American Superconductor Corporation — Form 10-Q Summary
Period clarification: Request metadata identifies 2010 Q3, but the filing reports the unaudited quarter ended June 30, 2011, the company’s fiscal 2011 first quarter. Comparative results are for the quarter ended June 30, 2010. Amounts below are in U.S. dollars.
Business context and reporting period
AMSC provides wind-power engineering, power electronics and grid solutions through its Wind and Grid segments. Effective April 1, 2011, it reorganized from technology-based units into these market-facing segments. The quarter’s results were severely affected by the breakdown in its relationship with Sinovel, historically a major customer.
Key financial metrics
| Metric | Quarter ended June 30, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $9.1 million | $97.2 million |
| Gross margin | (87.2%) | 40.1% |
| Operating income (loss) | ($38.3 million) | $16.1 million |
| Net income (loss) | ($37.7 million) | $9.2 million |
| Basic and diluted EPS | ($0.74) | $0.20 |
| Operating cash flow | ($57.8 million) | ($18.5 million) |
- Wind revenue was $4.3 million, down 95%; Grid revenue was $4.8 million, down 66%. Wind reported a $24.4 million operating loss and Grid a $10.6 million operating loss.
- Cost of revenue was $17.0 million, exceeding revenue by approximately $7.9 million. Management attributed the negative gross margin primarily to lower sales and underabsorbed fixed costs from idle capacity.
- Research and development expense was $8.1 million; selling, general and administrative expense was $22.0 million, up 45%, principally reflecting higher legal costs and former CEO transition expenses.
- Cash and cash equivalents were $130.9 million; marketable securities were $25.9 million and restricted cash was $9.4 million. Combined, these totaled $166.2 million, down $79.3 million from March 31, 2011.
- Total assets were $393.7 million, total liabilities $133.9 million and stockholders’ equity $259.7 million. The company had $4.6 million in line-of-credit borrowings at quarter-end.
- Cash from investing activities was $59.8 million, largely reflecting marketable-security maturities; it included the $20.6 million advance for the planned Switch acquisition. Cash from financing activities was $4.4 million, primarily net line-of-credit borrowings.
- Adverse purchase commitments were $40.3 million, recorded as a liability; the company also recorded $1.1 million of related losses during the quarter.
Material changes versus the prior comparable period
- Revenue fell approximately 91%, and results swung from operating and net income to substantial losses. Sinovel represented 72% of prior-year-quarter revenue but none of current-quarter revenue; AMSC recognized no Sinovel revenue because it received no cash payments from the customer during the quarter.
- AMSC said it had not shipped to Sinovel since February 2011 after Sinovel refused scheduled deliveries and past-due payments. The company stated it was operating on the assumption that Sinovel would not return as a customer.
- Cash used in operations increased to $57.8 million from $18.5 million. Cash, securities and restricted cash declined despite positive reported investing cash flow, which was driven mainly by security maturities.
- AMSC had approximately $225.4 million of backlog excluding Sinovel at June 30, compared with $228.4 million at March 31. Including Sinovel, reported backlog was $925.7 million; fulfillment and revenue realization were uncertain.
Outlook, risks and unusual items
- Outlook and liquidity: Management anticipated a substantial revenue decline and substantial operating cash use in fiscal 2011, ending March 31, 2012. If it received no further Sinovel payments, did not complete the Switch acquisition and did not raise capital, management believed available cash plus further cost and capital-spending reductions could fund operations through at least March 31, 2012. Long-term liquidity depends on profitable revenue growth or additional financing.
- Restructuring: Actions announced in August 2011 eliminated approximately 150 positions; the company said its workforce had been reduced by approximately 30% since April 1. Expected annual savings were approximately $30 million, with estimated restructuring charges of $3 million to $4 million in fiscal 2011’s second quarter.
- Switch acquisition: The agreed purchase price was approximately $273.6 million, comprising a $20.6 million advance already paid, $171.0 million cash at closing and $82.1 million in stock, subject to the agreement’s terms. A financing that leaves at least $100 million of post-acquisition net cash is required for closing. A failed or terminated transaction under specified conditions could result in forfeiture of the advance.
- Financing and credit: A Chinese unsecured credit line of approximately $15.5 million was not renewed after expiring in August 2011. AMSC said additional financing was needed to complete the acquisition while preserving sufficient operating liquidity; availability on acceptable terms was not assured.
- Accounting controls: AMSC had restated prior quarterly statements for revenue-recognition errors involving Chinese customers, including Sinovel, and disclosed unremediated material weaknesses in revenue and receivables controls. Management concluded disclosure controls were ineffective as of June 30, 2011; remediation was ongoing.
- Legal matters: AMSC pursued arbitration and intellectual-property claims against Sinovel in China, alleging unpaid shipments, contract breaches and unauthorized use of software. Securities class actions and shareholder derivative suits also alleged misleading disclosures and related claims. The company said litigation losses could not be estimated and stated it believed the shareholder actions lacked merit.
- Other developments: The CEO changed effective June 1, 2011; the former CEO’s transition agreement included $2.0 million in cash payments and benefits. NASDAQ had notified AMSC of filing-compliance deficiencies; the company reported receiving an exception to regain compliance by September 30, 2011, subject to required filings and confirmation.
Important facts for investors to verify
- Whether Sinovel pays overdue receivables, resumes accepting contracted shipments, or whether the China arbitration and intellectual-property actions produce recoveries or enforceable relief.
- Whether AMSC raises sufficient financing to close the Switch acquisition and retain adequate post-transaction liquidity, and whether the $20.6 million advance remains at risk.
- Actual cash burn, revenue recovery outside Sinovel, backlog conversion and the timing and realized savings of restructuring.
- Progress in remediating revenue-recognition and receivables control weaknesses, and the status and outcome of the related restatements and litigation.
- The extent to which the $40.3 million adverse purchase commitments and other customer or supplier obligations may require further cash payments or charges.