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American Superconductor (NASDAQ:AMSC)

Q1 2011 Earnings Call

September 23, 2011 9:00 am ET

Executives

David A. Henry - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Secretary and Treasurer

Daniel Patrick McGahn - Chief Executive Officer, President and Director

Jason Fredette - Managing Director of Corporate Communications

Analysts

Timothy M. Arcuri - Citigroup Inc, Research Division

Theodore R. O'Neil - Wunderlich Securities Inc., Research Division

David Giesecke - Wedbush Securities Inc., Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Paul Clegg - Mizuho Securities USA Inc., Research Division

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Carter W. Driscoll - Capstone Investments, Research Division

Elaine Kwei - Jefferies & Company, Inc., Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

Christopher M. Kovacs - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good day, everyone, and welcome to the American Superconductor's Conference Call. This call is being recorded. [Operator Instructions] With us on the call this morning are American Superconductor’s President and CEO, Daniel McGahn; Senior Vice President and CFO, David Henry; and Vice President of Communications and Marketing, Jason Fredette. For opening remarks, I would like to turn the call over to Mr. Jason Fredette. Please go ahead, sir.

Jason Fredette

Thank you, Christie, and welcome to the call, everyone. We'll be discussing our financial results this morning as well as a separate press release we issued with other business updates and contract wins.

Before we begin, I'd like to note that various remarks management may make on this conference call about American Superconductor’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our annual report on Form 10-K for the fiscal year ended March 31, 2011, which we filed with the SEC earlier today.

These forward-looking statements represent the company’s expectations only as of today and should not be relied upon as representing the company’s views as of any subsequent date to today. While American Superconductor anticipates that subsequent events and developments may cause the company’s views to change, we specifically disclaim any obligation to update these forward-looking statements.

I'd also would like to note that all of our press releases and SEC filings can be accessed on the Investors Page of our website at amsc.com.

And now, I'm going to turn the call over to CEO, Daniel McGahn. Dan?

Daniel Patrick McGahn

Thank you, Jason, and good morning, everyone. I'm happy to be speaking with you again and to be able to do it so soon. We're very pleased to be able to put the financials that we issued this morning behind us and focus our full attention on our future.

On the call today, we'll be providing some perspective on our financial results, we'll talk in greater detail about the actions we have taken to rightsize the business and get back to growth and profitability. We will discuss our strategy to build a stronger, sustainable AMSC. We will share some positive news about recent contracts and other accomplishments, and we'll also provide our near-term financial outlook.

Since we just recently focused an entire conference call on the cases we have brought against Sinovel, we won't be spending a lot of time on this topic today. But I would like to mention one significant update. This morning, the former employee that was arrested in Austria pled guilty to charges that included economic espionage and fraudulent misuse of data. We think it's important to point out that the individual not only admitted to stealing our intellectual property but he also admitted to collusion with Sinovel, and admitted that he was paid by Sinovel for this information. Since his arrest, this individual has been quite cooperative and he has provided us with important information that we have brought to the attention of Chinese courts and law enforcement.

In addition to the amount that he had been paid at the time of his arrest, this individual had employment contracts in place with Sinovel and with related parties totaling well over $1 million. These contracts were among the substantial evidence we have compiled. Obviously, we believe this admission of theft and collusion with Sinovel demonstrates the strength of our case.

I would also like to clarify an additional point. While we are not detailing publicly the amount that we are seeking from Sinovel in our commercial and civil suits, it is safe to say that this amount is significant. To date, Sinovel currently owes us $250 million for past shipments and shipments that they're contractually bound to accept to date. On top of this, there are future shipments covered under our existing contracts, vendor liabilities that we will discuss in a few moments and of course, damages for our stolen intellectual property.

So let's move on to our other updates today starting with our restatements and results. I'd like to start by publicly acknowledging the contributions of our financial organization, which has been working around-the-clock in recent months to get current with our SEC filings. We're all happy to have completed this work and get back into compliance with SEC regulations. And in doing so, we believe we'll be also back in compliance with NASDAQ listing standards. It's been a difficult time for us all. We're very happy to look forward to our bright future.

In terms of the financials, we reported fiscal 2010 revenues of approximately $287 million. This figure excludes approximately $77 million in shipments that we made to Sinovel and other Chinese customers that remained unpaid as of the end of our fiscal year.

We reported a net loss of approximately $186 million for the year or $3.95 per diluted share. Of this total, nearly $159 million was related to impairments, one-time asset write-downs and accrued charges that were closely tied to our situation with Sinovel. All of these charges are onetime in nature.

