American Superconductor Management Discusses Q3 2012 Results - Earnings Call Transcript

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American Superconductor (NASDAQ:AMSC) Q3 2012 Earnings Call February 11, 2013 5:00 PM ET


Kerry Farrell

Daniel Patrick McGahn - Chief Executive Officer, President and Director

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


Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

JinMing Liu - Ardour Capital Investments, LLC, Research Division

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


Good day, everyone, and welcome to the AMSC conference call. This call is being recorded. [Operator Instructions] With us on the call this afternoon are AMSC President and CEO, Daniel McGahn; Senior Vice President and CFO, David Henry; and Manager of Corporate Communications, Kerry Farrell. For opening remarks, I'd like to turn the call over to Kerry Farrell.

Kerry Farrell

Thank you, Angela, and welcome, everyone, to our Q3 conference call.

Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC'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/A for the fiscal year ended March 31, 2012, which we filed with the SEC on June 26 and subsequent reports that we have filed with the SEC.

These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today.

While AMSC 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 also would like to note that we will be referring on today's call to non-GAAP net loss or net loss before amortization of acquisition-related intangibles, restructuring and impairments, stock-based compensation expense, change in fair value of derivative liability and warrants, noncash interest expense, and other unusual charges.

Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this afternoon on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at

And now, CEO, Dan McGahn will begin our quarterly review. Dan?

Daniel Patrick McGahn

Thanks, Kerry, and good afternoon, everyone. I'll begin today by providing an overview of our third quarter fiscal results, as well as providing an update on our litigation against Sinovel. Dave Henry will then review our financial results in detail and provide our forecast for our fourth fiscal quarter. Following that, I'll take you about some of the trends in our key markets and some of our recent customer wins. I'll also tell you about a new product that we've added to our line of Gridtec Solutions. And finally, we will open up the line to your questions.

As we've discussed before, the wind industry has been particularly challenging over the past couple of years. Wind farm projects have been delayed, companies across the sector have been facing cash flow constraints. Globally, wind power installation have flattened. In fact, in China, which has become the world's largest wind power market, installations have actually been on the decline. And there also was considerable uncertainty around the renewal of the production tax credit, the key support mechanism for wind power in the United States. We at AMSC have not been immune to these challenges.

In the third fiscal quarter, we were unable to meet all of the criteria for revenue recognition for a particular customer. And as a result, we had a revenue shortfall on the wind side of our business. But it is important to highlight here that we were paid promptly by this customer for the scheduled product delivery, in line with our contract.

In trying market conditions, flexibility is essential and listening to our customers and responding to their needs is a key to building a sustainable business. Their prompt payment also demonstrates the strength and health of our customer relationship.

In the third fiscal quarter, we beat our cash forecast. We also paid down the vast majority of our remaining adverse purchase commitments.

Also this past quarter, in reaction to the wind industry challenges, we took aggressive action to lower our cost structure. While difficult, this action has reduced our break-even point and is expected to enhance our liquidity.

Now before Dave talks about our financials in greater detail, I'd like to bring you up to speed on our litigation against Sinovel.

On March 31, 2011, Sinovel, then our largest customer, refused a substantial contracted shipment from AMSC. A couple of months later, we learned that certain high-level employees within Sinovel had bribed a former AMSC employee to steal some of our intellectual property. Our former employee has since confessed to the theft and to colluding with Sinovel, and he was jailed for his crime.

We filed a series of suits against Sinovel in China: 2 copyright infringement suits, a trade secret suit and a commercial arbitration case. Each of the cases is moving through the Chinese legal system. Furthest along is arbitration, in which we are seeking nearly $70 million for past shipments and enforcement of our existing contracts, which are valued at approximately $700 million. Both sides have presented their evidence, and we continue to await our next hearing date, which we hope will be the final hearing to complete the proceedings.

As for the 3 civil cases, Sinovel has objected to all of them on jurisdictional grounds, requesting that they be moved to arbitration. Of course, the Beijing Arbitration Commission's responsibility is to resolve contractual disputes. Since our civil cases are focused on intellectual property theft, trade secret misappropriation and copyright infringement, it is clear to us that these are not contractual matters.

In our trade secrets case, we are seeking $450 million. The case was accepted by the courts in Beijing, and we are awaiting their response on Sinovel's jurisdictional appeal.

