AMERICAN SUPERCONDUCTOR CORP quarterly report, Q3 FY2021

Full document

American Superconductor Corporation — Fiscal 2021 Q3 10-Q

Reporting period: Three and nine months ended December 31, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.

Business context

AMSC supplies grid-resiliency and power systems, U.S. Navy ship-protection products, and wind-turbine power electronics, designs and services. It reports Grid and Wind segments. On October 1, 2020, AMSC acquired NEPSI, a provider of medium-voltage capacitor and harmonic-filter banks, for $26.0 million cash, 873,657 AMSC shares and contingent consideration tied to future revenue.

Financial performance and position

  • Revenue: Q3 revenue was $23.6 million, up 32% year over year; nine-month revenue was $66.0 million, up 44%. Q3 Grid revenue was $17.1 million and Wind was $6.5 million. NEPSI contributed $6.6 million of revenue from the acquisition date through December 31.
  • Margins and operating results: Gross margin was 17% in Q3 and 22% for the nine months, versus 9% and 15% in the prior-year periods. Operating loss was $9.3 million in Q3 and $15.7 million for the nine months. Net loss was $7.9 million and $15.1 million, respectively, versus $6.8 million and $11.2 million a year earlier. Basic net loss per share was $0.31 for Q3 and $0.65 for the nine months.
  • Non-GAAP results: Non-GAAP net loss was $3.4 million in Q3 and $8.5 million for the nine months, compared with $6.7 million and $14.4 million in the prior-year periods. The company’s measure excludes, among other items, stock compensation, acquisition-related amortization and changes in contingent consideration or warrant fair value.
  • Cash flow: Operating cash used was $4.9 million for the nine months, improved from $17.8 million used a year earlier. Investing activities used $2.6 million, including $26.0 million paid for NEPSI, partly offset by proceeds from marketable securities. Financing provided $50.6 million, principally from the October stock offering.
  • Liquidity and debt: At December 31, cash and cash equivalents were $67.9 million, marketable securities $10.2 million and restricted cash $6.2 million; together these totaled $84.4 million. Current assets were $109.7 million and current liabilities $40.0 million. The balance sheet reports no borrowings; lease liabilities totaled $3.9 million. Management said available liquidity was sufficient for operations and capital expenditures for the next 12 months.
  • Equity and acquisition accounting: The October offering of 3.67 million shares at $15 per share generated approximately $51.5 million net proceeds. NEPSI consideration was preliminarily valued at $42.4 million, including $4.0 million contingent consideration at acquisition; that liability was remeasured to $6.7 million at quarter-end, producing a $2.7 million operating loss. NEPSI acquisition goodwill was $32.9 million.

Changes versus prior comparable periods

  • Revenue growth reflected higher Grid sales, increased Wind electrical-control-system shipments to Inox, and NEPSI revenue. Q3 Grid revenue rose 12% and Wind revenue 144%; nine-month increases were 40% and 62%, respectively.
  • Gross margin improved with higher revenue and a more favorable product mix. Q3 operating loss nevertheless widened, reflecting higher Grid segment losses, increased operating expenses and the $2.7 million contingent-consideration remeasurement loss.
  • Nine-month net loss increased despite improved operating cash use and better non-GAAP net loss. The prior-year period included a $4.6 million gain from a change in warrant fair value that did not recur; AMSC reports no outstanding warrants at December 31, 2020.
  • The nine-month period also included $1.0 million of acquired-inventory fair-value step-up expense and $0.3 million of acquired backlog amortization in cost of revenue.

Outlook, risks and unusual items

  • No specific revenue or earnings guidance is provided. Management’s liquidity assessment depends on revenue growth, collecting amounts due under the Inox agreements, cost control and, if needed, access to additional capital.
  • Inox cured a supply-contract default on October 1, 2020 by delivering the remaining required letters of credit. AMSC cautioned that Inox’s ability to execute wind-turbine orders in India, and the pandemic’s effects, could affect future shipments. Inox represented 24% of Q3 revenue and 12% of nine-month revenue.
  • COVID-19 had not materially disrupted operations to date, according to management, but prolonged shutdowns or customer or supplier disruptions could materially harm results, liquidity and access to capital. Other disclosed risks include recurring operating losses, historical negative operating cash flows, customer concentration, government funding and contract risks, supply-chain dependence, and restricted cash required for letters of credit and performance obligations.
  • The company disclosed an unremediated material weakness in internal control over financial reporting involving NEPSI purchase accounting and ongoing fair-value accounting. Errors by a third-party valuation specialist caused a $1.3 million overstatement of the earnout fair value and preliminary purchase price in earlier acquisition disclosure; AMSC made post-closing adjustments. Management said the current financial statements fairly present results, but disclosure controls were not effective as of December 31, 2020. Remediation is underway.
  • AMSC reported no legal proceedings in Part II and no subsequent events requiring disclosure. The preliminary NEPSI purchase-price allocation remains subject to adjustment.

Important facts for investors to verify

  • Whether Inox maintains contractual compliance and converts its order book into shipments and collected revenue.
  • Whether revenue growth and gross-margin improvement continue as NEPSI is integrated, and how much growth reflects acquisition versus existing operations.
  • Cash use, working-capital movements and the adequacy of the stated 12-month liquidity outlook, particularly given recurring losses and restricted cash.
  • Final NEPSI purchase accounting, contingent-consideration valuation and any further adjustments, including the effect of earnout share issuance on dilution.
  • Progress in remediating the material weakness and whether controls over valuation and acquisition accounting become effective.
  • Execution and timing of the ComEd resilient electric grid project, expected to become operational in 2021, and related performance-bond and restricted-cash requirements.