Our first quarter revenue was approximately $9 million, which is down significantly both sequentially and year-over-year. The decline was primarily the result of a lack of shipments to Sinovel, but it was also related to abnormally low contributions from other Wind and Grid customers.

On the Wind side, we didn't make any shipments to Chinese customers in the first quarter, while shipments to customers and other countries temporarily slowed. On the Grid side, our D-VAR business has always been a bit lumpy and the first quarter just happened to be weaker quarter than normal. This is not indicative of our business going forward. Based on our backlog, we are confident that we will generate solid increases in revenue for both our Wind and Grid businesses in the second quarter. This will be our first step on our path to profitability. We turn this quarter once, we will turn it again, but this time our profitability will be sustainable.

As of June 30, our cash, cash equivalents, marketable securities and restricted cash stood at approximately $166 million. This was down from $245 million as of March 31. The cash usage was the result of 4 factors: first, we made an advance payment of more than $20 million for our proposed acquisition of The Switch; second, we paid down nearly $20 million in supply-chain liabilities that were tied to components that were intended for Sinovel; third, we incurred expenses for employee severance, legal and audit work that were higher than normal; and this contributed to the fourth factor, which is our loss from operations.

Clearly, cash is a key focus for us. So as I took over as CEO in June, we've taken action to reduce costs and slow our cash burn, and we'll continue to monitor our expense levels closely.

Now let me walk you through a few ways that we're streamlining and strengthening our business. First, we have flattened the organization by removing layers of management. Today, our organization is much leaner than it was at the start of the fiscal year. I believe that this will provide several key benefits. For instance, it will provide greater visibility throughout our company, allowing us to accelerate our decision-making. It will allow us to be more nimble and flexible as we see emerging opportunities and most importantly, it will allow us to better support our customers and anticipate their above needs rather than just responding to them.

Our business segments are now structured around core markets, namely Wind and Grid, and their value proposition across each of these markets is quite compelling. What is our value proposition? Well, in the wind market, wind turbine manufacturers rely on us for both proven and advanced wind turbine platforms and power electronics. We play a key role in helping them capture market share and differentiate themselves from their competitors. And in the grid market, companies rely on us, both to integrate renewables with high reliability and upgrade power networks with proven voltage stabilization products and transmission and distribution solutions.

In more general terms, our business is about lowering the cost of energy and enhancing power reliability.

Now let's spend some time discussing our strategic priorities in the wind and grid markets. Our business strategy in Wind is focused on 3 areas of internal investment and business growth. First, we are working closely with our partners in China to maximize their market share; second, we are working with our partners across other Asian countries to establish both local and global reach for their own businesses; and finally, we're continuing to develop high-quality, next-generation wind turbine platforms for use worldwide, both onshore and offshore.

As we said on our call last week, China has played a key role in AMSC's Wind business and we believe this will continue. Wind installations in China are expected to decline year-over-year in 2011. However, we believe it will remain by far the largest wind market in the world. So we fully intend to nurture and grow our many valued relationships in China. We remain strongly committed to Chinese wind customers, like Dongfang, XJ Group, Shenyang Blower Works and JCNE.

I am pleased to share the news today that we signed a new multi-year order with JCNE. They are respected, existing player who engaged us to upgrade and expand their multi-megawatt wind turbine platforms. Shipments of full electrical control systems for the 2-megawatt wind turbines we've licensed to JCNE are expected to begin late this calendar year and conclude in calendar year 2014 under this new contract. And of course, we will require payment upfront with this in all Chinese customers prior to any shipment. While China has been the catalyst for our past growth, we expect our success going forward to be driven by a more diverse space of customers across a broad spectrum of geographies.

In the broader Asian wind market, there are some other good news this morning. We have signed new electrical control system contracts with both Inox Wind in India and Hyundai Heavy Industries in Korea. Customers like Inox and the Hyundai Heavy and one of our other Korean customers, Doosan, collected AMSC because we are able to provide them with advanced engineering, strong support services and differentiated high-quality products and technology. These customers are expected to be key contributors to our revenue going forward.

And finally, outside of Asia, we also see substantial opportunities in Western markets. The focus here will be on providing multi-megawatt wind turbine platforms utilizing advanced solutions. Manufacture seeking differentiated technology with best-in-class performance will continue to choose AMSC, and we expect the offshore wind market to be one of our key growth drivers. With its advanced drive-train solutions, The Switch fits well with this strategy. We are already collaborating with The Switch today, and we continue to explore financing options to complete the acquisition while also keeping our shareholders' best interest in mind.

On the Grid side of our business, our strategy also focuses on 3 key areas of growth. First, we're focused on maximizing market share for our voltage stability and wind farm grid interconnection solutions; second, we intend to take advantage of the demand for multi-megawatt solar grid interconnection products; and finally, we continue to build on the successes we have already achieved in Korea with our cable and wire solutions.

