CEO Gaffe of the Week: A123 Systems

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 (Nasdaq: 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 (NYSE: GM  ) . You'd think the news might boost A123's near-term outlook, but that really isn't the case. Ford (NYSE: 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 (Nasdaq: 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 (NYSE: 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.

If you'd like a surefire way to avoid investing in companies with questionable leadership practices, I invite you to download a copy of our latest special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report contains a wide array of companies and sectors that are likely to keep your best interests in mind, regardless of whether the market is up or down. Best of all, it's completely free for a limited time, so don't miss out!

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.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2012, at 3:26 PM, devriet wrote:

    Good article. I guess what scares me is the timing of this new break through in battery technology. Sounds like the CEO is looking to go to the well once more.

  • Report this Comment On June 18, 2012, at 5:10 PM, ranger24 wrote:

    I think he has already found a well since he plans on hiring 400 new workers. He should be nominated for something other than a gaffe if he does not already have the financing. We just don't know the details yet.

  • Report this Comment On June 18, 2012, at 9:30 PM, blotwu wrote:

    Though its never prudent to increase your company's labor force by 20% when your future prospects are bleak, another news source is reporting that they were required to increase their workforce to keep federal and state funding. Is it possible Mr. Viaeu is trying to stave off bankruptcy for a few months in the hopes of getting additional funding or getting his product to the point where someone would buy it?

  • Report this Comment On June 19, 2012, at 3:53 PM, SClifford wrote:

    To get more cash . . . A123 is having an emergency stock holders meeting. They're asking stock holders to approve / authorize more stock for sale.

  • Report this Comment On July 20, 2012, at 9:16 PM, Wysenhymer wrote:

    Who's the Fool now, O' Great One? How does it feel to have become toothless? Cackling old hag trapped in a bag, fuming. A123 plays virtuoso on back to back monster sales contracts, having trained employees to dance to the music, cha-ching ding-a-ling. Give yourself a good tongue lashing, while A123 turns sales into check cashing. Crowing and growing.

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