Our 2 copyright infringement cases amount to just over $6 million. The lower courts have already responded to Sinovel's jurisdictional objection, one of them siding with Sinovel and the other rejecting Sinovel's motion. Both of these jurisdictional decisions were then appealed to China's Supreme People's Court. And since we last spoke with you, the Supreme Court has said it will hear both cases and will make a final decision on jurisdiction. We are now awaiting those hearings.

As a reminder, we believe the vast majority of the legal fees for these cases is already behind us. Now before discussing the positive signs that have begun to emerge in our core markets, let's turn the call over to Dave to provide a review of our financials. Dave?

David A. Henry

Thanks, Dan, and good afternoon, everyone. AMSC generated $17.4 million in revenue for the third quarter of fiscal 2012, slightly below the $18.1 million that we generated for the third quarter of fiscal 2011. Our forecast at the end of November had called for revenue to exceed $20 million.

Our lower-than-forecasted revenue was due to one of our wind customers not being in a position to accept delivery of contracted product at the end of the quarter. We expect this customer to be in a position to accept deliveries in the first quarter of fiscal 2013. The good news here is that the customer is meeting and is expected to continue to meet its contracted payment obligations.

On a year-over-year basis, wind revenues declined 33% to $6.8 million. Our grid revenues grew by approximately 34% year-over-year to $10.6 million thanks primarily to increased debar shipments in the U.K., as well as greater wire shipments to Korea.

Our total backlog on December 31 was approximately $243 million. This compares with $257 million as of September 30. As many of you know, some of the contracts in our backlog extend for multiple years and were signed when the cleantech market was in a period of significant growth. As a result of the market volatility over the past couple of years, we have been more flexible with our customers around the delivery schedules in some of the contracts. While we still believe that our total backlog figure is relevant, on future calls we will instead be discussing a 12-month backlog figure. This metric has been requested by some of our analysts and investors in the past, and we believe it is a more useful metric from a forecasting perspective.

As of today, our 12-month backlog is approximately $72 million. We define 12-month backlog as shipments we expect to make over the next 12 months under signed contracts. Our 12-month backlog includes amounts that we plan to ship under the Inox order that we signed in recent days and announced in a separate press release today. Our 12-month backlog excludes contracted orders from some customers for which there is delinquent backlog, or in other words, where the delivery schedule is more uncertain.

For instance, Shenyang Blower Works is an example of a customer who has delinquent backlog where future contracted deliveries are excluded from our 12-month backlog.

Moving on to the P&L analysis. Our gross margin for the third fiscal quarter was 5.1%, which compares with a negative 4.8% for the year-ago quarter. This increase was primarily due to the expiration of certain warranty obligations and the usage of previously written off inventory. Our R&D and SG&A expenses for the third fiscal quarter were $14.7 million, down significantly from $21.3 million in the third quarter of fiscal 2011.

The year-ago amount included approximately $2.4 million of costs associated with our litigation against Sinovel. Third quarter R&D and SG&A expenses are also down from $15.4 million in the second quarter of fiscal 2012, primarily as a result of our recently announced cost-reduction efforts.

Beginning in the quarter ending June 30, 2013, when we expect the benefits from these recent cost-reduction efforts to be fully realized, we expect R&D and SG&A expenses to be less than $58 million on an annualized basis. Approximately 20% of this spending is expected to be noncash.

For the third fiscal quarter of 2012, we incurred approximately $6.7 million in restructuring and impairment charges. Of that, $2.2 million were cash charges related to our November restructuring action and the remaining $4.5 million was a noncash charge for long-lived asset impairments.

We expect less than $1 million in additional restructuring charges associated with our November action in the March quarter and beyond, and these charges are expected to be noncash.

Net interest expense was $4.6 million in the third quarter of fiscal 2012. Of this amount, $3.9 million is noncash interest, in line with accounting rules under U.S. GAAP that results from the requirement to discount our debt for accounting purposes and that amortize the debt discount into the P&L in future periods. In addition, when we pay the installment payments on our convertible note in stock, we do so at a discount to market. We expense that discount through noncash interest as well.

We also recorded a $5.2 million noncash benefit in the third fiscal quarter for a change in the fair value of our derivative liabilities and warrants, which we are required to mark-to-market each quarter. As a reminder, when our stock price increases, the mark-to-market impact will generally be unfavorable. If our stock price decreases, as it did in the third quarter, the impact will be favorable.