Our first part of the grid strategy revolves around our D-VAR voltage stability solution, which has been and continues to be a market leader. Customers rely on this product for many reasons: it allows utilities to carry more power over their existing transmission and distribution assets; it enables wind farm developers to interconnect their renewable power to the grid in a reliable manner; and they can improve power quality for industrial manufacturers.

In recent months, we have signed new D-VAR deals with electric utilities in the U.S. We also have signed a number of contracts to provide D-VAR system's to interconnect renewable power plants to the grid in both the U.S. and Europe.

Our second strategy in our Grid business is focused on investments that we're making in our SolarTie system. Rather than purchasing in inverters and voltage stability systems separately, customers can rely on our SolarTie system to meet virtually all of their grid interconnection needs. The result, less complexity and lower overall costs.

While the solar market in general has been challenging in recent months, the market for utility scale solar continues to grow significantly. In its latest report, industry experts, IMS Research, projected that the amount of annual utility scale solar installations would roughly quadruple from nearly 3 gigawatts in 2010 to more than 11 gigawatts in 2015, and we believe each of these installations would benefit greatly from a product like SolarTie. We also continue to make solid progress with our wire and cable solutions.

I am very pleased that in recent weeks, we have begun shipping wire under the multi-year order we signed in late 2010 with LS Cable in Korea. This shipment was made ahead of schedule at LS Cable's request. They needed the wire so they could begin qualification work on their next superconductor cable projects with Korea electric power Corporation, or KEPCO. Our ability to meet this acceleration in demand reflects well on our industry-leading manufacturing capability and our relationships with KEPCO and LS Cable.

All of our Wind and Grid strategies and each of our recent orders are aimed at diversifying our customer base and our revenue mix. The team here has made grid progress and we have a bright future ahead. We recognize our near-term challenges, and we believe we have the strategy and the team we need to build a stronger, more sustainable AMSC.

Now I would like to turn the call over to Dave to review the financials in more detail. Dave?

David A. Henry

Thanks, Dan, and good morning, everyone. We're pleased to be able to issue our financials for fiscal year 2010 and Q1, and as a result, we expect that we will now be back in compliance with NASDAQ Listing rules. I'd like to touch briefly on the reasons for the restatements and the late filings. First, Sinovel's receivables were aging out and then they stopped paying us. As a result, it was necessary to reassess our prior judgment around collectibility. Second, we shipped some of our smaller customers in China under open credit with limited payment history. Shipping under open credit represented a concession because the sales contracts require letters of credit or bank guarantees prior to shipments. From an accounting standpoint, this also called into question the fixed and determinable nature of that revenue. And third, these decisions with regard to credit were decentralized. The people making the decisions did not have the requisite knowledge of revenue recognition principles under GAAP, and our corporate finance department was not made fully aware of the decisions that were being made.

The control deficiencies and our remediation plans are summarized in full in the SEC filings we made today. Our work to remediate these issues is well underway, and all elements of the plan have either been implemented or are in the process of being implemented.

One question that I would like to answer proactively is, "Why has it taken so long to issue our financial results?" The accounting issues we have dealt with have been extremely complex. It took a great deal of time to reach proper and supportable conclusions. As time continue to pass, events and new facts require changes in our accounting judgments. Of those notable events was our discovery of the theft of our intellectual property and our determination that Sinovel is no longer a customer. That changed our accounting judgments in many areas, and resulted in one-time write-offs, totaling nearly $159 million, of which approximately $155 million occurred in the fourth quarter.

I want to make one point very clear. The magnitude of the one-time charges is not due to the restatement. It is the direct result of intellectual property theft and our assumption that Sinovel will no longer be a customer. This has been a grueling extremely frustrating experience for us all, particularly for my finance team, and I know it has been a frustrating experience for many of you as well. However, we have now emerged from this period and in the process, we have improved our controls, policies and procedures. The changes that we have implemented company-wide provide greater transparency and clarity in terms of role and responsibilities. And our entire company is determined to create a dynamic, diversified business that generates sustainable profits.

Now let's begin our financial review with our restatement for the second quarter of fiscal 2010. In the second quarter, the restatement resulted in a decrease in revenue of $3.5 million and a decrease in earnings of $0.05 per diluted share. The adjustments were driven primarily by switching to cash-based revenue recognition or shipments after August 31, 2010 to a couple of our smaller Chinese customers.

