American Superconductor Corporation — FY ended March 31, 2011
Reporting period: Annual Form 10-K for the fiscal year ended March 31, 2011. The company calls this “fiscal 2010” in parts of the filing; it is the year shown as 2011 in the financial statements. The filing was late and should be read with the amended quarterly reports for September and December 2010 and the June 2011 Form 10-Q.
Business context and reporting period
AMSC supplies wind-turbine designs, engineering, power electronics and grid products, including superconductor wire and systems. Before April 1, 2011, it reported Power Systems and Superconductors segments; it subsequently reorganized into Wind and Grid.
Revenue was exceptionally concentrated: Sinovel, a Chinese wind-turbine manufacturer, contributed 68% of annual revenue. On March 31, 2011, Sinovel refused scheduled shipments and had stopped paying the company. AMSC says it is operating on the assumption Sinovel will no longer be a customer.
Key financial metrics
| Metric | FY ended Mar. 31, 2011 | Prior year |
|---|---|---|
| Revenue | $286.6 million | $316.0 million |
| Gross margin | (7.5)% | 36.4% |
| Operating income (loss) | $(178.0) million | $38.7 million |
| Net income (loss) | $(186.3) million | $16.2 million |
| Diluted EPS | $(3.95) | $0.36 |
| Net cash from (used in) operations | $(22.8) million | $40.7 million |
| Cash, cash equivalents, marketable securities and restricted cash | $245.5 million | $155.1 million |
| Working capital | $174.6 million | $158.2 million |
| Total assets / stockholders’ equity | $441.2 million / $292.9 million | $400.2 million / $281.0 million |
Investing activities used $104.8 million; financing activities provided $163.1 million, principally reflecting $155.2 million of net proceeds from a November 2010 share offering. Cash and cash equivalents alone were $123.8 million at year-end. The balance sheet shows no funded debt; it reports $148.4 million of total liabilities, including $38.8 million of adverse purchase commitments. By June 30, 2011, cash, securities and restricted cash had fallen to $166.2 million.
Material changes versus the prior comparable period
- Revenue declined about 9%, while reported results swung from profit to a substantial loss. Power Systems revenue fell to $276.4 million from $304.3 million; Superconductors revenue was $10.2 million versus $11.7 million.
- Fourth-quarter charges totaled $155.3 million: $61.2 million for excess and obsolete inventory, $38.8 million for adverse purchase commitments, $50.0 million for goodwill and long-lived asset impairment, and $5.4 million for prepaid value-added taxes. The annual inventory provision was $63.9 million.
- Restatements corrected revenue recognition for certain Chinese customer shipments where prices were not fixed or determinable or collection was not reasonably assured. Revenue was reduced by $3.5 million for the September quarter and $82.6 million for the December quarter; the latter quarter changed from $16.0 million net income to an $18.2 million net loss.
- Reported accounts receivable fell to $17.2 million from $57.3 million; Sinovel represented none of reported year-end receivables. Separately, AMSC cited approximately $62 million of disputed past-due amounts from Sinovel, excluding VAT.
Outlook, risks and unusual items
- Outlook and liquidity: Management anticipated substantially lower revenue and significant operating cash use in the fiscal year ending March 31, 2012. It said available funds, with further cost and capital-spending reductions as needed, would cover requirements through at least March 31, 2012 only if it received no further Sinovel payments, did not complete the Switch acquisition and raised no additional capital. Long-term liquidity depends on profitable growth or additional financing.
- Cost reductions: A restructuring initiated in August 2011 reduced the workforce by about 30%, to 599 employees, with expected annual savings of approximately $30 million and anticipated restructuring charges of $3–$4 million.
- Customer and backlog exposure: Sinovel accounted for 68% of annual revenue. Backlog was $921.5 million including Sinovel, but $228.4 million excluding it; backlog may be delayed, reduced, cancelled or fail to produce profitable revenue.
- Acquisition and funding: The proposed Switch acquisition had an aggregate stated purchase price of about $273.6 million, including cash and stock, and required additional financing while leaving at least $100 million of post-acquisition cash. The $20.6 million advance payment could be forfeited if the agreement terminated under specified conditions. Completion was not assured.
- Controls and reporting: Management and the auditor identified material weaknesses in revenue and receivables controls; disclosure controls were ineffective. Remediation was underway, but the filing gives no clear completion date. The auditor’s financial-statement opinion was unqualified, while its report concluded internal control over financial reporting was ineffective.
- Legal matters: AMSC pursued arbitration and intellectual-property claims against Sinovel and related parties in China. Securities class actions and shareholder derivative suits were also pending; the company said potential losses could not then be estimated.
- Other risks: The business is exposed to Chinese-market and collection risks, foreign exchange movements, supplier dependencies, performance bonds, competition, and uncertainty about commercial-scale production and demand for superconductor products. The Bank of China also declined to renew an approximately $15.2 million credit line.
Important facts for investors to verify
- Whether Sinovel pays the disputed amounts, resumes accepting shipments, or whether any arbitration or IP claims produce recoveries; distinguish claimed amounts from recognized receivables.
- Cash burn and liquidity after June 30, 2011, including the effect of the lost credit line, restructuring savings, and any additional financing.
- The status, financing, closing conditions and termination exposure of the proposed Switch acquisition, including the advance payment.
- Whether the revenue-control material weaknesses are remediated and whether future filings are timely and reliable.
- How much of reported backlog excluding Sinovel converts to revenue and cash, and at what margins.