Our net loss in the third fiscal quarter of 2012 was $20.1 million or $0.38 per share compared to $26.3 million or $0.52 per share in the year-ago quarter. The decrease was driven primarily by lower operating expenses and mark-to-market gains, partially offset by higher restructuring and impairment charges and interest expense on our debt. This compares favorably with our forecast for the third quarter, which called for a net loss of less than $24 million. Our forecast did not include either the mark-to-market gains or the noncash impairment charge, which we could not forecast at that time and which mostly offset each other.

Our non-GAAP net loss was $13.5 million or $0.26 per share for the third quarter of fiscal 2012. This is an improvement from $17.5 million or $0.34 per share for the third quarter of fiscal 2011 and compares with our forecast in late November of a non-GAAP net loss of less than $16 million or $0.31 per share from the third fiscal quarter.

I would also like to point out that due to a presentation error, we underreported our non-GAAP net loss by approximately $800,000 in both the first and second quarters of fiscal 2012 or by $1.6 million or $0.03 per share in total for the first 6 months of fiscal 2012.

Correcting for this, our non-GAAP net loss for the first 9 months of fiscal year 2012 was $40.4 million or $0.78 per share. As of December 31, 2012, we had approximately $56.4 million in cash, cash equivalents and restricted cash. This compares favorably with our most recent forecast, which was our cash balance to be greater than $48 million. The upside comes primarily from effective working capital management and strong cash collections, including the advanced cash payment for our Windtec Solutions customer that I mentioned a couple of minutes ago.

Our cash balance as of September 30, 2012, was $73.1 million. Our cash usage during the third fiscal quarter included approximately $9 million in cash payments that were made to settle some of our adverse purchase commitments, which were related to product we had ordered from certain vendors to support our contracts with Sinovel.

It's liabilities were approximately $40 million at their peak back in 2011. Working with our vendors, we reduced this figure from approximately $12.1 million as of September 30, 2012, to approximately $1.8 million as of December 31, 2012.

And I think it's worth noting, we did this without the benefit of being paid by Sinovel.

Now let's turn to our financial guidance. For the fourth quarter of fiscal 2012, we expect to grow our revenues to be more than $18 million. We expect that our net loss for the fourth quarter of fiscal 2012 will be less than $18 million or $0.32 per share. This guidance does not factor in any mark-to-market adjustments associated with our derivative liabilities and warrants, which can't be predicted.

Our non-GAAP net loss for the fourth fiscal quarter, which excludes mark-to-market adjustments and other noncash items, is expected to be less than $13 million or $0.23 per share.

And finally, at the end of the fourth quarter, we expect to have more than $48 million in cash, cash equivalents and restricted cash. We believe that the balance of cash, cash equivalents and restricted cash that we had on December 31, 2012, is sufficient to fund our business for at least 12 months. Of course, we continue to monitor the business and the macroenvironment closely, and we will take additional action if necessary. And now I'll hand things back over to Dan. Dan?

Daniel Patrick McGahn

Thank you, Dave. Now let me talk to you about recent developments in the wind and grid segments. I'll begin with wind. For those of you new to AMSC, through our Windtec Solutions, we provide both products and services to wind turbine manufacturers. Our services allow manufacturers to rapidly introduce new wind turbines or upgrade existing turbine platforms to gain competitive advantage and market share.

And our products, which we call electrical control systems, provide the brains for the wind turbine, allowing manufacturers to maximize power output and lower the cost of wind energy.

We currently have wind turbine manufacturing partners in countries such as China, Korea and India. And the dynamics in each of these markets is distinct.

Let's start with India. Our Indian partner, Inox, was a key contributor to our wind segment in the third quarter. Our relationship with Inox began in 2009 with its purchase of a 2-megawatt wind turbine license from AMSC. Since then, they have been producing high-quality wind turbines, with one of the most compelling power curves in India. Inox has taken a vertical approach to the market by developing wind farms, as well as manufacturing wind turbines. This enabled them to capture greater market share against industry leader Suzlon even as the overall market was contracting in 2012.

Looking at India from a high level, it is currently the third largest wind power market in the world, and this market is expected to expand in the coming years. The country is facing huge electricity shortages. And despite major capacity additions, power supply still struggles to keep up with demand. The government is increasingly looking to renewables to bridge that gap.

