Customers using A213 prismatic cells made at other facilities are not impacted. Similarly, the cylindrical cells used by BMW and other transportation customers, as well as for the majority of our grid energy storage systems and commercial applications, are not impacted.

The company anticipates that the cost of replacing the affected customer modules and packs will be approximately $55 million and expects it will be funded over the next several quarters. Although the company has sufficient liquidity to fund this campaign, it expects this situation will require an adjustment in its fund-raising strategy. The company plans to provide an updated outlook during the next quarterly earnings call.

Cause. According to the company, one of four automated tab welding machines in the prismatic cell manufacturing process at the Livonia, Michigan facility was incorrectly calibrated, causing a misalignment of a certain component in some prismatic cells. This defect was undetected by standard visual and electrical inspection.

When the defective prismatic cells were subsequently compressed as part of the module assembly process, a mechanical interference was created between the misplaced component and the foil pouch which contains the cell. In certain cases, this interference breaches the foil pouch electrical insulation causing an electrical short which can cause premature failure of the battery module or pack, leading to decrease in performance and reduced battery life.

A123 says it has isolated the root cause of the defective cells to this single automated welding machine, and has recalibrated it to conform with the other three automated welding machines at the Livonia facility.

The company says that cells made using these other three machines are not defective, giving A123 confidence that it has pinpointed the source of the defect and corrected it.

Recently, A123 has discovered that some prismatic cells made in our Livonia facility may contain a defect which can result in premature failure of a battery pack or module that includes a defective cell. We have isolated the root cause of the defective cells and we are confident that we have pinpointed the source of the defect and corrected it. As a result of engineering analysis and testing, we believe this is not a safety issue, and we have determined the root cause and have taken corrective actions.

We are working to get replacement packs and modules to impacted customers as quickly as possible. It is important to note that this defect has been discovered only in some prismatic cells manufactured at our Livonia facility. Prismatic cells produced at another A123 facility are not impacted. Further, the cylindrical cells we make at our facilities in China for a number of other transportation programs, as well as the majority of our grid energy storage systems and commercial applications, are also not affected by this defect.

In parallel with this field campaign, as we have discussed previously, we continue to implement actions that we believe will improve operations and minimize the possibility of quality issues going forward. This includes hiring a Chief Operating Officer, Ed Kopkowski, who has more than 25 years of global management and operational leadership in improving quality and reducing costs. A123 has produced hundreds of thousands of high-quality prismatic cells at another facility, so while the initial rapid ramp up of our Michigan operations to satisfy customer demand has resulted in near-term operational challenges, we are confident in our ability to overcome these issues. We are devoting our full resources to fixing this situation and moving forward to continue delivering high-quality products to our customers.

—David Vieau, CEO of A123 Systems