: elaine.ketchmere@ccgir.com

China BAK Battery Inc.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months and Fiscal Years Ended September 30, 2006 and 2005

(Amounts in thousands, except per share data)

Three Months Ended Years Ended

September 30, September 30,

2006 2005 2006 2005

(unaudited) (unaudited)

Revenues $46,108 $26,763 $143,829 $101,922

Cost of revenues (34,292) (18,043) (104,196) (76,047)

Gross profit 11,816 8,720 39,633 25,875

Operating expenses:

Research and

development costs (1,499) (227) (2,935) (542)

Sales and marketing

expenses (1,512) (1,082) (5,055) (3,855)

General and

administrative

expenses (2,921) (1,929) (9,071) (5,994)

Total operating

expenses (5,932) (3,238) (17,061) (10,391)

Operating income 5,884 5,482 22,572 15,484

Finance costs, net (895) (323) (1,888) (845)

Gain on trading

securities - - 279 -

Other expenses (income) (166) (436) (205) (490)

Income before income

taxes 4,823 4,723 20,758 14,149

Income taxes (81) 93 (593) (652)

Net income $4,742 $4,816 $20,165 $13,497

Other comprehensive

income (loss)

- Foreign currency

translation adjustment 1,193 1,004 2,443 1,005

Comprehensive income $5,935 $5,820 $22,608 $14,502

Net income per share:

Basic $0.10 $0.12 $0.41 $0.35

Diluted $0.10 $0.12 $0.41 $0.35

Weighted average shares

outstanding:

Basic 48,879 40,979 48,880 38,289

Diluted 49,076 41,028 48,913 38,409

China BAK Battery Inc.

Consolidated Balance Sheets

(Amounts in thousands)

As of September 30

2006 2005

Assets

Current assets

Cash and cash equivalents $21,100 $33,056

Pledged deposits 12,972 19,392

Trade accounts receivable, net 64,332 43,864

Inventories 47,389 21,696

Prepayments and other receivables 1,134 2,156

Total current assets 146,927 120,164

Property, plant and equipment, net 109,406 65,751

Lease prepayments, net 3,161 3,155

Intangible assets, net 75 53

Amounts due from related parties - 272

Deferred tax assets 86 91

Total assets $259,655 $189,486

Liabilities

Current liabilities

Short-term bank loans $67,900 $39,545

Accounts and bills payable 48,316 45,119

Accrued expenses and other payables 25,881 14,280

Share-based payment liabilities 3,625 -

Total current liabilities 145,722 98,944

Deferred tax liabilities 305 233

Total liabilities 146,027 99,177

Shareholders' equity:

Ordinary shares US$ 0.001 par value; 100,000,000

authorized; 48,878,396 issued and outstanding

as of June 30, 2006 and September 30, 2005 49 49

Additional paid-in-capital 68,127 67,416

Statutory reserves 5,792 3,034

Retained earnings 36,212 18,805

Accumulated other comprehensive income 3,448 1,005

Total shareholders' equity 113,628 90,309

Commitments and contingencies

Total liabilities and shareholders' equity $259,655 $189,486

China BAK Battery Inc.

Consolidated Statements of Cash Flows

For the Years Ended September 30, 2006 and 2005

(Amounts in thousands, except per share data)

Years Ended September 30,

2006 2005

Cash flow from operating activities $20,165 $13,497

Net income

Adjustments to reconcile net income to net

cash provided by/(used in) operating activities:

Depreciation and amortization 5,816 3,581

Bad debt expense (556) 770

Share-based compensation 4,336 -

Deferred income tax 73 98

Changes in operating assets and liabilities:

Trade accounts receivable (19,938) (23,675)

Inventories (25,693) 7,840

Prepayments and other receivables 456 (573)

Accounts and bills payable 4,274 5,005

Accrued expenses and other payables 5,382 1,472

Net cash provided by/(used in) operating

activities $(5,685) $8,014

Cash flow from investing activities

Purchases property, plant and equipment (41,382) (30,594)

Purchases of intangible assets (34) (2)

Net cash used in investing activities $(41,416) $(30,596)

Cash flow from financing activities

Proceeds from borrowings 99,036 63,012

Repayment of borrowings (70,681) (52,583)

Increase in pledged deposits 6,420 (12,272)

Amounts received from related parties 272 639

Repayments to Changzhou Lihai Investment

Consulting Co., Ltd. - (1,812)

Proceeds from issuance of capital stock, net - 55,379

Contribution from shareholders acquiring

shares of BAK International Limited - 11,500

Distribution to shareholders in connection

with acquisition of shares of

China BAK Battery, Inc. - (11,500)

Net cash provided by financing activities $35,047 $52,363

Effect of exchange rate changes on cash 98 62

Net decrease in cash and equivalents (11,956) 29,844

Cash and cash equivalents at the beginning of

period 33,056 3,212

Cash and cash equivalents at the end of period 21,100 33,056

Author:  

Email:    

Topic:    

Content: