American Superconductor Corporation — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2012. The quarter is the company’s third fiscal quarter; its fiscal year ends March 31. The statements are unaudited.
Business context
AMSC supplies wind-turbine power electronics, designs and services, and grid products and services, including D-VAR systems and superconductor-based solutions. It reports Wind and Grid segments. Management cited challenging wind-market conditions and announced a workforce reduction of approximately 25% on November 28, 2012, following an earlier reduction of approximately 50% during the prior fiscal year.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $17.4 million | $18.1 million | $67.0 million | $47.9 million |
| Gross margin | 5% | (5%) | 20% | (21%) |
| Operating loss | $20.6 million | $26.6 million | $41.7 million | $116.0 million |
| Net loss | $20.1 million | $26.3 million | $46.4 million | $115.7 million |
| Net loss per share | $0.38 | $0.52 | $0.89 | $2.28 |
- Quarterly revenue fell 4%; nine-month revenue rose 40%. In the quarter, Wind revenue decreased 33% to $6.8 million, while Grid revenue increased 34% to $10.6 million. For nine months, Wind revenue increased 27% and Grid revenue increased 58%.
- Gross-margin improvement reflected vendor settlement benefits, including an $8.4 million nine-month recovery on adverse purchase commitments, an approximately $0.8 million benefit from expired warranty liabilities, and higher revenue. The nine-month comparison also benefited from $3.3 million of revenue recognized on cash collection for earlier Chinese shipments, whose costs had been recorded in prior periods.
- Operating expenses declined substantially year over year, including nine-month R&D expense of $11.5 million versus $21.3 million and SG&A of $36.3 million versus $55.0 million. The company continued to report operating and net losses.
- Noncash gains from changes in fair value of derivatives and warrants were $5.2 million in the quarter and $6.1 million for nine months. Interest expense was $4.6 million and $10.2 million, respectively, driven by 2012 debt financing and noncash debt-discount amortization.
- Cash flow: Cash used in operations was $40.7 million for nine months, versus $133.3 million in the prior-year period. Investing activities provided $4.7 million; financing activities provided $32.3 million, including $32.9 million of net debt proceeds. Cash and cash equivalents decreased $3.8 million to $42.5 million.
- Liquidity: Cash, cash equivalents and restricted cash totaled $56.4 million at December 31, 2012, including $14.0 million restricted; there were no marketable securities. Total assets were $225.3 million, total liabilities $90.5 million, and stockholders’ equity $134.8 million.
- Debt: The company had a $25 million 7% senior unsecured convertible note, exchanged in December for a note with a reduced conversion price of $3.19 per share, and a $10 million secured term loan bearing 11% plus any applicable prime-rate increment. Balance-sheet debt carrying values are net of discounts: $11.2 million for the convertible note and $8.5 million for the term loan. The term loan is secured by substantially all company assets and includes a minimum U.S. unrestricted-cash covenant.
Changes, outlook and key risks
- Management expects restructuring to reduce annualized expenses by approximately $10 million and substantially reduce operating cash use during the fiscal year ending March 31, 2013. It said available cash, further cost and capital-spending reductions if needed, and continued stock settlement of convertible-note installments should fund operations and scheduled debt payments through December 31, 2013.
- That liquidity assessment is conditional: the company can pay note installments in shares only if stock-price and trading-volume conditions are met. If they are not met and no lender waiver is obtained, cash payments could leave insufficient funds through December 2013. Management said it had made payments to the lender in shares as of the report date and could not assure future covenant compliance, additional financing, or asset sales.
- The December restructuring produced $2.2 million of quarterly severance charges; a further $4.5 million impairment charge related to certain corporate and Grid assets. Management determined Wind-segment long-lived assets were not impaired.
- Customer concentration is significant: INOX Wind represented 18.9% of quarterly revenue and 17.3% of nine-month revenue; two other customers each exceeded 18% of quarterly revenue. The filing identifies dependence on wind-market conditions, customer demand, suppliers, government funding and the ability to raise capital as risks.
- Material litigation includes disputes with former major customer Sinovel over unpaid shipments, rejected deliveries and alleged intellectual-property misuse. AMSC seeks approximately $76 million in contract-related compensation and has other Chinese IP claims; Sinovel has asserted counterclaims. Outcomes and potential losses are not estimable. Securities and shareholder derivative litigation also remains pending, with loss estimates unavailable. A separate Indian arbitration claim seeks approximately $24 million; AMSC has recorded an immaterial loss contingency.
- Other contingencies include unaccrued vendor safety-stock claims with a stated possible loss range of $0–$2 million. Restricted cash also secured letters of credit; certain collateral was released and returned to unrestricted cash in January 2013.
Investor verification priorities
- Test the liquidity forecast against note-installment equity conditions, cash-payment alternatives, debt covenants and the term loan’s secured status.
- Reconcile reported margin improvement with the $8.4 million purchase-commitment recovery, expired warranty liabilities and revenue from previously shipped Chinese products.
- Track workforce and office-consolidation savings against restructuring cash costs and the announced $10 million annualized expense reduction.
- Monitor customer concentration, Wind and Grid order trends, and the timing and funding of government-supported projects.
- Follow Sinovel, shareholder litigation, vendor claims and the Indian arbitration, including any change in estimated exposure or potential cash requirements.
- Assess dilution from share-based note installments, the lower conversion price, warrants and shares already issued to settle debt and vendor obligations.