Inox's stated objective is to become India's premier wind turbine company. And today, we announced a new order from them that's valued at more than $30 million. We expect to begin shipments under this contract this current quarter and complete all shipments by the end of 2014.

Now let's turn to China. As many of you know, China's wind industry grew exponentially in past years, and AMSC grew with it. But overcapacity, grid connection delays and cash flow issues eventually prompted a market slowdown.

In 2011, the Chinese government tightened regulations. Wind projects now require approval through the central government before construction can begin. While this market shift has certainly been painful for many companies, including AMSC, we believe it is a change for the better and one that will foster more sustainable market development.

A couple of weeks ago, the Chinese Wind Energy Association, or CWEA, came out with its initial installation numbers for 2012. According to CWEA, 14 gigawatts of wind power were installed in China last year. This is down significantly from the 17.6 gigawatts in 2011 and nearly 19 gigawatts in 2010. There are, however, silver linings that are beginning to appear.

In addition to providing total installation figures, the CWEA also listed the top 20 wind turbine manufacturers in China in 2012. Three of our partners were among those top 20.

Also in January, China's natural -- National Energy Administration forecasts that 18 gigawatts of wind power would be installed in 2013. This implies a growth rate approaching 30%, up from the 14 gigawatts that were reportedly installed in 2012. Certainly good news for our Chinese partners.

In Korea, our partners are large, well-established, heavy industry manufacturers, namely Hyundai Heavy Industries and Doosan Heavy Industries. Both Hyundai and Doosan are well positioned for offshore wind projects that are currently planned in Korea. Doosan is in volume production with a 3-megawatt turbine. And this year, Hyundai plans to assemble its first 5-megawatt turbine at Jeju Island, a small island off the coast of Korea that has served as the breeding ground for many of the country's clean technologies.

And speaking of offshore markets, AMSC has a turbine and generator design that we call our 10-megawatt SeaTitan platform, which is specifically designed to lower the cost of offshore wind power installations. Of course, as the wind market slowed, so did adoption plans for larger wind turbines. As the market continues to show signs of a rebound, we expect that manufacturers will again look to higher megawatt turbines like our 10-megawatt SeaTitan.

Our core markets give us reason for optimism, but that's not all. We are also beginning to pursue opportunities related to a broader adoption of renewables in other emerging markets such as South America, South Africa and Eastern Europe.

Our business model is ideal for emerging markets. Why is that? Well, some emerging markets like Brazil or Turkey have local content requirements, meaning that wind turbines are required to have a certain percentage of components produced locally. Through our Windtec Solutions, we are able to help a new or existing local manufacturer meet those content requirements by enabling them to produce best-in-class turbines locally.

This in turn helps to create a new viable, sustainable local industry. We are actively evaluating and pursuing opportunities in many of these other emerging markets.

In keeping with the recent positive signs in the wind industry from around the world, the United States recently extended the production tax credit or PTC. We believe this could actually provide our grid business with a boost later this year. Why? Because our D-VAR product is a leader in helping to connect wind and solar farms to the grid. In fact, our D-VAR product is already connecting over 4 gigawatts of renewable power to the grid right here in North America.

Another driver for D-VAR product sales is electric utilities. Our D-VAR solution can help utilities carry more power through their existing transmission and distribution assets. It can also enhance transmission system performance and prevent widespread blackouts.

In the third quarter, we announced repeat orders from customers in China and the United Kingdom.

Australia is another market we've been successful with our D-VAR product. We are connecting more than 1 gigawatt of renewable energy to the grids in Australia and New Zealand. The grid codes in both of these countries make the D-VAR product a natural fit. In fact, the largest D-VAR system that AMSC has ever installed is located in Australia.

Our expertise with wind farms have also opened up dialogues with and orders from Australia's electric utilities.

We are also seeing an opportunity in Australia's mining industry. Industrial mining operations employ massive induction motors that can cause voltage instability on the greater power network. D-VAR systems can mitigate these types of issues and ensure high-power quality for both the industrial customer and the grid operator. We already have multiple sales to mines in Australia, and we see more potential there.

We believe Australia is now one of our most promising markets, and it's a great example of our ability to enter into a new market and find opportunities across a variety of applications. We are aiming to replicate the success that we've had in Australia in the other emerging markets that we talked about earlier, namely South America, South Africa and Eastern Europe.

