American Superconductor Corporation — Form 10-Q Summary
Business context and period: AMSC supplies wind-turbine power electronics, engineering and support, and power-grid planning and equipment, including superconductor-based products. This unaudited report covers the three months ended June 30, 2013, compared with the three months ended June 30, 2012; balance-sheet comparisons are with March 31, 2013.
Financial performance and position
| Metric | Quarter ended June 30, 2013 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $23.1 million | $28.7 million; down 20% |
| Gross profit and margin | $5.1 million; 22.1% | $11.8 million; 41.1% |
| Operating loss | $8.9 million | $6.1 million |
| Net loss | $10.5 million; $0.18 per diluted share | $10.3 million; $0.20 per diluted share |
| Cash used in operations | $9.3 million | $11.6 million |
| Cash and cash equivalents | $32.6 million | $39.2 million at March 31, 2013 |
| Total cash, cash equivalents and restricted cash | $39.5 million | $50.2 million at March 31, 2013 |
| Total assets / liabilities | $194.2 million / $75.7 million | $216.8 million / $91.6 million at March 31, 2013 |
Wind revenue declined 11% to $14.7 million, mainly on lower Korean customer revenue. Grid revenue fell 31% to $8.4 million, principally because the prior-year period included higher D-VAR revenue from a large Australian project. Beijing JINGCHENG represented 35% of quarterly revenue and INOX Wind 15%, highlighting customer concentration.
Gross margin fell substantially. Management attributed the comparison in part to a $7.3 million benefit from settlement of adverse purchase commitments in the prior-year quarter and to prior-period costs associated with revenue recognized when certain Chinese customers paid for earlier shipments. Selling, general and administrative expense declined 22% to $10.8 million; reported R&D expense declined 23% to $3.0 million. Management cited earlier cost reductions and lower legal costs.
Net cash declined $6.6 million during the quarter. Investing activities provided $3.8 million, largely due to a reduction in restricted cash; financing activities used $1.2 million, primarily for debt repayment. Working capital was approximately $31.6 million at June 30, based on current assets of $99.1 million and current liabilities of $67.5 million. Restricted cash of $6.9 million was not freely available.
Debt included a 7% senior convertible note and an 11%-plus-prime secured term loan. The convertible note’s reported principal outstanding was $14.4 million at June 30; the term loan’s balance-sheet carrying amount was approximately $6.5 million, net of discounts. Note carrying values are reduced by unamortized discounts. Interest expense was $2.1 million, including $1.7 million of non-cash interest and related charges.
Material changes, outlook and risks
- Going concern and liquidity: Recurring operating losses, negative operating cash flows and an accumulated deficit of $810.6 million led management to state that substantial doubt existed about the company’s ability to continue as a going concern. The filing says the financial statements include no adjustments for this uncertainty. Management believed cash and possible additional cost reductions could fund operations and scheduled debt payments through June 30, 2014, but only if its plans succeed.
- Cost actions and financing: In July 2013, AMSC reduced its workforce by approximately 7% and expected about $1.0 million in severance and related charges in the following quarter. Management also planned facility consolidation and further expense or capital-spending reductions if needed. In July, the convertible-note holder converted $4.0 million of the note into common shares. The filing reports no new financing since the approximately $35 million raised in 2012.
- Convertible-note cash risk and dilution: The company intended to make monthly note installments in shares when contractual stock-price and trading-volume conditions were met. If conditions failed and the lender did not waive them, cash payments could be required. Payments in shares and the note’s conversion provisions may dilute shareholders. Management said the principal had been reduced by $10.6 million through June 30 through share payments.
- Potential liquidity sources: AMSC was seeking to sell its minority stakes in Tres Amigas and Blade Dynamics, with a financial adviser engaged, but gave no assurance of a sale or acceptable terms. Separately, the Department of Homeland Security committed an additional $8.6 million to Project HYDRA on July 8, completing its expected project funding; this was a post-quarter development.
- Legal matters and contingencies: A securities class action had reached a settlement in principle, and AMSC recorded a $1.8 million loss contingency. Shareholder derivative suits remained unresolved, with losses not estimable. Sinovel proceedings include AMSC claims for unpaid shipments and alleged intellectual-property infringement, as well as Sinovel counterclaims; the company said it could not estimate potential losses. A separate Ghodawat arbitration hearing concluded in June, with a decision pending.
- Other exposures: Key risks include customer and wind-market dependence, supplier and project execution risks, debt covenants and default provisions, restricted cash, foreign-exchange exposure, and uncertainty around commercialization of superconductor products. Management reported disclosure controls were effective and no material quarter-on-quarter change in internal control over financial reporting.
Guidance: The filing provides no specific revenue or earnings guidance. Management’s outlook is conditional on revenue growth, cost controls, continued ability to service the convertible note in shares, debt-covenant compliance and potential investment sales or additional capital.
Important facts for investors to verify
- Whether operating cash burn declines as management expected, and how much unrestricted cash remains available after restricted balances and debt payments.
- Whether the convertible-note equity conditions continue to be met, whether the lender grants any waivers, and the resulting cash-payment and dilution effects.
- Progress on workforce and facility cost reductions, and whether these actions improve segment operating performance and gross margin.
- Revenue visibility and customer concentration, including the contribution of Beijing JINGCHENG and INOX Wind and the timing of Grid projects.
- Outcomes and potential financial effects of the securities settlement, derivative litigation, Sinovel cases and Ghodawat arbitration.
- Whether AMSC can sell its minority investments on acceptable terms and deliver Project HYDRA and other funded work as planned.