American Superconductor Corporation — Form 10-Q summary
Business context and reporting period. AMSC supplies power electronics, engineering and related products for wind turbines and electric grids. Its Wind and Grid segments also include superconductor-based products and services. This unaudited report covers the quarter and six months ended September 30, 2016, the second quarter and first half of fiscal 2017; comparisons are with the corresponding 2015 periods.
Financial performance and position
| Metric | Three months ended Sep. 30, 2016 | Six months ended Sep. 30, 2016 | Prior-year comparison |
|---|---|---|---|
| Revenue | $18.5 million | $31.9 million | Down 3% and 25%, respectively |
| Gross profit / margin | $2.1 million / 11.4% | $3.0 million / 9.3% | Margins were 15.8% and 14.6% |
| Operating loss | $7.2 million | $16.5 million | Prior-year losses were $6.8 million and $15.1 million |
| Net loss | $7.3 million; $0.53 per share | $17.7 million; $1.29 per share | Prior-year losses were $7.7 million and $16.8 million |
| Operating cash flow | Not separately reported for the quarter | $(10.9) million | $(7.8) million in the prior-year half |
- Six-month segment revenue was $18.6 million for Wind, down 41%, and $13.3 million for Grid, up 21%. In the quarter, Wind revenue was $12.9 million and Grid revenue was $5.6 million.
- At September 30, cash and cash equivalents were $25.3 million; restricted cash added $1.4 million. Cash, cash equivalents and restricted cash totaled $26.6 million, down $14.1 million from March 31.
- Inventory rose to $26.4 million from $18.5 million, including higher deferred program costs. Accounts receivable declined to $12.1 million from $19.3 million.
- Total assets were $115.8 million and total liabilities $49.1 million. Reported notes payable, net of discount, totaled $2.1 million, all current; the loans are secured by substantially all company assets. The Term Loan B was scheduled to mature November 1, 2016; Term Loan C was scheduled to mature June 1, 2017.
Changes, outlook and management commentary
- Revenue weakness was concentrated in Wind, reflecting lower Inox license development and royalty revenue, lower first-quarter Inox sales, and lower China spare-parts sales. Grid growth reflected the BASF development agreement and a U.S. Navy project.
- Gross margin fell year over year, which management attributed mainly to lower Wind revenue and royalties. Operating expenses declined; the prior-year half included a $0.7 million impairment of the Tres Amigas investment.
- Management said it expects to use less cash in the second half of fiscal 2017 than in the first half. It stated that available liquidity should fund operations, capital spending and scheduled debt payments for the next 12 months, while emphasizing dependence on revenue growth, cost control, debt-covenant compliance and potential access to additional capital.
- Management attributed higher first-half operating cash use partly to a gap in Inox revenue and collections amid the customer’s working-capital constraints, along with inventory payments made before the company curtailed its electrical-control-system supply chain. Shipments to Inox began returning to more normal levels in the second quarter.
- A December 2015 set of strategic agreements with Inox was valued at approximately $210 million and includes a multi-year supply contract and a limited manufacturing license. Inox accounted for 68% of quarterly and 51% of six-month revenue, creating substantial customer-concentration risk.
- AMSC recorded $0.7 million of inventory write-downs in the first half. Fair-value gains on warrants and derivatives were $1.2 million in the quarter and $0.6 million in the half, driven primarily by changes in the company’s share price; these gains reduced reported losses but are not operating revenue.
Risks, contingencies and other notable matters
- Recurring operating losses and negative operating cash flows continue; accumulated deficit was $945.9 million. Management’s liquidity assessment is subject to execution and financing risks, and it noted that additional capital may not be available.
- The company reported compliance with its loan covenants at September 30, 2016, but warned that a default could allow the lender to accelerate repayment and foreclose on collateral. The loans include a $2.0 million minimum U.S. unrestricted-cash threshold.
- AMSC is pursuing claims against Sinovel in China for unpaid shipments and alleged contract breaches, and in separate proceedings involving alleged software copyright and trade-secret infringement. Sinovel has asserted counterclaims; the company said possible losses could not be reasonably estimated. A Chinese court dismissed the Hainan copyright case in August 2016, and AMSC intended to seek Supreme People’s Court review.
- The company’s $210 million Inox agreement, government-funded grid projects, foreign operations, exchange-rate exposure, product quality and warranty obligations, and reliance on suppliers and collaborators are among the business risks disclosed. The final construction and deployment phase of the ComEd REG project will not proceed unless all parties agree.
- Management concluded disclosure controls were effective as of September 30, 2016, and reported no material change in internal control over financial reporting during the quarter. No subsequent events were reported through filing.
Important facts for investors to verify
- Whether Inox shipments and collections continue to normalize, and how the customer concentration affects revenue, receivables and cash flow.
- Whether AMSC achieves the expected reduction in second-half cash use and maintains adequate liquidity and compliance with loan covenants after the Term Loan B maturity.
- Whether Wind revenue and consolidated gross margin recover, given the first-half decline and inventory build.
- Progress, funding and customer approvals for the BASF, DHS-funded HYDRA/REG and U.S. Navy projects, including whether REG reaches its final deployment phase.
- Developments in the Sinovel proceedings, including the potential outcomes and financial exposure; the filing does not provide a clear estimate of possible losses.