We've already made our first sale in Romania over the past year. This initial installation has given us the opportunity to become familiar with the local grid and the local grid operator.

While D-VAR is our most immediate grid opportunity in many of these emerging markets, we are also seeing superconductor cable activity in an increasing number of countries as well. There are cable projects in motion or being discussed in Russia, India, China, Germany, Brazil, Australia, Japan and, of course, in Korea and the United States. And this list of countries continues to expand.

In the U.S, as a result of incidents like Superstorm Sandy, we also are seeing an increased interest in our superconductor fault current limiting cable. All around the world, utilities are evaluating the best ways to modernize their grid, and they are looking for solutions. We believe AMSC can play an important role in solving these issues.

At the beginning of the call, I mentioned a new product. In December, we announced the launch of a medium voltage superconductor fault current limiter, or SFCL, through a collaboration with Nexans. We believe the SFCL is a compelling solution for today's utilities that are dealing with increasing power demands.

So what's the benefit of an SFCL? Let's use an analogy. Think of a power line as if it were a water main. If a water main breaks, the result is a massive flow of water that can cause catastrophic damage.

In the electric grid, the fault current surge is like the water main break. If a surge occurs, it can damage everything it flows through. The superconductor fault current limiter acts much like a water valve. It is normally wide open to allow the power to flow without restriction. But if a fault, a water main break, occurs, the SFCL instantly closes down to a predetermined point like a valve, limiting the fault current to a level that will not cause damage. Together with Nexans, we are now offering these systems commercially to North American electric utilities.

In late January, we announced an Amperium wire order from Nexans for an SFCL that will be used in Europe's landmark AmpaCity projects. The project aims to replace intercity high-voltage equipment with superconductor solutions. It is being undertaken by RWE, one of Europe's leading electricity company. This project actually has the potential to be a model for how utilities around the world design and implement urban distribution networks, and we are proud to play a role in the project as we actively look for SFCL opportunities in North America and around the world.

Now I'd like to take a minute to talk about a project we haven't talked about in quite some time.

The U.S. Navy has in the past engaged us to design and produce both propulsion and protection systems. Motors designed around our power gun [ph] superconductors offers significant space and weight savings. These smaller motors can make new ships more fuel-efficient, while also freeing up additional space for war-fighting capacity.

Superconductors are also being used in degaussing cables, which help to reduce the magnetic signature of navy ships. These systems make it much more difficult for magnetically activated mines to detect and damage the ship. Similar to superconductor motors, superconductor protection systems can potentially save hundreds of metric tons on the navy's largest surface combatants. The Navy has now successfully tested AMSC systems on multiple ship platforms. And the Navy's dialogue with us on our superconductor propulsion systems continues as well. We are proud of our continued work with the Navy and see it as an opportunity to bolster our business, while also helping protect and enhance the performance of our nation's fleet.

Now before opening up the call to your questions, let me talk a bit about our longer-term outlook. As a reminder, we had previously forecast that we would end the calendar year with $48 million in cash, and we exceeded this figure. We now expect to end the fiscal year with more than $48 million in cash, cash equivalents and restricted cash. The revenue forecast for the fourth quarter that Dave mentioned a few minutes ago equates to revenue growth of more than 10% for full fiscal 2012. Not bad in a tough environment.

Based on the more positive trends that we have begun to see emerging in the wind market, we believe we can increase our annual revenues in fiscal year 2013 by more than 25%.

I will look forward to discussing this outlook a little more with you on our next quarterly conference call. Now, Angela, would you please open the call to questions from our audience. Thank you.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Benjamin Schuman with Pacific Crest Securities.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Can you give us JCNE and Inox just as percentage of sales for the quarter?

David A. Henry

It's Dave Henry. JCNE was less than 10% of revenue in the quarter, and Inox was about 19% in the third quarter.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Okay, great. And then if I look at the guidance for 2013 and the $72 million in 12 months backlog and then back out kind of $18 million revenue guidance for fourth quarter, is it fair to assume you have about half of the 2013 revenue guidance currently in backlog?

David A. Henry

Yes, that's one way of looking at -- but remember that the backlog for 2013 we're reporting doesn't have the full year.

David A. Henry

Remember, you're missing a future quarter in there in the year.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Okay, that makes sense.

