American Superconductor Corporation — Form 10-Q
Reporting period: Quarter and six months ended September 30, 2018 (the second quarter of fiscal 2019). Unaudited results. AMSC supplies wind-power and power-grid products and services through its Wind and Grid segments.
Financial results
| Metric | Three months ended Sep. 30, 2018 | Three months ended Sep. 30, 2017 | Six months ended Sep. 30, 2018 | Six months ended Sep. 30, 2017 |
|---|---|---|---|---|
| Revenue | $14.9 million | $11.0 million | $27.5 million | $20.0 million |
| Gross profit (loss) | $3.6 million | $0.3 million | $7.5 million | $(4.2) million |
| Gross margin | 24% | 2% | 27% | (21)% |
| Operating income (loss) | $24.7 million | $(7.8) million | $19.6 million | $(22.5) million |
| Net income (loss) | $22.6 million | $(7.3) million | $17.8 million | $(22.5) million |
| Diluted earnings (loss) per share | $1.10 | $(0.38) | $0.87 | $(1.26) |
Cash flow and balance sheet: Six-month operating cash flow was $23.6 million, versus $13.5 million used in the prior-year period; investing cash flow was $(0.4) million and financing cash flow was $(0.3) million. The operating cash flow benefited substantially from the Sinovel settlement. For the quarter, AMSC reported non-GAAP operating cash flow of $1.4 million after excluding the settlement proceeds and related tax effects. Cash, cash equivalents and restricted cash totaled $56.3 million at September 30, up from $34.2 million at March 31. AMSC reported no outstanding debt other than ordinary trade payables. Current assets were $86.4 million and current liabilities $26.8 million.
Other measures: Non-GAAP net loss was $2.7 million, or $0.13 per share, for the quarter and $6.1 million, or $0.30 per share, for the six months. The filing reports total stockholders’ equity of $70.6 million and an accumulated deficit of $970.5 million at September 30.
Material changes and drivers
- Revenue rose 35% in the quarter and 38% in the six-month period. Wind revenue increased with higher electrical control system shipments to Inox; Grid revenue increased mainly on higher D-VAR system sales.
- Gross margin improved year over year, which management attributed to higher revenue, a more favorable product mix, lower depreciation and reduced fixed factory overhead.
- Reported operating income includes a $28.7 million net gain from the first Sinovel settlement payment. Excluding that gain, operating results were a loss of approximately $4.0 million for the quarter and $9.1 million for the six months. Thus, reported GAAP profit does not reflect recurring operating profitability.
- Research and development and selling, general and administrative expenses declined year over year. The six-month 2017 comparison included $1.3 million of restructuring charges; 2018 restructuring charges were $0.4 million, primarily facility exit and relocation costs.
- Wind generated segment operating profit of $28.5 million in the quarter, primarily reflecting the Sinovel gain; Grid recorded a $2.9 million operating loss. For six months, Wind segment operating profit was $27.2 million and Grid recorded a $5.5 million loss.
Outlook, risks and contingencies
- Management believes available liquidity is sufficient for operations and capital spending for the next twelve months, but notes that liquidity depends on revenue growth, expense control, collections under the Inox agreements and, if needed, access to additional capital. AMSC has a history of operating losses and negative operating cash flows and may reduce costs or capital spending.
- Sinovel agreed to pay $57.5 million in two installments. AMSC received $32.5 million in July 2018; the remaining $25.0 million is due by May 6, 2019, and is guaranteed by former Sinovel chairman Wenyuan Wei. Nonpayment could materially affect results; recovery and enforcement remain uncertain. The settlement also grants Sinovel a limited, non-exclusive intellectual-property license, which terminates if the second payment is not made on time.
- Customer concentration is significant: Inox represented 45% of quarterly revenue and 36% of six-month revenue. AMSC cautions that delays or weaker execution of Inox’s Indian wind orders could reduce shipments. Remaining performance obligations were approximately $52.5 million expected within twelve months and $7.1 million over months 13–60; timing is subject to customer actions and the near-term amount includes Inox forecast shipments.
- BASF notified AMSC it will not extend its joint development agreement beyond March 3, 2019; AMSC therefore will not receive a $1.0 million payment otherwise expected in 2019.
- Other disclosed exposures include dependence on wind-market incentives, third-party suppliers, U.S. government funding for product development, execution of the facility move, and the risks of commercializing grid and superconductor products. Management said it had no material changes to the other risk factors in its fiscal 2018 Form 10-K. The filing reports no subsequent events.
- AMSC adopted ASC 606 revenue accounting on April 1, 2018 using the modified retrospective method; the opening adjustment and reported-period impact were immaterial. The company is evaluating lease accounting changes expected to take effect April 1, 2019, which management expects will add operating lease assets and liabilities.
Important facts for investors to verify
- Whether Sinovel or its guarantor pays the $25.0 million installment by May 6, 2019, and the related tax and settlement implications.
- Whether Inox converts its reported orders and forecasts into timely turbine deliveries and AMSC shipments; monitor customer concentration and collections.
- Underlying operating performance and cash generation excluding the one-time Sinovel gain, including whether gross-margin improvements persist.
- Whether the stated twelve-month liquidity assessment remains valid given recurring historical losses, capital needs and potential additional financing.
- How the BASF agreement expiration and adoption of lease accounting affect future revenue, cash flows and reported balance-sheet amounts.