AMERICAN SUPERCONDUCTOR CORP quarterly report, Q1 FY2013

American Superconductor Corporation — Form 10-Q Summary

Reporting period: Three months ended June 30, 2012, compared with the three months ended June 30, 2011. The balance sheet is compared with March 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.

Business context and results

AMSC supplies engineering, products and services for wind power and electrical grids through its Wind and Grid segments. Revenue increased sharply year over year, but the company remained loss-making and dependent on financing, cost reductions and successful execution to support liquidity.

Metric	Q ended June 30, 2012	Prior-year quarter
Revenue	$28.7 million	$9.1 million
Gross margin	41.1%	(87.2%)
Operating loss	$6.1 million	$38.3 million
Net loss	$10.3 million	$37.7 million
Loss per share, basic and diluted	$0.20	$0.74
Cash used in operating activities	$11.6 million	$57.8 million

Financial position and liquidity

• At June 30, cash and cash equivalents were $60.5 million, marketable securities $5.2 million, and restricted cash $21.5 million. Together these totaled $87.1 million; cash, cash equivalents and marketable securities excluding restricted cash totaled $65.7 million.
• Total assets were $264.2 million and total liabilities were $107.8 million. Stockholders’ equity was $156.4 million, down from $164.9 million at March 31.
• Operating cash outflow of $11.6 million and investing cash outflow of $6.8 million were more than offset by $32.9 million of financing inflows. Cash and cash equivalents rose to $60.5 million from $46.3 million.
• AMSC raised $25.0 million in 7% senior convertible notes in April (net proceeds $23.2 million) and borrowed $10.0 million under a secured term loan in June (net proceeds $9.7 million). The notes have a $4.85 initial conversion price and monthly repayments begin four months after issuance; the term loan bears a floating rate starting at 11% and principal repayments follow an interest-only period. The term loan is secured by substantially all company assets.
• Debt carrying amounts, net of discounts, totaled approximately $23.6 million at June 30. Debt discounts drove $2.3 million of non-cash interest expense during the quarter. The company also reported $13.6 million of derivative and warrant liabilities.

Material changes and management commentary

• Wind revenue rose to $16.5 million from $4.3 million, primarily on higher electrical control system shipments to customers in China and India. Grid revenue rose to $12.2 million from $4.8 million, primarily from increased D-VAR revenue.
• Wind reported $1.3 million of operating income versus a $24.4 million loss a year earlier. Grid’s operating loss narrowed to $5.3 million from $10.6 million.
• Management attributed much of the improvement to higher revenue, cost reductions, and a $7.3 million benefit from settlements of adverse purchase commitments. Approximately $3 million of revenue reflected cash collected from Chinese customers for past shipments whose costs had been recorded in prior periods. These items mean the margin improvement may not represent recurring performance.
• Research and development expense fell to $3.9 million from $8.1 million, and selling, general and administrative expense fell to $13.8 million from $22.0 million, reflecting prior restructuring and lower spending. A workforce reduction of approximately 50% had been implemented during fiscal 2012; the company had about 430 employees at quarter end.
• Interest expense was $2.7 million, compared with $0.2 million of interest income a year earlier. A $2.4 million expense from changes in the fair value of derivatives and warrants also affected results, principally reflecting an increase in the company’s share price.

Outlook, risks and contingencies

• Management expected cost reductions and anticipated revenue growth to substantially reduce operating cash use in the year ending March 31, 2013. It believed available cash, together with further cost and capital-spending reductions if needed, would fund operations, capital expenditures and scheduled debt payments through June 30, 2013. This is a forward-looking estimate, not a guarantee.
• Liquidity depends on profitable revenue growth, management of adverse purchase commitments, debt covenant compliance and potential access to additional capital. Management cautioned that additional financing might not be available on acceptable terms or at all.
• The company recorded $17.5 million of adverse purchase commitment liabilities. Separate vendor claims relating to safety stock not supported by valid purchase orders were not accrued; management described a reasonably possible loss range of $0 to $4 million.
• AMSC is pursuing claims against former major customer Sinovel, including approximately $76 million for past shipments and retention and claims relating to contracts and alleged intellectual-property infringement. Sinovel has asserted counterclaims, including a $190 million claim in one contract proceeding and a separate $17 million claim. Outcomes and potential losses could not be estimated.
• In securities litigation, the court dismissed Exchange Act claims against AMSC and its officers on July 26, 2012, but Securities Act claims against them remained. Shareholder derivative actions also remained pending; the company said it could not estimate potential losses. A separate Ghodawat arbitration sought approximately $24 million; AMSC Austria counterclaimed for approximately $9 million, and AMSC recorded an immaterial loss contingency.
• Debt agreements impose operating and financial restrictions and contain default provisions. The term loan requires a minimum U.S. unrestricted cash balance, and default could permit acceleration and enforcement against collateral. A 10% interest-rate change was not expected by management to materially affect results, but the term loan has a floating rate.
• Customer concentration was significant: three customers represented 19%, 15% and 15% of quarterly revenue. Management also identified dependence on China, suppliers, government-funded contracts, wind-market incentives, and successful commercialization and customer adoption as risks.

Most important facts for investors to verify

• Whether revenue growth and improved gross margin persist after excluding the $7.3 million purchase-commitment settlement benefit and revenue from collections on prior shipments.
• Actual operating cash use, unrestricted cash availability, and the amount and terms of any further financing needed to meet the company’s liquidity outlook.
• Compliance with convertible-note and term-loan covenants, repayment schedules, cash-balance requirements and any resulting dilution from stock-settled note payments or warrants.
• Developments in Sinovel and shareholder litigation, including any change in claims, potential exposure or recoverability of amounts sought.
• Whether the $17.5 million adverse purchase commitment liability is sufficient and whether the unaccrued $0–$4 million safety-stock claim exposure changes.
• Revenue dependence on a small number of customers and the sustainability of cost reductions following the workforce and facility restructuring.