In the third quarter, the restatement resulted in a decrease in revenue of $82.6 million and a decrease in earnings per diluted share of $0.71. These decreases in third quarter were driven primarily by switching to cash-based revenue recognition for Sinovel beginning for shipments after September 30, 2010. During the third quarter, shipments to Sinovel were substantially higher than the amount of payment that we've received.

For the fourth fiscal quarter, our revenues were $59.8 million and our net loss for the quarter was $185.1 million or $3.67 per diluted share. The fourth quarter net loss includes one-time impairments, write-downs and charges of $155.3 million that, as I mentioned earlier, are closely tied to the fact that Sinovel is no longer a customer. Excluding these charges, our non-GAAP net loss was $26.1 million or $0.52 per diluted share for the fourth quarter.

Turning to the fiscal year. Our revenues totaled $286.6 million for fiscal 2010, which compares with $316 million for fiscal 2009. Now some of you may have noticed that these fiscal 2010 revenues were below our previous $307 million estimate that was included in the 8-K we filed over the summer. Why? Well, at the time of that announcement, we recognized revenue based on a cash-based accounting methodology that we had agreed upon with our auditors. Subsequent to that announcement, we determine that there was a better approach to apply that cash-based accounting methodology. But this change in the application of cash-based accounting led to the $20 million change.

As Dan mentioned, our fiscal 2010 revenues also were reduced by approximately $77 million for shipments to Sinovel and other Chinese customers that were unpaid as of the end of the fiscal year. Our net loss for the year was $186.3 million or $3.95 per diluted share. This compares with net income of $16.2 million or $0.36 per diluted share for fiscal 2009.

On a non-GAAP basis, our net loss for fiscal 2010 was $12.8 million or $0.27 per diluted share. This compares with non-GAAP net income of $31.7 million or $0.70 per diluted share for fiscal 2009. The decrease in non-GAAP net income was driven primarily by lower gross margin as well as higher operating expenses.

Turning to our first quarter fiscal 2011 financial results. Revenues totaled $9.1 million, in line with our previous forecast. This is down from $97.2 million for the quarter ended June 30, 2010 as a result of the factors Dan described a few minutes ago.

Our net loss for the first fiscal quarter of 2011 was $37.7 million or $0.74 per diluted share. This figure includes approximately $3.1 million in severance and other nonrecurring charges, and compares with net income of $9.2 million or $0.20 per diluted share for the first quarter of fiscal 2010.

On a non-GAAP basis, our net loss for the first quarter of fiscal 2011 was $30.8 million or $0.61 per diluted share. This compares with non-GAAP net income of $13 million, or $0.28 per diluted share for the first quarter of fiscal 2010. As of June 30, 2011, AMSC's total backlog, excluding Sinovel, was approximately $225 million. I should point out that most of the new orders that we announced this morning and that Dan discussed earlier were actually booked after June 30, so we expect to see a solid uptick in backlog when we report our second quarter results later in the fall.

As of June 30, 2011, AMSC had $166.2 million in cash, cash equivalents, marketable securities and restricted cash. Our entire team is focused on cash right now, and we are making good progress in reducing our operational usage.

We are also doing our best to manage payments and relationships with various vendors who are contracted to ship us product that was intended for Sinovel. These liabilities, which exceeded $40 million in total as of June 30, are of course, a key component of our arbitration against Sinovel. We expect that our cash usage in Q2 will slow as compared with the first quarter. And we currently project that we will exit the quarter with more than $100 million in cash, cash equivalents, marketable securities and restricted cash.

About half of our cash usage in the second fiscal quarter is expected to come from our operational losses. The remainder is expected to come from payments that reduce our vendor liabilities, severance charges and legal and audit fees. The cash burn rate is then expected to slow significantly in the second half of the year due to the cost-saving actions we have undertaken.

Given the actions we have already taken, we believe that we have sufficient cash to fund our operations for at least the next 12 months. We will of course, continue to monitor closely our expenses and capital expenditures going forward.

Now in terms of our outlook, I would like to point out that the way we are providing financial guidance has changed. For the time being, we will be providing quarterly guidance, while our longer-term outlook will be more directional in nature. We currently expect that our revenues will increase from approximately $9 million for the first fiscal quarter to more than $18 million for the second fiscal quarter of 2011. We expect growth to be driven by an increase in both our Wind and Grid revenues. We expect to exit the second quarter on a quarterly run rate of approximately $25 million in operating expense, excluding Sinovel litigation costs.

We expect that our net loss for the second quarter of fiscal 2011 will be less than $38 million or $0.75 per diluted share. I would like to point out that this net loss figure include an estimate of more than $5 million charges related to our litigation with Sinovel. Most of this is tied directly to court fees for our arbitration and civil lawsuits, which are onetime in nature. As a result, we expect legal fees related to the suits will decline in future quarters.

On a non-GAAP basis, we expect that our net loss will be less than $27 million or $0.53 per diluted share. We expect the second half of our fiscal year to be stronger from a top line perspective compared with the first half of the fiscal year. And we also expect lower net losses in the second half of the year as a result of revenue growth and the actions we have taken to date.

Now let me turn the call back over to Dan.

Daniel Patrick McGahn

Thanks, Dave. In conclusion, we are responding to our challenges head on. We are bringing strong legal cases to court. We reduced our cost structure by $30 million annually, and are reducing our cash burn. We have instituted improved financial controls, which include the requirement for letters of credit or bank guarantees before shipments to China. We have flattened our organization to establish better collaboration and clarity of responsibilities. And we have clear priorities in place.

We have realigned the business from technologies, Power Systems and Superconductors; to markets, Wind and Grid. We have a sound 3-point strategy in place for each of these businesses. And we have already landed nearly $100 million of new contracts this fiscal year, and as David said, most of which have occurred after June.

Our team of managers and employees are energized and they are totally committed to AMSC's success. We have the partners, the products and the people we need to succeed. And we're all committed to bettering our customers' businesses, diversifying our business and in the process, rebuilding shareholder value.

We are very pleased to be able to put these financials behind us and our full attention is now focused on our bright future.

With that, let's open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Jim Ricchiuti from Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

The question I had just relates to backlog. I was wondering if you could say how much of that backlog is shippable over the next 12 months. And then if you can give just some flavor for how that backlog breaks down in terms of Wind and Grid.

Daniel Patrick McGahn

Yes. In terms of the overall backlog, roughly 25% of that backlog is shippable this fiscal year. But we're not going to break down the backlog at this time between Wind and Grid.

David A. Henry

The good thing, Jim, overall, is what we're seeing a strong traction in the Wind and the Grid market, and we're seeing that as well on all the major geographies that we serve.

Operator

And we'll go next to Jesse Pichel from Jefferies.

Elaine Kwei - Jefferies & Company, Inc., Research Division

This is Elaine Kwei for Jesse. Could you help us understand a little more the hit to the COGS line and the gross profit, and how that's going to look going forward? And that if we could tease out, what portion of that was due to items one-time nature and then when you could potentially expect to get to the gross profit breakeven?

Daniel Patrick McGahn

Yes, Elaine. So if you look at the -- in our press release, there is a non-GAAP table in the back. And you can see that the charges that were listed out for the year. And of those charges, the excess and obsolete inventory charge is $61 million. The purchase commitments of $38 million and then the write-off of -- actually not -- just those 2 related to cost of goods sold. The prepaid value-added tax just went to G&A, and then the goodwill was obviously, amortization and impairments which you see on the face of the financials.

On the annual guidance though a lot of things here you can see are changing at AMSC and the way we provided guidance is one of them. At this stage, we'll be providing near-term targets and we're going to focus on demonstrating our progress quarter-over-quarter. We are not providing today longer-term targets or forecasts. That being said, we pry at some directional insight in the second half of this fiscal year being stronger than the first.

Elaine Kwei - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And in terms of the expected though can you just clarify again the expected reduction in OpEx was about $30 million annually, was that correct?

Daniel Patrick McGahn

That's right.

Elaine Kwei - Jefferies & Company, Inc., Research Division

Okay. And that will be -- when will that level of OpEx reduction be reached? Will that be in the next quarter or 2 or...

Daniel Patrick McGahn

We'll start seeing the cash benefit of that within the next quarter. And I said earlier in the call, we expect to exit this quarter on a $25 million quarterly run rate for OpEx, excluding Sinovel litigation costs.

Operator

And we'll go to our next question from Theodore O'Neill from Wunderlich Securities.

Theodore R. O'Neil - Wunderlich Securities Inc., Research Division

I was wondering if you are going to talk about the superconductor Amperium wire sales, and what proportion of that would be in next quarter's revenue and how it would trend over time?

Daniel Patrick McGahn

I think that what we're going to try to focus on, I think the news today is that LS Cable is diligently working on their projects with KEPCO. They've required to start to take wire early. If you recall, originally, that contract has scheduled shipment starting in 2012. You're now going to see those happening sooner. And I think it's -- the way I see it, it's more a validation on the relationship and the fact that KEPCO is going forward with superconductor cables.

David A. Henry

And just to point out, Theo, that some of the $18 million of revenue that we are forecasting for this quarter includes shipments to LS Cable.

Theodore R. O'Neil - Wunderlich Securities Inc., Research Division

Okay. And David, what kind of revenue level would I expect to see where you'll be at breakeven?

David A. Henry

Yes. Dan just to mention, we're not really looking to provide long-term extended guidance at this time. We're focused on the near-term and coming to you -- telling you what we're going to do one quarter out and then show you how we did it. And that's right now our focus rather than providing long-term information. I will say though that we did provide some long-term guidance in terms of looking forward to our revenues for the second half of the year and also, our operating expense rate exiting the quarter.

Operator

And we'll go to our next question from Chris Kovacs from Robert Baird.

Christopher M. Kovacs - Robert W. Baird & Co. Incorporated, Research Division

Now that Sinovel is no longer a customer, can you maybe give us an idea of who your top wind customers are, and maybe give us a ranking of your largest contracts?

Daniel Patrick McGahn

Sure. One of the things that I think is going to become nicer about our business here is you're going to see a more diversified set of revenue. So you're going to see a good balance between Wind and Grid. In the near term, Wind will be the driver, particularly out of the Asian countries. But we are seeing revenues coming from all of our geographies and from nearly all of our substantial partners that we've talked about in our past. So we're looking to build a very diversified business and to make sure that we have strong health and strong growth in the near term.

Operator

And we'll go to our next question from Paul Clegg with Mizuho.

Paul Clegg - Mizuho Securities USA Inc., Research Division

My first question is really, why still go ahead with The Switch acquisition? Why not just conserve cash and build the existing businesses? It just seems that the capital markets and the stock price would put some dilutive pressure on you, so why still push ahead?

Daniel Patrick McGahn

Well, Paul, we see it still strategically as a nice fit for our business. We are out, and as you said in the markets, and they are challenged but we're looking to determine a pathway to finance the deal. But we want to do what we believe will be in the best interest for our shareholders.

Paul Clegg - Mizuho Securities USA Inc., Research Division

Okay. And I guess what is the agreement to buy The Switch then legally right now? Are you past the deadline? Do you need to do further amendments? And does the EUR 190 million still remain the purchase price?

Daniel Patrick McGahn

In June, we amended the contract, we added some changes to the contract. The purchase price was still the same as announced. We added an extension in time where we have a hard stop the year [ph] at September 30 and we're able to extend that 2x when we can extend this position now to the end of November, as long as we are out looking to pursue financing.

Operator

And we'll go to our next question from Carter Driscoll with Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

I was hoping you guys could elaborate a little on the JCNE contract. Is it similar? Is it uniform, meaning you're shipping same amount every month or every quarter, or is it kind of based on demand? And is it back- or front-end loaded based on that?

Daniel Patrick McGahn

I realized everybody's going to struggle with their models. There's a lot of new information out there and it's going to take some time for us all to get on the same page there, but we're not going to break down the JCNE contract. But just to reiterate what I have said, it's for electrical control system. So to make that clear, the shipments are to begin the end of this calendar year and go forward out through calendar 2014.

Carter W. Driscoll - Capstone Investments, Research Division

Okay. If I -- just a little read through, and obviously, like you said, you don't want to go out and talk about beyond one quarter. But it sounds as though you are anticipating at best reaching breakeven by the end of the fiscal year. Would that be a fair statement?

Daniel Patrick McGahn

We're not going to really comment. I mean, I think you guys are sensitized with the situation that we're in. This management team, we want to be able to set bars for ourselves here in the short-term, that get us back to growth here in the near term and put us in position to get back to profitability. What we want to be able to do were to set your expectations accordingly and make sure that we can run the business appropriately.

Operator

And we'll go to our next question from Timothy Arcuri from Citi.

Timothy M. Arcuri - Citigroup Inc, Research Division

A couple of things. I can get that you don't want to get any kind of revenue targets because it's very difficult to predict, but can you just give us some mild pose around cash flow breakeven. That's something that's within your control, so can you give us some estimate in terms of where cash flow breakeven will be in September and maybe looking out into the fourth calendar quarter as well? I mean, there has to be some metric for us to measure the business by.

David A. Henry

Well, I think, Tim, you'll have your -- as you put out your models and you have the historical information we provided, as Dan mentioned, we're not going to provide that kind of forward-looking information on a cash flows. I can tell you that we are monitoring our cash closely, not only our operating expenses but our capital expenditures as well, and we have enough cash, as I mentioned, at least to get us through the next 12 months.

Timothy M. Arcuri - Citigroup Inc, Research Division

All right. Well, then can you -- I know you don't want to break down backlog, but given the issues in China and that, the sort of payment, the thoughts around payment are different there in some cases. Can you give us some sense in terms of how much of the remaining backlog is China as it relates to Shenyang and XJ, and companies like that?

