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GMI Ratings Watchlist Bulletin | A123 Systems Inc.

May 16, 2012 | About:
GMI Ratings

GMI Ratings

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After A123 Systems Inc. wondered about its future on Tuesday and said it’s exploring its options, bargain hunters bought the electric car battery maker’s battered stock. They face ongoing challenges in understanding the value of their shares.

On May 11, CEO David Vieau and his team amended a loan that had provided funds on an as-needed basis. Instead of the earlier borrowing facility, the company can now access up to $15 million of credit by using letters from a bank that are collateralized with cash. A123 noted “substantial doubt” about its ability to continue as a going concern in a regulatory filing Tuesday, and Vieau has hired an outside adviser for help figuring out alternatives such as possible investment partners.

A123’s stock closed at 96 cents per share on Tuesday, 5 cents higher than on Monday. But it’s back down to 93 cents a share intraday on Wednesday.

Anyone poking into A123’s finances must deal with the fact that the company hasn’t always talked about them accurately. On March 11, 2011, the managers said in a regulatory filing that they’d discovered problems in their financial reporting. They said it’s “costly and time-consuming” to make sure they have adequate procedures in place for financial reporting, the effort needs to be evaluated frequently, and there’s a reasonable possibility that A123 won’t prevent misstatements of its results. Also, then-CFO Michael Rubino resigned in January 2011 and during the interim the vice president of finance and corporate controller John Granara had to fulfill his role, which meant the people preparing A123’s annual report for the year ended Dec. 31, 2010, were unfamiliar with how to do so. A123 took steps that year to improve the problems it identified, such as adding resources to its accounting and finance team, documenting more about its financial reporting and eliminating some of the manual elements of its process.

Then the company noted the same problem this March for the year ended Dec. 31, 2011, explaining that after recent management turnover the new finance team still hasn’t had time to reorganize, train employees, and implement new processes. They said those efforts will continue through the fiscal year 2012.

Meanwhile the company’s financial statements have reflected high accounting and governance risk. A123’s AGR score is a 33 as of March, indicating more risk than 67% of comparable companies, and putting it into the aggressive category. This doesn’t mean A123 is necessarily making mistakes, but there are numbers in its statements that merit further investigation. For example, A123’s inventory jumped in value to $103.4 million in the year ended Dec. 31, 2011 from $48.8 million in the comparable period of 2010 and $37.4 million in 2009. Since you have to estimate on your balance sheet what the goods you sell will be worth once you sell them, inventory is easy to falsify or honestly guess wrong.

Prices suggest that many equity investors consider it too costly and time-consuming to decipher A123’s statements. The stock has dwindled from $17 per share on Sept. 24, 2009, when it hit the market in a much-ballyhooed initial public offering.

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Vieau said March 26 that the company had recently discovered a manufacturing defect at its plant in Livonia, Mich., prompting it to ship replacements out to customers at a cost of $55 million. “With our systematic approach to ramping production volumes and anticipated customer demand, we expect to be capacity constrained over the next several quarters,” Vieau said on Tuesday.

Now Vieau is trying to raise $50 million of convertible debt from institutional buyers in a deal that closes this Friday. He’s promising to repay them in July 2013 and to pay 6% interest. Hopefully he’ll be able to communicate with them well about the company’s finances.

Region: North America

Industry: Industrials

Sector: Electrical Components / Equipment

Market Cap: $ 170.4 million (Micro Cap)

ESG Rating: D

AGR: Aggressive (33)

Rating: 2.5/5 (4 votes)

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