David A. Henry

And then, we remind you about the business. I mean, on the grid side, we do have this lumpiness, and the book and bill can be at a pretty good clip. And I think we'll be in -- we have a good news today with Inox, so you see that. I think you know what's been going on with some of the other customers on the wind side.

Daniel Patrick McGahn

To be clear, our 12-month backlog is the backlog that's aged through December 31, 2013.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Okay, got it. Because you said as of today that it included the Inox order. Okay. And if you look at that guidance, Dan, what would you say the biggest potential swing factors are in terms of opportunities for upside or maybe downside there?

Daniel Patrick McGahn

I think when you look at the grid business, what we've shown I think is good, stable revenue generation. I mean, you look year-to-year, you see some good growth there. You see the expansion of the grid business into new geographies. We mentioned today Romania. We mentioned a lot of other target countries that we're going to go after. We're starting to see continued repeat business in a lot of our core markets for the D-VAR. I had mentioned potential expansion as well for superconductor interest in a lot of different countries. I think the challenge to grow revenues greatly really is on the wind side of our business. So we saw challenges coming down our way here in the past quarter or so. We made that change last quarter where we reduced 25% of our costs to be able to kind of get through the near term. The good news that we talked about today and I think that everyday we wake up we see additional good news happening in the wind market is that China is changing for the better. India is going to get back to growth here. And the Koreans are in a very good situation, where they can deploy locally and export globally. So I think you're going to see a very nice grid business. And on top of that, the wild card becomes how much growth could we see in wind. And that's why we went through in a little bit of detail what's going on specifically in China, what we see growth there, what's going on specifically in India and Korea today on the call.


And we'll take our next question from Carter Driscoll with Ascendiant Capital Markets.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

I just want to revisit the definition that you gave for the new classification of the backlog to 12 months. My understanding is, so this is revenue that you expect to, obviously, ship and book there the sales for within 12 months. But is there a qualitative difference between that and what you have in providing the past in terms of some type of comfort level that it is more predictable? Or is it really just trying to parse it on a different time frame?

Daniel Patrick McGahn

I'll let Dave answer. But I think spiritually, we look at it as we were reporting kind of backlogging aggregate without defined timetable. Now what we're trying to do is to give a specific timetable with a specific number to provide some additional transparency to really help in forecasting the business.

David A. Henry

And to add on top of that, Carter, we are -- if you look at the 12-month backlog for what's -- according to contracts, it's actually a larger number than the 72. What I said in the call is we're reporting what we believe is shippable. So there's some customers that have backlog, where they pushed out deliveries already based on the current contract. And we see uncertainty about being able to fill that backlog under the timetable that are currently in those contracts. So where there are those uncertainties, we back them out. So the 12-month backlog is what we believe, like I said, is the orders that we have on backlog that we believe are shippable through that time period, which is December 31, 2013.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Okay. It's also a pretty firm number. Okay, that's helpful. Dave, could you talk about what the 0 cost inventory impact did to the gross margin and maybe try to back into a kind of clean gross margin figure if you weren't using any of the stuff off the balance sheet? And was the gross margin positive outside of that one factor?

David A. Henry

Yes, you actually can see -- it's in the -- because we wrote off that inventory previously, we don't take credit for it in our non-GAAP net loss. So we add that gross margin back. So if you look at the non-GAAP reconciliation table, you can see, it's about $600,000 in the quarter compared to like $50,000 for the same period a year ago. So it's about $550,000 of impact for third quarter. And then I mentioned the expiration of warranty. That was somewhere in the ballpark of like $800,000.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

$800,000. All right, so positive gross margin. Okay. Could you talk about the customer, the rev recognition, the geographic location of the customer, if it's not identifying the customer, would you have the revenue recognition issue?

Daniel Patrick McGahn

We want to be really sensitive to them. One of the things that we're trying to communicate to you all, and we've been out talking specifically to our customers, is that we're only going to be successful if they're successful. So we want to focus and honor the conversations that we've had with them, but we want to be as transparent as we possibly can, and we've really said all that we can say so far in the prepared remarks. I really don't want to get into [indiscernible] and where. The issue -- specific revenue recognition issue was -- I mean, even though the customer paid for the product, they couldn't accept delivery. So because they couldn't accept delivery, even though they paid, we couldn't recognize revenue.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

That would be reversed in this quarter, correct? Third quarter?

