Business context and reporting period
American Superconductor Corporation (AMSC) provides wind-turbine engineering, power electronics and grid solutions through its Wind and Grid segments. This fiscal 2011 second-quarter Form 10-Q covers the three and six months ended September 30, 2011; amounts below are in U.S. dollars unless stated otherwise.
The business was severely disrupted after major customer Sinovel stopped accepting deliveries and paying outstanding amounts. AMSC says it had made no shipments to Sinovel since February 2011 and recognizes no Sinovel revenue for the periods reported.
Financial performance and position
| Metric | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $20.8 million | $29.9 million | $98.1 million; $195.3 million |
| Operating loss | $51.1 million | $89.5 million | Operating income of $13.1 million; $29.2 million |
| Net loss | $51.7 million | $89.4 million | Net income of $7.8 million; $17.0 million |
| Basic and diluted EPS | $(1.02) | $(1.76) | $0.17; $0.37 |
| Gross margin | (5.5%) | (30.3%) | 39.4%; 39.8% |
Revenue fell 79% for the quarter and 85% for the six-month period year over year. Wind revenue was $13.4 million and $17.7 million, respectively; Grid revenue was $7.4 million and $12.1 million. The Wind decline was principally attributed to Sinovel. Grid revenue also declined, mainly from lower HTS and D-VAR sales.
At September 30, 2011, cash and cash equivalents were $93.5 million, marketable securities $5.4 million and restricted cash $9.4 million, totaling $108.3 million, down from $245.5 million at March 31. Current assets were $202.1 million and current liabilities $114.1 million. Total liabilities were $117.5 million; the filing reports no borrowings outstanding at quarter-end. Stockholders’ equity was $208.2 million.
For the six months, operating cash use was $106.9 million, investing activities provided $76.2 million, and financing activities used $0.1 million. Cash and cash equivalents declined by $30.3 million to $93.5 million. Capital expenditures were $7.3 million. The $76.2 million investing inflow mainly reflects maturities of marketable securities.
Material changes versus the prior comparable period
- Revenue and profitability reversed sharply from prior-year income to substantial losses, primarily following the Sinovel disruption and lower Wind sales.
- Gross margin turned negative, which management attributed to lower sales and under-absorbed fixed overhead from idle capacity.
- Cash, cash equivalents, marketable securities and restricted cash decreased by $137.3 million from March 31, 2011. Operating cash use rose substantially from $1.9 million in the prior-year six-month period.
- AMSC recorded a $20.6 million write-off of its advance payment to The Switch and $4.3 million of restructuring and impairment charges. It also reported $3.3 million in Sinovel-related legal fees for the quarter and six-month period.
- Customer concentration shifted: Inox Wind represented 24% of quarterly revenue and Doosan 17%; Sinovel had represented 82% of prior-year quarterly revenue and generated none in the current quarter.
Outlook, risks and unusual items
Management anticipated substantially lower revenue and substantial operating cash use in fiscal 2011, citing weak and uncertain economic conditions, especially in China, and the slowdown in the Chinese wind market. AMSC had eliminated approximately 30% of its workforce since April 1, including about 150 positions under an August restructuring, and expected annualized expense reductions of approximately $30 million. Management believed available cash, together with further cost and capital-spending reductions if needed, would fund operations for at least 12 months. Longer-term liquidity depends on profitable revenue growth or additional capital; financing availability and terms are not assured.
AMSC terminated its planned acquisition of The Switch on October 28, 2011 because financing was not available on acceptable terms amid adverse market conditions. The Switch retained AMSC’s $20.6 million advance as a break-up fee, recorded as an expense in the quarter.
AMSC initiated Chinese legal actions against Sinovel over alleged contract breaches and intellectual-property misuse. AMSC sought approximately $67 million in contract-related damages and specific performance; the value of undelivered contract components was stated as approximately $720 million. Sinovel later counterclaimed, increasing its claim to approximately $157 million, or approximately $89 million net of AMSC’s stated contract claim. AMSC also sought separate damages for alleged copyright and trade-secret infringement. Outcomes and potential losses were not estimable. Securities class actions and shareholder derivative cases were also pending; AMSC said it could not estimate possible losses and intended to defend them.
Other exposures include $34.5 million of adverse purchase commitments, primarily associated with Chinese customer demand, and restricted cash securing letters of credit. AMSC reported disclosure controls were ineffective at September 30 because material weaknesses in revenue recognition and accounts-receivable controls remained unremediated. Management’s remediation efforts were ongoing. Management also cited customer concentration, China-market conditions, litigation, possible future capital needs, and the risk that backlog may not convert to sales.
Backlog excluding Sinovel was approximately $298.2 million at September 30, compared with $228.4 million at March 31. Management cautioned that backlog is not assurance of future revenue.
Most important facts for investors to verify
- Whether AMSC can replace lost Sinovel business and convert the reported backlog into revenue and cash collections.
- Cash burn and liquidity trends, including restricted cash, working-capital requirements, and the timing and realization of expected cost savings.
- Progress and outcomes of Sinovel-related arbitration and intellectual-property cases, Sinovel’s counterclaim, and the securities and derivative litigation.
- Changes in adverse purchase commitments and inventory exposure as customer demand and supplier commitments evolve.
- Whether management remediates the identified material weaknesses and improves revenue recognition and receivables controls.
- Clarification of the fiscal-year revenue and cash-use outlook: the filing describes expected declines and substantial cash use but does not provide a clear numerical forecast.