CEO Gaffe of the Week: A123 Systems
Jun 16th 2012 7:37PM
Updated Jun 16th 2012 7:38PM
This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week, I plan to highlight CEO, David Vieau, of A123 Systems (NAS: AONE) , and demonstrate why the company's math may not quite add up.
The dunce cap
I promise you this isn't a personal vendetta against corporate leaders with too many vowels in their last name! Pinkie-swear, even!
The reason A123 and its leader make the cut this week relates to two very different announcements about the company's direction in the past two weeks.
Earlier this week, A123 announced the development of a new revolutionary battery, the Nanophosphate EXT. This battery, according to the company, is capable of operating in more extreme temperatures and costs considerably less than current lithium-ion batteries. With the cooling aspect of lithium-ion batteries accounting for 10% to 20% of their cost, it could lead to considerable savings and, perhaps, a more mainstream adoption of these batteries in cars.
Currently, A123 has contracts in place to provide EV batteries to Fisher Karma, BMW, and General Motors (NYS: GM) . You'd think the news might boost A123's near-term outlook, but that really isn't the case. Ford (NYS: F) shunned A123 in favor of LG Chem for its batteries, and the company's performance became arguably worse after its competitor Ener-1 declared bankruptcy. Worse yet, as the Fool's Tamara Rutter reported, A123 has $249 million in government-backed financing that it may never repay, as the company has yet to turn a quarterly profit at any point in its existence.
According to a few Wall Street research firms, A123 is going to need even more financing if it hopes to roll out its new technology and survive well into 2013. An analyst at Stifel Nicolaus estimates that A123 will need $275 million in additional funding to survive through 2013, while an analyst at Wunderlich Securities estimates that these costs could be as much as $400 million.
With order delays and manufacturing snafus being the norm, A123 never quite hit the ground running as everyone expected. Now facing the serious prospect of a debt default, it seems only logical that A123 would tighten the reins on its spending habits.
To the corner, Mr. Vieau
It would seem logical. I mean, a company that's burned through nearly all of its government funding and cash raised through its IPO shouldn't be on a spending spree ... should it?
Well, get that "bang your head here" stress kit ready, because A123 announced plans to hire 400 additional workers the same day it announced its breakthrough battery technology. That's a 20% increase in the workforce of a company that's profusely burning cash.
What's perhaps unforgivable is that the news of the added expense of 400 workers comes just two weeks after A123 issued the following statement in a filing with the Securities and Exchange Commission:
The company's history and near term forecast of incurring significant net losses and negative operating cash flows raise substantial doubt on the company's ability to continue as a going concern. Management is taking actions to raise additional capital to fund cash requirements and evaluating other strategic alternatives. The company is actively engaged in discussions with strategic partners for substantial investments in the company. In addition, the company is evaluating various options to raise cash in the capital markets.
Seriously? Spending even more when you admit your cash flow is deeply negative is a strategic alternative? I was unaware that corporate suicide was a business tactic. I definitely must have missed that day in my economics classes back in college.
Sarcasm aside, times are very dire for A123. It may have a breakthrough technology, but it has proved time and again that it doesn't have the ability to see its projects through. Its technology might be useful for Tesla Motors (NAS: TSLA) , whose Model S is readying to hit the market. I'm still concerned about whether Tesla can really monetize its EV idea, but A123's batteries, if effective, could knock down Tesla's costs to the point where it could actually be profitable -- something I thought I'd never see. Johnson Controls (NYS: JCI) is another company that could benefit from A123's technology, as it produced nearly $1.1 billion in operating cash flow in the trailing-12-month period -- more than enough to handle the hiccups associated with bringing new technology to market.
In the meantime, we as taxpayers get to decide whether it's worth propping up A123 as it attempts yet again to bring new EV battery technology to market, or whether we're just going to eat the loss and lump it in with other failed green-energy initiatives. Good job, Mr. Vieau!
Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is merciless when it comes to poking fun at CEO antics. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services have recommended buying shares of General Motors, Ford, and Tesla Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never wears a dunce cap.
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