American Superconductor Corporation — Form 10-Q
Business context and reporting period. AMSC supplies wind-turbine power electronics, designs and support services, and power-grid products and services, including high-temperature superconductor technology. This filing covers the quarter and six months ended September 30, 2013 (the second quarter and first half of fiscal 2013). Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Six months ended September 30, 2013 | Six months ended September 30, 2012 |
|---|---|---|---|---|
| Revenue | $24.2 | $20.9 | $47.3 | $49.6 |
| Gross margin | 6.5% | 2.3% | 14.1% | 24.8% |
| Operating loss | $(11.0) | $(15.0) | $(19.9) | $(21.1) |
| Net loss | $(14.6) | $(15.9) | $(25.1) | $(26.2) |
| Net loss per diluted share | $(0.24) | $(0.31) | $(0.42) | $(0.51) |
- Revenue mix: Quarterly Wind revenue rose 22% to $14.7 million; Grid revenue rose 7% to $9.5 million. First-half Wind revenue increased 3% to $29.4 million, while Grid revenue declined 15% to $17.9 million.
- Profitability: Quarterly gross margin improved year over year, partly due to use of previously written-off inventory. First-half margin fell primarily because the prior-year period included an $8.3 million benefit from adverse purchase-commitment recoveries that did not recur, and because of lower collections on certain past Chinese shipments.
- Costs: First-half R&D expense was $6.1 million versus $7.5 million; SG&A was $19.5 million versus $25.5 million. A July workforce reduction of about 7% generated $0.8 million in restructuring charges.
- Cash flow: First-half operating cash use was $14.8 million, versus $25.0 million in the prior-year period. Investing activities provided $3.4 million, primarily from a reduction in restricted cash; financing activities used $2.3 million, including debt repayment.
- Cash and working capital: At September 30, cash and cash equivalents were $25.9 million and restricted cash was $6.9 million, for total cash and restricted cash of $32.8 million, down from $50.2 million at March 31. Current assets were $81.0 million and current liabilities were $55.0 million. Restricted cash is not freely available for general purposes.
- Debt: The company reported approximately $13.7 million of net carrying value for its convertible note and term loan combined. Convertible-note principal outstanding was $10.4 million after $14.6 million of principal reduction through stock payments. The Hercules term loan is secured by substantially all company assets and bears interest at 11% plus any prime-rate excess over 3.75%. First-half interest expense was $5.6 million, including $4.8 million of non-cash interest and related charges.
- Other balance-sheet items: Total assets were $172.5 million, total liabilities $59.7 million, and stockholders’ equity $112.9 million. Accumulated deficit was $825.3 million.
Changes, outlook, and material risks
- The company continued to report recurring operating losses and negative operating cash flows. Management stated these conditions raise substantial doubt about its ability to continue as a going concern. It said funding operations, capital expenditures and scheduled debt payments through September 30, 2014 depends on improved operating performance and additional capital or other funding. The filing references a qualified auditor opinion with a going-concern explanatory paragraph.
- Management expects cost reductions and anticipated revenue growth to reduce operating cash use in fiscal 2013 compared with the prior year. It plans to monitor expenses, potentially further reduce operating costs and capital spending, broaden its customer base, enter new markets and commercialize its superconductor products. No specific revenue or earnings guidance is provided.
- Management is seeking new debt or equity financing and pursuing sales of its minority interests in Tres Amigas and Blade Dynamics, with a financial adviser engaged. There is no assurance that financing or sales will be available on acceptable terms or at all.
- Convertible-note payments may be made in shares only if stock-price and trading-volume conditions are met, or the lender grants a waiver. If not, cash payments may be required. Stock settlement also creates dilution. The debt agreements include restrictive covenants and default provisions that could accelerate repayment or require cash redemption.
- On October 9, 2013, after quarter-end, AMSC amended its arrangements with CVI and exchanged the existing warrant for one with a reduced $2.61 exercise price. The company expected approximately $1.1 million of non-cash interest expense from the warrant amendment in the quarter ending December 31, 2013.
- Two customers represented 55% of quarterly revenue combined (Beijing JINGCHENG 28%; INOX Wind 27%); their combined first-half share was 52%. This concentration creates customer and collection risk.
- AMSC continues to pursue significant claims against Sinovel in China for unpaid shipments, contract breaches and alleged intellectual-property misuse. Sinovel asserted counterclaims, including a $190 million claim in the contract arbitration; AMSC said potential losses could not be reasonably estimated. The company’s claims include approximately $76 million for past shipments and retention, and a separate trade-secret claim of approximately $453 million. These are disputed claims, not recognized assets or assured recoveries.
- The company recorded a $1.8 million contingency for a securities class action with settlement in principle; shareholder derivative matters also reached settlement in principle, with no material contingency recorded. A separate Ghodawat arbitration claim seeks approximately $24 million; AMSC recorded an immaterial loss contingency and asserted a counterclaim of approximately $9 million.
Most important facts for investors to verify
- Whether AMSC can secure financing, sell minority investments, and fund operations and debt obligations through September 30, 2014.
- Whether the stock-price and trading-volume tests or lender waivers will permit continued convertible-note payments in shares rather than cash, and the resulting dilution.
- Revenue and cash-collection trends, particularly dependence on major customers and Chinese business, and whether backlog converts to sales.
- Whether reported margin improvement is sustainable given prior-period purchase-commitment recoveries and zero-cost inventory effects.
- Developments and potential financial consequences of Sinovel, securities, derivative and Ghodawat legal matters, plus the post-quarter CVI warrant amendment.