A123's 'Positive Developments' Are All Too Predictable

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This story has been updated at the end.

Seems like every time stimulus recipient battery-maker A123 Systems suffers bad news or a stock price hit, its leaders miraculously produce great news via press release that temporarily bumps shares higher.

The latest example came yesterday, when A123 announced a “technological breakthrough” called Nanophosphate EXT that officials claim would reduce or eliminate the need for cooling systems for overheating batteries, and lower the cost of electric vehicle batteries by $600. This followed news that A123 plans to hire 400 employees (125 were laid off in November) in the coming months, thanks to new contracts it has won. Apparently Wall Street was unjustifiably non-skeptical, as heavily subsidized A123 saw its stock price shoot up from $1.04 to $1.58 yesterday. A123 was given $249.1 million in stimulus funds to help launch two battery-manufacturing plants in Michigan, and also received grants and tax credits from the state that could total more than $135 million.

“I think it is a major breakthrough for the technology,” said Jason Forcier, A123’s vice president for automotive solutions, to the Detroit Free Press.

NLPC readers might remember Forcier was one of the company officers that received huge compensation boosts two days after its top customer, Fisker Automotive, announced the Department of Energy halted payments from its $529 million Recovery Act loan award. It turns out Fisker – which to date has only produced a $107,000 electric hybrid sports sedan for the wealthy, the Karma – owed at least part of its predicament to problems with A123’s batteries, which have been the cause of two Karma recalls. The second blunder could not have led to worse publicity, with Consumer Reports trying to test a Karma that clunked due to the battery. In another incident, an A123 battery caused an explosion at a General Motors test facility, seriously injuring at least one person.

Besides those core flaws with its product, A123: is the target of a class action lawsuit from its investors; lost $125 million in the first quarter and has never been profitable; fired 125 employees at the end of last year; and reported to the SEC that its ability to continue as a viable company is “a going concern.” Nevertheless the company’s compensation committee boosted the salaries of three top executives (including Forcier) by an average of 36.6 percent, despite its massive losses and plummeting stock price. In addition, at least two other executives – including CEO David Vieau – received stock and severance boosts should the company transfer ownership.

That appears to be exactly what Vieau and his lieutenants want, as last month they announced that they retained an outside adviser for “evaluation of strategic alternatives.” Undoubtedly they’re looking to sell, if they can get a good price.

But that’s difficult when your product repeatedly fails, or injures people, and you suffer massive losses, and your stock price plummets (it stood at $2.28 when the executives got their pay boost on February 8, and at one time it had traded at over $20 and was near $10 early last year). Shares wallowed below $1.00 for much of April and May, reaching a 52-week low of 82 cents.

Hence the need for positive news, and A123 in recent months has used the media focus on its failings to get it to spur greater attention on more upbeat developments, whether real or manufactured. Yesterday’s “breakthrough” is only the latest instance. 

For example, A123’s stock price at the end of December wallowed between $1.53 and $1.61, a low point for the company. So on January 5 the company announced an agreement to supply batteries for VIA Motors, an electric vehicle company that builds trucks, vans and sport utility vehicles. Voila! Shares surged to $2.43 the following week.

Then in early February Fisker, A123’s top customer, announced layoffs of at least 65 employees and a cutoff of its loan guarantee by the Department of Energy. A123’s stock suffered a one-day drop from $2.47 to $1.88. But then miraculously the battery maker heralded another big contract, this time to supply battery systems for the largest smart grid project in the United Kingdom. Within two business days the share price was back up to $2.13, and hit $2.22 on February 21.

The bad news/good news publicity ploy was again in effect at the beginning of March, when Vieau and company knew they were about to announce huge losses for 2011. So on March 1 and 2, respectively, A123 announced agreements with India’s Tata Motors (the nation’s largest automaker) and with China’s largest automaker, SAIC Motors, to supply batteries and technology. The SAIC deal was nothing new, as A123 was already working with them.

In order to help cover its $68 million in warranty losses due to the Fisker recalls (which also affected four other customers, including Smith Electric Vehicles), A123 raised $50 million in unsecured notes and warrants. A123 has also told media outlets it plans to expand its customer base to become less dependent on the transportation sector, with more products for energy storage and utilities. Economic analysts wonder, though, if too much damage hasn’t already been done.

“If I’m an auto manufacturer and see the sorts of issues A123 is having, I may look to another company, one with more experience,” said Michael Lew, energy creation and energy efficiency analyst for investment firm Needham & Co. “The (quality control) issues were surprising, and there are companies like Johnson Controls and LG Chem that have significant automotive experience coming to market.” Lew’s comments were reported by Crain’s Detroit Business. 

Indeed, A123 executives even doubt the viability of the electric car business. Vieau, blaming part of his company’s struggles on limp EV sales, told the New York Times, “It’s been softer than what we and everyone else expected.” Everyone else? Many, if not most of us, are not surprised.

“As a company we’re not focused on EVs because we have seen a pullback in the marketplace as it relates to EV adoption,” Forcier told the Detroit Free Press. “Focusing on those other customers, that’s really what’s going to be driving the company going forward.”

Is that what President Obama and Energy Secretary Steven Chu, who bet much of the stimulus on electric cars, wanted to hear? Clearly A123 and the administration are (and were) delusional, as there could never be a “pullback” when there was no surge in the first place. 

Now Vieau is talking about A123’s other projects as “a hedge against the market for electric vehicles.” It’s not good when even the battery companies think their top customers have a doubtful future. 

So these executives who padded their parachutes look for someone to bail them out. According to Crain’s, “Forcier said the company will take any offers seriously,” and the news site also reported “a local financial advisory executive, who spoke on the condition of anonymity, said turnaround companies are scrambling to get in the door at A123 to ‘right-size the company and fix its manufacturing processes.’”

Maybe A123’s executives will sell and get their payout, before they have to play the good news-bad news press release cycle again.

Update 1:45 p.m.: Associated Press reports that Wunderlich Securities' Theodore O'Neill -- who said in February that A123 faced a "doomsday scenario" and in April said "People are just looking to get out before (the stock) goes to zero" -- wrote yesterday that new battery technologies are "a dime a dozen."

"We reiterate our 'Sell' rating and our 50-cent price target," he wrote in a note to investors, "which would be zero except that we believe the factory has some residual scrap value."

Paul Chesser is an associate fellow for the National Legal and Policy Center.