Thursday, March 29, 2012

Analyst Downgrades A123 Systems In Light Of Fundraising Challenges

Published March 29, 2012

By Jeff Cobb

After announcing a $55 million recall for Fisker Karma and other supplied batteries, A123 Systems has had a Deutsche Bank analyst cut his recommendation from “buy” for its stock to “hold.”

The New York-based analyst was reported as saying costs to replace all defective battery packs and modules “represents a severe impact” and his confidence in AONE, as the stock is called, is diminished.

"We no longer have enough confidence that AONE can raise sufficient capital (without massive equity dilution) and/or continue to augment their book of future business," Galves wrote. "Recent quality issues may lead to concerns over AONE's ability to manufacture with quality at high volumes, potentially leading to customer defections or at least difficulty in procuring new contracts."

The Massachusetts-based battery maker says the problem was traced to faulty calibration on one of four welding machines at its Livonia, Mich. plant. The problem thus meant misalignment of a component in some cells, Automotive News reports, which could lead to an electrical short, premature failure, or merely decreased performance and battery longevity.

A123 has said it will begin shipping replacement batteries to its customers – including Fisker which experienced a battery failure during a most conspicuous Consumer Reports speed calibration test, and whose whose CEO went on record saying the Karma performed as intended. Within qualified terms, Fisker CEO Tom LaSorda was correct, and the Karma's fault detection system did work as intended, but it has now been determined the battery was defective as first reported.

AONE is trading today at the lowest it has since its September 2009 initial public offering. It closed yesterday at $1.22, and today’s range as of mid-morning is lower still between $1.15-1.21.

This said, the company says its customers – which includes General Motors which intends to use A123 batteries in its 2013 Spark EV – are “supportive,” and their confidence has not been taken away.

"Initial customer response has been supportive as they recognize that we have an enabling and high-quality technology," David Vieau, A123's CEO, said in a statement. "We have demonstrated our ability to strengthen our liquidity through strategic partnerships, and believe we will be successful in fulfilling any necessary funding required to continue the growth of the company."

And fulfilling more funding is something the company will have to do. Vieau vaguely said after the latest $55 million setback, the company will have to readjust its fundraising strategy.

The Deutsche Bank analyst noted that at the end of 2011, A123 had $187 million in cash and faced a cash burn of at least $155 million this year – an estimate made prior to the $55 million setback.

His prediction was that raising an additional $50 million would be “challenging” for A123 due to a variety of market pressures.

In its annual report filed March 12, A123 estimated it may need to borrow as much as $233 million from the U.S. Department of Energy, and it will likely be looking for more funding as it works to replace batteries and repair its reputation.

Automotive News


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