David A. Henry

The backlog in China -- I mean, we're not breaking down the backlog per se. I mean, China is a good part of the backlog but that's really about as far as I would go at this time. Just note that, as Dan mentioned in his earlier marks, and as I mentioned as well, there's about $77 million of shipments that we made to customers that we have not been paid for and have not recognized revenue on.

Daniel Patrick McGahn

And I guess the other point that I'll make, I mean, we're not going to be back out again talking to you all, again relatively soon again as our second quarter is about to close here in about a week.

Operator

And we'll go to our next question from Craig Irwin with Wedbush Securities.

David Giesecke - Wedbush Securities Inc., Research Division

This is actually David Giesecke in for Craig. I would like to get a little bit more granularity on the Superconductors side, and perhaps, you guys can talk a little bit more about the LS Cable deal, whether you expect the losses from the superconductors side to be up or down compared from a year ago, or anything along the lines of the new manufacturing line. Is it producing more efficiency? Is that one of the reasons why you're able to meet this accelerated demand? Any granularity you could provide, please.

Daniel Patrick McGahn

Sure, I'll try. But I think one key point that we're trying to make today is we're no longer thinking about Superconductors as one of our operating divisions. We see Superconductors as an extension of our offerings in Wind and Grid. It's a uniquely differentiated technology that we have a strong level of, intellectual property and competency in. We're focused into areas, in Wind really on the machine technology for wind turbines.

On the Grid side, which is really where most of your questions lie, where the wire and cable part of your business sits. In the near-term here, we're going to start shipping to LS Cable. We are actively working to try to develop additional business, not only with our friends in Korea, but our friends around the world. We've made a statement, I think clearly, in the opening remarks that we are able to deliver the wire to LS Cable early as a result of our strength in manufacturing. We have been able to bring the second-generation product to market now, we have the commercial customer and partner at LS Cable and we have commercial capability to be able to deliver that wire.

David Giesecke - Wedbush Securities Inc., Research Division

Okay. A couple small follow-ups, maybe you'll answer and maybe you won't. Could you give us a sense in the amount of cable you're expected to ship to LS Cable this year? And then also for the backlog, could you tell us of the June quarter how much of it came out of backlog? You may have answered that, I might have missed it.

Daniel Patrick McGahn

So we'll go back to the original contract. It was for 3,000 kilometers or 3 million meters over a number of years. It was supposed to begin in 2012, and we're beginning to ship it earlier.

Operator

[Operator Instructions] We'll go next to JinMing Liu from Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

My first question is related to your strategy in your Wind segment. In the past, American Superconductor made a few small acquisitions is like Dynamic Blades (sic) [Blade Dynamics]. I think you guys were trying to go vertical. What are you going to do with those investments? And also, since you guys are still are waiting to focus on the Chinese market, a new trend there is the one developers are turning their focus to low wind resources areas, whether your technology can fit into that new trend?

David A. Henry

I'll start with the overall strategy part. So about a year ago, a little less, we made a strategic investment in Blade Dynamics with Dow Chemical. We've made other investments, obviously, getting into wind with Windtec. We've developed a group as well to do design of drive trains and bearing solutions as well as part of our team. So I think that the strategy, as you see it, of being vertically integrated, as a technology provider is true. What we're trying to do is position the company now to think not only about state-of-the-art, drive trains and wind turbines, but truly novel and advanced technologies and drive train, not only for the Asian markets but for the global markets.

Turning specifically to China. I think you hit very well on one of our key differentiators. We spent a lot of time focusing with our partners to be able to develop different wind condition, turbine configurations as well as different climate condition, turbine configurations. China is a very big country in many ways from climate, as well as to wind conditions. So in many of the more competitive bids right now those occur in low-wind conditions, we believe that we have positioned our partners to be able to gain more market share in China across-the-board.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. My follow-up question is really a quick one. It looks like you guys stopped mentioning CSR-ZELRI as a customer. Can you clarify the situation there, whether that company is among those customers who didn't pay you or this is simply their contracts versus [ph] your company is over?

Daniel Patrick McGahn

We don't consider them as a customer. I think one of the things again with the changing AMSC is we're trying to be a bit more specific to you all on who we're focused on to making sure that they succeed. We always get questions about who we think that would be key or strategic customers are, and we've mentioned them in China as being Dongfang, XJ, JCNE and Shenyang Blower.

Operator

And we'll go to our next question from Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Obviously, we're very happy to see that you're winning additional business in China. But can you talk about which -- what measures you're taking to make sure that the situation with Sinovel, particularly the IP stuff, does not refer what any other Chinese customers in the future?

