American Superconductor Corporation — Form 10-Q
Reporting period: Quarter and six months ended September 30, 2012. The company’s fiscal year runs April 1–March 31. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Business context
AMSC supplies power-electronics, engineering and support solutions for wind turbine manufacturers, and power-grid products and services, including D-VAR systems and high-temperature superconducting technologies. It reports Wind and Grid segments.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $20.9m, versus $20.8m in 2011 | $49.6m, versus $29.9m in 2011 |
| Gross margin | 2%, versus (6%) in 2011 | 25%, versus (30%) in 2011 |
| Operating loss | $15.0m, versus $51.1m in 2011 | $21.1m, versus $89.5m in 2011 |
| Net loss | $15.9m, or $0.31 per share | $26.2m, or $0.51 per share |
| Operating cash flow | Not separately presented | Cash used of $23.2m, versus $106.9m in 2011 |
- Six-month revenue increased 66%; second-quarter revenue was essentially unchanged. Six-month Wind revenue rose 61% to $28.5m and Grid revenue rose 73% to $21.1m. In the second quarter, Wind revenue fell 11% to $12.0m, while Grid revenue rose 21% to $8.9m.
- Quarter-end cash and cash equivalents were $49.1m; marketable securities were $5.2m. Including $18.8m of restricted cash, reported cash, securities and restricted cash totaled $73.1m. Management reported $54.4m of cash, cash equivalents and marketable securities, excluding restricted cash.
- At September 30, total assets were $242.3m, total liabilities $97.5m, and stockholders’ equity $144.8m. Current liabilities included $3.6m of current note payable, $6.0m of current convertible note and a $10.3m derivative liability.
- AMSC raised $25.0m principal through 7% senior convertible notes in April and borrowed $10.0m under a secured term loan in June. Net proceeds were $23.2m and $9.7m, respectively. The term loan bears interest at 11% plus any prime-rate excess over 3.75%; both financings have scheduled payments through 2014.
Material changes and unusual items
- Lower operating losses reflected prior cost reductions, including a workforce reduction of approximately 50%, and lower personnel and other expenses. The company had approximately 445 employees at quarter-end.
- Gross-margin improvement was materially affected by vendor settlements that reduced adverse purchase commitment liabilities by $1.0m in the quarter and $8.3m in the six-month period. Six-month results also included approximately $3.3m of revenue from Chinese customers for past shipments, recognized upon cash collection, with related costs recorded in earlier periods.
- The company recorded a $3.3m gain in the quarter and a $0.9m gain for six months from changes in fair value of derivatives and warrants. Interest expense was $2.9m for the quarter and $5.6m for six months, largely reflecting the new financing and related non-cash discount amortization.
- For context, the prior-year comparison included a $20.6m write-off of an advance payment after termination of a planned acquisition, as well as $4.3m of restructuring and impairment charges.
Outlook, liquidity and risks
- Management expects cost reductions and anticipated revenue growth to substantially reduce operating cash use in the fiscal year ending March 31, 2013. It believes available cash, together with further expense and capital-spending reductions if needed, will fund operations, capital expenditures and scheduled debt payments through September 30, 2013. This outlook depends on revenue growth, managing purchase commitments, and maintaining debt-covenant compliance; additional financing may be needed, with no assurance it will be available on acceptable terms.
- AMSC had $12.1m of recorded adverse purchase commitments. Separately, it disclosed a reasonably possible, unaccrued loss of $0–$4m related to vendors’ safety-stock claims, which it disputes. Vendor settlements also involved approximately $9.0m of letters of credit and bank guarantees secured by $8.5m of cash collateral.
- Sinovel disputes include AMSC’s claims for approximately $76m for past shipments and retention, plus claims involving alleged intellectual-property misuse; Sinovel asserted counterclaims, including a claim of approximately $190m in the contract arbitration. AMSC says these proceedings are at early stages and losses cannot be estimated. Securities and shareholder derivative litigation also remains unresolved, with loss estimates unavailable. An Indian customer’s arbitration claim is approximately $24m; AMSC recorded an immaterial loss contingency.
- A November 6, 2012 vendor settlement provides for approximately €2.2m, with AMSC planning to issue 765,301 shares and potentially pay a shortfall in cash by December 31, 2012. A letter of credit securing the obligation is backed by approximately $3.0m of cash collateral.
- Customer concentration was significant: Beijing JINGCHENG represented 26% and INOX Wind 19% of second-quarter revenue. Risks also include China exposure, customer and market adoption, supplier reliance, foreign-exchange movements, and debt covenants. The filing added potential compliance costs and supply-chain risks from conflict-minerals disclosure rules.
Important facts for investors to verify
- Whether revenue growth and cost controls reduce cash burn as management expects, and how much cash is unrestricted and available after collateral requirements.
- Debt payment terms, covenant thresholds, compliance status and potential dilution from the convertible notes and warrants.
- Whether vendor settlements and other purchase commitments require additional cash, shares or collateral, including the disclosed possible $0–$4m safety-stock exposure.
- Developments in Sinovel, securities, derivative and customer litigation, and any resulting effect on cash, operations or intellectual property.
- The durability of reported margin improvement, given the $8.3m six-month purchase-commitment recovery and recognition of revenue for prior Chinese shipments.