A123 says fixes battery problem, shares up 12 percent

Tue May 15, 2012 10:57am EDT

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(Reuters) - Lithium-ion battery maker A123 Systems Inc AONE.O expects production capacity to be constrained over the next several quarters as it recovers from a battery recall but said it has corrected the cause of the defect and that demand remains strong, sending shares up 12 percent.

A123 also said on Tuesday it had not lost any customers due to the defective batteries.

"We felt after the last (earnings) call that we were looking at a very strong year and that campaign has diverted resources that otherwise would have been deployed on many of our growth activities," A123 Chief Executive David Vieau told analysts on a conference call, referring to the recall.

Last week, A123 warned of a huge first-quarter loss due to the recall and said much of the production that would have generated revenue this year will be diverted to replace the possibly defective cells.

The company, which received a $249 million grant from the Obama administration as part of a program to develop advanced batteries, said the cost of recalling the battery packs would be $66.8 million.

A123, which developed as a start-up at the Massachusetts Institute of Technology, said on Tuesday it was restarting production in a controlled manner at the Livonia, Michigan, facility.

Its first-quarter net loss widened to a record $125 million, or 87 cents per share, from $53.6 million, or 51 cents per share, a year ago.

Revenue fell 40 percent to $10.9 million. The company's previous largest loss had been $85 million in the fourth quarter of 2011, when revenue was $40.4 million.

A123 reaffirmed its full-year revenue outlook, which it had cut last week. It expects 2012 revenue in a range of $145 million to $175 million, down from its prior forecast of $230 million to $300 million. A123 executives said most of the revenue will come in the second half of the year.

Vieau said there has been no change in demand and the change in the revenue forecast was mostly due to a shift of those sales to next year. He said A123 will complete shipment of replacement battery packs over the next several quarters.

Chief Financial Officer David Prystash said the company now expects to achieve positive quarterly gross profit margins next year instead of by the end of 2012. It expects positive adjusted operating earnings on a quarterly basis next year as well.

He also said A123 is talking with potential strategic partners, but said it was premature to discuss the timing or size of any investment.

A123 said its current production capacity will be fully used some time next year and it will need additional capacity in the latter part of the year.

The company's federal grant, which has $120 million in remaining proceeds, has been extended by two years to December 2014, Prystash said. A123 also qualifies for tax credits from the state of Michigan totaling $100 million, payable in four annual installments of $25 million starting late next year.

In late March, A123 announced it was replacing battery modules and battery packs that could fail due to a manufacturing defect, which led to a high-profile shutdown of a Fisker Karma electric car while it was being tested by consumer watchdog Consumer Reports. Privately held Fisker is a key customer for A123.

Last November, A123 cut 35 percent of the workers at its Livonia plant because of a drop in Fisker orders.

A123's automotive customers include General Motors Co (GM.N), BMW (BMWG.DE), SAIC Motor Corp (600104.SS), Tata Motors (TAMO.NS), and commercial vehicle maker Smith Electric Vehicles SMITH.O based in Kansas City, Missouri. A123 customers also include major U.S. utility companies in its power grid division.

A123 had said it would show a loss of $51.6 million in warranty expenses from replacing battery packs and modules in the recall campaign for product already in the field. It was also expected to show a cost of about $15.2 million to replace batteries that had been in inventory but not yet shipped.

A123's stock was up 12 percent at $1.02 on Tuesday morning on the Nasdaq.

(Additional Reporting By A. Ananthalakshmi in Bangalore; Editing by Joyjeet Das, Maureen Bavdek and Matthew Lewis)

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