Daniel Patrick McGahn

Sure. I'll start at a high-level then get into maybe some specifics. At a high-level, if you recall, as we described on the previous call, there were a very few people that have access to the information. And today, there are even fewer people that have access to information within the company. We set up additional IT controls to also monitor and be able to control information that we feel that we had a very strong system to start with, we had very limited exposure and now we believe that we've put additionally limited that exposure.

From a protection standpoint, it's clear that outright the fab had to occur to be able to get around our product level protections. When we look at the control systems for the partners that we have that pay and our partners that respect intellectual property, we have gotten clear signals from them that they are committed to working with us to be able to utilize current technology as well as new technology going forward.

Operator

And we'll go next with Paul Clegg from Mizuho.

Paul Clegg - Mizuho Securities USA Inc., Research Division

Questions really on kind of working capital. What are your other receivables agings look like today, particularly, the Chinese customers? Is there anything out there to China that's not LC-backed or backed by credit insurance? And similarly, any payables for product meant for Sinovel currently that is still on the books? I was a little unclear on that?

Daniel Patrick McGahn

Yes, I'll take your first question on the receivables. For the most part, I would say the vast majority, the receivables from Chinese customers. And when you're on cash basis, you, by definition, don't have receivables. So any unpaid amount for some of these customers that were length [ph] a long-time in nature and have aged out have been -- are now off the books as of the end of the fiscal year. And revenue will be recognized going forward as we receive cash. In terms of the vendor liabilities, as we exit the second quarter, I think we will be on a more -- we should have our payables more in line with our business going forward. We will stop paying down some of the payables that we had as a result of the supply-chain buildup that we had in support of Sinovel. But we still will have about $40 million on the balance sheet at the end of June, which relates to purchase commitments, things we have not received yet but had committed to with our suppliers in anticipation of future shipments to Sinovel and having that supply-chain in place. So those liabilities remain, and we're working closely with our vendors. And we're very pleased with the cooperation and the understanding that we're receiving so far.

Paul Clegg - Mizuho Securities USA Inc., Research Division

Okay. And if I could, a follow-up on the strategy for financing The Switch. Are you talking to strategic partners about equity in American Superconductor to help finance that?

Daniel Patrick McGahn

We're exploring any and all options at this point. We do believe that the deal is strategic. So we would like to see a pathway to be able to complete the transaction. But I want to make it clear to everybody, we're only going to do what's going to be in the best interest of our shareholders.

Operator

[Operator Instructions] We'll go next to Carter Driscoll from Capstone Investments.

Carter W. Driscoll - Capstone Investments, Research Division

Just a follow-up on Paul's question, from receivables standpoint, the cash accounting, that applies to the China market, or that is the strategy for all parts of both the Wind and Grid business in terms of the reverent?

Daniel Patrick McGahn

The issues that we had were primarily located in China, that drove us to restate our financial statement. The other areas of our business, we have not seen these same issues that we saw in China, but be that as it may, we do -- it has instituted improved policies and procedures across the company to ensure that this doesn't happen again.

Carter W. Driscoll - Capstone Investments, Research Division

And then if I may, I know you don't want to talk about Sinovel, but can you give us your understanding of their response to the arbitration claim that was put to them by the Beijing Commission [Beijing Arbitration Commission]? Could you time frame when they're supposed to respond by, or your expectation of how long arbitration may play out?

Daniel Patrick McGahn

We believe they have probably have another week or so to respond. I would say from our point of view, what is setting up is a path to go into arbitration. We've stated our case, I think, very strongly and very clearly, and we look forward to letting the arbitration process take its course.

Operator

And our final question comes from the line of Timothy Arcuri with Citi.

Timothy M. Arcuri - Citigroup Inc, Research Division

Just a quick follow up. Dave, can you give us some CapEx guidance?

David A. Henry

As I mentioned earlier in the call, we're going to be monitoring our CapEx and our operating expenditures very closely as part of an overall strategy to minimize our cash burn here going forward. But other than that, we're not providing specific CapEx value other than we're going to keep a very close eye on it.

Daniel Patrick McGahn

We're keeping a close eye on all cash in every part of the business. It's the key objective for, not only for the senior management, Dave and I, but our management team across the company.

Operator

And at this time, we have no further questions. I'd like to turn the call back to Mr. Daniel McGahn for any closing remarks.

Daniel Patrick McGahn

In general, you're seeing a new AMSC. You're seeing the reemergence of the company, and we're coming out strongly, we believe. I realize and I want to emphasize with everybody's frustration over the past months, we've attempted to share our own on the previous call and this call as well.

We really want to thank you all for taking part in this morning's call. We look forward to speaking with you again later in the fall as we report our second quarter results. Thank you very much, and we appreciate your support.

Operator

That concludes our call for today. Thank you for your participation.

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