Daniel Patrick McGahn

I said we expect the customer to be -- to take the delivery of the product in the first quarter of fiscal 2013.

Carter W. Driscoll - Ascendiant Capital Markets LLC, Research Division

Okay. I'm sorry, I thought it was this quarter. The stolen property, Dan, the PTC being re-upped, how do you see that playing out? Do you think there's somewhat of a lag effect? Was it a little bit disruptive when it expired? Maybe you could give your take on how it does or does not affect -- potentially the wind business, obviously, I heard what you said about the grid business, but on the wind side, do you think that restarts some growth in the U.S. or maybe...

David A. Henry

I think in the wind market, it will restart some growth. I think there's 2 pieces to it. I think there's an immediate, say, change in the market, where there's some pent-up projects that might be opportunities. But really, as you look later in the year, we would see, hopefully, getting back to the kind of the rates that happened in the past, say, 2 years in the US. But the benefit to our company really in the U.S. has historically come from the grid business using D-VAR to connect those wind farms to the grid. There may emerge opportunities for some of our Asian partners to start to export into the U.S., and we've repeated comments we've gotten from them on a previous call, where they have begun to enter the U.S. market. So we believe that any real activity on the wind side in the U.S. is going to help the company overall, first and foremost on the grid side, but potentially on the wind side as well.


[Operator Instructions] And we will take our next question from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

First of all, I need to look at more information about your Asian customers, especially I think one name is the XJ Group. [indiscernible] installed roughly close to 200 megawatts last year, where [indiscernible] installed 30 megawatts. But I don't think they order that much [indiscernible] electronics from you, or what's the position there?

Daniel Patrick McGahn

I think that the first part of XJ that you have to understand is the content, JinMing, is a bit different. When you compare those 2 customers, with most of the newer customers, we're supplying full ECF systems, which is a higher value per megawatt. With XJ, we're supplying core components. And XJ has placed purchase orders, and they bought equipment from us in the past, and their 2-megawatt platform is using our technology and using our brains as well.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay, I see that. Okay. Also, just you mentioned your D-VAR sales into the U.S. wind market. Can you give us some idea how much D-VAR sales you had in the American market in 2012?

Daniel Patrick McGahn

We don't generally give percentages. But the way that you can see the -- you'll be able to see the breakout of the business unit revenue. When you look at the grid business, it typically comes from the U.S., Europe, and we talked a bit today on the call about Australia; whereas the wind business comes principally from Asia. So you can make a decent approximation, I think, of some part of the U.S. business really is coming from the grid segment. But we don't delve down into those kinds of fractions.


And we will take our final question from Pavel Molchanov with Raymond James.

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

Can we get a quick update on Tres Amigas? Any updates on that project?

Daniel Patrick McGahn

Yes. They seem to be doing well. They are currently right now working to continuing towards progressing towards their Phase 1 construction, which is a 750-megawatt back-to-back line between the Eastern and Western interconnections I believe. And the next stage of that, they need to raise the capital to enable that. I think they'll be looking to do that here in the, hopefully, near future. So Phase 1, as you recall and as we've said in the past, it has nothing to do with superconductors. It's strictly to set up a back-to-back line and begin getting revenue streams so they can move to Phase 2 and Phase 3, which may involve superconductors depending on the configuration and what they decide to do.

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

And can you remind me real quick what your current equity ownership of the project is?

David A. Henry

It's just over 25%.


That concludes today's question-and-answer session. Mr. McGahn, at this time, I'd like to turn the conference back to you for any additional or closing remarks.

Daniel Patrick McGahn

Thanks, Angela. After what's been a challenging 24 months, we believe that we're beginning to see signs of a turnaround in the wind industry. China has forecasted increased installations, the U.S. has extended the PTC, and Inox has recently placed a large order with us.

Our grid business has demonstrated good year to-year growth. Based in part on these trends and our ongoing customer discussions and dialogues, we believe that in addition to our forecasted growth of 10% for FY 2012, we can increase our annual revenues by more than 25% in fiscal year 2013.

I look forward to talking to you guys next quarter and doing a recap on the year that was 2012. Certainly each year going forward, things start to look better for the company, and we hope to continue to talk about the good things that are going on in our business. Thank you very much.


Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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