Tuesday, November 13, 2012

No Battery Producer Left Behind

In late 2009, nine companies in the battery sector were recipients of American Reconstruction and Recovery Act (ARRA) funds awarded by the Department of Energy to jump start manufacturing capacity.  By the end of December 2011, six of them had made enough progress to begin production.  Three were lagging behind, including Exide Technologies (XIDE:  Nasdaq) and its partner Axion Power International (AXPW:  OTC/BB).   

Conventional battery producer and recycler, Exide was awarded $34.3 million by the DOE to advance the production of advanced lead-acid batteries at Exide’s facilities in Bristol, Tennessee and Columbus, Georgia.  The batteries would use lead-carbon electrodes for micro-hybrid applications such as so-called Start-Stop batteries.  By the end of 2011, when the General Accounting Administration last checked in on all the projects funded by Recovery Act funds, Exide had been able to install and commission all the equipment intended for the facility in Columbus.  This is where Exide was to produce its Absorbed Glass Mat (AGM) flat plate batteries.  Exide’s Columbus facility had been a lead recycling plant that was taken out of service in 1999.  It is now part of a larger operation including lead-acid battery manufacturing lines.  The Company has confirmed completion of the new AGM production capacity at Columbus and started shipping out its AGM flat plate batteries in the March 2012 quarter.

When the GAO completed their report, the Bristol facility equipment had been installed and commissioned for production of Exide’s lead-acid batteries, but the company was still validating equipment to be used in production of its Absorbed Glass Mat (AGM) ‘spiral wound’ batteries.  We note Exide is transferring its standard flooded battery production lines to facilities it operates in Salina, Kansas and Manchester, Iowa.  Management refers to these moves as the ‘closure’ of the Bristol facility, but as recently as the Exide’s second fiscal quarter conference call in early November 2012, indicated they are on schedule with installation of a ‘spiral wound’ battery production line at Bristol.  Earlier in 2012, management had expressed confidence in that ‘spiral wound’ AGM batteries will be produced at Bristol yet in 2012 and they have not backed away from that timeline.

Exide is closing certain facilities for the sake of reducing costs.  The company has been historically profitable, although it did report a net loss of $106.5 million on $693.4 million in sales in the June 2012 quarter, after establishing a valuation allowance for future tax allowances of $87.6 million.  Exide has produced positive operating cash flow in each of the last five fiscal years at a rate averaging 3.4% of total sales.   

It is Exide’s partner Axion Power that has real cash flow issues.  The lead-carbon electrodes Exide is using in it AGM batteries is ostensibly based on technology from Axion Power.  The two formed a partnership of sorts in 2009.  Axion has developed advanced ‘five-layer’ electrodes made from micro-porous activated carbon.  Use of Axion’s electrode assembly makes it possible to recharge batteries at a faster rate, a capability particularly for the transportation and industrial batteries Exide produces. 

Axion raised $9.5 million through an offering of common stock in February 2012, bringing to $60 million the total amount of equity capital Axion has raised since inception.  At the end June 2012, Axion had $6.3 million in cash on its balance sheet.  I estimate Axion is burning as much as $2.0 million per quarter.  If I am right, Axion will be out of money by the end of the first quarter 2013.  That is, of course, if its fortunes do not improve. 

In early August 2012, Axion announced a new distribution agreement with Rosewater Energy, which is targeting the residential energy market.  Axion will provide Rosewater with a battery storage and management system complete with electronics.  Axion has received interest from several corners, including Norfolk Southern for an all-electric, battery powered locomotive.  However, the initial order from Norfolk was $475,000 and there is no visibility on future orders from Norfolk or any other rail operator.  The company has also received a consistent flow of orders to its flooded lead-acid batteries over the past year and recently indicated it expects to continue receiving orders at least through the first quarter 2013.

The DOE appears to have made its grants with the idea of leaving no battery producer behind.  However, investors have to wonder about the ability of Axion to keep up when its order flow is sporadic and one of its most important partners is playing it safe in tough demand conditions.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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