American Superconductor Corporation — Form 10-Q Summary
Business and period: AMSC supplies wind-turbine power electronics, designs and support services, and grid solutions including power electronics, transmission planning and U.S. Navy ship-protection products. This report covers the quarter and nine months ended December 31, 2018 (fiscal 2019 third quarter); comparisons are with the periods ended December 31, 2017. Amounts below are U.S. dollars.
Key financial results
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $14.1 million | $14.9 million | $41.6 million | $34.9 million |
| Gross margin | $3.7 million; 26% | $5.0 million; 34% | $11.3 million; 27% | $0.8 million; 2% |
| Operating income (loss) | $20.8 million | $(3.9) million | $40.4 million | $(26.4) million |
| Net income (loss) | $17.3 million | $(4.2) million | $35.1 million | $(26.8) million |
| Operating cash flow | $24.2 million | Not stated in the provided cash-flow table | $47.8 million | $(20.2) million |
Important earnings qualification: Results include net gains from the Sinovel settlement of $25.0 million for the quarter and $53.7 million for the nine months. Excluding specified unusual and non-cash items, AMSC reported non-GAAP net losses of $2.3 million for the quarter and $8.4 million for the nine months, versus losses of $3.4 million and $26.8 million, respectively, in the prior-year periods. The filing’s non-GAAP reconciliation also adjusts for items including stock compensation, warrant fair-value changes and taxes.
Balance sheet and liquidity: At December 31, 2018, cash and cash equivalents were $80.0 million ($80.2 million including restricted cash), compared with $34.1 million and $34.2 million, respectively, at March 31, 2018. Current assets were $109.2 million and current liabilities $31.5 million. Total liabilities were $39.8 million; the company reported no outstanding debt other than ordinary trade payables. Equity was $88.7 million. The nine-month cash increase principally reflects Sinovel settlement proceeds. AMSC’s non-GAAP operating cash flow, excluding the settlement and specified adjustments, was negative $4.6 million for the nine months.
Changes and operating performance
- Quarterly revenue declined 5%, while nine-month revenue increased 19% year over year. Wind revenue rose 178% for the quarter and 75% for the nine months, driven by increased electrical control system shipments to Inox. Grid revenue fell 45% for the quarter and 5% for the nine months, reflecting lower D-VAR system revenue and lower U.S. Navy project revenue, respectively.
- Quarterly gross margin fell to 26% from 34%, primarily due to less favorable product mix. Nine-month gross margin improved to 27% from 2%, principally because of lower depreciation and fixed factory overhead; the prior-year period included $4.1 million of accelerated depreciation.
- Research and development and selling, general and administrative expenses were lower year over year in both reported periods, primarily due to reduced compensation expense.
- Warrant fair-value changes produced losses of $2.5 million for the quarter and $2.7 million for the nine months, compared with gains in the prior-year periods. These are valuation changes, not operating cash flows.
Outlook, risks and notable items
- Management said existing liquidity was sufficient to fund operations and capital expenditures for the 12 months following issuance of the financial statements. It cautioned that liquidity depends on revenue growth, collecting amounts due under the Inox agreements, cost control and, if needed, access to additional capital. No specific revenue or earnings guidance was provided.
- Inox represented 47% of quarterly revenue and 40% of nine-month revenue. AMSC noted uncertainty about Inox’s execution of Indian wind-auction orders and warned that delays or weaker order execution could reduce shipments. Inox’s first four central SECI auctions generated over 900 MW of orders, with an additional 50 MW from a Maharashtra state auction, according to the filing.
- Sinovel agreed to pay AMSC China the RMB equivalent of $57.5 million in two installments; both had been paid by December 27, 2018. The settlement resolved specified litigation and arbitration proceedings and included a non-exclusive intellectual-property license. AMSC warned that tax authorities could disagree with its tax treatment of the payments, potentially affecting cash flow and financial position.
- AMSC’s ComEd subcontract for a resilient electric grid system is contingent on an amendment to its prime contract with the U.S. Department of Homeland Security. Expected DHS funding is $9–$11 million over the agreement term; AMSC also agreed to provide a $5 million letter of credit. Construction was expected to begin within six months after DHS approval, with the system expected to be operational by 2021.
- BASF notified AMSC it would not extend its joint development agreement beyond March 3, 2019; consequently, AMSC said it would not receive a further $1.0 million payment otherwise due in 2019. Management also cited historical operating losses and negative operating cash flows, customer concentration, wind-market and government-incentive dependence, supplier risks, and uncertainty in converting backlog to revenue.
- Remaining performance obligations were approximately $36.8 million expected to be recognized within 12 months and $12.9 million over months 13–60; timing depends on customer actions. The filing states that lease-accounting adoption was expected on April 1, 2019, with balance-sheet recognition of operating lease assets and liabilities; the final impact was still under evaluation.
Key investor verification points
- Reconcile reported earnings and operating cash flow to the Sinovel settlement, legal costs, tax effects and the company’s non-GAAP adjustments.
- Monitor Inox shipments, order execution, customer concentration and collections, as well as the timing and customer dependencies in remaining performance obligations.
- Verify tax treatment of the Sinovel proceeds and any resulting cash or liability exposure.
- Track DHS approval, funding and letter-of-credit requirements for the ComEd project, and the effect of the BASF agreement’s expiry.
- Assess the expected operating-lease balance-sheet impact and whether AMSC can sustain liquidity without settlement proceeds or additional financing.