A123 Goes on the Auction Block: Here’s How It Got This Bad

[Update 12/10: Chinese firm wins A123 auction, feds must approve deal.]

A123 Systems was supposed to be a leading light in the next phase of clean-energy innovation in the U.S.—hundreds of millions of dollars in federal grants, state-government support in Massachusetts and Michigan, deals to supply the batteries for luxury electric cars.

In 2009, the Waltham, MA-based company registered the country’s biggest IPO, at $371 million. The company’s future, and the road ahead for cleantech manufacturing in the U.S., looked promising.

It didn’t quite work out that way. Today, A123 is in the middle of bankruptcy proceedings, with bids for its assets raising political alarm bells in Washington, DC.

So how did we end up here? It’s hard to pin down a singular cause for A123’s demise. But the company’s early filings in the bankruptcy case lay out a few key moments. It helps illustrate a blow-by-blow account—at least from A123’s perspective—of how the company’s fortunes unraveled so quickly.

Red Ink
A123 has been a big money-loser for a long time, racking up more than $900 million in net losses from 2007 through October, according to the company’s court filings. And the losses had been expanding.

In 2009, the year it was awarded a $250 million Energy Department grant as part of the big federal stimulus program, A123 lost some $87 million. Those losses climbed to $153 million in 2010, and grew again to nearly $258 million last year. Losses through this October were nearly $300 million.

Two Key Customers
A123’s advanced battery technology has all kinds of possible applications, from consumer and heavy-duty commercial vehicle power to supplementing electrical grids. But, although the company has been around since 2001, by the time of its bankruptcy filing, A123 was relying very heavily on just a few customers for the bulk of its revenue.

Court filings show that luxury electric-car company Fisker Automotive and electric-grid servicer AES Energy Storage accounted for half of A123’s revenue in 2011. That lack of diversity came home to roost: In October 2011, A123 says Fisker issued “an unexpected reduction in fourth-quarter orders.”

A123 had previously been projecting at least $210 million in year-end sales, but the Fisker pullback hurt—A123 ended 2011 with revenue of about $159 million instead.

A123 now says its “revenue sources have become more diverse as more of their automotive customers ramp up production and as they continue to grow their business in the grid and commercial markets, but a significant portion of their revenue still comes from a relatively small number of customers.”

Technical Troubles
A123 says that sometime in 2010, it ran into unspecified technical problems as it attempted to scale up production at a Michigan plant that was used to produce a newer kind of automotive battery. “The problems resulted in a higher yield loss in ramp-up production, temporary halts in the production process and distraction of personnel,” A123 says in court filings.

That wouldn’t be the last of the technical stumbles. In December 2011, some of the batteries produced for Fisker were found to be potentially unsafe because hose clamps in the batteries’ cooling systems weren’t aligned properly.

Then, this March, A123 had to start replacing possibly defective automotive batteries produced at its Livonia, MI, factory. The “field campaign” to fix that problem cost the company nearly $52 million, and A123 also had to charge $15 million against its inventory to account for possibly defective batteries.

Because of the incident, “A123 expects to continue to incur significant net losses and negative operating cash flows over the next several quarters.”

A123’s handling of the defective battery problem also has stirred up legal trouble on other fronts. As of late last month, the company was the subject of at least three lawsuits—two in federal court and one in Massachusetts state court—alleging that A123 had been inaccurate or misleading in the way it publicly disclosed the problems with its batteries.

Search for Suitors
With all of those problems as a backdrop, A123 needed cash. In court filings, the company says it came close in February and March of this year, negotiating “definitive agreements with respect to a significant equity investment from a strategic investor.” But that unnamed investor walked away, and A123 went back on the hunt.

An “extensive marketing process searching for potential partners and equity investors as well as entities interested in acquiring some or all of [A123’s] assets” followed, with the company’s agent contacting some 74 parties. Twenty-four of those prospects asked for more information, and 11 went further by conducting confidential due diligence.

The field continued to narrow. “Seven parties visited A123 facilities and received management presentations. Ultimately, however, only one offer … was received to invest in [A123] as a going concern,” the company reports in court documents. It was from Wanxiang Group Corp., a major Chinese auto-parts manufacturer.

Hitting a Wall
The Wanxiang investment may have appeared to be a life-saver. But the deal, worth potentially $465 million to A123, involved several stages—and there were hiccups along the way, according to A123’s court filings.

The company was able to get ahold of an advance of $12.5 million and a letter of credit worth $10 million. But subsequent infusions of cash were tied to closing conditions, some of which had thorny international political implications—notably, approval of the Chinese and American governments.

As of the mid-October bankruptcy filing, “certain of the aforementioned conditions had not been satisfied,” and the rest of the investment and loan package from Wanxiang never arrived, A123 says.

What Now?
Wanxiang is still in the picture, having loaned A123 some $50 million to help finance operations during the bankruptcy period. Wisconsin-based Johnson Controls is the opening bidder ahead of Thursday’s auction, having put together a $125 million proposal for A123’s automotive business.

Wanxiang is still very interested in the company, but it faces political resistance—some members of Congress question the strategic sense of having a foreign-owned company take control of A123, despite the fact that Wanxiang has operated a U.S.-based subsidiary for years.

And the Energy Department has made clear in court filings that its heavy grant funding of A123—about $130 million of the $250 million grant had been spent—leaves the federal government with a say in any sale that comes out of the bankruptcy process.

This one is far from over.

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5 responses to “A123 Goes on the Auction Block: Here’s How It Got This Bad”

  1. Great write up, thanks for posting!

  2. Tom Campbell says:

    Here’s a nutty thought. Let actual investors put their money in rather than taxpayers. The government is not good at picking winners. Investors are slightly better, and come with the distinct advantage of not requiring that taxpayers foot the bill.

    • Curt Woodwardcurtwoodward says:

      A123 did have private investors, including GE, and was a public company after all. The DOE stimulus grants were mostly intended to help build a factory in Michigan – the one where problems cropped up, it turns out. So it was publicly and privately backed.

      • GeneralEmergency says:

        If A123 was in fact a viable concern, then no DOE grant was needed for factory construction. If the DOE grant -was- needed to build a factory, then A123 was -not- a going concern. See how easy that is when you think clearly?

  3. darth says:

    Tom is wrong, the government has done much better than the private sector in picking winners. DOE grants have a very high rate of return.

    See: http://thinkprogress.org/climate/2012/10/16/1020991/clean-energy-highest-rate-of-return-any-federal-program/