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A123 to spend $55m to fix faulty batteries

Fixing latest defect could hurt battery maker

Charles Dharapak/AP/File 2007

A123 chief David Vieau has shown off the firm’s battery technology to presidents Obama and Bush. One analyst said the latest recall could drain company reserves.

Waltham battery maker A123 Systems Inc. said Monday it will spend $55 million to fix a defect in some of the components it produces for car batteries, another setback to a company that recently had millions of dollars in orders canceled by one of its biggest customers.

It was also the second time in about three months that A123 has found a flaw in its automotive batteries, used in several cars, including hybrid BMWs and the all-electric Karma manufactured by Fisker Automotive of Anaheim, Calif. The company’s stock, which peaked above $25 a share in 2009, fell another 21 cents yesterday to $1.49.

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The recall is likely to hurt A123’s financial performance, which has been shaky since Fisker cut its battery orders late last year after saying it would build fewer cars. The loss of business forced A123 lay off a few hundred employees in Michigan, where it manufactures the batteries.

The company - which earned 61 percent of its product revenue from the transportation sector last year - ended 2011 with a net loss of nearly $258 million, according to financial filings, and had roughly $187 million cash on hand.

Before the recall, Theodore O’Neill, an analyst at Wunderlich Securities in New York, said he expected A123 to spend $165 million of its cash this year. The recall, he added, could further drain the company’s reserves, requiring it to raise more money to finance operations, likely by borrowing it.

“Those poor guys,’’ O’Neill said. “It just keeps getting worse.’’

Struggles like those of A123 seem increasingly common in the nascent alternative energy industry, which still has limited markets and depends on government subsidies. Some of those subsidies have been curtailed recently in the face of mounting federal deficits and the high profile failure of Solyndra, a California solar panel manufacturer that has been under federal investigation and owes the United States more than $500 million.

Fisker Automotive, for instance, was recently cut off from hundreds of millions in federal funds because it failed to meet production and sales goals required by a $529 million loan from the Department of Energy. Beacon Power Corp., a Tyngsborough energy storage company, filed for bankruptcy last year and sold its factory to repay $39 million to the government.

A123, meanwhile, received a nearly $250 million grant from the federal government for the manufacturing plant in Livonia, Mich., near Detroit, but has not turned a profit since it began selling stock to the public in 2009.

A123 said it first learned of the problem late last week. Chief executive David Vieau told investors during a conference call Monday that the company is working to replace the defective batteries, which went to five unnamed transportation customers.

The defect, Vieau added, stems from an incorrectly calibrated welding machine that causes a component in the company’s battery cells to be out of alignment, creating the possibility that a battery pack will fail or not work to standard.

“We are certainly disappointed and frustrated by this unexpected situation,’’ Vieau said yesterday. “We continue to believe that we have an innovative technology.’’

The defect is different from a cooling system problem found last year in batteries in several dozen Fisker Karmas. That flaw stemmed from misaligned hose clamps that could cause coolant in the batteries to leak and create a short-circuit. A123 repaired those batteries.

Andrea James, an applied technologies analyst with Dougherty & Co., a Minneapolis investment banking firm, said flaws in new technologies are not unusual and neither are recalls in the auto industry, which often must replace parts or fix defects after cars roll off the line.

Still, the company faces challenges, she said, including whether it will be able to keep up with customer orders because of recent problems.

“Are they going to be able to deliver fully upon their 2012 contracts?’’ James asked. “Or are they going to be so busy doing recalls that they are not going to be able to deliver as they had originally hoped?’’

Erin Ailworth can be reached at eailworth@globe.com. Follow her on Twitter @ailworth.
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